UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number | 811-04347 | |||||||
| ||||||||
GMO Trust | ||||||||
(Exact name of registrant as specified in charter) | ||||||||
| ||||||||
40 Rowes Wharf, Boston, MA |
| 02110 | ||||||
(Address of principal executive offices) |
| (Zip code) | ||||||
| ||||||||
J.B. Kittredge, Chief Executive Officer, 40 Rowes Wharf, Boston, MA 02110 | ||||||||
(Name and address of agent for service) | ||||||||
| ||||||||
Registrant’s telephone number, including area code: | 617-346-7646 |
| ||||||
| ||||||||
Date of fiscal year end: | 02/28/11 |
| ||||||
| ||||||||
Date of reporting period: | 08/31/10 |
| ||||||
Item 1. Reports to Stockholders.
The semiannual reports for each series of the registrant for the periods ended August 31, 2010 are filed herewith.
GMO Alpha Only Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Alpha Only Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Cash and Cash Equivalents | 90.7 | % | |||||
Common Stocks | 83.4 | ||||||
Short-Term Investments | 6.7 | ||||||
Investment Funds | 2.0 | ||||||
Preferred Stocks | 0.2 | ||||||
Forward Currency Contracts | 0.1 | ||||||
Options Purchased | 0.0 | ||||||
Written Options | (0.0 | ) | |||||
Swap Agreements | (18.8 | ) | |||||
Futures Contracts | (68.0 | ) | |||||
Other | 3.7 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds"). Swaps and futures concentrations use the notional value of the respective contracts for purposes of computing asset class exposures.
1
GMO Alpha Only Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares / Par Value | Description | Value ($) | |||||||||||||
INVESTMENT FUNDS — 2.1% | |||||||||||||||
United States — 2.1% | |||||||||||||||
919,851 | Vanguard Emerging Markets ETF (a) | 37,511,524 | |||||||||||||
TOTAL INVESTMENT FUNDS (COST $35,925,107) | 37,511,524 | ||||||||||||||
MUTUAL FUNDS — 88.2% | |||||||||||||||
United States — 88.2% | |||||||||||||||
Affiliated Issuers | |||||||||||||||
20,758,760 | GMO International Growth Equity Fund, Class IV | 402,719,944 | |||||||||||||
21,201,494 | GMO International Intrinsic Value Fund, Class IV | 400,072,196 | |||||||||||||
29,731,711 | GMO Quality Fund, Class VI | 522,683,477 | |||||||||||||
27,458,060 | GMO U.S. Core Equity Fund, Class VI | 270,736,475 | |||||||||||||
921,058 | GMO U.S. Treasury Fund | 23,026,455 | |||||||||||||
Total United States | 1,619,238,547 | ||||||||||||||
TOTAL MUTUAL FUNDS (COST $1,593,877,105) | 1,619,238,547 | ||||||||||||||
SHORT-TERM INVESTMENTS — 2.9% | |||||||||||||||
Time Deposits — 2.9% | |||||||||||||||
USD | 15,000,000 | Bank of Tokyo-Mitsubishi (Tokyo) Time Deposit, 0.21%, due 09/01/10 | 15,000,000 | ||||||||||||
USD | 8,514,373 | Commerzbank (Frankfurt) Time Deposit, 0.21%, due 09/01/10 | 8,514,373 | ||||||||||||
USD | 15,000,000 | Nordea Bank Norge ASA (Oslo) Time Deposit, 0.21%, due 09/01/10 | 15,000,000 | ||||||||||||
USD | 15,000,000 | DnB Nor Bank (Oslo) Time Deposit, 0.21%, due 09/01/10 | 15,000,000 | ||||||||||||
Total Time Deposits | 53,514,373 | ||||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $53,514,373) | 53,514,373 | ||||||||||||||
TOTAL INVESTMENTS — 93.2% (Cost $1,683,316,585) | 1,710,264,444 | ||||||||||||||
Other Assets and Liabilities (net) — 6.8% | 125,546,840 | ||||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 1,835,811,284 |
See accompanying notes to the financial statements.
2
GMO Alpha Only Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
A summary of outstanding financial instruments at August 31, 2010 is as follows:
Forward Currency Contracts
Settlement Date | Counterparty | Deliver/ Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||
Buys † | |||||||||||||||||||||||
10/22/10 | J.P. Morgan Chase Bank | SEK | 1,341,802 | $ | 181,383 | $ | 1,423 | ||||||||||||||||
Sales # | |||||||||||||||||||||||
10/22/10 | Brown Brothers Harriman & Co. | AUD | 22,016,382 | $ | 19,468,518 | $ | 61,067 | ||||||||||||||||
10/22/10 | Deutsche Bank AG | AUD | 24,053,647 | 21,270,018 | 47,568 | ||||||||||||||||||
10/22/10 | Brown Brothers Harriman & Co. | CHF | 21,534,626 | 21,220,813 | (443,976) | ||||||||||||||||||
10/22/10 | Bank of America | CHF | 19,343,050 | 19,061,173 | (446,278 | ) | |||||||||||||||||
10/22/10 | Barclays | DKK | 25,320,501 | 4,310,159 | 56,650 | ||||||||||||||||||
10/22/10 | Morgan Stanley | DKK | 3,234,969 | 550,670 | 6,781 | ||||||||||||||||||
10/22/10 | Bank of New York Mellon | EUR | 24,824,119 | 31,456,223 | 414,718 | ||||||||||||||||||
10/22/10 | Barclays | EUR | 24,183,605 | 30,644,587 | 406,678 | ||||||||||||||||||
10/22/10 | J.P. Morgan Chase Bank | EUR | 28,751,706 | 36,433,119 | 423,147 | ||||||||||||||||||
10/22/10 | Royal Bank of Scotland PLC | EUR | 29,622,970 | 37,537,153 | 486,328 | ||||||||||||||||||
10/22/10 | State Street Bank and Trust Co. | EUR | 8,425,608 | 10,676,625 | 124,162 | ||||||||||||||||||
10/22/10 | Bank of America | GBP | 12,527,988 | 19,206,928 | 421,923 | ||||||||||||||||||
10/22/10 | Bank of New York Mellon | GBP | 29,117,562 | 44,640,762 | 981,799 | ||||||||||||||||||
10/22/10 | Deutsche Bank AG | GBP | 13,418,272 | 20,571,842 | 374,440 | ||||||||||||||||||
10/22/10 | J.P. Morgan Chase Bank | GBP | 14,503,247 | 22,235,241 | 414,747 | ||||||||||||||||||
10/22/10 | J.P. Morgan Chase Bank | HKD | 99,792,955 | 12,833,593 | 12,354 | ||||||||||||||||||
10/22/10 | Barclays | JPY | 3,147,388,893 | 37,485,285 | (556,671 | ) | |||||||||||||||||
10/22/10 | J.P. Morgan Chase Bank | JPY | 1,549,284,950 | 18,451,926 | (270,808 | ) | |||||||||||||||||
10/22/10 | Royal Bank of Scotland PLC | JPY | 4,400,772,943 | 52,413,043 | (808,688 | ) | |||||||||||||||||
10/22/10 | State Street Bank and Trust Co. | JPY | 433,314,273 | 5,160,757 | (81,258) | ||||||||||||||||||
10/22/10 | Barclays | NOK | 23,985,649 | 3,792,445 | 95,158 | ||||||||||||||||||
10/22/10 | Brown Brothers Harriman & Co. | NZD | 716,041 | 497,231 | 5,838 | ||||||||||||||||||
10/22/10 | Bank of New York Mellon | SEK | 56,677,163 | 7,661,527 | 28,517 |
See accompanying notes to the financial statements.
3
GMO Alpha Only Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Forward Currency Contracts — continued
Settlement Date | Counterparty | Deliver/ Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||
10/22/10 | J.P. Morgan Chase Bank | SEK | 51,151,099 | $ | 6,914,522 | $ | (1,420 | ) | |||||||||||||||
10/22/10 | Deutsche Bank AG | SGD | 11,342,837 | 8,367,868 | (35,344 | ) | |||||||||||||||||
$ | 492,862,028 | $ | 1,717,432 |
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Sales | |||||||||||||||||||
8,625 | S&P 500 E-Mini Index | September 2010 | $ | 452,057,813 | $ | 10,131,918 | |||||||||||||
182 | Amesterdam Exchanges | September 2010 | 14,517,724 | 398,949 | |||||||||||||||
231 | DAX | September 2010 | 43,112,136 | 377,587 | |||||||||||||||
1,552 | FTSE 100 Index | September 2010 | 123,176,405 | (321,021 | ) | ||||||||||||||
112 | Hang Seng | September 2010 | 14,693,926 | 76,335 | |||||||||||||||
421 | S&P 400 E-Mini Index | September 2010 | 30,358,310 | 1,194,480 | |||||||||||||||
131 | FTSE/MIB | September 2010 | 16,292,824 | 224,689 | |||||||||||||||
482 | SPI 200 | September 2010 | 47,225,212 | 1,389,249 | |||||||||||||||
1,256 | CAC 40 | September 2010 | 55,218,299 | 2,171,860 | |||||||||||||||
166 | IBEX 35 | September 2010 | 21,323,308 | 282,024 | |||||||||||||||
191 | MSCI Singapore | September 2010 | 9,836,309 | (138,854 | ) | ||||||||||||||
4,570 | Russell 2000 Mini | September 2010 | 274,931,200 | 21,207,024 | |||||||||||||||
1,345 | TOPIX | September 2010 | 128,078,389 | 11,831,836 | |||||||||||||||
1,218 | OMXS 30 | September 2010 | 16,625,837 | 579,079 | |||||||||||||||
$ | 1,247,447,692 | $ | 49,405,155 |
See accompanying notes to the financial statements.
4
GMO Alpha Only Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Swap Agreements
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Fund Pays | Fund Receives | Market Value | ||||||||||||||||||||||
199,886,869 | USD | 3/30/2011 | Deutsche Bank AG | MSCI Daily Total | 12 month | ||||||||||||||||||||||
Return EAFE | LIBOR -0.73% | $ | 15,491,956 | ||||||||||||||||||||||||
100,983,424 | USD | 5/10/2011 | BNP Paribas | MSCI Daily Total Return EAFE | 12 month LIBOR -0.78% | 1,440,722 | |||||||||||||||||||||
45,000,526 | USD | 1/19/2011 | BNP Paribas | MSCI Daily Total Return EAFE | 12 month LIBOR -0.78% | 5,034,005 | |||||||||||||||||||||
$ | 21,966,683 | ||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
As of August 31, 2010, for futures contracts, swap agreements and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
Notes to Schedule of Investments:
ETF – Exchange – Traded Fund
LIBOR - London Interbank Offered Rate
MSCI - Morgan Stanley Capital International
(a) Represents an investment to obtain exposure in Emerging Markets. The Vanguard Emerging Markets ETF is a separate investment portfolio of Vanguard, Inc., a registered investment company. The Vanguard Emerging Markets ETF invests substantially all (normally about 95%) of its assets in the common stocks included in the MSCI Emerging Market Index, while employing a form of sampling to reduce risk.
See accompanying notes to the financial statements.
5
GMO Alpha Only Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Currency Abbreviations:
AUD - Australian Dollar
CHF - Swiss Franc
DKK - Danish Krone
EUR - Euro
GBP - British Pound
HKD - Hong Kong Dollar
JPY - Japanese Yen
NOK - Norwegian Krone
NZD - New Zealand Dollar
SEK - Swedish Krona
SGD - Singapore Dollar
USD - United States Dollar
See accompanying notes to the financial statements.
6
GMO Alpha Only Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $89,439,480) (Note 2) | $ | 91,025,897 | |||||
Investments in affiliated issuers, at value (cost $1,593,877,105) (Notes 2 and 10) | 1,619,238,547 | ||||||
Receivable for Fund shares sold | 6,500,000 | ||||||
Unrealized appreciation on open forward currency contracts (Note 4) | 4,363,298 | ||||||
Receivable for collateral on open futures contracts (Note 4) | 97,622,479 | ||||||
Receivable for variation margin on open futures contracts (Note 4) | 3,690,928 | ||||||
Receivable for open swap contracts (Note 4) | 21,966,683 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 693,015 | ||||||
Total assets | 1,845,100,847 | ||||||
Liabilities: | |||||||
Due to custodian | 13,884 | ||||||
Payable for Fund shares repurchased | 5,500,000 | ||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 771,409 | ||||||
Shareholder service fee | 157,290 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 3,170 | ||||||
Unrealized depreciation on open forward currency contracts (Note 4) | 2,644,443 | ||||||
Accrued expenses | 199,367 | ||||||
Total liabilities | 9,289,563 | ||||||
Net assets | $ | 1,835,811,284 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 2,944,590,344 | |||||
Accumulated undistributed net investment income | 11,745,781 | ||||||
Accumulated net realized loss | (1,220,563,398 | ) | |||||
Net unrealized appreciation | 100,038,557 | ||||||
$ | 1,835,811,284 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 71,139,940 | |||||
Class IV shares | $ | 1,764,671,344 | |||||
Shares outstanding: | |||||||
Class III | 14,617,108 | ||||||
Class IV | 362,524,974 | ||||||
Net asset value per share: | |||||||
Class III | $ | 4.87 | |||||
Class IV | $ | 4.87 |
See accompanying notes to the financial statements.
7
GMO Alpha Only Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 10) | $ | 11,216,158 | |||||
Interest | 9,171 | ||||||
Dividends | 44 | ||||||
Total investment income | 11,225,373 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 4,469,748 | ||||||
Shareholder service fee – Class III (Note 5) | 52,850 | ||||||
Shareholder service fee – Class IV (Note 5) | 858,716 | ||||||
Custodian and fund accounting agent fees | 139,380 | ||||||
Legal fees | 51,060 | ||||||
Audit and tax fees | 35,788 | ||||||
Transfer agent fees | 21,160 | ||||||
Trustees fees and related expenses (Note 5) | 19,133 | ||||||
Registration fees | 1,932 | ||||||
Miscellaneous | 15,548 | ||||||
Total expenses | 5,665,315 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (251,344 | ) | |||||
Expense reductions (Note 2) | (22 | ) | |||||
Indirectly incurred fees waived or borne by Manager (Note 5) | (3,229,871 | ) | |||||
Shareholder service fee waived (Note 5) | (570,633 | ) | |||||
Net expenses | 1,613,445 | ||||||
Net investment income (loss) | 9,611,928 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | 38,674,605 | ||||||
Realized gains distributions from affiliated issuers (Note 10) | 313 | ||||||
Closed futures contracts | (5,102,001 | ) | |||||
Closed swap contracts | (22,483,365 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 4,386,408 | ||||||
Net realized gain (loss) | 15,475,960 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | 1,586,417 | ||||||
Investments in affiliated issuers | (100,093,913 | ) | |||||
Open futures contracts | 49,377,820 | ||||||
Open swap contracts | 8,181,350 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 1,009,264 | ||||||
Net unrealized gain (loss) | (39,939,062 | ) | |||||
Net realized and unrealized gain (loss) | (24,463,102 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (14,851,174 | ) |
See accompanying notes to the financial statements.
8
GMO Alpha Only Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 9,611,928 | $ | 27,295,546 | |||||||
Net realized gain (loss) | 15,475,960 | (671,971,029 | ) | ||||||||
Change in net unrealized appreciation (depreciation) | (39,939,062 | ) | 537,944,298 | ||||||||
Net increase (decrease) in net assets from operations | (14,851,174 | ) | (106,731,185 | ) | |||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | — | (6,172,043 | ) | ||||||||
Class IV | — | (87,315,114 | ) | ||||||||
Total distributions from net investment income | — | (93,487,157 | ) | ||||||||
Net share transactions (Note 9): | |||||||||||
Class III | 345,319 | (34,627,393 | ) | ||||||||
Class IV | 130,554,653 | (21,256,031 | ) | ||||||||
Increase (decrease) in net assets resulting from net share transactions | 130,899,972 | (55,883,424 | ) | ||||||||
Total increase (decrease) in net assets | 116,048,798 | (256,101,766 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 1,719,762,486 | 1,975,864,252 | |||||||||
End of period (including accumulated undistributed net investment income of $11,745,781 and $2,133,853, respectively) | $ | 1,835,811,284 | $ | 1,719,762,486 |
See accompanying notes to the financial statements.
9
GMO Alpha Only Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 4.91 | $ | 5.77 | $ | 11.11 | $ | 10.42 | $ | 10.36 | $ | 10.26 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.03 | 0.11 | 0.23 | 0.21 | 0.17 | 0.16 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.07 | ) | (0.67 | ) | 0.93 | 0.70 | 0.10 | 0.31 | |||||||||||||||||||
Total from investment operations | (0.04 | ) | (0.56 | ) | 1.16 | 0.91 | 0.27 | 0.47 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | — | (0.30 | ) | (4.41 | ) | (0.22 | ) | (0.21 | ) | (0.37 | ) | ||||||||||||||||
From net realized gains | — | — | (2.09 | ) | — | — | — | ||||||||||||||||||||
Total distributions | — | (0.30 | ) | (6.50 | ) | (0.22 | ) | (0.21 | ) | (0.37 | ) | ||||||||||||||||
Net asset value, end of period | $ | 4.87 | $ | 4.91 | $ | 5.77 | $ | 11.11 | $ | 10.42 | $ | 10.36 | |||||||||||||||
Total Return(b) | (0.81 | )%** | (10.30 | )% | 11.92 | % | 8.74 | % | 2.64 | % | 4.63 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 71,140 | $ | 71,481 | $ | 121,711 | $ | 176,067 | $ | 166,626 | $ | 1,460,161 | |||||||||||||||
Net expenses to average daily net assets(c) | 0.23 | %(d)* | 0.24 | %(d) | 0.23 | %(d) | 0.16 | %(d) | 0.15 | % | 0.10 | % | |||||||||||||||
Net investment income (loss) to average daily net assets(a) | 1.07 | %* | 2.16 | % | 2.37 | % | 1.91 | % | 1.66 | % | 1.52 | % | |||||||||||||||
Portfolio turnover rate | 46 | %** | 114 | % | 87 | % | 44 | % | 22 | % | 40 | % | |||||||||||||||
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets:(e) | 0.45 | %* | 0.45 | % | 0.44 | % | 0.51 | % | 0.53 | % | 0.59 | % | |||||||||||||||
Redemption fees consisted of the following per share amounts:† | $ | 0.00 | (f) | $ | 0.00 | (f) | $ | 0.00 | (g) | $ | 0.01 | $ | 0.01 | $ | 0.02 |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(d) The net expense ratio does not include the effect of expense reductions (Note 2).
(e) Ratios include reimbursement of direct operating expenses and waiver of expenses indirectly incurred through investment in the underlying funds (See Note 5).
(f) There were no purchase premiums and redemption fees during the period.
(g) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
10
GMO Alpha Only Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007(a) | |||||||||||||||||||
Net asset value, beginning of period | $ | 4.91 | $ | 5.77 | $ | 11.11 | $ | 10.41 | $ | 10.37 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)(b)† | 0.03 | 0.11 | 0.24 | 0.21 | 0.20 | ||||||||||||||||||
Net realized and unrealized gain (loss) | (0.07 | ) | (0.67 | ) | 0.92 | 0.71 | 0.06 | ||||||||||||||||
Total from investment operations | (0.04 | ) | (0.56 | ) | 1.16 | 0.92 | 0.26 | ||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | — | (0.30 | ) | (4.41 | ) | (0.22 | ) | (0.22 | ) | ||||||||||||||
From net realized gains | — | — | (2.09 | ) | — | — | |||||||||||||||||
Total distributions | — | (0.30 | ) | (6.50 | ) | (0.22 | ) | (0.22 | ) | ||||||||||||||
Net asset value, end of period | $ | 4.87 | $ | 4.91 | $ | 5.77 | $ | 11.11 | $ | 10.41 | |||||||||||||
Total Return(c) | (0.81 | )%** | (10.30 | )% | 12.00 | % | 8.90 | % | 2.54 | %** | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,764,671 | $ | 1,648,282 | $ | 1,854,153 | $ | 2,557,970 | $ | 1,693,793 | |||||||||||||
Net expenses to average daily net assets(d) | 0.18 | %(e)* | 0.18 | %(e) | 0.18 | %(e) | 0.11 | %(e) | 0.10 | %* | |||||||||||||
Net investment income (loss) to average daily net assets(b) | 1.08 | %* | 2.11 | % | 2.52 | % | 1.96 | % | 1.93 | %* | |||||||||||||
Portfolio turnover rate | 46 | %** | 114 | % | 87 | % | 44 | % | 22 | %†† | |||||||||||||
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets:(f) | 0.45 | %* | 0.46 | % | 0.44 | % | 0.51 | % | 0.53 | %* | |||||||||||||
Redemption fees consisted of the following per share amounts:† | $ | 0.00 | (g) | $ | 0.00 | (g) | $ | 0.00 | (h) | $ | 0.01 | $ | 0.00 | (g) |
(a) Period from March 2, 2006 (commencement of operations) through February 28, 2007.
(b) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(c) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(e) The net expense ratio does not include the effect of expense reductions (Note 2).
(f) Ratios include reimbursement of direct operating expenses and waiver of expenses indirectly incurred through investment in the underlying funds (See Note 5).
(g) There were no purchase premiums and redemption fees during the period.
(h) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the year ended February 28, 2007.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
11
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO Alpha Only Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks to outperform its benchmark, the Citigroup 3 Month Treasury Bill Index. The Fund's investment program involves having both long and short investment exposures. The Fund seeks to construct a portfolio in which it has long investment exposure to asset classes and sub-asset classes that it expects will outperform relative to the asset classes and sub-asset classes to which it has short investment exposure. To gain long investment exposure, the Fund invests primarily in shares of GMO U.S. Equity Funds and GMO International Equity Funds, and also may invest in shares of GMO Emerging Country Debt Fund (GMO Funds in which the Fund invests are collectively referred to as "underlying funds"). In addition, the Fund may gain long investment exposure by investing in securities directly, rather than through the underlying funds. To gain short investment exposure, the Fund may use over-the-counter ("OTC") and exchange-traded de rivatives (including futures, swap contracts, and currency forwards) and by making short sales of securities (e.g., shares of exchange-traded funds), including short sales of securities the Fund does not own.
The Manager uses proprietary quantitative models and fundamental investment techniques to select the underlying funds and securities in which the Fund invests and to decide how much to invest in each. The models use multi-year forecasts of relative value and risk among asset classes (e.g., foreign equity, U.S. equity, emerging country equity, and emerging country debt) and sub-asset classes (e.g., small-to-mid cap stocks in the foreign equity asset class and quality stocks in the U.S. equity and emerging country equity asset classes). The Manager changes the Fund's holdings in response to changes in its investment outlook and market valuations and may use redemption/purchase activity to rebalance the Fund's investments.
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
Throughout the period ended August 31, 2010, the Fund had two classes of shares outstanding: Class III and Class IV. Each class of shares bears a different shareholder service fee.
12
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The financial statements of the underlying funds should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request by calling (617) 346-7646 (collect) or by visiting GMO's website at www.gmo.com.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Shares of the funds in which the Fund invests ("underlying funds") and other investment funds are generally valued at their net asset value. Investments held by the underlying funds are valued as follows. Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the OTC market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, w hich approximates market value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale.
Additionally, because many foreign equity securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund and the underlying funds generally value foreign equity securities as of the NYSE close using fair value prices, which are based on local closing prices and adjustments supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2010, 44.4% of the net assets of the Fund, through investments in the underlying funds, were valued using fair value prices based on those adjustments.
13
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Those underlying funds classify such securities (as defined below) as Level 2. See note 4 for a further discussion on valuation of derivative financial instruments.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include: fair value adjustments applied to closing prices of foreign securities due to market events that have occurred since the local market close but before the Fund's daily NAV calculation.
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Investment Funds | |||||||||||||||||||
United States | $ | 37,511,524 | $ | — | $ | — | $ | 37,511,524 | |||||||||||
TOTAL INVESTMENT FUNDS | 37,511,524 | — | — | 37,511,524 | |||||||||||||||
Mutual Funds | |||||||||||||||||||
United States | 1,619,238,547 | — | — | 1,619,238,547 | |||||||||||||||
TOTAL MUTUAL FUNDS | 1,619,238,547 | — | — | 1,619,238,547 | |||||||||||||||
Short-Term Investments | 53,514,373 | — | — | 53,514,373 | |||||||||||||||
Total Investments | 1,710,264,444 | — | — | 1,710,264,444 |
14
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
ASSET VALUATION INPUTS — continued
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts Foreign exchange risk | $ | — | $ | 4,363,298 | $ | — | $ | 4,363,298 | |||||||||||
Futures Contracts Equity risk | 32,533,422 | 17,331,608 | — | 49,865,030 | |||||||||||||||
Swap Agreements Equity risk | — | 21,966,683 | — | 21,966,683 | |||||||||||||||
Total Derivatives | 32,533,422 | 43,661,589 | — | 76,195,011 | |||||||||||||||
Total | $ | 1,742,797,866 | $ | 43,661,589 | $ | — | $ | 1,786,459,455 |
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts Foreign exchange risk | $ | — | $ | (2,644,443 | ) | $ | — | $ | (2,644,443 | ) | |||||||||
Futures Contracts Equity risk | — | (459,875 | ) | — | (459,875 | ) | |||||||||||||
Total Derivatives | — | (3,104,318 | ) | — | (3,104,318 | ) | |||||||||||||
Total | $ | — | $ | (3,104,318 | ) | $ | — | $ | (3,104,318 | ) |
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements.
15
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund held no investments or other financial instruments at either August 31, 2010 or February 28, 2010, whose fair value was determined using Level 3 inputs.
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are inclu ded with the net realized and unrealized gain or loss on investment securities.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
16
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
As of February 28, 2010, the Fund elected to defer to March 1, 2010 post-October capital losses of $162,499,519.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2018 | $ | (710,774,856 | ) | ||||
Total | $ | (710,774,856 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 1,954,366,242 | $ | — | $ | (244,101,798 | ) | $ | (244,101,798 | ) |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Income dividends and capital gain distributions from the underlying funds are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Non-cash dividends, if any, are
17
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for the purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 5).
Brown Brothers Harriman & Co. ("BBH") serves as the Fund's custodian and fund accounting agent. State Street Bank and Trust Company ("State Street") serves as the Fund's transfer agent. BBH's and State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
For the period ended August 31, 2010, the Fund did not charge a premium on cash purchases or fee on cash redemptions of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by a Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. The Fund charges purchase premiums and redemption fees based on the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premiums and/or redemption fees, if any, imposed by the underlying Funds in which it invests, provided that, if that weighted average is less than 0.05%, the Fund generally will not charge a purchase premium or redemption fee. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee at any time. Purch ase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager may consider known cash flows out of or into other series of the Trust when placing orders for the cash purchase or redemption of shares by the Fund shareholders or other prospective or existing shareholders of the Funds for whom GMO provides asset allocation advice. Consequently, the Fund and those other shareholders for whom GMO provides asset allocation advice will tend to benefit from waivers of the Funds' purchase premiums and redemption fees to a greater extent than other prospective and existing shareholders of the other series of the Trust. All or a portion of the Fund's purchase premiums and/or redemption fees may be waived at the Manager's discretion when they are de minimis and/or the Manager deems it equitable to do so, including without
18
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
limitation when the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premiums and/or redemption fees, if any, imposed by the underlying funds are less than the purchase premiums and/or redemption fees imposed by the Fund. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of a Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. Howeve r, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. References to investments include those held directly by the Fund and indirectly through the Fund's investments in the underlying funds. The Fund and some of the underlying funds are non-diversified investment companies under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund or an underlying fund may affect the Fund's or the underlying fund's performance more than if the Fund or the underlying fund were diversified. The principal risks of investing in the Fund are summarized below, including those risks to which the Fund is exposed as a result of its investments in the underlying funds. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Derivatives Risk — The use of derivatives involves the risk that their value may not correlate with the value of the relevant underlying assets, rates or indices. Derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk. This risk is particularly pronounced because the Fund uses various types of exchange-traded and over-the counter derivatives to attempt to implement its investment strategy.
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund or the underlying funds may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds
19
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
generated from those securities. Also, there are risks associated with any license that the Fund or the underlying funds need to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund or the underlying funds to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund's investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund's investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. In addition, the value of the Fund's shares will be adversely affected if the equity investments that are the subject of the Fund's short positions appreciate in value.
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent a Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in the underlying funds, including the risk that the underlying funds in which it invests will not perform as expected or that the Fund will invest in underlying funds with higher fees or expenses.
• Market Risk — Fixed Income Securities — Typically, the value of fixed income securities will decline during periods of rising interest rates and widening credit spreads on asset-backed securities.
• Leveraging Risk — The use of reverse repurchase agreements and other derivatives may cause the Fund's portfolio to be leveraged. The Fund and some underlying funds are not limited in the extent to which they may use derivatives or in the absolute face value of their derivative positions. Leverage increases the Fund's portfolio losses when the value of its investments decline.
Other principal risks of an investment in the Fund include Currency Risk (risk that fluctuations in exchange rates may adversely affect the value of the Fund's investments denominated in foreign currencies, or that the U.S. dollar will decline in value relative to the foreign currency being hedged); Credit and Counterparty Risk (risk of default of an issuer of a portfolio security, a derivatives counterparty, or a borrower of the Fund's securities); Market Risk — Value Securities (risk that the price of investments held by the Fund will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Market Risk — Growth Securities (greater
20
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
price fluctuations resulting from dependence on future earnings expectations); Real Estate Risk (risk to an underlying fund that concentrates its assets in real estate-related investments that factors affecting the real estate industry may cause the value of the Fund's investments to fluctuate more than if it invested in securities of companies in a broader range of industries); Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investment in companies with smaller market capitalizations); Short Sales Risk (risk that an underlying fund's loss on a short sale of securities that the Fund does not own is unlimited); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareho lder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing
21
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index). The Funds also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedin gs. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be secured by collateral (e.g., foreign currency forwards; see "Currency Risk" above), that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance
22
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. During the period ended August 31, 2010, the Fund used forward currency contracts to hedge some or all of the currency exposure of the underlying Funds and assets in which the Fund invests, adjust against anticipated currency exchange rate changes and adjust exposure to foreign currencies. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
23
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because regular trading on many foreign exchanges closes prior to the close of the NYSE, closing prices for foreign futures contracts on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures contracts using fair value prices, which are based on adjustments to local closing prices, and supplied by a third party vendor based on that vendor's proprietary models. As of August 31, 2010, futures contracts representing 0.9% of the net assets of the Fund, directly and through investments in the underlying funds, were valued using fair value prices based on those adjustments. The Fund and those underlying funds classify such securities as Level 2 inputs in the table above. During the period ended August 31, 2010, the Fund used futures contracts to hedge some or all of the broad market exposure of the underlying Funds and assets in which the Fund invests. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying
24
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid marke t. The Fund had no written option contracts outstanding at the end of the period.
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
25
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type
26
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the period ended August 31, 2010, the Fund used swap agreements to hedge some or all of the broad market exposure of the underlying Funds and assets in which the Fund invests. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Unrealized appreciation on futures contracts* | $ | — | $ | — | $ | — | $ | 49,865,030 | $ | — | $ | 49,865,030 | |||||||||||||||
Unrealized appreciation on forward currency contracts | — | 4,363,298 | — | — | — | 4,363,298 | |||||||||||||||||||||
Unrealized appreciation on swap agreements | — | — | — | 21,966,683 | — | 21,966,683 | |||||||||||||||||||||
Total | $ | — | $ | 4,363,298 | $ | — | $ | 71,831,713 | $ | — | $ | 76,195,011 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Unrealized depreciation on futures contracts* | $ | — | $ | — | $ | — | $ | (459,875 | ) | $ | — | $ | (459,875 | ) | |||||||||||||
Unrealized depreciation on forward currency contracts | — | (2,644,443 | ) | — | — | — | (2,644,443 | ) | |||||||||||||||||||
Total | $ | — | $ | (2,644,443 | ) | $ | — | $ | (459,875 | ) | $ | — | $ | (3,104,318 | ) |
27
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Period Ended August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Futures contracts | $ | — | $ | — | $ | — | $ | (5,102,001 | ) | $ | — | $ | (5,102,001 | ) | |||||||||||||
Forward currency contracts | — | 3,725,171 | — | — | — | 3,725,171 | |||||||||||||||||||||
Swap contracts | — | — | — | (22,483,365 | ) | — | (22,483,365 | ) | |||||||||||||||||||
Total | $ | — | $ | 3,725,171 | $ | — | $ | (27,585,366 | ) | $ | — | $ | (23,860,195 | ) | |||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Futures contracts | $ | — | $ | — | $ | — | $ | 49,377,820 | $ | — | $ | 49,377,820 | |||||||||||||||
Forward currency contracts | — | 993,838 | — | — | — | 993,838 | |||||||||||||||||||||
Swap contracts | — | — | — | 8,181,350 | — | 8,181,350 | |||||||||||||||||||||
Total | $ | — | $ | 993,838 | $ | — | $ | 57,559,170 | $ | — | $ | 58,553,008 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments.
The volume of derivative activity, based on absolute values (forward currency contracts, futures contracts), or notional amounts (swap agreements) outstanding at each month-end, was as follows for the period ended August 31, 2010:
Forward Currency Contracts | Futures Contracts | Swap Agreements | |||||||||||||
Average amount outstanding | $ | 502,817,847 | $ | 977,018,630 | $ | 494,126,819 |
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.50% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets of each class at the annual rate of 0.15% for Class III shares and 0.10% for Class IV shares. The Manager has contractually agreed through at least June 30, 2011 to waive the Fund's
28
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
shareholder service fee to the extent that the aggregate of any direct and indirect shareholder service fees borne by a class of shares of the Fund exceeds 0.15% for Class III shares and 0.10% for Class IV shares; provided, however, that the amount of this waiver will not exceed the respective Class' shareholder service fee.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.50% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investme nt company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in other GMO Funds (excluding those Funds' Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund's Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $19,133 and $6,716, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees) | Indirect Shareholder Service Fees | Total Indirect Expenses | |||||||||
0.364 | % | 0.064 | % | 0.428 | % |
29
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended August 31, 2010 aggregated $898,861,479 and $736,944,694, respectively.
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, 80.87% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund. Two of the shareholders are other funds of the Trust.
As of August 31, 2010, 0.19% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 98.69% of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 3,126,746 | $ | 15,130,469 | 14,274,158 | $ | 72,446,196 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 962,240 | 5,306,700 | |||||||||||||||
Shares repurchased | (3,058,314 | ) | (14,785,150 | ) | (21,771,208 | ) | (112,380,289 | ) | |||||||||||
Net increase (decrease) | 68,432 | $ | 345,319 | (6,534,810 | ) | $ | (34,627,393 | ) |
30
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 65,530,351 | $ | 316,900,868 | 201,793,852 | $ | 1,008,931,852 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 15,779,561 | 87,315,114 | |||||||||||||||
Shares repurchased | (38,498,253 | ) | (186,346,215 | ) | (203,304,382 | ) | (1,117,502,997 | ) | |||||||||||
Net increase (decrease) | 27,032,098 | $ | 130,554,653 | 14,269,031 | $ | (21,256,031 | ) |
10. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO International Growth Equity Fund, Class IV | $ | 373,227,353 | $ | 95,519,289 | $ | 64,666,778 | $ | 1,378,188 | $ | — | $ | 402,719,944 | |||||||||||||||
GMO International Intrinsic Value Fund, Class IV | 370,530,202 | 103,129,009 | 64,882,790 | 1,667,409 | — | 400,072,196 | |||||||||||||||||||||
GMO International Small Companies Fund, Class III | 16,554,137 | 152,713 | 16,859,445 | 152,713 | — | — | |||||||||||||||||||||
GMO Quality Fund, Class VI | 497,679,365 | 131,133,939 | 70,041,120 | 5,589,839 | 522,683,477 | ||||||||||||||||||||||
GMO U.S. Core Equity Fund, Class VI | 276,676,267 | 52,962,368 | 43,472,313 | 2,389,268 | — | 270,736,475 | |||||||||||||||||||||
GMO U.S. Treasury Fund | 19,998,853 | 480,039,055 | 477,022,248 | 38,741 | 313 | 23,026,455 | |||||||||||||||||||||
Totals | $ | 1,554,666,177 | $ | 862,936,373 | $ | 736,944,694 | $ | 11,216,158 | $ | 313 | $ | 1,619,238,547 |
31
GMO Alpha Only Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
11. Subsequent events
On October 5, 2010, the Fund's Board of Trustees approved a reverse stock split for Class III and Class IV of the Fund. It is anticipated that the reverse splits will be effective for shareholders of record after the close of the NYSE on or about November 12, 2010. Each share class will trade at its post-split prices on or about November 15, 2010, and the ticker symbols and cusips for the share classes will not change.
The reverse splits will reduce the number of shares outstanding for the share classes, and result in a proportionate increase in the price per share of each share class. The reverse splits do not change the value of a shareholder's investment. For example, for a 1-for-5 reverse split, every five pre-split shares held by a shareholder will result in the receipt of one post-split share, which will be priced five times higher than the pre-split shares.
32
GMO Alpha Only Fund
(A Series of GMO Trust)
Board Review of Investments Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three-, five-, seven- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees observed that the comparative data provided by the third-party data services was based on peer groups that included funds with investment approaches that were substantially different from that of the
33
GMO Alpha Only Fund
(A Series of GMO Trust)
Board Review of Investments Management Agreement — (Continued)
August 31, 2010 (Unaudited)
Fund. As a result, the Trustees gave more weight to the Fund's performance relative to its benchmark than to the peer group data. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took in to account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also con sidered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of other funds of the Trust in which it invests. The Trustees noted in particular that certain underlying funds do not charge any advisory fees, and that with respect to all other underlying funds, pursuant to a contractual expense reimbursement arrangement in place with the Fund, the Manager effectively reimburses the Fund for management fees, shareholder servicing fees and most other expenses of the underlying funds that the Fund would otherwise bear as a result of its investments in those other funds. In addition, the Trustees considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economie s of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which
34
GMO Alpha Only Fund
(A Series of GMO Trust)
Board Review of Investments Management Agreement — (Continued)
August 31, 2010 (Unaudited)
the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
35
GMO Alpha Only Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.66 | % | $ | 1,000.00 | $ | 991.90 | $ | 3.31 | |||||||||||
2) Hypothetical | 0.66 | % | $ | 1,000.00 | $ | 1,021.88 | $ | 3.36 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.61 | % | $ | 1,000.00 | $ | 991.90 | $ | 3.06 | |||||||||||
2) Hypothetical | 0.61 | % | $ | 1,000.00 | $ | 1,022.13 | $ | 3.11 |
* Expenses are calculated using each Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
36
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Consolidated Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a private placement memorandum, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The private placement memorandum can be obtained by calling 1-617-346-7646 (collect).
GMO Alternative Asset Opportunities Fund
(A Series of GMO Trust)
Consolidated Investments Concentration Summary (a)
August 31, 2010 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 46.6 | % | |||||
Swap Agreements** | 32.8 | ||||||
Futures Contracts** | 10.7 | ||||||
Short-Term Investments | 9.6 | ||||||
Forward Currency Contracts | 0.4 | ||||||
Other | (0.1 | ) | |||||
100.0 | % |
(a) GMO Alternative Asset SPC Ltd. is a 100% owned subsidiary of GMO Alternative Asset Opportunity Fund.
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds"). Swaps and futures concentrations use the notional value of respective contracts for purposes of computing asset class exposures.
** Represents commodity exposure. See Consolidated Schedule of Investments.
1
GMO Alternative Asset Opportunities Fund
(A Series of GMO Trust)
Consolidated Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) / Shares | Description | Value ($) | |||||||||
DEBT OBLIGATIONS — 39.2% | |||||||||||
U.S. Government — 39.2% | |||||||||||
7,906,824 | U.S. Treasury Inflation Indexed Note, 2.38%, due 04/15/11 (a) (b) (c) | 8,005,043 | |||||||||
TOTAL DEBT OBLIGATIONS (COST $8,053,183) | 8,005,043 | ||||||||||
MUTUAL FUNDS — 46.3% | |||||||||||
Affiliated Issuers — 46.3% | |||||||||||
791,020 | GMO Short-Duration Collateral Fund | 9,239,117 | |||||||||
8,245 | GMO U.S. Treasury Fund | 206,128 | |||||||||
TOTAL MUTUAL FUNDS (COST $10,746,322) | 9,445,245 | ||||||||||
SHORT-TERM INVESTMENTS — 15.3% | |||||||||||
Money Market Funds — 1.6% | |||||||||||
312,170 | SSgA USD Liquidity Fund-Class I Stable NAV Shares (a) (d) | 312,170 | |||||||||
16,173 | State Street Institutional Treasury Plus Money Market Fund-Institutional Class | 16,173 | |||||||||
Total Money Market Funds | 328,343 | ||||||||||
U.S. Government — 13.7% | |||||||||||
2,800,000 | U.S. Treasury Bill, 0.21%, due 06/30/11 (a) (e) | 2,795,066 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $3,121,703) | 3,123,409 | ||||||||||
TOTAL INVESTMENTS — 100.8% (Cost $21,921,208) | 20,573,697 | ||||||||||
Other Assets and Liabilities (net) — (0.8%) | (157,135 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 20,416,562 |
See accompanying notes to the financial statements.
2
GMO Alternative Asset Opportunities Fund
(A Series of GMO Trust)
Consolidated Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
A summary of outstanding financial instruments at August 31, 2010 is as follows:
Futures Contracts (a)
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||||||
Buys | |||||||||||||||||||||||
4 | Coffee "C" | December 2010 | $ | 267,675 | $ | (1,294 | ) | ||||||||||||||||
8 | Cotton No. 2 | December 2010 | 344,800 | 28,906 | |||||||||||||||||||
4 | Gold 100 OZ | December 2010 | 500,120 | 23,423 | |||||||||||||||||||
3 | Lean Hogs | October 2010 | 90,180 | (1,874 | ) | ||||||||||||||||||
12 | Live Cattle | October 2010 | 466,920 | 12,125 | |||||||||||||||||||
7 | Soybean | November 2010 | 353,500 | 4,708 | |||||||||||||||||||
16 | Soybean Meal | December 2010 | 472,320 | 46,172 | |||||||||||||||||||
2 | Soybean Oil | December 2010 | 48,060 | (62 | ) | ||||||||||||||||||
4 | Wheat | December 2010 | 137,150 | (3,930 | ) | ||||||||||||||||||
$ | 2,680,725 | $ | 108,174 | ||||||||||||||||||||
Sales | |||||||||||||||||||||||
9 | Cocoa | December 2010 | $ | 246,240 | $ | 11,887 | |||||||||||||||||
2 | Corn | December 2010 | 43,925 | (9,559 | ) | ||||||||||||||||||
1 | Gasoline RBOB | September 2010 | 78,011 | (67 | ) | ||||||||||||||||||
3 | Heating Oil | September 2010 | 250,954 | 5 | |||||||||||||||||||
3 | Light Sweet Crude Oil | September 2010 | 215,760 | 12,618 | |||||||||||||||||||
6 | Natural Gas | September 2010 | 228,960 | 13,146 | |||||||||||||||||||
3 | Sugar 11 | September 2010 | 66,360 | (11,371 | ) | ||||||||||||||||||
$ | 1,130,210 | $ | 16,659 |
See accompanying notes to the financial statements.
3
GMO Alternative Asset Opportunities Fund
(A Series of GMO Trust)
Consolidated Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Swap Agreements (a)
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Fund Pays | Fund Receives | Market Value | ||||||||||||||||||||||
11,413,905 | USD | 10/14/2010 | Barclays | 1 month | Return on DJ-AIG | ||||||||||||||||||||||
T-Bill + 0.23% | Commodity Index (b) | $ | (107,010 | ) | |||||||||||||||||||||||
$ | (107,010 | ) | |||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
As of August 31, 2010, for forward currency contracts, futures contracts, swap agreements, and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
Notes to Schedule of Investments:
(a) All or a portion of this security is owned by GMO Alternative Asset SPC Ltd., which is a 100% owned subsidiary of GMO Alternative Asset Opportunity Fund.
(b) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic (Note 2).
(c) All or a portion of this security has been pledged to cover margin requirements on open financial futures contracts and/or collateral on open swap contracts (Note 4).
(d) Fund is domiciled in Ireland.
(e) Rate shown represents yield-to-maturity.
RBOB - Reformulated Blendstock for Oxygenate Blending.
Currency Abbreviations:
USD - United States Dollar
See accompanying notes to the financial statements.
4
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Consolidating Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
GMO Alternative Asset Opportunity Fund | GMO Alternative Asset SPC Ltd. | Eliminations | Consolidated Totals | ||||||||||||||||
Assets: | |||||||||||||||||||
Investments in unaffiliated issuers, at value (consolidated cost $11,174,886) (Note 2) | $ | 16,173 | $ | 11,112,279 | $ | — | $ | 11,128,452 | |||||||||||
Investments in affiliated issuers, at value (consolidated cost $10,746,322) (Note 2) | 20,475,802 | — | (11,030,557 | ) | 9,445,245 | ||||||||||||||
Dividends and interest receivable | — | 72,078 | — | 72,078 | |||||||||||||||
Receivable for expenses reimbursed by Manager (Note 5) | 12,901 | 9,455 | — | 22,356 | |||||||||||||||
Total assets | 20,504,876 | 11,193,812 | (11,030,557 | ) | 20,668,131 | ||||||||||||||
Liabilities: | |||||||||||||||||||
Payable to affiliate for (Note 5): | |||||||||||||||||||
Management fee | 12,253 | — | — | 12,253 | |||||||||||||||
Shareholder service fee | 2,626 | — | — | 2,626 | |||||||||||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 107 | — | — | 107 | |||||||||||||||
Payable for variation margin on open futures contracts (Note 4) | — | 6,221 | — | 6,221 | |||||||||||||||
Payable for open swap contracts (Note 4) | — | 107,010 | — | 107,010 | |||||||||||||||
Accrued expenses | 73,328 | 50,024 | — | 123,352 | |||||||||||||||
Total liabilities | 88,314 | 163,255 | — | 251,569 | |||||||||||||||
Net assets | $ | 20,416,562 | $ | 11,030,557 | $ | (11,030,557 | ) | $ | 20,416,562 | ||||||||||
Shareholders' capital | $ | 20,416,562 | $ | 20,416,562 | |||||||||||||||
Shares outstanding | 751,407 | 751,407 | |||||||||||||||||
Net asset value per share | $ | 27.17 | $ | 27.17 |
See accompanying notes to the financial statements.
5
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Consolidating Statement of Operations — For the Six Months Ended August 31, 2010 (Unaudited)
GMO Alternative Asset Opportunity Fund | GMO Alternative Asset SPC Ltd. | Eliminations | Consolidated Totals | ||||||||||||||||
Investment Income: | |||||||||||||||||||
Dividends from affiliated issuers (Note 10) | $ | 87,478 | $ | — | $ | — | $ | 87,478 | |||||||||||
Dividends | 5 | 157 | — | 162 | |||||||||||||||
Interest | — | 58,280 | — | 58,280 | |||||||||||||||
Total income (loss) | 87,483 | 58,437 | — | 145,920 | |||||||||||||||
Expenses: | |||||||||||||||||||
Management fee (Note 5) | 60,720 | — | — | 60,720 | |||||||||||||||
Shareholder service fee (Note 5) | 16,895 | — | — | 16,895 | |||||||||||||||
Audit and tax fees | 47,288 | — | — | 47,288 | |||||||||||||||
Custodian and transfer agent fees | 1,840 | 36,156 | — | 37,996 | |||||||||||||||
Legal fees | 552 | — | — | 552 | |||||||||||||||
Trustees fees and related expenses (Note 5) | 290 | 9,476 | — | 9,766 | |||||||||||||||
Miscellaneous | 184 | 3,772 | — | 3,956 | |||||||||||||||
Total expenses | 127,769 | 49,404 | — | 177,173 | |||||||||||||||
Fees and expenses reimbursed by Manager (Note 5) | (59,808 | ) | (49,404 | ) | — | (109,212 | ) | ||||||||||||
Net expenses | 67,961 | — | — | 67,961 | |||||||||||||||
Net investment income (loss) | 19,522 | 58,437 | — | 77,959 | |||||||||||||||
Realized and unrealized gain (loss): | |||||||||||||||||||
Net realized gain (loss) on: | |||||||||||||||||||
Investments in unaffiliated issuers | — | 5,258 | — | 5,258 | |||||||||||||||
Investments in affiliated issuers | (518,608 | ) | — | 518,055 | (553 | ) | |||||||||||||
Realized gains distribution from affiliated issuers (Note 10) | 125 | — | — | 125 | |||||||||||||||
Closed futures contracts | — | (302,227 | ) | — | (302,227 | ) | |||||||||||||
Closed swap contracts | — | (206,657 | ) | — | (206,657 | ) | |||||||||||||
Net realized gain (loss) | (518,483 | ) | (503,626 | ) | 518,055 | (504,054 | ) | ||||||||||||
Change in net unrealized appreciation (depreciation) on: | |||||||||||||||||||
Investments in unaffiliated issuers | — | (61,455 | ) | — | (61,455 | ) | |||||||||||||
Investments in affiliated issuers | 459,782 | — | (75,681 | ) | 384,101 | ||||||||||||||
Open futures contracts | — | 131,211 | — | 131,211 | |||||||||||||||
Open swap contracts | — | (66,941 | ) | — | (66,941 | ) | |||||||||||||
Net unrealized gain (loss) | 459,782 | 2,815 | (75,681 | ) | 386,916 | ||||||||||||||
Net realized and unrealized gain (loss) | (58,701 | ) | (500,811 | ) | 442,374 | (117,138 | ) | ||||||||||||
Net increase (decrease) in net assets resulting from operations | $ | (39,179 | ) | $ | (442,374 | ) | $ | 442,374 | $ | (39,179 | ) |
See accompanying notes to the financial statements.
6
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Consolidated Statement of Changes in Net Assets
Year Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 77,959 | $ | 441,050 | |||||||
Net realized gain (loss) | (504,054 | ) | 1,411,897 | ||||||||
Change in net unrealized appreciation (depreciation) | 386,916 | 3,326,812 | |||||||||
Net increase (decrease) in net assets from operations | (39,179 | ) | 5,179,759 | ||||||||
Fund share transactions: (Note 9) | |||||||||||
Cost of shares repurchased | (2,644,369 | ) | (4,493,912 | ) | |||||||
Redemption fees | — | 25,396 | |||||||||
Net increase (decrease) in Fund share transactions | (2,644,369 | ) | (4,468,516 | ) | |||||||
Total increase (decrease) in net assets | (2,683,548 | ) | 711,243 | ||||||||
Net assets: | |||||||||||
Beginning of period | 23,100,110 | 22,388,867 | |||||||||
End of period | $ | 20,416,562 | $ | 23,100,110 |
See accompanying notes to the financial statements.
7
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Consolidated Financial Highlights
(For a share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006(a) | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 27.24 | $ | 21.94 | $ | 33.11 | $ | 28.54 | $ | 26.63 | $ | 25.00 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(b)† | 0.09 | 0.46 | 0.93 | 0.69 | 1.28 | 0.73 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.16 | ) | 4.84 | (12.10 | ) | 3.88 | (c) | 0.63 | 0.90 | ||||||||||||||||||
Total from investment operations | (0.07 | ) | 5.30 | (11.17 | ) | 4.57 | 1.91 | 1.63 | |||||||||||||||||||
Net asset value, end of period | $ | 27.17 | $ | 27.24 | $ | 21.94 | $ | 33.11 | $ | 28.54 | $ | 26.63 | |||||||||||||||
Total Return(d) | (0.26 | )%** | 24.16 | % | (33.74 | )% | 16.01 | % | 7.17 | % | 6.52 | %** | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 20,417 | $ | 23,100 | $ | 22,389 | $ | 33,972 | $ | 174,514 | $ | 181,947 | |||||||||||||||
Net expenses to average daily net assets(e) | 0.60 | %* | 0.60 | % | 0.60 | %(f) | 0.60 | % | 0.60 | % | 0.61 | %* | |||||||||||||||
Net investment income to average daily net assets(b) | 0.69 | %* | 1.85 | % | 3.24 | % | 2.41 | % | 4.60 | % | 3.12 | %* | |||||||||||||||
Portfolio turnover rate | 14 | %** | 73 | % | 89 | % | 24 | % | 12 | % | 13 | %** | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.97 | %* | 1.06 | % | 0.73 | % | 0.21 | % | 0.12 | % | 0.15 | %* | |||||||||||||||
Redemption fees consisted of the following per share amounts:† | — | $ | 0.03 | $ | 0.00 | (g) | — | — | — |
(a) Period from April 11, 2005 (commencement of operations) to February 28, 2006.
(b) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(c) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain (loss) on investments due to the timing of purchases and redemptions of Fund shares in relation to fluctuating market values of the investments of the Fund.
(d) Total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown. Calculation excludes redemption fees which are borne by the shareholder.
(e) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(f) The net expense ratio does not include the effect of expense reductions (Note 2).
(g) Redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
8
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO Alternative Asset Opportunity Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks total return greater than that of its benchmark. The Fund's benchmark is a composite of the Dow Jones-UBS Commodity Index, which is composed of futures contracts on nineteen physical commodities, and the J.P. Morgan U.S. 3 Month Cash Index, which measures the total return performance of three-month U.S. dollar Euro-deposits. The Dow Jones-UBS Commodity Index and J.P. Morgan U.S. 3 Month Cash Index each represent 50% of the composite benchmark. In constructing the Fund's portfolio, the Manager does not seek to match the Fund's portfolio composition to that of its benchmark, and the Fund's portfolio composition may differ significantly from that of its benchmark.
The Fund's investment program has two primary components. One component is intended to gain exposure to the investment returns of commodities and, from time to time, other alternative asset classes (e.g., currencies). "Commodities" include a range of assets with tangible properties, including oil, natural gas, agricultural products (e.g., wheat, corn, and livestock), precious metals (e.g., gold and silver), industrial metals (e.g., copper), and softs (e.g., cocoa, coffee, and sugar). The Fund typically gains exposure to commodities indirectly, by investing in a wholly owned subsidiary company (discussed below), which, in turn, invests in various commodity-related exchange-traded and over-the-counter ("OTC") derivatives. The Fund also may use, directly or indirectly through its wholly owned subsidiary, a wide variety of other exchange-traded and OTC derivatives that are not linked to the value of a commodity or other commodity-re lated instruments (including financial futures, options, and swap contracts). The Fund is not limited in the extent to which it may use derivatives or in the absolute face value of its derivative positions, and, as a result, it may be leveraged in relation to its assets.
The second component of the Fund's investment program consists of investments in U.S. and foreign fixed income securities, primarily asset-backed securities. The Fund has historically gained its investment exposure to fixed income securities through investment in GMO Short-Duration Collateral Fund ("SDCF"). SDCF has primarily invested in asset-backed securities issued by a wide range of private and government issuers.
The Manager uses proprietary models to identify trends in commodity prices. The factors considered and models used by the Manager may change over time.
A substantial portion of the Fund's investments (through SDCF) in fixed income securities consist of asset-backed securities, including, but not limited to, securities backed by pools of residential and
9
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
commercial mortgages, credit-card receivables, home equity loans, automobile loans, educational loans, corporate and sovereign bonds, and bank loans made to corporations. In addition, the Fund may invest (including through SDCF) in government securities, corporate debt securities, money market instruments, and commercial paper, and enter into credit default swaps, reverse repurchase agreements, and repurchase agreements. The Fund's fixed income securities may include securities issued by a wide range of private issuers and, to a lesser extent, securities issued by federal, state, local, and foreign governments (including securities neither guaranteed nor insured by the U.S. government). The Fund may hold directly or indirectly (through SDCF) fixed income securities whose ratings, after the securities were acquired, were reduced below investment grade. Because of the deterioration in credit markets that became acute in 2008, the Fund, in particular through its investment in SDCF, currently has and may continue to have material exposure to below investment grade securities.
In addition to its commodity-related investments, from time to time, the Fund may invest in a range of currency-related investments, including currency futures, forwards, and options. The Fund does not invest directly in commodities and commodity-related derivatives. Instead, to gain exposure to commodities and certain other assets, the Fund invests in a wholly owned subsidiary company. GMO serves as the investment manager to this company but does not receive any additional management or other fees for such services. The company invests primarily in commodity-related derivatives and fixed income securities.
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. If deemed prudent by the Manager, the Fund will take temporary defensive measures until the Manager has determined that normal conditions have returned or that it is otherwise prudent to resume investing in accordance with the Fund's normal investment strategies. The Fund may not achieve its investment objective while it is taking temporary defensive measures. The Fund does not seek to maintain a specified interest rate duration for its portfolio.
Currently, shares of the Fund are not publicly offered and are principally available for purchase by other GMO Funds and certain other accredited investors.
The financial statements of the GMO funds in which the Fund invests collectively referred to as the "underlying funds" should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect) or by visiting GMO's website at www.gmo.com.
The Fund currently limits subscriptions.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in
10
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Basis of presentation and principles of consolidation
The accompanying consolidated financial statements include the accounts (and the related notes when appropriate) of the GMO Alternative Asset Opportunity Fund and its wholly owned investment in GMO Alternative Asset SPC Ltd. The consolidated financial statements include 100% of the assets and liabilities of GMO Alternative Asset SPC Ltd. All significant interfund accounts and transactions have been eliminated in consolidation.
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the OTC market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or who se values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of August 31, 2010, the total value of securities held directly and indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 0.9% of net assets. The Fund and the funds in which it invests ("underlying funds") classify such securities (as defined below) as Level 3. During the period ended August 31, 2010, the Manager has evaluated the Fund's OTC derivatives contracts and determined that no reduction in val ue was warranted on account of the creditworthiness of a counterparty. See Note 4 for a further discussion on valuation of derivative financial instruments.
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a
11
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. Although alternative prices are available for securities held by the Fund and the underlying funds, those alternative sources are not typically part of the valuation process and would not necessarily confirm the security price used by the Fund and the underlying funds. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fund and the underlying funds. As of August 31, 2010, the total value of securities held directly and indirectly for which no alternative pricing source was available represented 4.2% of the net assets of the Fund.
In accordance with the authoritative guidance on fair value measurements and disclosures under the U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data.
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Debt Obligations | $ | — | $ | 8,005,043 | $ | — | $ | 8,005,043 | |||||||||||
Mutual Funds | 9,445,245 | — | — | 9,445,245 | |||||||||||||||
Short-Term Investments | 3,123,409 | — | — | 3,123,409 | |||||||||||||||
Total Investments | 12,568,654 | 8,005,043 | — | 20,573,697 | |||||||||||||||
Derivatives | |||||||||||||||||||
Futures Contracts Other contract risk | 152,990 | — | — | 152,990 | |||||||||||||||
Total | $ | 12,721,644 | $ | 8,005,043 | $ | — | $ | 20,726,687 |
12
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Swap Agreements Other contract risk | $ | — | $ | (107,010 | ) | $ | — | $ | (107,010 | ) | |||||||||
Futures Contracts Other contract risk | (28,157 | ) | — | — | (28,157 | ) | |||||||||||||
Total | $ | (28,157 | ) | $ | (107,010 | ) | $ | — | $ | (135,167 | ) |
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements. The aggregate net values of the Fund's indirect investments in securities and other financial instruments using Level 3 inputs were 29.8% and (0.1%) of total net assets, respectively.
The Fund held no investments or other financial instruments at either August 31, 2010 or February 28, 2010, whose fair value was determined using Level 3 inputs.
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are inclu ded with the net realized and unrealized gain or loss on investment securities.
Loan agreements
The Fund may invest in loans to corporate, governmental, or other borrowers. The Fund's investments in loans may be in the form of participations in loans or assignments of all or a portion of loans. A loan is often administered by a bank or other financial institution that acts as agent for all holders. The agent
13
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation, (i) the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the party from whom the Fund has purchased the participation and only upon receipt by that party of payments from the borrower and (ii) the Fund generally has no right to enforce compliance by the borrower with the terms of the loan agreement or to vote on matters arising under the loan agreement. Thus, the Fund may be subject to credit risk both of the party from whom it purchased the loan participation and the borrower and the Fund may have minimal control over the terms of any loan modification. When the Fund purchases assignments of loans, it acquires direct rights against the borrower. The Fund had no loan agreements outstanding at the end of the period.
Repurchase agreements
The Fund may enter into repurchase agreements. Under a repurchase agreement the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities it acquired under the repurchase agreement. The value of the securities acquired is required by contract to be marked to market daily so that their market value is at least equal to the amount owed to the Fund by the seller. If the seller of a repurchase agreement defaults or enters into insolvency proceedings and/or the value of the securities subject to the repurchase agreement is insufficient, the Fund's recovery of cash from the seller may be delayed and the Fund may incur a loss equal to the difference between the cash it paid and the value of the securities. The Fund had no repurchase agreements outstanding at the end of the period.
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at an agreed upon price and date. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which generally causes the Fund's portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the even t of a buyer's bankruptcy or insolvency, the Fund's use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund's right to repurchase the securities. The Fund had no reverse repurchase agreements outstanding at the end of the period.
Inflation-indexed bonds
The Fund may invest in inflation indexed bonds. Inflation indexed bonds are fixed income securities whose principal value is adjusted periodically according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that reflects inflation in the principal value of the bond. Most other issuers pay out any inflation related accruals as part of a semiannual coupon.
14
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The value of inflation indexed bonds is expected to change in response to changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal interest rates (i.e., stated interest rates) and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate than nominal interest rates, real interest rates (i.e. nominal interest rate minus inflation) might decline, leading to an increase in value of inflation indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation indexed bonds. There can be no assurance, however, that the value of inflation indexed bonds will be directly correlated to changes in nominal interest rates, and short term increases in inflation may lead to a decline in their value. Coupon payments received by the Fund from inflation indexed bonds are included in the Fund's gross income for the period in which they accrue. In addition, any increase or decrease in the principal amount of an inflation indexed bond will increase or decrease taxable ordinary income to the Fund, even though principal is not paid until maturity. Inflation-indexed bonds outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Taxes
The Fund has elected to be treated as a partnership for U.S. federal income tax purposes. As a partnership, the Fund is not itself subject to U.S. federal income tax. Instead, each shareholder is required to take into account in determining its tax liability its distributive share of items of Fund income, gain, loss, deduction, credit, and tax preference for each taxable year substantially as though such items have been realized directly by the shareholder and without regard to whether any distribution by the Fund has been or will be received. Accordingly, no provision (benefit) for U.S. federal and state income taxes is reflected in the accompanying financial statements.
Taxes on foreign interest and dividend income are generally withheld at the statutory rate. The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Transaction based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 29,077,041 | $ | — | $ | (8,503,344 | ) | $ | (8,503,344 | ) |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the
15
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact its operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Distributions
Because the Fund has elected to be treated as a partnership for U.S. federal tax purposes, it is not required to make distributions to its shareholders. It is the policy of the Fund to declare and pay distributions as determined by the Trustees (or their delegates).
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which co llection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 5).
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average
16
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
For the period ended August 31, 2010, the Fund did not charge a premium on cash purchases or fee on cash redemptions of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by a Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund sha res executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below, including those risks to which the Fund is exposed as a result of the investments of the Fund's wholly owned subsidiary, GMO Alternative Asset SPC Ltd. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because th e types of investments it makes may change over time.
17
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
• Commodities Risk — Because of the Fund's indirect exposure to the global commodity markets, the value of its shares is affected by factors particular to the commodity markets and may fluctuate more than the value of shares of a fund with a broader range of investments.
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
• Credit and Counterparty Risk — The Fund runs the risk that the issuer or guarantor of a fixed income security, the counterparty to an over-the-counter derivatives contract, a borrower of the Fund's securities or the obligor of an obligation underlying an asset-backed security will be unable or unwilling to make timely principal, interest, or settlement payments or otherwise honor its obligations. Credit risk is particularly pronounced for below investment grade securities. In addition, to the extent that the Fund uses over-the-counter derivatives, including swap contracts with longer term maturities, and/or has significant exposure to a single counterparty, this risk will be particularly pronounced for the Fund. This risk is particularly acute in environments (like tho se experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions.
• Leveraging Risk — The Fund's use of reverse repurchase agreements and other derivatives and securities lending may cause its portfolio to be leveraged. The Fund is not limited in the extent to which it uses derivatives. Leverage increases the Fund's portfolio losses when the value of its investments decline.
• Derivatives Risk — The use of derivatives involves the risk that their value may not correlate with the value of the relevant underlying assets, rates or indices. Derivatives also present other Fund risks, including market risk, liquidity risk, and credit and counterparty risk.
• Market Risk — Fixed Income Securities — Typically, the value of fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.
• Management and Operational Risk — The Fund runs the risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations.
• Market Disruption and Geopolitical Risk — Geopolitical events may disrupt securities markets and adversely affect global economies and markets. Those events as well as other changes in foreign and domestic economic and political conditions could adversely affect the value of the Fund's investments.
18
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Other principal risks of an investment in the Fund include Focused Investment Risk (increased risk from the Fund's focus on investments in commodities and in industries with high positive correlations to one another); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
The most significant market risk for Funds investing in fixed income securities is that the securities in which they invest experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. These risks apply to the Fund because it invests in asset-backed securities. Asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as "collateralized debt obligations" or "collateralized loan obligations") and by the fees earned by service providers. Payment of interest on asset-backed securities and repayment of principal largely depend on t he cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. Many asset-backed securities owned (directly or indirectly) by the Fund that were once rated investment grade are now rated below investment grade as of the date of this Report.
With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e .g., automobiles) financed by those loans, and the inability of borrowers to refinance existing
19
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and a Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.
The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution's business may have a material impact on multiple investments.
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps or other derivatives on an index, a single security or a basket of securities to gain investment exposures (e.g., by selling protection under a credit default swap). The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). For example, the Fund may use credit default swaps to take a short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
20
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund's exposure to the credit of an issuer through the debt instrument, but adjust the Fund's interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed versus variable rates and shorter duration versus longer duration exposure. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedin gs. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be secured by collateral (e.g., foreign currency forwards; see "Currency Risk" above), that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
21
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. The Fund had no forward currency contracts outstanding at the end of the period.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with
22
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventin g liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. During the period ended August 31, 2010, the Fund used futures contracts to adjust exposure to certain markets and enhance the diversity and liquidity of the portfolio. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an of fsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains
23
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
The Fund values exchange traded options at the last sale price or, if no sale is reported, the last bid price for options it has purchased and the last ask price for options it has written. The Fund values over-the-counter options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
24
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the pe riod ended August 31, 2010, the Fund used total return swap agreements to adjust exposure to certain markets. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
25
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair values of derivative instruments on the Statement of Assets and Liabilities as of August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Unrealized appreciation on futures contracts* | $ | — | $ | — | $ | — | $ | — | $ | 152,990 | $ | 152,990 | |||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | 152,990 | $ | 152,990 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Unrealized depreciation on futures contracts* | $ | — | $ | — | $ | — | $ | — | $ | (28,157 | ) | $ | (28,157 | ) | |||||||||||||
Unrealized depreciation on swap agreements | — | — | — | — | (107,010 | ) | (107,010 | ) | |||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | (135,167 | ) | $ | (135,167 | ) |
The Effect of Derivative Instruments on the Statement of Operations for the period ended August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Futures contracts | $ | — | $ | — | $ | — | $ | — | $ | (302,227 | ) | $ | (302,227 | ) | |||||||||||||
Swap contracts | — | — | — | — | (206,657 | ) | (206,657 | ) | |||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | (508,884 | ) | $ | (508,884 | ) | |||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Futures contracts | $ | — | $ | — | $ | — | $ | — | $ | 131,211 | $ | 131,211 | |||||||||||||||
Swap contracts | — | — | — | — | (66,941 | ) | (66,941 | ) | |||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | — | $ | 64,270 | $ | 64,270 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Value of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments.
26
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The derivative financial instruments outstanding as of period end (as disclosed in the Notes to Schedules of Investments) and the amounts of realized and changes in unrealized gains and losses on derivative financial instruments during the period (as disclosed in the Statements of Operations) serve as indicators of the volume of derivative activity for the Fund during the period.
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. Prior to June 25, 2010, that fee was paid monthly at the annual rate of 0.45% of average daily net assets. Effective June 25, 2010, that fee is paid monthly at the annual rate of 0.70% of average daily net assets. Beginning on June 25, 2010 and continuing through June 30, 2011, the Manager has voluntarily agreed to waive the Fund's management fee by 0.25% and to reimburse the Fund to the extent the Fund's total annual operating expenses exceed 0.45% of the Fund's average daily net assets (excluding the Fund's Excluded Fund Fees and Expenses described below). The Manager may change or terminate these voluntary waivers and reimbursements at any time, and these voluntary waivers and reimbursements are in addition to the Manager's contractual expense reimbursement agreement described below. During any period for which these voluntary waivers and reimbursements a re in effect, the Fund will incur management fees at an annual rate lower than 0.70% of the Fund's average daily net assets, and, as a result, total annual operating expenses after expense reimbursement for the Fund will be lower. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15%.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's total annual operating expenses that exceed 0.70% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities-lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would b e an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). The Manager also has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Expense Reimbursement Amount. The Fund's contractual expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
27
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $9,766 and $92, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Indirect Interest Expense | Total Indirect Expenses | ||||||||||||
0.002 | % | 0.000 | % | 0.004 | % | 0.006 | % |
The Fund's investments in commodity-related derivatives are generally made through GMO Alternative Asset SPC Ltd., a wholly owned subsidiary organized as a Bermuda limited liability company, which GMO serves as investment manager but does not receive any additional management or other fees for such services.
6. Purchases and sales of securities
For the period ended August 31, 2010, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | — | $ | 112,711 | |||||||
Investments (non-U.S. Government securities) | 2,697,721 | 5,573,000 |
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
28
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
8. Principal shareholders and related parties
As of August 31, 2010, 97.50% of the outstanding shares of the Fund were held by one shareholder. The shareholder is another fund of the Trust.
As of August 31, 2010, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and all of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||
Shares repurchased | (96,619 | ) | $ | (2,644,369 | ) | (172,662 | ) | $ | (4,493,912 | ) | |||||||||
Redemption fees | — | — | — | 25,396 | |||||||||||||||
Net increase (decrease) | (96,619 | ) | $ | (2,644,369 | ) | (172,662 | ) | $ | (4,468,516 | ) |
10. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income* | Distributions of Realized Gains* | Return of Capital* | Value, end of Period | ||||||||||||||||||||||||
GMO Short-Duration Collateral Fund | $ | 11,849,484 | $ | — | $ | — | $ | 86,882 | $ | — | $ | 2,994,036 | $ | 9,239,117 | |||||||||||||||||
GMO U.S. Treasury Fund | 3,081,526 | 2,697,721 | 5,573,000 | 596 | 125 | — | 206,128 | ||||||||||||||||||||||||
Totals | $ | 14,931,010 | $ | 2,697,721 | $ | 5,573,000 | $ | 87,478 | $ | 125 | $ | 2,994,036 | $ | 9,445,245 |
* The table above includes estimated sources of all distributions paid by the underlying funds during the period March 1, 2010 through August 31, 2010. The actual tax characterization of distributions paid by the underlying funds will be determined through fiscal year ending February 28, 2011.
29
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
An amended and restated investment management agreement for the Fund took effect on June 25, 2010. In determining to approve the amended and restated investment management agreement of the Fund, the Trustees, each of whom was not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to approval of the Fund's amended and restated investment management agreement. In addition, at a meeting with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees discussed materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering an increase in the investment management fee payable by the Fund in connection with proposed changes to the Fund's investment program. The Trustees observed that these proposed changes would involve the use of long and short investments across multiple asset classes as part of an inflation protection strategy. The Trustees further observed that, with the exception of the increase in management fees, the amended and restated investment management agreement was identical to the Fund's inves tment management agreement renewed by the Trustees in 2009.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel who would be providing services under the Fund's amended and restated investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process to be applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered materials, including materials provided in connection with the 2009 renewal of the Fund's investment management agreement, relating to the Fund's investment performance as compared to funds managed by other managers deemed by third-party data services to have similar objectives. Over the course of the year, the Trustees reviewed factors identified by the Manager as contributing to the Fund's performance. The Trustees observed that the Fund's purpose is to serve as an investment vehicle for the Trust's other funds and the Manager's separate account clients and that shares of the Fund would not otherwise be made available to investors. The Trustees also considered the qualifications and experience of the personnel responsible for managing those funds, the support those personnel received from the Manager, the investment techniques used to manage those funds, and the overall competence of the Manager.
30
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's amended and restated investment management and shareholder servicing agreements. The Trustees considered information, which had been previously provided in connection with the 2009 renewal of the Fund's investment management agreement, prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. In addition, the Trustees considered information provided by the Manager regarding the proposed changes to the Fund's investment program and corresponding increase in the management fees described above. The Trustees also considered that the amount of the increase in management fees would be reimbursed by the Manager until the changes to the Fund's investment program were fully implemented. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees also took into account the sophistication of the investment techniques to be used to manage the Fund. The Trustees also considered so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee to be charged under the Fund's amended and restated investment management agreement would be based on services provided by the Manager that are in addition to, rather than dupli cative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds, including funds of the Trust, in which it may invest. The Trustees noted in particular that certain underlying funds do not charge any advisory fees, and that with respect to all other underlying funds, pursuant to the contractual expense reimbursement arrangement to be put in place with the Fund, the Manager would effectively reimburse the Fund for advisory fees, shareholder fees and most other expenses of the underlying funds that the Fund would otherwise bear as a result of its investments in those other funds. In addition, the Trustees considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, the Trustees co ncluded, within the context of their overall conclusions regarding the agreement, that the management fee to be charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading of its officers and employees), the procedures by which the Manager allocates trades
31
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services to be provided by the Manager to the Fund under the amended and restated investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the amended and restated investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to be provided to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager 's reimbursement of certain expenses pursuant to the revised contractual expense reimbursement arrangement to be put in place with the Fund in connection with the change in the management fees, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the approval of the Fund's amended and restated investment management agreement.
Following their review, the Trustees, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the Fund's amended and restated investment management agreement for an initial period ending on the second anniversary of the agreement's execution.
32
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including redemption fees; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
1 | ) Actual | 0.61 | % | $ | 1,000.00 | $ | 997.40 | $ | 3.07 | ||||||||||
2 | ) Hypothetical | 0.61 | % | $ | 1,000.00 | $ | 1,022.13 | $ | 3.11 |
* Expenses are calculated using the annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
33
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 115.3 | % | |||||
Options Purchased | 7.2 | ||||||
Short-Term Investments | 3.5 | ||||||
Swaps | (0.9 | ) | |||||
Futures | (3.3 | ) | |||||
Written Options | (7.2 | ) | |||||
Reverse Repurchase Agreements | (18.0 | ) | |||||
Other | 3.4 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
1
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) / Shares / Contracts | Description | Value ($) | |||||||||||||
DEBT OBLIGATIONS — 115.3% | |||||||||||||||
U.S. Government — 115.3% | |||||||||||||||
156,886,800 | U.S. Treasury Inflation Indexed Bond, 1.88%, due 07/15/15 (a) | 168,849,418 | |||||||||||||
88,090,090 | U.S. Treasury Inflation Indexed Bond, 2.38%, due 01/15/17 (a) | 98,172,265 | |||||||||||||
54,229,324 | U.S. Treasury Inflation Indexed Bond, 1.38%, due 01/15/20 (a) | 56,567,964 | |||||||||||||
24,987,000 | U.S. Treasury Inflation Indexed Bond, 1.25%, due 07/15/20 (a) | 25,701,478 | |||||||||||||
12,720,070 | U.S. Treasury Inflation Indexed Bond, 2.38%, due 01/15/25 (a) | 14,576,412 | |||||||||||||
68,021,230 | U.S. Treasury Inflation Indexed Bond, 2.50%, due 01/15/29 (a) | 79,829,307 | |||||||||||||
33,279,690 | U.S. Treasury Inflation Indexed Bond, 2.13%, due 02/15/40 (a) | 37,379,848 | |||||||||||||
62,925,141 | U.S. Treasury Inflation Indexed Note, 2.38%, due 04/15/11 (a) (b) (c) | 63,706,797 | |||||||||||||
60,000,000 | U.S. Treasury Principal Strip Bond, due 11/15/21 (b) | 43,148,580 | |||||||||||||
50,000,000 | U.S. Treasury Strip Coupon, due 08/15/22 (b) | 34,715,550 | |||||||||||||
Total U.S. Government | 622,647,619 | ||||||||||||||
TOTAL DEBT OBLIGATIONS (COST $600,153,481) | 622,647,619 | ||||||||||||||
MUTUAL FUNDS — 3.4% | |||||||||||||||
Affiliated Issuers — 3.4% | |||||||||||||||
734,099 | GMO U.S. Treasury Fund | 18,352,472 | |||||||||||||
TOTAL MUTUAL FUNDS (COST $18,352,472) | 18,352,472 | ||||||||||||||
OPTIONS PURCHASED — 7.2% | |||||||||||||||
Options on Futures — 7.2% | |||||||||||||||
11,000 | Euro Dollar Futures Options Call, Expires 09/10/10, Strike 98.38 | 26,262,500 | |||||||||||||
11,000 | Euro Dollar Futures Options Call, Expires 09/10/10, Strike 98.88 | 12,512,500 | |||||||||||||
Total Options on Futures | 38,775,000 | ||||||||||||||
TOTAL OPTIONS PURCHASED (COST $4,856,500) | 38,775,000 |
See accompanying notes to the financial statements.
2
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
SHORT-TERM INVESTMENTS — 0.1% | |||||||||||||||
Money Market Funds — 0.1% | |||||||||||||||
780,598 | State Street Institutional U.S. Government Money Market Fund-Institutional Class | 780,598 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $780,598) | 780,598 | ||||||||||||||
TOTAL INVESTMENTS — 126.0% (Cost $624,143,051) | 680,555,689 | ||||||||||||||
Other Assets and Liabilities (net) — (26.0%) | (140,459,996 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 540,095,693 |
See accompanying notes to the financial statements.
3
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
A summary of outstanding financial instruments at August 31, 2010 is as follows:
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
8,500 | Euro Dollar 90 Day | March 2011 | $ | 2,114,906,250 | $ | 13,494,500 | |||||||||||||
Sales | |||||||||||||||||||
8,500 | Euro Dollar 90 Day | March 2012 | $ | 2,104,175,000 | $ | (31,056,939 | ) | ||||||||||||
450 | Euro Dollar 90 Days | September 2011 | 111,746,250 | (106,688 | ) | ||||||||||||||
$ | 2,215,921,250 | $ | (31,163,627 | ) |
Reverse Repurchase Agreements
Face Value | Description | Market Value | |||||||||||||
USD | 28,050,000 | Barclays Bank PLC, 0.30%, dated 8/25/10, to be repurchased on demand at face value plus accrued interest with a stated maturity date of 10/08/10. | $ | (28,050,234 | ) | ||||||||||
USD | 13,180,000 | Goldman Sachs, 0.30%, dated 8/02/10, to be repurchased on demand at face value plus accrued interest with a stated maturity date of 09/02/10. | (13,183,295 | ) | |||||||||||
USD | 33,875,000 | Barclays Bank PLC, 0.30%, dated 8/25/10, to be repurchased on demand at face value plus accrued interest with a stated maturity date of 10/08/10. | (33,875,282 | ) | |||||||||||
USD | 22,000,000 | Barclays Bank PLC, 0.30%, dated 8/25/10, to be repurchased on demand at face value plus accrued interest with a stated maturity date of 10/08/10. | (22,000,183 | ) | |||||||||||
$ | (97,108,994 | ) |
See accompanying notes to the financial statements.
4
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Average balance outstanding | $ | (79,879,889 | ) | ||||
Average interest rate | (0.31 | )% | |||||
Maximum balance outstanding | $ | (97,105,000 | ) |
Average balance outstanding was calculated based on daily face value balances outstanding during the period that the Fund has entered into reverse repurchase agreements.
Swap Agreements
Interest Rate Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay)# | Fixed Rate | Variable Rate | Market Value | |||||||||||||||||||||||||
20,000,000 | USD | 11/15/2021 | JP Morgan Chase Bank | (Pay) | 0.00 | % | 3 month LIBOR | $ | (1,836,489 | ) | |||||||||||||||||||||
40,000,000 | USD | 11/15/2021 | JP Morgan Chase Bank | (Pay) | 0.00 | % | 3 month LIBOR | (3,018,737 | ) | ||||||||||||||||||||||
50,000,000 | USD | 8/15/2022 | Barclays Bank PLC | (Pay) | 0.00 | % | 3 month LIBOR | (5,334,702 | ) | ||||||||||||||||||||||
1,266,000,000 | USD | 10/15/2012 | JP Morgan Chase Bank | (Pay) | 1.12 | % | 3 month LIBOR | (10,287,358 | ) | ||||||||||||||||||||||
500,000,000 | USD | 10/15/2015 | JP Morgan Chase Bank | Receive | 2.30 | % | 3 month LIBOR | 16,058,718 | |||||||||||||||||||||||
$ | (4,418,568 | ) | |||||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
# Receive - Fund receives fixed rate and pays variable rate.
(Pay) - Fund pays fixed rate and receives variable rate.
Written Options
A summary of open written option contracts for the Fund at August 31, 2010 is as follows:
Contracts | Expiration Date | Description | Premiums | Market Value | |||||||||||||||||||
22,000 | 9/10/2010 | USD | Euro Dollar Future Option Call, Strike 98.63 | $ | (3,531,000 | ) | $ | (38,775,000 | ) |
As of August 31, 2010, for forward currency contracts, futures contracts, swap agreements and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
See accompanying notes to the financial statements.
5
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Notes to Schedule of Investments:
LIBOR - London Interbank Offered Rate
(a) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic (Note 2).
(b) All or a portion of this security has been pledged to cover collateral requirements on reverse repurchase agreements (Note 2).
(c) All or a portion of this security has been pledged to cover margin requirements on open financial futures contracts and/or collateral on open swap contracts (Note 4).
Currency Abbreviations:
USD - United States Dollar
See accompanying notes to the financial statements.
6
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $605,790,579) (Note 2) | $ | 662,203,217 | |||||
Investments in affiliated issuers, at value (cost $18,352,472) (Notes 2 and 10) | 18,352,472 | ||||||
Receivable for investments sold | 7,104,672 | ||||||
Receivable for Fund shares sold | 4,362,157 | ||||||
Dividends and interest receivable | 1,658,342 | ||||||
Receivable for open swap contracts (Note 4) | 16,058,718 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 15,345 | ||||||
Total assets | 709,754,923 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 5,728,585 | ||||||
Payable for Fund shares repurchased | 6,384,850 | ||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 114,065 | ||||||
Shareholder service fee | 28,337 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 412 | ||||||
Payable for variation margin on open futures contracts (Note 4) | 961,875 | ||||||
Payable for open swap contracts (Note 4) | 20,477,286 | ||||||
Payable for reverse repurchase agreements (Note 2) | 97,108,994 | ||||||
Written options outstanding, at value (premiums $3,531,000) (Note 4) | 38,775,000 | ||||||
Accrued expenses | 79,826 | ||||||
Total liabilities | 169,659,230 | ||||||
Net assets | $ | 540,095,693 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 498,354,528 | |||||
Accumulated undistributed net investment income | 4,852,728 | ||||||
Accumulated net realized gain | 37,570,903 | ||||||
Net unrealized depreciation | (682,466 | ) | |||||
$ | 540,095,693 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 40,979,316 | |||||
Class VI shares | $ | 499,116,377 | |||||
Shares outstanding: | |||||||
Class III | 1,530,073 | ||||||
Class VI | 18,635,787 | ||||||
Net asset value per share: | |||||||
Class III | $ | 26.78 | |||||
Class VI | $ | 26.78 |
See accompanying notes to the financial statements.
7
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Interest | $ | 13,001,103 | |||||
Dividends from affiliated issuers (Note 10) | 7,944 | ||||||
Dividends | 451 | ||||||
Total investment income | 13,009,498 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 957,748 | ||||||
Shareholder service fee – Class III (Note 5) | 29,862 | ||||||
Shareholder service fee – Class VI (Note 5) | 199,755 | ||||||
Interest expense (Note 2) | 123,214 | ||||||
Custodian, fund accounting agent and transfer agent fees | 47,810 | ||||||
Audit and tax fees | 34,776 | ||||||
Legal fees | 17,480 | ||||||
Trustees fees and related expenses (Note 5) | 8,353 | ||||||
Registration fees | 6,348 | ||||||
Miscellaneous | 6,636 | ||||||
Total expenses | 1,431,982 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (110,236 | ) | |||||
Expense reductions (Note 2) | (9 | ) | |||||
Net expenses | 1,321,737 | ||||||
Net investment income (loss) | 11,687,761 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | 24,600,899 | ||||||
Investments in affiliated issuers | (5,837 | ) | |||||
Realized gains distributions from affiliated issuers (Note 10) | 1,393 | ||||||
Closed futures contracts | (883,983 | ) | |||||
Closed swap contracts | 7,087,053 | ||||||
Written options | 6,647,211 | ||||||
Net realized gain (loss) | 37,446,736 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | 35,291,845 | ||||||
Investments in affiliated issuers | 2,764 | ||||||
Open futures contracts | (17,893,999 | ) | |||||
Written options | (35,205,750 | ) | |||||
Open swap contracts | (6,475,088 | ) | |||||
Net unrealized gain (loss) | (24,280,228 | ) | |||||
Net realized and unrealized gain (loss) | 13,166,508 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 24,854,269 |
See accompanying notes to the financial statements.
8
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Period from March 18, 2009 (commencement of operations) through February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 11,687,761 | $ | 20,059,016 | |||||||
Net realized gain (loss) | 37,446,736 | 8,308,306 | |||||||||
Change in net unrealized appreciation (depreciation) | (24,280,228 | ) | 23,597,762 | ||||||||
Net increase (decrease) in net assets from operations | 24,854,269 | 51,965,084 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (289,046 | ) | (804,821 | ) | |||||||
Class VI | (6,713,287 | ) | (17,695,337 | ) | |||||||
Total distributions from net investment income | (7,002,333 | ) | (18,500,158 | ) | |||||||
Net realized gains | |||||||||||
Class III | (167,081 | ) | (261,324 | ) | |||||||
Class VI | (3,675,930 | ) | (5,471,362 | ) | |||||||
Total distributions from net realized gains | (3,843,011 | ) | (5,732,686 | ) | |||||||
(10,845,344 | ) | (24,232,844 | ) | ||||||||
Net share transactions (Note 9): | |||||||||||
Class III | (255,434 | ) | 38,394,972 | ||||||||
Class VI | (373,645,902 | ) | 833,860,892 | ||||||||
Increase (decrease) in net assets resulting from net share transactions | (373,901,336 | ) | 872,255,864 | ||||||||
Total increase (decrease) in net assets | (359,892,411 | ) | 899,988,104 | ||||||||
Net assets: | |||||||||||
Beginning of period | 899,988,104 | — | |||||||||
End of period (including accumulated undistributed net investment income of $4,852,728 and $167,300, respectively) | $ | 540,095,693 | $ | 899,988,104 |
See accompanying notes to the financial statements.
9
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Statement of Cash Flows — Six Months Ended August 31, 2010
Cash flows from operating activities: | |||||||
Net increase (decrease) in net assets resulting from operations | $ | 24,854,269 | |||||
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities: | |||||||
Net change in unrealized (appreciation) depreciation | 24,280,228 | ||||||
Net realized (gain) loss | (37,446,736 | ) | |||||
Net amortization of discount and premium | 1,974,659 | ||||||
Investments purchased | (1,409,813,983 | ) | |||||
Proceeds from sale of investments | 1,722,060,973 | ||||||
Short term investments, net | (434,991 | ) | |||||
Realized gain distributions from affiliated issuers | 1,393 | ||||||
Other proceeds (cost): | |||||||
Swap contracts | 7,323,644 | ||||||
Futures contracts | (17,801,107 | ) | |||||
Written option contracts | 6,297,711 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | — | ||||||
Changes in assets and liabilities: | |||||||
(Increase) decrease in receivable for expenses reimbursed by Manager | 40,899 | ||||||
(Increase) decrease in dividends and interest receivable | 1,280,917 | ||||||
(Increase) decrease in interest receivable for open swap contracts | — | ||||||
Increase (decrease) in periodic payments due on swap contracts | (16,394 | ) | |||||
Increase (decrease) in payable to broker for cash collateral | — | ||||||
Increase (decrease) in payable to affiliate for: | |||||||
Management fee | (52,150 | ) | |||||
Shareholder service fee payable | (11,150 | ) | |||||
Trustee and Chief Compliance Officer of GMO Trust fees | (1,046 | ) | |||||
Increase (decrease) in accrued expenses | (43,602 | ) | |||||
Net cash provided by (used in) operating activities | 322,493,534 | ||||||
Cash flows from financing activities:* | |||||||
Proceeds from shares sold | 273,818,924 | ||||||
Shares repurchased | (629,650,975 | ) | |||||
Cash distributions paid | (338,441 | ) | |||||
Increase (decrease) in payable for reverse repurchase agreements | 33,676,958 | ||||||
Net cash provided by (used in) financing activities | (322,493,534 | ) | |||||
Net increase in cash | — | ||||||
Cash and cash equivalents, beginning of period | — | ||||||
Cash and cash equivalents, end of period | $ | — | |||||
*Supplemental disclosure of cash flow information: | |||||||
Reinvestment of dividends and distributions | $ | 10,506,903 |
See accompanying notes to the financial statements.
10
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout the period)
Six Months Ended August 31, 2010 (Unaudited) | Period from March 27, 2009 (commencement of operations) through February 28, 2010 | ||||||||||
Net asset value, beginning of period | $ | 26.13 | $ | 25.15 | |||||||
Income (loss) from investment operations: | |||||||||||
Net investment income (loss)† | 0.36 | 0.92 | |||||||||
Net realized and unrealized gain (loss) | 0.59 | 0.85 | |||||||||
Total from investment operations | 0.95 | 1.77 | |||||||||
Less distributions to shareholders: | |||||||||||
From net investment income | (0.19 | ) | (0.60 | ) | |||||||
From net realized gains | (0.11 | ) | (0.19 | ) | |||||||
Total distributions | (0.30 | ) | (0.79 | ) | |||||||
Net asset value, end of period | $ | 26.78 | $ | 26.13 | |||||||
Total Return(a) | 3.68 | %** | 7.07 | %** | |||||||
Ratios/Supplemental Data: | |||||||||||
Net assets, end of period (000's) | $ | 40,979 | $ | 40,225 | |||||||
Net operating expenses to average daily net assets(b) | 0.40 | %* | 0.40 | %* | |||||||
Interest expense to average daily net assets(c) | 0.04 | %* | 0.03 | %* | |||||||
Total net expenses to average daily net assets(b) | 0.44 | %* | 0.43 | %* | |||||||
Net investment income (loss) to average daily net assets | 2.71 | %* | 3.86 | %* | |||||||
Portfolio turnover rate | 162 | %** | 116 | %(d)** | |||||||
Fees and expenses reimbursed by the Manager to average daily net assets:(e) | 0.03 | %* | 0.04 | %* |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income.
(d) Calculation represents portfolio turnover of the Fund for the period from March 18, 2009 (commencement of operations) through February 28, 2010.
(e) Ratios include reimbursement of direct operating expenses and waiver of expenses indirectly incurred through investment in the underlying funds (See Note 5).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
11
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class VI share outstanding throughout the period)
Six Months Ended August 31, 2010 (Unaudited) | Period from March 18, 2009 (commencement of operations) through February 28, 2010 | ||||||||||
Net asset value, beginning of period | $ | 26.13 | $ | 25.00 | |||||||
Income (loss) from investment operations: | |||||||||||
Net investment income (loss)† | 0.41 | 0.80 | |||||||||
Net realized and unrealized gain (loss) | 0.55 | 1.15 | |||||||||
Total from investment operations | 0.96 | 1.95 | |||||||||
Less distributions to shareholders: | |||||||||||
From net investment income | (0.20 | ) | (0.63 | ) | |||||||
From net realized gains | (0.11 | ) | (0.19 | ) | |||||||
Total distributions | (0.31 | ) | (0.82 | ) | |||||||
Net asset value, end of period | $ | 26.78 | $ | 26.13 | |||||||
Total Return(a) | 3.72 | %** | 7.83 | %** | |||||||
Ratios/Supplemental Data: | |||||||||||
Net assets, end of period (000's) | $ | 499,116 | $ | 859,763 | |||||||
Net operating expenses to average daily net assets(b) | 0.31 | %* | 0.31 | %* | |||||||
Interest expense to average daily net assets(c) | 0.03 | %* | 0.03 | %* | |||||||
Total net expenses to average daily net assets(b) | 0.34 | %* | 0.34 | %* | |||||||
Net investment income (loss) to average daily net assets | 3.07 | %* | 3.24 | %* | |||||||
Portfolio turnover rate | 162 | %** | 116 | %(d)** | |||||||
Fees and expenses reimbursed by the Manager to average daily net assets:(e) | 0.03 | %* | 0.04 | %* |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income.
(d) Calculation represents portfolio turnover of the Fund for the period from March 18, 2009 (commencement of operations) through February 28, 2010.
(e) Ratios include reimbursement of direct operating expenses and waiver of expenses indirectly incurred through investment in the underlying funds (See Note 5).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
12
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO Asset Allocation Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks total return in excess of that of its benchmark, the Citigroup 3 Month Treasury Bill Index. The Fund is permitted to invest in bonds of any kind (e.g., bonds of any maturity, duration, or credit quality) and under normal circumstances invests directly and indirectly (e.g., through other GMO Funds or derivatives) at least 80% of its assets in bonds. The term "bond" refers to any fixed income security, which includes (i) obligations of an issuer to make payments of principal and/or interest on future dates, (ii) synthetic debt instruments created by the Manager by using derivatives (e.g., a futures contract, swap contract, currency forward or option), and (iii) instruments with variable interest payments. The Fund may invest in any sector of the bond market and is not required to maintain a minimum or maximum allocation of investments in any one sector. The sectors and types of bonds in which the Fund may invest inc lude, but are not limited to: investment grade bonds denominated in various currencies, including securities issued by the U.S. and foreign governments and their agencies or instrumentalities (including securities neither guaranteed nor insured by the U.S. government), corporate bonds, taxable and tax-exempt municipal bonds, and Rule 144A securities; below investment grade bonds (also known as "junk bonds"); inflation indexed bonds issued by the U.S. and foreign governments and their agencies or instrumentalities (including securities neither guaranteed nor insured by the U.S. government), including Inflation-Protected Securities issued by the U.S. Treasury ("TIPS"), and inflation indexed bonds issued by corporations; sovereign debt of emerging countries and other bonds issued in emerging countries (including below investment grade bonds (also known as "junk bonds")); and asset-backed securities, including mortgage related and mortgage-backed securities.
The Fund may also invest in exchange traded and over-the-counter ("OTC") derivatives, including futures contracts, currency options, currency forwards, reverse repurchase agreements, swap contracts (including credit default swaps), interest rate options, swaps on interest rates, and other types of derivatives. The Fund is not limited in its use of derivatives or in the absolute face value of its derivatives positions, and, as a result, the Fund may be leveraged in relation to its assets.
The Fund may gain exposure to the investments described above through investments in shares of other GMO Funds, including GMO High Quality Short-Duration Bond Fund, GMO Debt Opportunities Fund, and GMO U.S. Treasury Fund ("underlying funds"). In addition, the Fund may invest in unaffiliated money market funds. The Fund may invest up to 100% of its assets in below investment grade bonds. The
13
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Fund also may hold securities that are downgraded to below investment grade status after they were purchased by the Fund.
The Manager uses fundamental investment techniques and quantitative models to determine the relative values of different sectors of the bond market, such as the corporate, U.S. government, foreign, and asset-backed bond sectors, and to identify investments that the Manager believes are undervalued or less overvalued and/or that may provide downside protection. The Fund may take substantial positions in particular sectors of the bond market, using derivatives and other instruments to adjust its foreign currency exposure independently of its exposure to those sectors.
The Manager does not seek to maintain a specified interest rate duration for the Fund, and the Fund's interest rate duration will change depending on the Fund's investments and the Manager's current outlook on different sectors of the bond market. The Fund, if deemed prudent by the Manager, will take temporary defensive measures until the Manager has determined that normal conditions have returned or that it is otherwise prudent to resume investing in accordance with the Fund's normal investment strategies. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
The Fund is not intended to serve as a standalone investment product and is available for investment only by other GMO Funds and other GMO asset allocation clients.
The financial statements of the underlying funds should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request by calling (617) 346-7646 (collect) or visiting GMO's website at www.gmo.com.
For the period ending August 31, 2010, the Fund had two classes of shares outstanding: Class III and Class VI. Each class of shares bears a different shareholder service fee.
The Fund currently limits subscriptions.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
14
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the OTC market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or who se values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. During the period ended August 31, 2010, the Manager has evaluated the Fund's OTC derivatives contracts and determined that no reduction in value was warranted on account of the creditworthiness of a counterparty. See note 4 for a further discussion on valuation of derivative financial instruments.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data.
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
15
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Debt Obligations | |||||||||||||||||||
U.S. Government | $ | — | $ | 622,647,619 | $ | — | $ | 622,647,619 | |||||||||||
TOTAL DEBT OBLIGATIONS | — | 622,647,619 | — | 622,647,619 | |||||||||||||||
Mutual Funds | 18,352,472 | — | — | 18,352,472 | |||||||||||||||
Options Purchased | 38,775,000 | — | — | 38,775,000 | |||||||||||||||
Short-Term Investments | 780,598 | — | — | 780,598 | |||||||||||||||
Total Investments | 57,908,070 | 622,647,619 | — | 680,555,689 | |||||||||||||||
Derivatives | |||||||||||||||||||
Futures Contracts | |||||||||||||||||||
Interest Rate Risk | 13,494,500 | — | — | 13,494,500 | |||||||||||||||
Swap Agreements | |||||||||||||||||||
Interest Rate Risk | — | 16,058,718 | — | 16,058,718 | |||||||||||||||
Total | $ | 71,402,570 | $ | 638,706,337 | $ | — | $ | 710,108,907 |
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Futures Contracts | |||||||||||||||||||
Interest Rate Risk | $ | (31,163,627 | ) | $ | — | $ | — | $ | (31,163,627 | ) | |||||||||
Written Options | |||||||||||||||||||
Interest Rate Risk | (38,775,000 | ) | — | — | (38,775,000 | ) | |||||||||||||
Swap Agreements | |||||||||||||||||||
Interest Rate Risk | — | (20,477,286 | ) | — | (20,477,286 | ) | |||||||||||||
Total | $ | (69,938,627 | ) | $ | (20,477,286 | ) | $ | — | $ | (90,415,913 | ) |
16
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements.
The Fund held no direct investments or other financial instruments at either August 31, 2010 or February 28, 2010, whose fair value was determined using Level 3 inputs.
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are inclu ded with the net realized and unrealized gain or loss on investment securities.
Repurchase agreements
The Fund may enter into repurchase agreements. Under a repurchase agreement the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities it acquired under the repurchase agreement. The value of the securities acquired is required by contract to be marked to market daily so that their market value is at least equal to the amount owed to the Fund by the seller. If the seller of a repurchase agreement defaults or enters into insolvency proceedings and/or the value of the securities subject to the repurchase agreement is insufficient, the Fund's recovery of cash from the seller may be delayed and the Fund may incur a loss equal to the difference between the cash it paid and the value of the securities. The Fund had no repurchase agreements outstanding at the end of the period.
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at an agreed upon price and date. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which generally causes the Fund's portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the
17
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the event of a buyer's bankruptcy or insolvency, the Fund's use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund's right to repurchase the securities. As of August 31, 2010, the Fund had received $97,105,000 from reverse repurchase agreements relating to securities with a market value, plus accrued interest, of $100,066,085. Reverse repurchase agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Inflation-indexed bonds
The Fund may invest in inflation indexed bonds. Inflation indexed bonds are fixed income securities whose principal value is adjusted periodically according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that reflects inflation in the principal value of the bond. Most other issuers pay out any inflation related accruals as part of a semiannual coupon.
The value of inflation indexed bonds is expected to change in response to changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal interest rates (i.e., stated interest rates) and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate than nominal interest rates, real interest rates (i.e. nominal interest rate minus inflation) might decline, leading to an increase in value of inflation indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation indexed bonds. There can be no assurance, however, that the value of inflation indexed bonds will be directly correlated to changes in nominal interest rates, and short term increases in inflation may lead to a decline in their value. Coupon payments received by the Fund from inflation indexed bonds are included in the Fund's gross income for the period in which they accrue. In addition, any increase or decrease in the principal amount of an inflation indexed bond will increase or decrease taxable ordinary income to the Fund, even though principal is not paid until maturity. Inflation-indexed bonds outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
18
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 624,568,197 | $ | 55,987,492 | $ | — | $ | 55,987,492 |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the year ended February 28, 2010 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the
19
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. Investment income, common expenses and realized and unrealized gains and losses are allocated among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class's operations. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 5).
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below.
• Market Risk — Fixed Income Securities — Typically, the value of the Fund's fixed income securities will decline during periods of rising interest rates and widening of credit spreads.
• Credit and Counterparty Risk — The Fund runs the risk that the issuer or guarantor of a fixed income security, the counterparty to an over-the-counter derivatives ("OTC") contract, a borrower of the Fund's securities or the obligor of an obligation underlying an asset-backed security will be unable or unwilling to make timely principal, interest, or settlement payments or otherwise honor its obligations. This risk is
20
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
particularly pronounced for the Fund because it may invest up to 100% of its assets in below investment grade bonds. Junk bonds have speculative characteristics, and changes in economic conditions or other circumstances are more likely to impair the capacity of issuers to make principal and interest payments than is the case with issuers of investment grade bonds. In addition, to the extent that the Fund uses OTC derivatives, including swap contracts with longer-term maturities, and/or has significant exposure to a single counterparty, this risk will be particularly pronounced for the Fund. The risk of counterparty default is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions.
• Derivatives Risk — The use of derivatives involves the risk that their value may not correlate with the value of the relevant underlying assets, rates or indices. Derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk.
Other principal risks of an investment in the Fund include Foreign Investment Risk (risk that the market prices of foreign securities will fluctuate more rapidly and to a greater extent than those of U.S. securities, which may adversely affect the value of the Fund's foreign investments, with the Fund's investments in emerging countries subject to this risk to a greater extent); Currency Risk (risk that fluctuations in exchange rates will adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies); Liq uidity Risk (difficulty in selling Fund investments at desirable prices and/or increased likelihood of honoring redemption requests in-kind); Leveraging Risk (increased risk of loss from use of reverse repurchase agreements and other derivatives and securities lending); Focused Investment Risk (increased risk from the Fund's focus on investments in countries, regions, sectors or companies with high positive correlations to one another); Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
21
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps or other derivatives on an index, a single security or a basket of securities to gain investment exposures (e.g., by selling protection under a credit default swap). The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). For example, the Fund may use credit default swaps to take a short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund's exposure to the credit of an issuer through the debt instrument, but adjust the Fund's interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed versus variable rates and shorter duration versus longer duration exposure. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedin gs. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be secured by collateral (e.g., foreign currency forwards; see "Currency Risk" below), that require collateral
22
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates.
23
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. The Fund had no forward currency contracts outstanding at the end of the period.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. During the period ended August 31, 2010, the Fund used futures contracts to adjust interest-rate exposure and enhance the diversity and liquidity of the portfolio. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. During the period ended August 31, 2010, the Fund used purchased option contracts to adjust interest rate exposure. Option contracts purchased by the Fund and outstanding at the end o f the period are listed in the Fund's Schedule of Investments.
24
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an of fsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. During the period ended August 31, 2010, the Fund used written option contracts to adjust interest rate exposure. Written options outstanding at the end of the period are listed in the Fund's Schedule of Investments.
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
For the period ended August 31, 2010, investment activity in options contracts written by the Fund was as follows:
Puts | Calls | ||||||||||||||||||||||||||
Principal Amount of Contracts | Number of Futures Contracts | Premiums | Principal Amount of Contracts | Number of Futures Contracts | Premiums | ||||||||||||||||||||||
Outstanding, beginning of period | $ | — | (6,000 | ) | $ | (2,050,500 | ) | $ | — | (10,000 | ) | $ | (1,830,000 | ) | |||||||||||||
Options written | — | (14,000 | ) | (5,503,250 | ) | — | (27,000 | ) | (8,599,150 | ) | |||||||||||||||||
Options bought back | — | 3,000 | 1,587,750 | — | 15,000 | 6,898,150 | |||||||||||||||||||||
Options expired | — | 17,000 | 5,966,000 | — | — | — | |||||||||||||||||||||
Options sold | — | — | — | — | — | — | |||||||||||||||||||||
Outstanding, end of period | $ | — | — | $ | — | $ | — | (22,000 | ) | $ | (3,531,000 | ) |
25
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying
26
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the stri ke price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the pe riod ended August 31, 2010, the Fund used swap agreements to adjust interest rate exposure. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
27
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (purchased options) | $ | — | $ | 38,775,000 | $ | — | $ | — | $ | — | $ | 38,775,000 | |||||||||||||||
Unrealized appreciation on future contracts* | 13,494,500 | — | — | — | — | 13,494,500 | |||||||||||||||||||||
Unrealized appreciation on swap agreements | 16,058,718 | — | — | — | — | 16,058,718 | |||||||||||||||||||||
Total | $ | 29,553,218 | $ | 38,775,000 | $ | — | $ | — | $ | — | $ | 68,328,218 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | (38,775,000 | ) | $ | — | $ | — | $ | — | $ | — | $ | (38,775,000 | ) | |||||||||||||
Unrealized depreciation on future contracts* | (31,163,627 | ) | — | — | — | — | (31,163,627 | ) | |||||||||||||||||||
Unrealized depreciation on swap agreements | (20,477,286 | ) | — | — | — | — | (20,477,286 | ) | |||||||||||||||||||
Total | $ | (90,415,913 | ) | $ | — | $ | — | $ | — | $ | — | $ | (90,415,913 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair values of derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments.
28
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Period Ended August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | — | $ | (6,586,166 | ) | $ | — | $ | — | $ | — | $ | (6,586,166 | ) | |||||||||||||
Written options | 6,647,211 | — | — | — | — | 6,647,211 | |||||||||||||||||||||
Future contracts | (883,983 | ) | — | — | — | — | (883,983 | ) | |||||||||||||||||||
Swap contracts | 7,087,053 | — | — | — | — | 7,087,053 | |||||||||||||||||||||
Total | $ | 12,850,281 | $ | (6,586,166 | ) | $ | — | $ | — | $ | — | $ | 6,264,115 | ||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | — | $ | 34,050,515 | $ | — | $ | — | $ | — | $ | 34,050,515 | |||||||||||||||
Written options | (35,205,750 | ) | — | — | — | — | (35,205,750 | ) | |||||||||||||||||||
Future contracts | (17,893,999 | ) | — | — | — | — | (17,893,999 | ) | |||||||||||||||||||
Swap contracts | (6,475,088 | ) | — | — | — | — | (6,475,088 | ) | |||||||||||||||||||
Total | $ | (59,574,837 | ) | $ | 34,050,515 | $ | — | $ | — | $ | — | $ | (25,524,322 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
The volume of derivative activity, based on absolute values (futures contracts), notional amounts (swap agreements), or principal amounts (options) outstanding at each month-end, was as follows for the period ended August 31, 2010:
Futures Contracts | Swap Agreements | Options | |||||||||||||
Average amount outstanding | $ | 3,298,634,196 | $ | 1,009,725,973 | $ | 98,285,714 |
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.25% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets of each class at the annual rate of 0.15% for Class III shares and 0.055% for Class VI shares. The Manager has contractually agreed through at least June 30, 2011 to waive the Fund's
29
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
shareholder service fee to the extent that the aggregate of any direct and indirect shareholder service fees borne by a class of shares of the Fund exceeds 0.15% for Class III shares and 0.055% for Class VI shares; provided, however, that the amount of this waiver will not exceed the respective Class' shareholder service fee.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.25% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investme nt company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition to the contractual expense reimbursement described above, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in other GMO Funds (excluding those Funds' Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund's Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $8,353 and $2,814, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Total Indirect Expenses | |||||||||
< 0.001% | 0.000 | % | < 0.001% |
30
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
6. Purchases and sales of securities
For the period ended August 31, 2010, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | 1,184,532,475 | $ | 1,544,048,754 | |||||||
Investments (non-U.S. Government securities) | 156,700,198 | 141,352,084 |
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, 69.60% of the shares outstanding of the Fund were held by three shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund. Two of these shareholders are other funds of the Trust.
As of August 31, 2010, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and 99.99% of the Fund's shares were held by accounts for which the Manager had investment discretion.
31
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Period from March 27, 2009 (commencement of operations) through February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 368,572 | $ | 9,671,740 | 4,718,252 | $ | 119,445,441 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 17,436 | 456,127 | 41,021 | 1,066,145 | |||||||||||||||
Shares repurchased | (395,172 | ) | (10,383,301 | ) | (3,220,036 | ) | (82,116,614 | ) | |||||||||||
Net increase (decrease) | (9,164 | ) | $ | (255,434 | ) | 1,539,237 | $ | 38,394,972 | |||||||||||
Six Months Ended August 31, 2010 (Unaudited) | Period from March 18, 2009 (commencement of operations) through February 28, 2010 | ||||||||||||||||||
Class VI: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 9,213,085 | $ | 241,955,846 | 38,433,140 | $ | 978,458,954 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 384,351 | 10,050,776 | 891,713 | 23,166,699 | |||||||||||||||
Shares repurchased | (23,868,762 | ) | (625,652,524 | ) | (6,417,740 | ) | (167,764,761 | ) | |||||||||||
Net increase (decrease) | (14,271,326 | ) | $ | (373,645,902 | ) | 32,907,113 | $ | 833,860,892 |
10. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO U.S. Treasury Fund | $ | 9,396,214 | $ | 139,109,338 | $ | 130,150,000 | $ | 7,944 | $ | 1,393 | $ | 18,352,472 | |||||||||||||||
Totals | $ | 9,396,214 | $ | 139,109,338 | $ | 130,150,000 | $ | 7,944 | $ | 1,393 | $ | 18,352,472 |
32
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including a one-year period and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees observed that the Fund's purpose is to serve as an investment vehicle for the Trust's asset allocation funds and the Manager's asset allocation separate account clients and is not otherwise available to investors. The Trustees also considered the qualifications and experience of the personnel responsible for managing the
33
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took in to account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also con sidered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of other funds of the Trust in which it invests. The Trustees noted in particular that certain underlying funds do not charge any advisory fees, and that with respect to all other underlying funds, pursuant to a contractual expense reimbursement arrangement in place with the Fund, the Manager effectively reimburses the Fund for management fees, shareholder servicing fees and most other expenses of the underlying funds that the Fund would otherwise bear as a result of its investments in those other funds. In addition, the Trustees considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economie s of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory
34
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
35
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.44 | % | $ | 1,000.00 | $ | 1,036.80 | $ | 2.26 | |||||||||||
2) Hypothetical | 0.44 | % | $ | 1,000.00 | $ | 1,022.99 | $ | 2.24 | |||||||||||
Class VI | |||||||||||||||||||
1) Actual | 0.34 | % | $ | 1,000.00 | $ | 1,037.20 | $ | 1.75 | |||||||||||
2) Hypothetical | 0.34 | % | $ | 1,000.00 | $ | 1,023.49 | $ | 1.73 |
* Expenses are calculated using each Class's annualized expense ratio (including interest expense and indirect expenses incurred) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
36
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 63.8 | % | |||||
Debt Obligations | 22.7 | ||||||
Cash and Cash Equivalents | 19.3 | ||||||
Short-Term Investments | 11.2 | ||||||
Options Purchased | 1.2 | ||||||
Preferred Stocks | 1.0 | ||||||
Investment Funds | 0.5 | ||||||
Loan Participations | 0.2 | ||||||
Loan Assignments | 0.1 | ||||||
Rights and Warrants | 0.0 | ||||||
Promissory Notes | 0.0 | ||||||
Forward Currency Contracts | (0.1 | ) | |||||
Written Options | (1.1 | ) | |||||
Reverse Repurchase Agreements | (1.3 | ) | |||||
Swap Agreements | (4.7 | ) | |||||
Futures Contracts | (14.3 | ) | |||||
Other | 1.5 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
1
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2010 (Unaudited)
Country / Region Summary** | % of Investments | ||||||
United States | 52.2 | % | |||||
Australia | 8.9 | ||||||
Japan | 6.9 | ||||||
Euro Region*** | 5.4 | ||||||
United Kingdom | 4.3 | ||||||
Korea | 2.7 | ||||||
Switzerland | 2.7 | ||||||
Russia | 2.3 | ||||||
Brazil | 1.7 | ||||||
New Zealand | 1.3 | ||||||
Turkey | 1.1 | ||||||
China | 1.0 | ||||||
Taiwan | 1.0 | ||||||
India | 0.9 | ||||||
Thailand | 0.9 | ||||||
Singapore | 0.6 | ||||||
Sweden | 0.6 | ||||||
Indonesia | 0.4 | ||||||
Mexico | 0.4 | ||||||
Philippines | 0.4 | ||||||
South Africa | 0.4 | ||||||
Argentina | 0.3 | ||||||
Czech Republic | 0.3 | ||||||
Denmark | 0.3 | ||||||
Emerging**** | 0.3 | ||||||
Hong Kong | 0.3 | ||||||
Egypt | 0.2 | ||||||
Hungary | 0.2 | ||||||
Malaysia | 0.2 | ||||||
Norway | 0.2 | ||||||
Poland | 0.2 | ||||||
Venezuela | 0.2 | ||||||
Canada | 0.1 | ||||||
Chile | 0.1 | ||||||
Colombia | 0.1 | ||||||
Congo | 0.1 | ||||||
Developed | 0.1 | ||||||
Dominican Republic | 0.1 | ||||||
Iraq | 0.1 | ||||||
Ivory Coast | 0.1 | ||||||
Peru | 0.1 |
2
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2010 (Unaudited)
Country / Region Summary** | % of Investments | ||||||
Ukraine | 0.1 | % | |||||
Uruguay | 0.1 | ||||||
Vietnam | 0.1 | ||||||
100.0 | % |
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds except for GMO Alpha Only Fund. The table excludes short-term investments. The table includes exposure through the use of derivative contracts.
*** The "Euro Region" is comprised of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
**** The "Emerging" exposure is associated only with investments in the GMO Emerging Country Debt Fund, which is exposed to emerging countries primarily comprised of Russia, Argentina, Brazil, Philippines, Mexico, Venezuela, Colombia, Ukraine, Turkey, and Indonesia. Additional information about the fund's emerging country exposure is available in the financial statements of the GMO Emerging Country Debt Fund.
3
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
MUTUAL FUNDS — 98.1% | |||||||||||
Affiliated Issuers — 98.1% | |||||||||||
74,959,895 | GMO Alpha Only Fund, Class IV | 365,054,691 | |||||||||
732,600 | GMO Alternative Asset Opportunity Fund | 19,904,741 | |||||||||
2,595,581 | GMO Asset Allocation Bond Fund, Class VI | 69,509,662 | |||||||||
77,757,202 | GMO Currency Hedged International Equity Fund, Class III | 203,723,868 | |||||||||
4,197,424 | GMO Emerging Country Debt Fund, Class IV | 39,833,555 | |||||||||
15,238,799 | GMO Emerging Markets Fund, Class VI | 187,742,009 | |||||||||
2,742,096 | GMO Flexible Equities Fund, Class VI | 46,835,007 | |||||||||
26,075,669 | GMO Quality Fund, Class VI | 458,410,264 | |||||||||
4,031,632 | GMO Special Situations Fund, Class VI | 107,523,623 | |||||||||
15,095,576 | GMO Strategic Fixed Income Fund, Class VI | 238,208,188 | |||||||||
929,854 | GMO World Opportunity Overlay Fund | 20,614,872 | |||||||||
TOTAL MUTUAL FUNDS (COST $1,792,447,264) | 1,757,360,480 | ||||||||||
DEBT OBLIGATIONS — 1.9% | |||||||||||
Asset-Backed Securities — 1.9% | |||||||||||
Auto Financing — 0.2% | |||||||||||
700,000 | Capital Auto Receivable Asset Trust, Series 08-1, Class A4B, 1 mo. LIBOR + 1.35%, 1.63%, due 07/15/14 | 708,533 | |||||||||
300,000 | Daimler Chrysler Auto Trust, Series 08-B, Class A4A, 5.32%, due 11/10/14 | 315,090 | |||||||||
500,000 | Daimler Chrysler Auto Trust, Series 08-B, Class A4B, 1 mo. LIBOR + 1.85%, 2.14%, due 11/10/14 | 509,725 | |||||||||
1,400,000 | Ford Credit Auto Owner Trust, Series 08-B, Class A4B, 1 mo. LIBOR + 2.00%, 2.28%, due 03/15/13 | 1,428,784 | |||||||||
1,300,000 | Ford Credit Floorplan Master Owner Trust, Series 06-4, Class A, 1 mo. LIBOR + .25%, 0.53%, due 06/15/13 | 1,287,000 | |||||||||
Total Auto Financing | 4,249,132 | ||||||||||
Business Loans — 0.1% | |||||||||||
481,667 | Bayview Commercial Asset Trust, Series 04-3, Class A1, 144A, 1 mo. LIBOR + .37%, 0.63%, due 01/25/35 | 375,700 | |||||||||
427,466 | GE Business Loan Trust, Series 04-1, Class A, 144A, 1 mo. LIBOR + .29%, 0.57%, due 05/15/32 | 376,169 |
See accompanying notes to the financial statements.
4
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
Business Loans — continued | |||||||||||
1,099,936 | Lehman Brothers Small Balance Commercial, Series 05-2A, Class 1A, 144A, 1 mo. LIBOR + .25%, 0.51%, due 09/25/30 | 791,954 | |||||||||
Total Business Loans | 1,543,823 | ||||||||||
CMBS — 0.2% | |||||||||||
700,000 | Commercial Mortgage Pass-Through Certificates, Series 06-FL12, Class AJ, 144A, 1 mo. LIBOR + .13%, 0.41%, due 12/15/20 | 504,000 | |||||||||
740,426 | GE Capital Commercial Mortgage Corp., Series 05-C4, Class A2, 5.31%, due 11/10/45 | 742,499 | |||||||||
81,717 | Greenwich Capital Commercial Funding Corp., Series 06-FL4A, Class A1, 144A, 1 mo. LIBOR + .09%, 0.39%, due 11/05/21 | 77,223 | |||||||||
816,783 | GS Mortgage Securities Corp., Series 07-EOP, Class A1, 144A, 1 mo. LIBOR + .09%, 0.39%, due 03/06/20 | 793,015 | |||||||||
1,082,542 | J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 06-LDP7, Class A2, 6.05%, due 04/15/45 | 1,105,817 | |||||||||
500,000 | Merrill Lynch Mortgage Trust, Series 06-C1, Class A2, 5.79%, due 05/12/39 | 520,900 | |||||||||
30,600 | Morgan Stanley Dean Witter Capital I, Series 03-TOP9, Class A1, 3.98%, due 11/13/36 | 30,819 | |||||||||
409,026 | Wachovia Bank Commercial Mortgage Trust, Series 06-WL7A, Class A1, 144A, 1 mo. LIBOR + .09%, 0.36%, due 09/15/21 | 364,033 | |||||||||
Total CMBS | 4,138,306 | ||||||||||
CMBS Collateralized Debt Obligations — 0.1% | |||||||||||
1,599,399 | American Capital Strategies Ltd. Commercial Real Estate CDO Trust, Series 07-1A, Class A, 144A, 3 mo. LIBOR + .80%, 1.14%, due 11/23/52 | 71,973 | |||||||||
1,476,549 | Crest Exeter Street Solar, Series 04-1A, Class A1, 144A, 3 mo. LIBOR + .35%, 0.89%, due 06/28/19 | 1,255,067 | |||||||||
Total CMBS Collateralized Debt Obligations | 1,327,040 | ||||||||||
Credit Cards — 0.3% | |||||||||||
1,900,000 | Capital One Multi-Asset Execution Trust, Series 04-A7, Class A7, 3 mo. LIBOR + .15%, 0.53%, due 06/16/14 | 1,897,948 | |||||||||
700,000 | Charming Shoppes Master Trust, Series 07-1A, Class A1, 144A, 1 mo. LIBOR + 1.25%, 1.53%, due 09/15/17 | 683,522 | |||||||||
200,000 | MBNA Credit Card Master Note Trust, Series 04-A8, Class A8, 1 mo. LIBOR + .15%, 0.43%, due 01/15/14 | 199,904 |
See accompanying notes to the financial statements.
5
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
Credit Cards — continued | |||||||||||
800,000 | National City Credit Card Master Trust, Series 08-3, Class A, 1 mo. LIBOR + 1.80%, 2.08%, due 05/15/13 | 807,248 | |||||||||
1,300,000 | World Financial Network Credit Card Master Trust, Series 06-A, Class A, 144A, 1 mo. LIBOR + .13%, 0.41%, due 02/15/17 | 1,257,178 | |||||||||
Total Credit Cards | 4,845,800 | ||||||||||
Equipment Leases — 0.1% | |||||||||||
800,000 | CNH Equipment Trust, Series 08-A, Class A4B, 1 mo. LIBOR + 1.95%, 2.23%, due 08/15/14 | 812,640 | |||||||||
Insured Auto Financing — 0.2% | |||||||||||
913,434 | AmeriCredit Automobile Receivables Trust, Series 07-AX, Class A4, XL, 1 mo. LIBOR + .04%, 0.34%, due 10/06/13 | 904,299 | |||||||||
800,000 | AmeriCredit Prime Automobile Receivable Trust, Series 07-2M, Class A4B, MBIA, 1 mo. LIBOR + .50%, 0.79%, due 03/08/16 | 797,200 | |||||||||
398,937 | Capital One Auto Finance Trust, Series 06-B, Class A4, MBIA, 1 mo. LIBOR + .02%, 0.29%, due 07/15/13 | 396,646 | |||||||||
174,513 | Capital One Auto Finance Trust, Series 07-C, Class A3B, FGIC, 1 mo. LIBOR + .51%, 0.79%, due 04/16/12 | 174,517 | |||||||||
860,575 | Santander Drive Auto Receivables Trust, Series 07-3, Class A4B, FGIC, 1 mo. LIBOR + .65%, 0.93%, due 10/15/14 | 856,789 | |||||||||
1,100,000 | Triad Auto Receivables Owner Trust, Series 07-B, Class A4B, FSA, 1 mo. LIBOR + 1.20%, 1.49%, due 07/14/14 | 1,101,826 | |||||||||
Total Insured Auto Financing | 4,231,277 | ||||||||||
Insured Other — 0.1% | |||||||||||
1,000,000 | Dominos Pizza Master Issuer LLC, Series 07-1, Class A2, 144A, MBIA, 5.26%, due 04/25/37 | 977,500 | |||||||||
715,400 | Henderson Receivables LLC, Series 06-4A, Class A1, 144A, MBIA, 1 mo. LIBOR + .20%, 0.48%, due 12/15/41 | 632,710 | |||||||||
2,500,000 | Toll Road Investment Part II, Series C, 144A, MBIA, Zero Coupon, due 02/15/37 | 184,775 | |||||||||
Total Insured Other | 1,794,985 | ||||||||||
Insured Residential Asset-Backed Securities (United States) — 0.0% | |||||||||||
304,395 | Residential Asset Mortgage Products, Inc., Series 05-RS9, Class AI3, FGIC, 1 mo. LIBOR + .22%, 0.48%, due 11/25/35 | 203,993 |
See accompanying notes to the financial statements.
6
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
Insured Residential Mortgage-Backed Securities (United States) — 0.0% | |||||||||||
200,675 | Chevy Chase Mortgage Funding Corp., Series 04-1A, Class A2, 144A, AMBAC, 1 mo. LIBOR + .33%, 0.59%, due 01/25/35 | 122,412 | |||||||||
75,196 | GreenPoint Home Equity Loan Trust, Series 04-4, Class A, AMBAC, 1 mo. LIBOR + .28%, 0.84%, due 08/15/30 | 37,443 | |||||||||
283,706 | Wachovia Asset Securitization, Inc., Series 04-HE1, Class A, MBIA, 1 mo. LIBOR + .22%, 0.48%, due 06/25/34 | 242,968 | |||||||||
Total Insured Residential Mortgage-Backed Securities (United States) | 402,823 | ||||||||||
Insured Time Share — 0.0% | |||||||||||
107,024 | Cendant Timeshare Receivables Funding LLC, Series 05-1A, Class A2, 144A, FGIC, 1 mo. LIBOR + .18%, 0.45%, due 05/20/17 | 102,409 | |||||||||
Residential Asset-Backed Securities (United States) — 0.4% | |||||||||||
651,390 | ACE Securities Corp., Series 07-WM1, Class A2A, 1 mo. LIBOR + .07%, 0.33%, due 11/25/36 | 353,379 | |||||||||
24,232 | ACE Securities Corp., Series 06-ASL1, Class A, 1 mo. LIBOR + .14%, 0.40%, due 02/25/36 | 3,094 | |||||||||
553,024 | Argent Securities, Inc., Series 06-M1, Class A2C, 1 mo. LIBOR + .15%, 0.41%, due 07/25/36 | 227,085 | |||||||||
1,200,000 | Asset Backed Funding Certificates, Series 06-OPT2, Class A3C, 1 mo. LIBOR + .15%, 0.41%, due 10/25/36 | 795,000 | |||||||||
871,253 | Bayview Financial Acquisition Trust, Series 04-B, Class A1, 144A, 1 mo. LIBOR + .50%, 1.26%, due 05/28/39 | 439,983 | |||||||||
554,434 | Bayview Financial Acquisition Trust, Series 04-B, Class A2, 144A, 1 mo. LIBOR + .65%, 1.56%, due 05/28/39 | 206,526 | |||||||||
295,467 | Carrington Mortgage Loan Trust, Series 07-FRE1, Class A1, 1 mo. LIBOR + .12%, 0.38%, due 02/25/37 | 270,559 | |||||||||
1,050,014 | Centex Home Equity, Series 06-A, Class AV3, 1 mo. LIBOR + .16%, 0.42%, due 06/25/36 | 846,217 | |||||||||
267,864 | Countrywide Asset-Backed Certificates, Series 06-BC5, Class 2A1, 1 mo. LIBOR + .08%, 0.34%, due 03/25/37 | 265,051 | |||||||||
115,580 | Equity One ABS, Inc., Series 04-1, Class AV2, 1 mo. LIBOR + .30%, 0.56%, due 04/25/34 | 75,127 | |||||||||
726,572 | First Franklin Mortgage Loan Asset Backed Certificates, Series 06-FF5, Class 2A3, 1 mo. LIBOR + .16%, 0.42%, due 04/25/36 | 440,030 | |||||||||
163,108 | Fremont Home Loan Trust, Series 06-B, Class 2A2, 1 mo. LIBOR + .10%, 0.36%, due 08/25/36 | 94,603 |
See accompanying notes to the financial statements.
7
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||
756,806 | Household Home Equity Loan Trust, Series 05-3, Class A2, 1 mo. LIBOR + .29%, 0.56%, due 01/20/35 | 656,766 | |||||||||
586,521 | Master Asset-Backed Securities Trust, Series 06-FRE2, Class A4, 1 mo. LIBOR + .15%, 0.41%, due 03/25/36 | 293,260 | |||||||||
2,262,946 | Master Asset-Backed Securities Trust, Series 06-HE3, Class A3, 1 mo. LIBOR + .15%, 0.41%, due 08/25/36 | 792,031 | |||||||||
770,343 | Master Second Lien Trust, Series 06-1, Class A, 1 mo. LIBOR + .16%, 0.42%, due 03/25/36 | 99,182 | |||||||||
202,989 | Merrill Lynch Mortgage Investors, Series 07-HE2, Class A2A, 1 mo. LIBOR + .12%, 0.38%, due 02/25/37 | 133,019 | |||||||||
633,834 | Morgan Stanley Home Equity Loans, Series 07-2, Class A1, 1 mo. LIBOR + .10%, 0.36%, due 04/25/37 | 584,712 | |||||||||
676,376 | Residential Asset Securities Corp., Series 05-KS12, Class A2, 1 mo. LIBOR + .25%, 0.51%, due 01/25/36 | 647,482 | |||||||||
Total Residential Asset-Backed Securities (United States) | 7,223,106 | ||||||||||
Residential Mortgage-Backed Securities (Australian) — 0.1% | |||||||||||
428,124 | Interstar Millennium Trust, Series 03-3G, Class A2, 3 mo. LIBOR + .25%, 1.04%, due 09/27/35 | 403,293 | |||||||||
211,626 | Interstar Millennium Trust, Series 05-1G, Class A, 3 mo. LIBOR + .12%, 0.94%, due 12/08/36 | 204,037 | |||||||||
566,102 | Medallion Trust, Series 06-1G, Class A1, 3 mo. LIBOR + .05%, 0.59%, due 06/14/37 | 539,429 | |||||||||
240,641 | Superannuation Members Home Loans Global Fund, Series 8, Class A1, 3 mo. LIBOR + .07%, 0.60%, due 01/12/37 | 231,618 | |||||||||
Total Residential Mortgage-Backed Securities (Australian) | 1,378,377 | ||||||||||
Residential Mortgage-Backed Securities (European) — 0.1% | |||||||||||
602,778 | Aire Valley Mortgages, Series 06-1A, Class 1A, 144A, 3 mo. LIBOR + .11%, 0.65%, due 09/20/66 | 499,040 | |||||||||
683,769 | Brunel Residential Mortgages, Series 07-1A, Class A4C, 144A, 3 mo. LIBOR + .10%, 0.63%, due 01/13/39 | 611,973 | |||||||||
200,527 | Granite Master Issuer Plc, Series 06-2, Class A4, 1 mo. LIBOR + .04%, 0.31%, due 12/20/54 | 186,290 | |||||||||
40,226 | Paragon Mortgages Plc, Series 7A, Class A1A, 144A, 3 mo. LIBOR + .21%, 0.80%, due 05/15/34 | 34,417 |
See accompanying notes to the financial statements.
8
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) / Shares | Description | Value ($) | |||||||||
Residential Mortgage-Backed Securities (European) — continued | |||||||||||
523,643 | Paragon Mortgages Plc, Series 14A, Class A2C, 144A, 3 mo. LIBOR + .10%, 0.64%, due 09/15/39 | 431,901 | |||||||||
Total Residential Mortgage-Backed Securities (European) | 1,763,621 | ||||||||||
Residential Mortgage-Backed Securities (United States) — 0.0% | |||||||||||
104,448 | Chevy Chase Mortgage Funding Corp., Series 04-3A, Class A2, 144A, 1 mo. LIBOR + .30%, 0.56%, due 08/25/35 | 63,713 | |||||||||
Time Share — 0.0% | |||||||||||
160,613 | Sierra Receivables Funding Co., Series 08-1A, Class A2, 144A, 1 mo. LIBOR + 4.00%, 4.27%, due 02/20/20 | 167,439 | |||||||||
Total Asset-Backed Securities | 34,248,484 | ||||||||||
U.S. Government Agency — 0.0% | |||||||||||
41,875 | Agency for International Development Floater (Support of C.A.B.E.I), 6 mo. U.S. Treasury Bill + .40%, 0.59%, due 10/01/12 (a) | 41,440 | |||||||||
101,782 | Agency for International Development Floater (Support of Honduras), 3 mo. U.S. Treasury Bill x 117%, 0.17%, due 10/01/11 (a) | 100,932 | |||||||||
100,000 | Agency for International Development Floater (Support of Zimbabwe), 3 mo. U.S. Treasury Bill x 115%, 0.17%, due 01/01/12 (a) | 98,822 | |||||||||
Total U.S. Government Agency | 241,194 | ||||||||||
TOTAL DEBT OBLIGATIONS (COST $31,842,716) | 34,489,678 | ||||||||||
SHORT-TERM INVESTMENTS — 0.0% | |||||||||||
Money Market Funds — 0.0% | |||||||||||
53,615 | State Street Institutional U.S. Government Money Market Fund-Institutional Class | 53,615 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $53,615) | 53,615 | ||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $1,824,343,595) | 1,791,903,773 | ||||||||||
Other Assets and Liabilities (net) — (0.0%) | (34,818 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 1,791,868,955 |
See accompanying notes to the financial statements.
9
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Notes to Schedule of Investments:
144A - Securities 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.
AMBAC - Insured as to the payment of principal and interest by AMBAC Assurance Corporation.
C.A.B.E.I. - Central American Bank for Economic Integration
CDO - Collateralized Debt Obligation
CMBS - Commercial Mortgage Backed Security
FGIC - Insured as to the payment of principal and interest by Financial Guaranty Insurance Corporation.
FSA - Insured as to the payment of principal and interest by Financial Security Assurance.
LIBOR - London Interbank Offered Rate
MBIA - Insured as to the payment of principal and interest by MBIA Insurance Corp.
XL - Insured as to the payment of principal and interest by XL Capital Assurance.
The rates shown on variable rate notes are the current interest rates at August 31, 2010, which are subject to change based on the terms of the security.
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
See accompanying notes to the financial statements.
10
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $31,896,331) (Note 2) | $ | 34,543,293 | |||||
Investments in affiliated issuers, at value (cost $1,792,447,264) (Notes 2 and 10) | 1,757,360,480 | ||||||
Receivable for Fund shares sold | 10,692,543 | ||||||
Interest receivable | 34,833 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 20,057 | ||||||
Miscellaneous receivable | 5,349 | ||||||
Total assets | 1,802,656,555 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 5,895,068 | ||||||
Payable for Fund shares repurchased | 4,782,866 | ||||||
Payable to affiliate for (Note 5): | |||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 3,148 | ||||||
Accrued expenses | 106,518 | ||||||
Total liabilities | 10,787,600 | ||||||
Net assets | $ | 1,791,868,955 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 1,999,741,486 | |||||
Distributions in excess of net investment income | (8,799,764 | ) | |||||
Accumulated net realized loss | (166,632,945 | ) | |||||
Net unrealized depreciation | (32,439,822 | ) | |||||
$ | 1,791,868,955 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 1,791,868,955 | |||||
Shares outstanding: | |||||||
Class III | 84,276,996 | ||||||
Net asset value per share: | |||||||
Class III | $ | 21.26 |
See accompanying notes to the financial statements.
11
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 10) | $ | 17,291,038 | |||||
Interest | 1,653,485 | ||||||
Dividends | 65 | ||||||
Total investment income | 18,944,588 | ||||||
Expenses: | |||||||
Legal fees | 43,608 | ||||||
Audit and tax fees | 27,048 | ||||||
Custodian, fund accounting agent and transfer agent fees | 26,772 | ||||||
Trustees fees and related expenses (Note 5) | 18,835 | ||||||
Chief Compliance Officer (Note 5) | 6,716 | ||||||
Registration fees | 736 | ||||||
Miscellaneous | 8,740 | ||||||
Total expenses | 132,455 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (106,904 | ) | |||||
Expense reductions (Note 2) | (550 | ) | |||||
Net expenses | 25,001 | ||||||
Net investment income (loss) | 18,919,587 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | 1,558,165 | ||||||
Investments in affiliated issuers | (29,165,441 | ) | |||||
Realized gains distributions from affiliated issuers (Note 10) | 306,598 | ||||||
Net realized gain (loss) | (27,300,678 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | (1,165,219 | ) | |||||
Investments in affiliated issuers | (6,621,123 | ) | |||||
Net unrealized gain (loss) | (7,786,342 | ) | |||||
Net realized and unrealized gain (loss) | (35,087,020 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (16,167,433 | ) |
See accompanying notes to the financial statements.
12
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 18,919,587 | $ | 51,948,450 | |||||||
Net realized gain (loss) | (27,300,678 | ) | (148,179,320 | ) | |||||||
Change in net unrealized appreciation (depreciation) | (7,786,342 | ) | 479,240,924 | ||||||||
Net increase (decrease) in net assets from operations | (16,167,433 | ) | 383,010,054 | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (3,656,743 | ) | (61,240,647 | ) | |||||||
Net realized gains | |||||||||||
Class III | — | (1,384,125 | ) | ||||||||
(3,656,743 | ) | (62,624,772 | ) | ||||||||
Net share transactions (Note 9): | |||||||||||
Class III | 78,481,151 | (24,919,659 | ) | ||||||||
Purchase premiums and redemption fees (Notes 2 and 9): | |||||||||||
Class III | 39,373 | 756,234 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees | 78,520,524 | (24,163,425 | ) | ||||||||
Total increase (decrease) in net assets | 58,696,348 | 296,221,857 | |||||||||
Net assets: | |||||||||||
Beginning of period | 1,733,172,607 | 1,436,950,750 | |||||||||
End of period (including distributions in excess of net investment income of $8,799,764 and $24,062,608, respectively) | $ | 1,791,868,955 | $ | 1,733,172,607 |
See accompanying notes to the financial statements.
13
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 21.49 | $ | 17.51 | $ | 25.30 | $ | 26.92 | $ | 27.76 | $ | 26.50 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.23 | 0.64 | 3.21 | 1.19 | 0.80 | 1.26 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.42 | ) | 4.11 | (6.72 | ) | 1.18 | 1.63 | 2.93 | |||||||||||||||||||
Total from investment operations | (0.19 | ) | 4.75 | (3.51 | ) | 2.37 | 2.43 | 4.19 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.04 | ) | (0.75 | ) | (3.71 | ) | (1.12 | ) | (1.16 | ) | (1.51 | ) | |||||||||||||||
From net realized gains | — | (0.02 | ) | (0.57 | ) | (2.87 | ) | (2.11 | ) | (1.42 | ) | ||||||||||||||||
Total distributions | (0.04 | ) | (0.77 | ) | (4.28 | ) | (3.99 | ) | (3.27 | ) | (2.93 | ) | |||||||||||||||
Net asset value, end of period | $ | 21.26 | $ | 21.49 | $ | 17.51 | $ | 25.30 | $ | 26.92 | $ | 27.76 | |||||||||||||||
Total Return(b) | (0.87 | )%** | 27.18 | % | (15.11 | )% | 8.60 | % | 9.31 | % | 16.50 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,791,869 | $ | 1,733,173 | $ | 1,436,951 | $ | 1,610,066 | $ | 1,296,396 | $ | 1,207,625 | |||||||||||||||
Net expenses to average daily net assets(c)(d) | 0.00 | %(e)* | 0.00 | %(e) | 0.00 | %(e) | 0.00 | %(e) | 0.00 | % | 0.00 | % | |||||||||||||||
Net investment income (loss) to average daily net assets(a) | 2.10 | %* | 3.14 | % | 14.05 | % | 4.30 | % | 2.94 | % | 4.64 | % | |||||||||||||||
Portfolio turnover rate | 22 | %** | 24 | % | 40 | % | 57 | % | 45 | % | 47 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.01 | %* | 0.01 | % | 0.01 | % | 0.01 | % | 0.01 | % | 0.01 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.00 | (f) | $ | 0.01 | $ | 0.00 | (f) | $ | 0.00 | (f) | $ | 0.00 | (f) | $ | 0.00 | (f) |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(d) Net expenses to average daily net assets were less than 0.01%.
(e) The net expense ratio does not include the effect of expense reductions (Note 2).
(f) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
14
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO Benchmark-Free Allocation Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks a positive total return. The Fund does not have a particular securities market index as a benchmark and does not seek to outperform a particular index or blend of indices (e.g., the Fund seeks positive return, not "relative" return). The Fund is a fund of funds and invests primarily in shares of other GMO Funds, which may include the GMO International Equity Funds, the GMO U.S. Equity Funds, the GMO Fixed Income Funds, GMO Alpha Only Fund, GMO Alternative Asset Opportunity Fund, GMO Debt Opportunities Fund, GMO High Quality Short-Duration Bond Fund, GMO Special Situations Fund, and GMO World Opportunity Overlay Fund (GMO Funds in which the Fund invests are collectively referred to as "underlying funds"). In addition, the Fund may hold securities (particularly asset-backed securities) directly or through one or more subsidiaries or other entities. The Fund implements its strategy by allocating its assets among asse t classes represented by the underlying funds (e.g., foreign equity, U.S. equity, emerging country equity, emerging country debt, foreign fixed income, U.S. fixed income, and commodities). The Fund is not restricted in its exposure to any particular asset class, and at times may be substantially invested in underlying funds that primarily invest in a single asset class (e.g., GMO Fixed Income Funds). In addition, the Fund is not restricted in its exposure to any particular market. Although the Fund generally will have exposure to both emerging countries and developed countries, including the U.S., at times, it also may have substantial exposure to a particular country or type of country (e.g., emerging countries).
The Manager uses proprietary quantitative models and fundamental investment techniques to select the underlying funds in which the Fund invests and to decide how much to invest in each. The models use multi-year forecasts of relative value and risk among asset classes (e.g., foreign equity, U.S. equity, emerging country equity, emerging country debt, foreign fixed income, U.S. fixed income, and commodities). The Manager changes the Fund's holdings of underlying funds in response to changes in its investment outlook and market valuations and may use redemption/purchase activity to rebalance the Fund's investments. The Manager's ability to shift investments among the underlying funds is not subject to any limits. The Fund may invest substantially all of its assets in a few underlying funds that primarily invest in the same asset class and may, at times, also invest a substantial portion of its assets in a single underlying Fund.
15
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
The financial statements of the underlying funds should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request by calling (617) 346-7646 (collect). As of August 31, 2010, shares of GMO Alternative Asset Opportunity Fund, GMO Special Situations Fund and and GMO World Opportunity Overlay Fund were not publicly available for direct purchase.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Shares of the underlying funds and other investment funds are generally valued at their net asset value. Investments held by the Fund and the underlying funds are valued as follows. Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the over-the-counter ("OTC") market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, whi ch approximates market value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of August 31, 2010, the total value of securities held directly and indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 1.1% of net assets. The Fund and the underlying funds classify such securities (as defined below) as Level 3. Additionally, because many foreign equity securities mark ets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do
16
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund and the underlying funds generally value foreign equity securities as of the NYSE close using fair value prices, which are based on local closing prices and adjustments supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2010, equity securities and futures contracts representing 33.1% and 0.2%, respectively, of the net assets of the Fund, through investments in the underlying funds, were valued using fair value prices based on those adjustments. Those underlying funds classify such securities (as defined below) as Level 2.
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. Although alternative prices are available for securities held by the Fund and the underlying funds, those alternative sources are not typically part of the valuation process and would not necessarily confirm the security price used by the Fund and the underlying funds. Therefore, the existence of those alternative sou rces does not necessarily provide greater certainty about the prices used by the Fund and the underlying funds. As of August 31, 2010, the total value of securities held directly and indirectly for which no alternative pricing source was available represented 1.9% of the net assets of the Fund.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data.
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund used the following fair value techniques on Level 3 investments: The Fund valued certain debt securities using indicative bids received from primary pricing sources. The Fund valued certain debt securities using a specified spread above the LIBOR Rate.
17
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Mutual Funds | $ | 1,757,360,480 | $ | — | $ | — | $ | 1,757,360,480 | |||||||||||
Debt Obligations | |||||||||||||||||||
Asset-Backed Securities | — | 9,968,211 | 24,280,273 | 34,248,484 | |||||||||||||||
U.S. Government Agency | — | — | 241,194 | 241,194 | |||||||||||||||
TOTAL DEBT OBLIGATIONS | — | 9,968,211 | 24,521,467 | 34,489,678 | |||||||||||||||
Short-Term Investments | 53,615 | — | — | 53,615 | |||||||||||||||
Total Investments | 1,757,414,095 | 9,968,211 | 24,521,467 | 1,791,903,773 | |||||||||||||||
Total | $ | 1,757,414,095 | $ | 9,968,211 | $ | 24,521,467 | $ | 1,791,903,773 |
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements. The aggregate net values of the Fund's investments (both direct and indirect) in securities and other financial instruments using Level 3 inputs were 10.5% and (0.1%) of total net assets, respectively.
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2010 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Transfers into Level 3* | Transfers out of Level 3* | Balances as of August 31, 2010 | ||||||||||||||||||||||||||||
Debt Obligations | |||||||||||||||||||||||||||||||||||
Asset-Backed Securities | $ | 34,186,897 | $ | (11,382,479 | ) | $ | 471,565 | $ | 1,675,853 | $ | (495,198 | ) | $ | — | $ | (176,365 | )** | $ | 24,280,273 | ||||||||||||||||
U.S. Government Agency | 314,363 | (74,924 | ) | 1,809 | 1,616 | (1,670 | ) | — | — | 241,194 | |||||||||||||||||||||||||
Total Debt Obligations | 34,501,260 | (11,457,403 | ) | 473,374 | 1,677,469 | (496,868 | ) | — | (176,365 | ) | 24,521,467 | ||||||||||||||||||||||||
Total | $ | 34,501,260 | $ | (11,457,403 | ) | $ | 473,374 | $ | 1,677,469 | $ | (496,868 | ) | $ | — | $ | (176,365 | ) | $ | 24,521,467 |
* The Fund recognizes investments transferred into Level 3 at value at the beginning of the period and transferred out of Level 3 at value at the end of the period.
** Financial assets transferred between Level 2 and Level 3 were due to a change in observable and/or unobservable inputs.
18
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are inclu ded with the net realized and unrealized gain or loss on investment securities.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund elected to defer to March 1, 2010 post-October capital losses of $2,221,679.
19
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2018 | $ | (111,308,319 | ) | ||||
Total | $ | (111,308,319 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 1,891,509,382 | $ | 72,349,991 | $ | (171,955,600 | ) | $ | (99,605,609 | ) |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Income dividends and capital gain distributions from the underlying funds are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for the purposes of determining the cost basis.
20
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 5).
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
For the period ended August 31, 2010, the premium on cash purchases and fee on cash redemptions of Fund shares were each 0.09% of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by a Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. The Fund charges purchase premiums and redemption fees based on the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premiums and/or redemption fees, if any, imposed by the underlying Funds in which it invests, provided that, if that weighted average is less than 0.05%, the Fund generally will not charge a purchase premium or redemption fee. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee at any t ime. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager may consider known cash flows out of or into other series of the Trust when placing orders for the cash purchase or redemption of shares by the Fund shareholders or other prospective or existing shareholders of the Funds for whom GMO provides asset allocation advice. Consequently, the Fund and those other shareholders for whom GMO provides asset allocation advice will tend to benefit from waivers of the Funds' purchase premiums and redemption fees to a greater extent than other pr ospective and existing shareholders of the other series of the Trust. All or a portion of the Fund's purchase premiums and/or redemption fees may be waived at the Manager's discretion when they are de minimis and/or the Manager deems it equitable to do so, including without limitation when the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premium and/or redemption fees, if any, imposed by the underlying funds are less than the purchase premium and/or redemption fee imposed by the Fund. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's
21
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of a Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. References to investments include those held directly by the Fund and indirectly through the Fund's investments in the underlying funds. Some of the underlying funds are non-diversified investment companies under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by those funds may affect their performance more than if they were diversified. The principal risks of investing in the Fund are summarized below, including those risks to which the Fund is exposed as a result of its investments in the underlying funds. This summary is not intended to incl ude every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Declines in stock market prices generally are likely to reduce the market value of the Fund's investments.
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund or the underlying funds may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund or the underlying funds needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., th e requirement to pay for securities prior to receipt) may expose the Fund or the underlying funds to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund's investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of
22
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
assets of foreign issuers to which the Fund is exposed) are greater for the Fund's investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Market Risk — Fixed Income Securities — From time to time, the Fund may allocate part or all of its assets to fixed income securities, which may include emerging country debt (including below investment grade securities (also known as "junk bonds")). Typically, the value of fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.
• Smaller Company Risk — From time to time, the Fund may allocate part or all of its assets to investments in companies with smaller market capitalizations. The securities of companies with smaller market capitalizations often are less widely held and trade less frequently and in lesser quantities, and their market prices often fluctuate more, than the securities of companies with larger market capitalization.
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund or an underlying fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
• Derivatives Risk — The use of derivatives involves the risk that their value may not correlate with the value of the relevant underlying assets, rates or indices. Derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk.
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of foreign currency holdings and investments denominated in foreign currencies.
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in the underlying funds, including the risk that the underlying funds in which it invests do not perform as expected. Because the Fund bears the fees and expenses of the underlying funds in which it invests, new investments in underlying funds with higher fees or expenses than those of the underlying funds in which the Fund is currently invested will increase the Fund's total expenses. The fees and expenses associated with an investment in the Fund are less predictable and may be higher than fees and expenses associated with an investment in funds that charge a fixed management fee.
Other principal risks of an investment in the Fund include Credit and Counterparty Risk (risk of default of an issuer of a portfolio security, a derivatives counterparty, or a borrower of the Fund's securities); Commodities Risk (value of an underlying fund's shares may be affected by factors particular to the commodities markets and may fluctuate more than the share value of a fund with a broader range of investments); Leveraging Risk (increased risk of loss from use of reverse repur chase agreements and other
23
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
derivatives and securities lending); Market Risk — Value Securities (risk that the price of investments held by the Fund will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Market Risk — Growth Securities (greater price fluctuations resulting from dependence on future earnings expectations); Real Estate Risk (risk to an underlying fund that concentrates its assets in real estate-related investments that factors affecting the real estate industry may cause the value of the Fund's investments to fluctuate more than if it invested in securities of companies in a broader range of industries); Short Sales Risk (risk that an underlying fund's loss on the short sale of securities that it does not own is unlimited); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
The most significant market risk for Funds investing in fixed income securities is that the securities in which they invest experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. These risks apply to the Fund because it invests in asset-backed securities. Asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as "collateralized debt obligations" or "collateralized loan obligations") and by the fees earned by service providers. Payment of interest on asset-backed securities and repayment of principal largely depend on t he cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. Many asset-backed securities owned (directly or indirectly) by the Funds that were once rated investment grade are now rated below investment grade as of the date of this Report.
With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic
24
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and a Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.
The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution's business may have a material impact on multiple investments.
4. Derivative financial instruments
At August 31, 2010, the Fund held no derivative contracts.
5. Fees and other transactions with affiliates
The Manager decides how to allocate the assets of the Fund among underlying funds. The Manager does not charge the Fund a management fee or shareholder service fee, but it receives management and shareholder service fees from the underlying funds in which the Fund invests. Because those fees vary from fund to fund, the levels of indirect net expenses set forth below are affected by the Manager's asset allocation decisions.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.00% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means
25
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). This contractual expense lim itation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $18,835 and $6,716, respectively. The compensation and expenses of the CCO are in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Indirect Interest Expense | Total Indirect Expenses | ||||||||||||
0.422 | % | 0.075 | % | 0.007 | % | 0.504 | % |
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments and class exchanges, for the period ended August 31, 2010 aggregated $482,338,685 and $385,516,367, respectively.
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may
26
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, 21.23% of the outstanding shares of the Fund were held by two shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2010, 1.95% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 95.75% of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 4,201,165 | $ | 91,313,764 | 8,076,509 | $ | 171,733,021 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 143,759 | 3,043,381 | 2,477,429 | 52,843,672 | |||||||||||||||
Shares repurchased | (730,800 | ) | (15,875,994 | ) | (11,939,115 | ) | (249,496,352 | ) | |||||||||||
Purchase premiums | — | 34,731 | — | 107,754 | |||||||||||||||
Redemption fees | — | 4,642 | — | 648,480 | |||||||||||||||
Net increase (decrease) | 3,614,124 | $ | 78,520,524 | (1,385,177 | ) | $ | (24,163,425 | ) |
27
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
10. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income* | Distributions of Realized Gains* | Return of Capital* | Value, end of period | ||||||||||||||||||||||||
GMO Alpha Only Fund, Class IV | $ | 342,509,435 | $ | 52,068,733 | $ | 26,863,562 | $ | — | $ | — | $ | — | $ | 365,054,691 | |||||||||||||||||
GMO Alternative Asset Opportunity Fund | 19,956,023 | — | — | — | — | — | 19,904,741 | ||||||||||||||||||||||||
GMO Asset Allocation Bond Fund, Class VI | 56,220,417 | 29,843,489 | 18,146,020 | 559,935 | 306,598 | — | 69,509,662 | ||||||||||||||||||||||||
GMO Currency Hedged International Equity Fund, Class III | — | 235,432,683 | 18,000,000 | — | — | — | 203,723,868 | ||||||||||||||||||||||||
GMO Emerging Country Debt Fund, Class IV | 33,345,891 | 2,314,876 | — | 1,532,827 | — | — | 39,833,555 | ||||||||||||||||||||||||
GMO Emerging Markets Fund, Class VI | 97,647,483 | 83,774,333 | 55,000 | — | — | — | 187,742,009 | ||||||||||||||||||||||||
GMO Flexible Equities Fund, Class VI | 50,721,211 | 172,006 | — | — | — | — | 46,835,007 | ||||||||||||||||||||||||
GMO International Small Companies Fund, Class III | 114,873,673 | 5,047,760 | 122,104,315 | 1,263,978 | — | — | — | ||||||||||||||||||||||||
GMO Quality Fund, Class VI | 661,825,731 | 14,965,275 | 181,782,000 | 5,575,288 | — | — | 458,410,264 | ||||||||||||||||||||||||
GMO Special Situations Fund, Class VI | 51,138,284 | 58,719,530 | — | — | — | — | 107,523,623 | ||||||||||||||||||||||||
GMO Strategic Fixed Income Fund, Class VI | 233,830,471 | — | — | 8,359,010 | — | 4,115,262 | 238,208,188 | ||||||||||||||||||||||||
GMO World Opportunity Overlay Fund | 19,805,899 | — | — | — | — | — | 20,614,872 | ||||||||||||||||||||||||
Totals | $ | 1,681,874,518 | $ | 482,338,685 | $ | 366,950,897 | $ | 17,291,038 | $ | 306,598 | $ | 4,115,262 | $ | 1,757,360,480 |
* The table above includes estimated sources of all distributions paid by the underlying funds during the period March 1, 2010 through August 31, 2010. The actual tax characterization of distributions paid by the underlying funds will be determined through fiscal year ending February 28, 2011.
28
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees considered that the Fund seeks a positive total return and does not seek to outperform a particular securities market index or blend of market indices. The Trustees also considered the Fund's investment performance as compared to funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three- and five-year periods and for the life of the Fund, and information prepared by the third-party data services, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees observed that the comparative data provided by the third-party data services was based on peer groups that included funds with investment approaches that were substantially different from that of the Fund and, therefore, was of
29
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
limited value. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fact that the Fund does not pay a management fee to the Manager under the Fund's investment management agreement, but that the Fund indirectly bears management and shareholder servicing fees paid to the Manager by other funds of the Trust in which it invests. The Trustees also considered so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees noted that they had approved renewal of the Manager's investment management agreements with the other funds of the Trust in which the Fund may invest and had concluded that the advisory fees charged to those funds were reasonable, after considering, among other things: possible economies of scale to the Manager in connection with its management of the other funds of the Trust; the Manager's profitability with respect to the other funds of the Trust and the Trust as a whole (including the effect of recent changes in assets under management); and information prepared by a third-party data service concerning fee s paid to managers of funds deemed by that service to have similar objectives to those of the other funds of the Trust.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
30
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
31
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including indirect management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.51 | % | $ | 1,000.00 | $ | 991.30 | $ | 2.56 | |||||||||||
2) Hypothetical | 0.51 | % | $ | 1,000.00 | $ | 1,022.63 | $ | 2.60 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
32
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 74.5 | % | |||||
Short-Term Investments | 27.5 | ||||||
Options Purchased | 1.9 | ||||||
Loan Participations | 0.2 | ||||||
Loan Assignments | 0.1 | ||||||
Rights and Warrants | 0.0 | ||||||
Promissory Notes | 0.0 | ||||||
Forward Currency Contracts | (0.1 | ) | |||||
Futures Contracts | (0.1 | ) | |||||
Swap Agreements | (0.9 | ) | |||||
Reverse Repurchase Agreements | (1.4 | ) | |||||
Written Options | (1.6 | ) | |||||
Other | (0.1 | ) | |||||
100.0 | % | ||||||
Country / Region Summary** | % of Investments | ||||||
United States | 95.3 | % | |||||
Canada | 3.7 | ||||||
Emerging*** | 3.4 | ||||||
Euro Region**** | 3.1 | ||||||
Sweden | 0.7 | ||||||
Norway | 0.0 | ||||||
New Zealand | 0.0 | ||||||
Switzerland | (0.1 | ) | |||||
Japan | (1.7 | ) | |||||
Australia | (1.8 | ) | |||||
United Kingdom | (2.6 | ) | |||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds. The table excludes short-term investments. The table includes exposure through the use of derivative contracts. The table is based on duration adjusted exposures, taking into account the market value of securities and the notional amounts of swaps and other derivative contracts. Duration is based on the Manager's models. The greater the duration of a bond, the greater its contribution to the concentration percentage. Credit default swap exposures (both positive and negative) are factored into the duration-adjusted exposure using the reference security and applying the same methodology to that security.
*** The "Emerging" exposure is associated only with investments in the GMO Emerging Country Debt Fund, which is exposed to emerging countries primarily comprised of Russia, Argentina, Brazil, Philippines, Mexico, Venezuela, Colombia, Ukraine, Turkey, and Indonesia. Additional information about the fund's emerging country exposure is available in the financial statements of the GMO Emerging Country Debt Fund.
**** The "Euro Region" is comprised of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
1
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
DEBT OBLIGATIONS — 27.0% | |||||||||||||||
Albania — 1.7% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
USD | 14,281,227 | Republic of Albania Par Bond, Zero Coupon, due 08/31/25 (a) | 5,855,303 | ||||||||||||
Australia — 0.2% | |||||||||||||||
Asset-Backed Securities | |||||||||||||||
USD | 227,681 | Crusade Global Trust, Series 07-1, Class A1, 3 mo. LIBOR + .06%, 0.58%, due 04/19/38 | 219,116 | ||||||||||||
USD | 312,332 | Medallion Trust, Series 05-1G, Class A1, 3 mo. LIBOR + .08%, 0.49%, due 05/10/36 | 302,582 | ||||||||||||
521,698 | |||||||||||||||
Total Australia | 521,698 | ||||||||||||||
United Kingdom — 0.3% | |||||||||||||||
Asset-Backed Securities | |||||||||||||||
USD | 85,683 | Aire Valley Mortgages, Series 07-1A, Class 1A2, 144A, 3 mo. LIBOR + .09%, 0.63%, due 03/20/30 | 85,126 | ||||||||||||
USD | 683,769 | Brunel Residential Mortgages, Series 07-1A, Class A4C, 144A, 3 mo. LIBOR + .10%, 0.63%, due 01/13/39 | 611,973 | ||||||||||||
USD | 40,105 | Granite Master Issuer Plc, Series 06-2, Class A4, 1 mo. LIBOR + .04%, 0.31%, due 12/20/54 | 37,258 | ||||||||||||
USD | 300,000 | Permanent Master Issuer Plc, Series 07-1, Class 4A, 3 mo. LIBOR + .08%, 0.61%, due 10/15/33 | 293,280 | ||||||||||||
1,027,637 | |||||||||||||||
Total United Kingdom | 1,027,637 | ||||||||||||||
United States — 24.8% | |||||||||||||||
Asset-Backed Securities — 3.1% | |||||||||||||||
USD | 299,153 | Alliance Bancorp Trust, Series 07-S1, Class A1, 144A, 1 mo. LIBOR + .20%, 0.46%, due 05/25/37 | 31,052 | ||||||||||||
USD | 260,981 | AmeriCredit Automobile Receivables Trust, Series 07-AX, Class A4, XL, 1 mo. LIBOR + .04%, 0.34%, due 10/06/13 | 258,371 |
See accompanying notes to the financial statements.
2
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
Asset-Backed Securities — continued | |||||||||||||||
USD | 109,593 | Argent Securities, Inc., Series 06-M2, Class A2B, 1 mo. LIBOR + .11%, 0.37%, due 09/25/36 | 42,467 | ||||||||||||
USD | 917,022 | Argent Securities, Inc., Series 06-W5, Class A2C, 1 mo. LIBOR + .15%, 0.41%, due 06/25/36 | 348,469 | ||||||||||||
USD | 1,106,048 | Argent Securities, Inc., Series 06-M1, Class A2C, 1 mo. LIBOR + .15%, 0.41%, due 07/25/36 | 454,171 | ||||||||||||
USD | 160,044 | Bayview Commercial Asset Trust, Series 05-4A, Class A2, 144A, 1 mo. LIBOR + .39%, 0.65%, due 01/25/36 | 102,428 | ||||||||||||
USD | 292,213 | Capital Auto Receivable Asset Trust, Series 07-2, Class A4B, 1 mo. LIBOR + .40%, 0.68%, due 02/18/14 | 292,806 | ||||||||||||
USD | 500,000 | Charming Shoppes Master Trust, Series 07-1A, Class A1, 144A, 1 mo. LIBOR + 1.25%, 1.53%, due 09/15/17 | 488,230 | ||||||||||||
USD | 300,000 | College Loan Corp. Trust, Series 07-2, Class A1, 3 mo. LIBOR + .25%, 0.75%, due 01/25/24 | 300,036 | ||||||||||||
USD | 773,430 | Crest Exeter Street Solar, Series 04-1A, Class A1, 144A, 3 mo. LIBOR + .35%, 0.89%, due 06/28/19 | 657,416 | ||||||||||||
USD | 300,000 | Daimler Chrysler Auto Trust, Series 08-B, Class A4B, 1 mo. LIBOR + 1.85%, 2.14%, due 11/10/14 | 305,835 | ||||||||||||
USD | 726,572 | First Franklin Mortgage Loan Asset Backed Certificates, Series 06-FF5, Class 2A3, 1 mo. LIBOR + .16%, 0.42%, due 04/25/36 | 440,030 | ||||||||||||
USD | 202,592 | Ford Credit Auto Owner Trust, Series 06-C, Class A4B, 1 mo. LIBOR + .04%, 0.32%, due 02/15/12 | 202,519 | ||||||||||||
USD | 500,000 | Ford Credit Floorplan Master Owner Trust, Series 06-4, Class A, 1 mo. LIBOR + .25%, 0.53%, due 06/15/13 | 495,000 | ||||||||||||
USD | 415,812 | Fremont Home Loan Trust, Series 06-A, Class 1A2, 1 mo. LIBOR + .20%, 0.46%, due 05/25/36 | 257,804 | ||||||||||||
USD | 100,000 | Fremont Home Loan Trust, Series 06-B, Class 2A3, 1 mo. LIBOR + .16%, 0.42%, due 08/25/36 | 35,500 | ||||||||||||
USD | 859,014 | GE Business Loan Trust, Series 05-2A, Class A, 144A, 1 mo. LIBOR + .24%, 0.52%, due 11/15/33 | 712,982 | ||||||||||||
USD | 6,118 | GreenPoint Mortgage Funding Trust, Series 05-HE4, Class 2A3C, 1 mo. LIBOR + .25%, 0.51%, due 07/25/30 | 5,945 | ||||||||||||
USD | 800,000 | GS Mortgage Securities Corp., Series 07-EOP, Class A2, 144A, 1 mo. LIBOR + .13%, 0.43%, due 03/06/20 | 760,000 | ||||||||||||
USD | 600,000 | Household Credit Card Master Note Trust I, Series 07-2, Class A, 1 mo. LIBOR + .55%, 0.83%, due 07/15/13 | 600,281 |
See accompanying notes to the financial statements.
3
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
Asset-Backed Securities — continued | |||||||||||||||
USD | 700,000 | Master Asset-Backed Securities Trust, Series 06-HE2, Class A3, 1 mo. LIBOR + .15%, 0.41%, due 06/25/36 | 246,750 | ||||||||||||
USD | 195,507 | Master Asset-Backed Securities Trust, Series 06-FRE2, Class A4, 1 mo. LIBOR + .15%, 0.41%, due 03/25/36 | 97,753 | ||||||||||||
USD | 500,000 | Morgan Stanley Capital, Inc., Series 07-HE4, Class A2C, 1 mo. LIBOR + .23%, 0.49%, due 02/25/37 | 198,750 | ||||||||||||
USD | 300,000 | National City Credit Card Master Trust, Series 08-3, Class A, 1 mo. LIBOR + 1.80%, 2.08%, due 05/15/13 | 302,718 | ||||||||||||
USD | 221,947 | National Collegiate Student Loan Trust, Series 06-1, Class A2, 1 mo. LIBOR + .14%, 0.40%, due 08/25/23 | 216,398 | ||||||||||||
USD | 74,910 | Nissan Auto Lease Trust, Series 08-A, Class A3B, 1 mo. LIBOR + 2.20%, 2.48%, due 07/15/11 | 75,052 | ||||||||||||
USD | 115,501 | Residential Asset Securities Corp., Series 07-KS3, Class AI1, 1 mo. LIBOR + .11%, 0.37%, due 04/25/37 | 112,521 | ||||||||||||
USD | 79,444 | Residential Funding Mortgage Securities II, Series 03-HS1, Class AII, FGIC, 1 mo. LIBOR + .29%, 0.55%, due 12/25/32 | 33,740 | ||||||||||||
USD | 221,692 | Santander Drive Auto Receivables Trust, Series 07-1, Class A4, FGIC, 1 mo. LIBOR + .05%, 0.33%, due 09/15/14 | 218,701 | ||||||||||||
USD | 144,657 | SBI Heloc Trust, Series 05-HE1, Class 1A, 144A, FSA, 1 mo. LIBOR + .19%, 0.45%, due 11/25/35 | 87,503 | ||||||||||||
USD | 405,766 | Sierra Receivables Funding Co., Series 06-1A, Class A2, 144A, MBIA, 1 mo. LIBOR + .15%, 0.42%, due 05/20/18 | 380,963 | ||||||||||||
USD | 423,558 | SLM Student Loan Trust, Series 07-A, Class A1, 3 mo. LIBOR + .03%, 0.57%, due 09/15/22 | 406,087 | ||||||||||||
USD | 62,658 | Structured Asset Securities Corp., Series 05-S6, Class A2, 1 mo. LIBOR + .29%, 0.55%, due 11/25/35 | 28,509 | ||||||||||||
USD | 400,000 | Triad Auto Receivables Owner Trust, Series 07-B, Class A4B, FSA, 1 mo. LIBOR + 1.20%, 1.49%, due 07/14/14 | 400,664 | ||||||||||||
USD | 800,000 | Wachovia Auto Owner Trust, Series 08-A, Class A4B, 1 mo. LIBOR + 1.15%, 1.42%, due 03/20/14 | 809,408 | ||||||||||||
USD | 400,000 | World Financial Network Credit Card Master Trust, Series 06-A, Class A, 144A, 1 mo. LIBOR + .13%, 0.41%, due 02/15/17 | 386,824 | ||||||||||||
10,793,683 | |||||||||||||||
Total Asset-Backed Securities | 10,793,683 |
See accompanying notes to the financial statements.
4
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value / Shares | Description | Value ($) | |||||||||||||
Corporate Debt — 0.4% | |||||||||||||||
USD | 140,270 | CIT Group, Inc., 7.00%, due 05/01/13 | 138,685 | ||||||||||||
USD | 210,405 | CIT Group, Inc., 7.00%, due 05/01/14 | 204,998 | ||||||||||||
USD | 210,405 | CIT Group, Inc., 7.00%, due 05/01/15 | 202,241 | ||||||||||||
USD | 350,676 | CIT Group, Inc., 7.00%, due 05/01/16 | 334,440 | ||||||||||||
USD | 490,947 | CIT Group, Inc., 7.00%, due 05/01/17 | 462,079 | ||||||||||||
1,342,443 | |||||||||||||||
U.S. Government — 21.3% | |||||||||||||||
USD | 22,183,034 | U.S. Treasury Inflation Indexed Note, 2.38%, due 04/15/11 (b) (c) | 22,458,592 | ||||||||||||
USD | 30,000,000 | U.S. Treasury Note, 2.50%, due 03/31/15 | 31,727,400 | ||||||||||||
USD | 10,100,000 | U.S. Treasury Receipts, 0.00%, due 08/15/12 * (d) | 9,816,401 | ||||||||||||
USD | 10,100,000 | U.S. Treasury Receipts, 0.00%, due 02/15/12 * (d) | 9,895,978 | ||||||||||||
73,898,371 | |||||||||||||||
Total United States | 86,034,497 | ||||||||||||||
TOTAL DEBT OBLIGATIONS (COST $89,869,804) | 93,439,135 | ||||||||||||||
MUTUAL FUNDS — 72.6% | |||||||||||||||
United States — 72.6% | |||||||||||||||
Affiliated Issuers | |||||||||||||||
1,179,660 | GMO Emerging Country Debt Fund, Class IV | 11,194,970 | |||||||||||||
7,417,054 | GMO Short-Duration Collateral Fund | 86,631,192 | |||||||||||||
93,858 | GMO Special Purpose Holding Fund (e) | 50,683 | |||||||||||||
3,352,619 | GMO U.S. Treasury Fund | 83,815,480 | |||||||||||||
3,160,555 | GMO World Opportunity Overlay Fund | 70,069,499 | |||||||||||||
251,761,824 | |||||||||||||||
Total United States | 251,761,824 | ||||||||||||||
TOTAL MUTUAL FUNDS (COST $263,945,235) | 251,761,824 |
See accompanying notes to the financial statements.
5
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
SHORT-TERM INVESTMENTS — 0.5% | |||||||||||||||
Money Market Funds — 0.2% | |||||||||||||||
760,822 | State Street Institutional Treasury Plus Money Market Fund-Institutional Class | 760,822 | |||||||||||||
U.S. Government — 0.3% | |||||||||||||||
900,000 | U.S. Treasury Bill, 0.22%, due 06/30/11 (b) (f) | 898,414 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $1,658,620) | 1,659,236 | ||||||||||||||
TOTAL INVESTMENTS — 100.1% (Cost $355,473,659) | 346,860,195 | ||||||||||||||
Other Assets and Liabilities (net) — (0.1%) | (239,976 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 346,620,219 |
See accompanying notes to the financial statements.
6
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
A summary of outstanding financial instruments at August 31, 2010 is as follows:
Forward Currency Contracts
Settlement Date | Counterparty | Deliver/ Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||
Buys † | |||||||||||||||||||||||
10/26/10 | Royal Bank of Scotland PLC | AUD | 3,900,000 | $ | 3,447,701 | $ | (26,969 | ) | |||||||||||||||
10/26/10 | Deutsche Bank AG | AUD | 15,800,000 | 13,967,610 | 138,079 | ||||||||||||||||||
10/26/10 | Citibank | AUD | 700,000 | 618,818 | (13,324 | ) | |||||||||||||||||
11/02/10 | Royal Bank of Scotland PLC | CAD | 1,300,000 | 1,217,897 | (36,354 | ) | |||||||||||||||||
11/02/10 | Deutsche Bank AG | CAD | 10,600,000 | 9,930,546 | (325,095 | ) | |||||||||||||||||
10/05/10 | Royal Bank of Scotland PLC | CHF | 1,100,000 | 1,083,796 | 24,622 | ||||||||||||||||||
10/05/10 | Citibank | CHF | 2,100,000 | 2,069,065 | 47,249 | ||||||||||||||||||
10/05/10 | Deutsche Bank AG | CHF | 24,700,000 | 24,336,150 | 1,061,232 | ||||||||||||||||||
10/12/10 | Deutsche Bank AG | EUR | 11,600,000 | 14,699,365 | (211,143 | ) | |||||||||||||||||
10/12/10 | Royal Bank of Scotland PLC | EUR | 1,300,000 | 1,647,343 | (4,177 | ) | |||||||||||||||||
9/07/10 | Citibank | GBP | 2,300,000 | 3,527,274 | (132,122 | ) | |||||||||||||||||
9/07/10 | Deutsche Bank AG | GBP | 2,300,000 | 3,527,274 | (78,818 | ) | |||||||||||||||||
10/19/10 | Deutsche Bank AG | JPY | 1,600,800,000 | 19,064,495 | 838,694 | ||||||||||||||||||
9/21/10 | Deutsche Bank AG | NZD | 14,700,000 | 10,235,108 | 358,924 | ||||||||||||||||||
$ | 109,372,442 | $ | 1,640,798 | ||||||||||||||||||||
Sales # | |||||||||||||||||||||||
11/02/10 | Royal Bank of Scotland PLC | CAD | 7,400,000 | $ | 6,932,645 | $ | 89,553 | ||||||||||||||||
11/02/10 | Deutsche Bank AG | CAD | 20,900,000 | 19,580,038 | 427,564 | ||||||||||||||||||
10/05/10 | Deutsche Bank AG | CHF | 28,700,000 | 28,277,226 | (2,203,265 | ) | |||||||||||||||||
10/12/10 | Deutsche Bank AG | EUR | 15,100,000 | 19,134,518 | 253,260 | ||||||||||||||||||
9/07/10 | Royal Bank of Scotland PLC | GBP | 2,300,000 | 3,527,274 | 73,157 | ||||||||||||||||||
9/07/10 | Deutsche Bank AG | GBP | 1,200,000 | 1,840,317 | 21,075 | ||||||||||||||||||
9/07/10 | Barclays Bank PLC | GBP | 4,900,000 | 7,514,628 | (468,084 | ) | |||||||||||||||||
10/19/10 | Deutsche Bank AG | JPY | 110,000,000 | 1,310,029 | (28,426 | ) | |||||||||||||||||
10/19/10 | Royal Bank of Scotland PLC | JPY | 110,000,000 | 1,310,029 | (11,443 | ) | |||||||||||||||||
9/21/10 | Citibank | NZD | 2,100,000 | 1,462,158 | 64,542 | ||||||||||||||||||
9/21/10 | Deutsche Bank AG | NZD | 2,000,000 | 1,392,532 | 19,508 | ||||||||||||||||||
9/21/10 | Royal Bank of Scotland PLC | NZD | 8,200,000 | 5,709,380 | 201,324 | ||||||||||||||||||
$ | 97,990,774 | $ | (1,561,235 | ) |
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.
See accompanying notes to the financial statements.
7
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Forward Cross Currency Contracts
Settlement Date | Counterparty | Deliver/Units of Currency | Receive/In Exchange For | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
9/14/10 | Deutsche Bank AG | NOK | 51,101,472 | EUR | 6,400,000 | $ | 13,507 | ||||||||||||
9/28/10 | Deutsche Bank AG | SEK | 33,379,898 | EUR | 3,500,000 | (78,958 | ) | ||||||||||||
9/14/10 | Deutsche Bank AG | EUR | 11,200,000 | NOK | 88,610,910 | (153,035 | ) | ||||||||||||
9/14/10 | Royal Bank of Scotland PLC | EUR | 1,300,000 | NOK | 10,402,262 | 786 | |||||||||||||
$ | (217,700 | ) |
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
99 | Canadian Government Bond 10 Yr. | December 2010 | $ | 11,724,771 | $ | 56,284 | |||||||||||||
33 | Euro Bund | September 2010 | 5,621,764 | 219,067 | |||||||||||||||
15 | Euro BOBL | September 2010 | 2,330,664 | 36,567 | |||||||||||||||
84 | U.S. Treasury Note 2 Yr. (CBT) | December 2010 | 18,407,813 | 1,061 | |||||||||||||||
73 | U.S. Treasury Note 10 Yr. (CBT) | September 2010 | 9,234,500 | 271,236 | |||||||||||||||
55 | U.S. Treasury Bond 30 Yr. (CBT) | September 2010 | 7,504,062 | 411,241 | |||||||||||||||
$ | 54,823,574 | $ | 995,456 | ||||||||||||||||
Sales | |||||||||||||||||||
47 | Australian Government Bond 3 Yr. | September 2010 | $ | 4,380,881 | $ | (42,134 | ) | ||||||||||||
24 | Australian Government Bond 10 Yr. | September 2010 | 2,344,021 | (71,828 | ) | ||||||||||||||
4 | Japanese Government Bond 10 Yr. (TSE) | September 2010 | 6,808,237 | (77,375 | ) | ||||||||||||||
45 | UK Gilt Long Bond | December 2010 | 8,644,728 | (9,098 | ) | ||||||||||||||
64 | U.S. Treasury Note 5Yr. (CBT) | December 2010 | 7,700,500 | (18,126 | ) | ||||||||||||||
$ | 29,878,367 | $ | (218,561 | ) |
See accompanying notes to the financial statements.
8
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Swap Agreements
Credit Default Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay)^ | Annual Premium | Implied Credit Spread (1) | Deliverable on Default | Maximum Potential Amount of Future Payments by the Fund Under the Contract (2) | Market Value | |||||||||||||||||||||||||||||||||||
2,000,000 | USD | 6/20/2011 | Barclays | Receive | 0.30 | % | 2.51 | % | Prologis | 2,000,000 | USD | $ | (34,206 | ) | |||||||||||||||||||||||||||||
2,000,000 | USD | 6/20/2011 | UBS AG | Receive | 0.26 | % | 0.55 | % | ERP Operating LP | 2,000,000 | USD | (3,702 | ) | ||||||||||||||||||||||||||||||
2,000,000 | USD | 12/20/2013 | Barclays | Receive | 0.25 | % | 6.81 | % | SLM Corp. | 2,000,000 | USD | (363,833 | ) | ||||||||||||||||||||||||||||||
$ | (401,741 | ) | |||||||||||||||||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
^ Receive - Fund receives premium and sells credit protection.
(Pay) - Fund pays premium and buys credit protection.
(1) Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on the reference security, as of August 31, 2010, serve as an indicator of the current status of the payment/performance risk and reflect the likelihood or risk of default for the reference entity. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection. Wider (i.e.. higher) credit spreads represent a deterioration of the referenced entity's credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.
(2) The maximum potential amount the Fund could be required to pay as a seller of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.
See accompanying notes to the financial statements.
9
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Interest Rate Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay)# | Fixed Rate | Variable Rate | Market Value | |||||||||||||||||||||||||
6,400,000 | CHF | 3/16/2016 | JPMorgan Chase Bank | Receive | 1.30 | % | 6 Month CHF LIBOR | $ | 23,006 | ||||||||||||||||||||||
12,700,000 | CHF | 3/16/2016 | Barclays | Receive | 1.30 | % | 6 Month CHF LIBOR | 45,651 | |||||||||||||||||||||||
25,800,000 | SEK | 9/15/2015 | Barclays | Receive | 2.50 | % | 3 Month SEK STIBOR | 69,985 | |||||||||||||||||||||||
$ | 138,642 | ||||||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | (39,300 | ) |
# Receive - Fund receives fixed rate and pays variable rate.
(Pay) - Fund pays fixed rate and receives variable rate.
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Fund Pays | Fund Receives | Market Value | ||||||||||||||||||||||
25,000,000 | USD | 10/29/2010 | Barclays | 1 month | Barclays MBS | $ | 26,604 | ||||||||||||||||||||
LIBOR - 0.05% | Fixed Rate | ||||||||||||||||||||||||||
250,000,000 | USD | 8/19/2011 | Morgan Stanley | 3 month LIBOR - 0.01% | Barclays Capital Aggregate Total Return Index | 711,302 | |||||||||||||||||||||
$ | 737,906 | ||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
As of August 31, 2010, for forward currency contracts, futures contracts, swap agreements and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
Notes to Schedule of Investments:
144A - Securities 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.
BOBL - Bundesobligationen
CBT - Chicago Board of Trade
See accompanying notes to the financial statements.
10
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
CHF LIBOR - London Interbank Offered Rate denominated in Swiss Franc.
FGIC - Insured as to the payment of principal and interest by Financial Guaranty Insurance Corporation.
FSA - Insured as to the payment of principal and interest by Financial Security Assurance.
LIBOR - London Interbank Offered Rate
MBIA - Insured as to the payment of principal and interest by MBIA Insurance Corp.
MBS - Mortgage-Backed Security
SEK STIBOR - Stockholm Interbank Offered Rate denominated in Swedish Krona.
TSE - Tokyo Stock Exchange
XL - Insured as to the payment of principal and interest by XL Capital Assurance.
The rates shown on variable rate notes are the current interest rates at August 31, 2010, which are subject to change based on the terms of the security.
* Non-income producing security.
(a) Security is backed by the U.S. Government.
(b) All or a portion of this security has been pledged to cover margin requirements on open financial futures contracts and/or collateral on open swap contracts (Note 4).
(c) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic.
(d) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
(e) Underlying investment represents interests in defaulted claims.
(f) Rate shown represents yield-to-maturity.
Currency Abbreviations:
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
EUR - Euro
GBP - British Pound
JPY - Japanese Yen
NOK - Norwegian Krone
NZD - New Zealand Dollar
SEK - Swedish Krona
USD - United States Dollar
See accompanying notes to the financial statements.
11
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $91,528,424) (Note 2) | $ | 95,098,371 | |||||
Investments in affiliated issuers, at value (cost $263,945,235) (Notes 2 and 10) | 251,761,824 | ||||||
Dividends and interest receivable | 544,902 | ||||||
Unrealized appreciation on open forward currency contracts (Note 4) | 3,633,076 | ||||||
Receivable from broker for closed futures contracts | 65,315 | ||||||
Receivable for open swap contracts (Note 4) | 876,548 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 25,472 | ||||||
Total assets | 352,005,508 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 9,101 | ||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 72,755 | ||||||
Shareholder service fee | 31,324 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 560 | ||||||
Payable for variation margin on open futures contracts (Note 4) | 67,397 | ||||||
Unrealized depreciation on open forward currency contracts (Note 4) | 3,771,213 | ||||||
Payable for open swap contracts (Note 4) | 401,741 | ||||||
Miscellaneous payable | 931,671 | ||||||
Accrued expenses | 99,527 | ||||||
Total liabilities | 5,385,289 | ||||||
Net assets | $ | 346,620,219 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 521,510,575 | |||||
Distributions in excess of net investment income | (7,279,805 | ) | |||||
Accumulated net realized loss | (160,071,302 | ) | |||||
Net unrealized depreciation | (7,539,249 | ) | |||||
$ | 346,620,219 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 52,816,353 | |||||
Class IV shares | $ | 293,803,866 | |||||
Shares outstanding: | |||||||
Class III | 7,021,723 | ||||||
Class IV | 38,991,280 | ||||||
Net asset value per share: | |||||||
Class III | $ | 7.52 | |||||
Class IV | $ | 7.54 |
See accompanying notes to the financial statements.
12
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Interest | $ | 1,663,408 | |||||
Dividends from affiliated issuers (Note 10) | 1,292,469 | ||||||
Dividends | 25,128 | ||||||
Total investment income | 2,981,005 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 429,666 | ||||||
Shareholder service fee – Class III (Note 5) | 42,736 | ||||||
Shareholder service fee – Class IV (Note 5) | 143,376 | ||||||
Custodian, fund accounting agent and transfer agent fees | 67,896 | ||||||
Audit and tax fees | 41,768 | ||||||
Interest expense (Note 2) | 18,514 | ||||||
Legal fees | 11,040 | ||||||
Trustees fees and related expenses (Note 5) | 3,280 | ||||||
Registration fees | 1,381 | ||||||
Miscellaneous | 1,932 | ||||||
Total expenses | 761,589 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (120,152 | ) | |||||
Expense reductions (Note 2) | (14 | ) | |||||
Indirectly incurred fees waived or borne by Manager (Note 5) | (25,532 | ) | |||||
Shareholder service fee waived (Note 5) | (6,013 | ) | |||||
Net expenses | 609,878 | ||||||
Net investment income (loss) | 2,371,127 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | (272,849 | ) | |||||
Investments in affiliated issuers | (732,270 | ) | |||||
Realized gains distributions from affiliated issuers (Note 10) | 6,400 | ||||||
Closed futures contracts | 1,210,491 | ||||||
Closed swap contracts | 15,161,743 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (324,277 | ) | |||||
Net realized gain (loss) | 15,049,238 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | 2,831,247 | ||||||
Investments in affiliated issuers | 8,599,351 | ||||||
Open futures contracts | 557,869 | ||||||
Open swap contracts | (1,362,612 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | (450,362 | ) | |||||
Net unrealized gain (loss) | 10,175,493 | ||||||
Net realized and unrealized gain (loss) | 25,224,731 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 27,595,858 |
See accompanying notes to the financial statements.
13
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 2,371,127 | $ | 4,962,892 | |||||||
Net realized gain (loss) | 15,049,238 | 8,917,779 | |||||||||
Change in net unrealized appreciation (depreciation) | 10,175,493 | 58,972,164 | |||||||||
Net increase (decrease) in net assets from operations | 27,595,858 | 72,852,835 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (594,441 | ) | (5,147,569 | ) | |||||||
Class IV | (3,244,007 | ) | (23,853,558 | ) | |||||||
Total distributions from net investment income | (3,838,448 | ) | (29,001,127 | ) | |||||||
Net share transactions (Note 9): | |||||||||||
Class III | (6,973,164 | ) | (25,871,935 | ) | |||||||
Class IV | (2,853,270 | ) | 7,038,788 | ||||||||
Increase (decrease) in net assets resulting from net share transactions | (9,826,434 | ) | (18,833,147 | ) | |||||||
Redemption fees (Notes 2 and 9): | |||||||||||
Class III | — | 16,973 | |||||||||
Class IV | — | 75,321 | |||||||||
Increase in net assets resulting from redemption fees | — | 92,294 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and redemption fees | (9,826,434 | ) | (18,740,853 | ) | |||||||
Total increase (decrease) in net assets | 13,930,976 | 25,110,855 | |||||||||
Net assets: | |||||||||||
Beginning of period | 332,689,243 | 307,578,388 | |||||||||
End of period (including distributions in excess of net investment income of $7,279,805 and $5,812,484, respectively) | $ | 346,620,219 | $ | 332,689,243 |
See accompanying notes to the financial statements.
14
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 7.02 | $ | 6.08 | $ | 9.42 | $ | 10.49 | $ | 10.32 | $ | 10.35 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.05 | 0.05 | 0.27 | 0.37 | 0.43 | 0.15 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.53 | 1.51 | (2.08 | ) | (0.63 | ) | 0.27 | 0.17 | |||||||||||||||||||
Total from investment operations | 0.58 | 1.56 | (1.81 | ) | (0.26 | ) | 0.70 | 0.32 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.08 | ) | (0.62 | ) | (1.53 | ) | (0.81 | ) | (0.53 | ) | (0.35 | ) | |||||||||||||||
Total distributions | (0.08 | ) | (0.62 | ) | (1.53 | ) | (0.81 | ) | (0.53 | ) | (0.35 | ) | |||||||||||||||
Net asset value, end of period | $ | 7.52 | $ | 7.02 | $ | 6.08 | $ | 9.42 | $ | 10.49 | $ | 10.32 | |||||||||||||||
Total Return(b) | 8.36 | %** | 26.84 | % | (20.12 | )% | (2.56 | )% | 6.85 | % | 3.10 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 52,816 | $ | 55,839 | $ | 73,730 | $ | 125,506 | $ | 187,045 | $ | 148,476 | |||||||||||||||
Net operating expenses to average daily net assets(c) | 0.39 | %(d)* | 0.38 | %(d) | 0.39 | %(d) | 0.39 | %(d) | 0.39 | % | 0.39 | % | |||||||||||||||
Interest expense to average daily net assets(e) | 0.01 | %* | 0.02 | % | — | — | — | — | |||||||||||||||||||
Total net expenses to average daily net assets(d)(c) | 0.40 | %(d)* | 0.40 | %(d) | 0.39 | %(d) | 0.39 | %(d) | 0.39 | % | 0.39 | % | |||||||||||||||
Net investment income (loss) to average daily net assets(a) | 1.32 | %* | 0.77 | % | 3.20 | % | 3.70 | % | 4.11 | % | 1.40 | % | |||||||||||||||
Portfolio turnover rate | 20 | %** | 58 | % | 22 | % | 44 | % | 72 | % | 62 | % | |||||||||||||||
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets:(f) | 0.09 | %* | 0.09 | % | 0.08 | % | 0.06 | % | 0.06 | % | 0.06 | % | |||||||||||||||
Redemption fees consisted of the following per share amounts:† | $ | 0.00 | (g) | $ | 0.00 | (h) | $ | 0.01 | $ | — | $ | — | $ | — |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(d) The net expense ratio does not include the effect of expense reductions (Note 2).
(e) Interest expense incurred as a result of payables owed to Lehman Brothers in connection with the termination of derivative contracts in 2008.
(f) Ratios include reimbursement of direct operating expenses and waiver of expenses indirectly incurred through investment in the underlying funds (See Note 5).
(g) There were no redemption fees during the period.
(h) Redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
15
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006(a) | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 7.03 | $ | 6.09 | $ | 9.44 | $ | 10.50 | $ | 10.33 | $ | 10.46 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(b)† | 0.05 | 0.12 | 0.17 | 0.36 | 0.45 | 0.23 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.55 | 1.45 | (1.99 | ) | (0.61 | ) | 0.26 | (0.01 | )(c) | ||||||||||||||||||
Total from investment operations | 0.60 | 1.57 | (1.82 | ) | (0.25 | ) | 0.71 | 0.22 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.09 | ) | (0.63 | ) | (1.53 | ) | (0.81 | ) | (0.54 | ) | (0.35 | ) | |||||||||||||||
Total distributions | (0.09 | ) | (0.63 | ) | (1.53 | ) | (0.81 | ) | (0.54 | ) | (0.35 | ) | |||||||||||||||
Net asset value, end of period | $ | 7.54 | $ | 7.03 | $ | 6.09 | $ | 9.44 | $ | 10.50 | $ | 10.33 | |||||||||||||||
Total Return(d) | 8.50 | %** | 26.87 | % | (20.23 | )% | (2.42 | )% | 6.90 | % | 2.06 | %** | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 293,804 | $ | 276,850 | $ | 233,848 | $ | 1,017,792 | $ | 2,182,618 | $ | 2,618,011 | |||||||||||||||
Net operating expenses to average daily net assets(e) | 0.34 | %(f)* | 0.33 | %(f) | 0.34 | %(f) | 0.34 | %(f) | 0.34 | % | 0.34 | %* | |||||||||||||||
Interest expense to average daily net assets(g) | 0.01 | %* | 0.02 | % | — | — | — | — | |||||||||||||||||||
Total net expenses to average daily net assets(e) | 0.35 | %(f)* | 0.35 | %(f) | 0.34 | %(f) | 0.34 | %(f) | 0.34 | % | 0.34 | %* | |||||||||||||||
Net investment income (loss) to average daily net assets(b) | 1.39 | %* | 1.78 | % | 1.89 | % | 3.60 | % | 4.33 | % | 2.16 | %(h) | |||||||||||||||
Portfolio turnover rate | 20 | %** | 58 | % | 22 | % | 44 | % | 72 | % | 62 | %†† | |||||||||||||||
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets:(i) | 0.09 | %* | 0.09 | % | 0.08 | % | 0.06 | % | 0.06 | % | 0.07 | %* | |||||||||||||||
Redemption fees consisted of the following per share amounts:† | $ | 0.00 | (j) | $ | 0.00 | (k) | $ | 0.01 | $ | — | $ | — | $ | — |
(a) Period from July 26, 2005 (commencement of operations) through February 28, 2006.
(b) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(c) The per share amount is not in accord with the net realized and unrealized gain (loss) on investments for the period because of the timing of sales of Fund shares and the amount of the per share realized and unrealized gains and losses at such time.
(d) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(e) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(f) The net expense ratio does not include the effect of expense reductions (Note 2).
(g) Interest expense incurred as a result of payables owed to Lehman Brothers in connection with the termination of derivative contracts in 2008.
(h) The ratio for the period ended February 28, 2006 has not been annualized since the Fund believes it would not be appropriate because the Fund's net income is not earned ratably throughout the fiscal year.
(i) Ratios include reimbursement of direct operating expenses and waiver of expenses indirectly incurred through investment in the underlying funds (See Note 5).
(j) There were no redemption fees during the period.
(k) Redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the year ended February 28, 2006.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
16
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO Core Plus Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks total return in excess of that of its benchmark, the Barclays Capital U.S. Aggregate Index. The Fund's investment program has two principal components. One component of the investment program is designed to approximate the return of the Fund's benchmark. The second component seeks to add value relative to that benchmark by exploiting misvaluations in global markets (e.g., global interest rates, sectors, currencies, credit and emerging country debt markets) beyond those represented in the Fund's benchmark. As a result, the Fund's interest rate, sector, credit and currency exposures will differ from those of its benchmark.
The Manager uses fundamental investment techniques and quantitative models to determine the relative values of the interest rate and currency markets, to determine currency and interest rate exposures, and to identify investments the Manager believes are undervalued or are likely to provide downside protection. The Manager selects investments based on an evaluation of various factors including, but not limited to, fundamental factors such as inflation and current account positions, as well as price-based factors such as interest and exchange rates.
Under normal circumstances, the Fund invests directly and indirectly (e.g., through the GMO funds in which the Fund invests, collectively referred to as the "underlying funds" or derivatives) at least 80% of its assets in bonds. The term "bond" refers to any fixed income security, which includes (i) obligations of an issuer to make payments of principal and/or interest on future dates, (ii) synthetic debt instruments created by the Manager by using derivatives (e.g., a futures contract, swap contract, currency forward or option), and (iii) instruments with variable interest payments.
The Fund implements its investment program by investing in or holding: exchange-traded and over-the-counter ("OTC") derivatives, including without limitation, futures contracts, currency options, interest rate options, currency forwards, reverse repurchase agreements, credit default swaps, and other swap contracts (to gain exposure to the global interest rate, credit, and currency markets); investment-grade bonds denominated in various currencies, including foreign and U.S. government securities, asset-backed securities issued by foreign governments and U.S. government agencies (including securities neither guaranteed nor insured by the U.S. government), corporate bonds, and mortgage-backed and other
17
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
asset-backed securities issued by private issuers; shares of GMO Short-Duration Collateral Fund ("SDCF") (a fund that invests primarily in asset-backed securities); shares of GMO World Opportunity Overlay Fund ("Overlay Fund") (to attempt to exploit misvaluations in world interest rates, currencies and credit markets); shares of GMO Emerging Country Debt Fund ("ECDF") (to gain exposure to emerging country debt markets); shares of GMO High Quality Short-Duration Bond Fund (to seek to generate a return in excess of that of the J.P. Morgan U.S. 3 Month Cash Index by investing in a wide variety of high quality U.S. and foreign debt investments); shares of GMO Debt Opportunities Fund (to seek to generate a positive return by investing in a wide variety of U.S. and foreign debt investments without regard to the credit quality of the investment); and shares of GMO U.S. Treasury Fund (for liquidity management purposes). In addition, the Fund may invest in unaffiliated money market funds.
Historically, the Fund has used derivatives and investments in other GMO Funds as the principal means to gain investment exposure. As a result, the Fund has substantial holdings of SDCF (a fund that invests primarily in asset-backed securities) and Overlay Fund (a fund that invests in asset-backed securities and uses derivatives to attempt to exploit misvaluations in world interest rates, currencies and credit markets). Because of the deterioration in credit markets that became acute in 2008, the Fund, including through its investment in SDCF and Overlay Fund, currently has and may continue to have material exposure to below investment grade securities. This is in addition to the Fund's below investment grade emerging country debt investments. The Fund is not limited in its use of derivatives or in the absolute face value of its derivatives positions, and, as a result, the Fund may be leveraged in relation to its assets.
The Manager normally seeks to maintain the Fund's estimated interest rate duration within +/- 2 years of the benchmark's duration. The Fund, if deemed prudent by the Manager, will take temporary defensive measures until the Manager has determined that normal conditions have returned or that it is otherwise prudent to resume investing in accordance with the Fund's normal investment strategies. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
Throughout the period ended August 31, 2010, the Fund had two classes of shares outstanding: Class III and Class IV. Each class of shares bears a different shareholder service fee.
The financial statements of the underlying funds should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request by calling (617) 346-7646 (collect). As of August 31, 2010, shares of SDCF, Overlay Fund and GMO Special Purpose Holding Fund ("SPHF") were not publicly available for direct purchase.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in
18
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the OTC market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or who se values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of August 31, 2010, the total value of securities held directly and indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 6.3% of net assets. The Fund and the underlying funds classify such securities (as defined below) as Level 3. During the period ended August 31, 2010, the Manager has evaluated the Fund's OTC derivatives contracts and determined that no reduction in value was warranted on account of the creditworthiness of a counterparty. See note 4 for a further discussion on valuation of derivative financial instruments.
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. Although alternative prices are available for securities held by the Fund and the underlying funds, those alternative sources are not typically part of the valuation process and would not necessarily confirm the security price used by the Fund and the underlying funds. Therefore, the existence of those alternative sou rces does not necessarily provide greater certainty about the prices used by the Fund and the underlying funds. As of August 31, 2010, the total value of securities held directly and indirectly for which no alternative pricing source was available represented 6.5% of the net assets of the Fund.
19
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data. The Fund also used third party valuation services (which use industry models and market data from pricing vendors) to value credit default swaps.
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund used the following fair value techniques on Level 3 investments: The Fund valued certain debt securities using indicative bids received from primary pricing sources. The Fund valued certain debt securities using a specified spread above the LIBOR Rate or U.S. Treasury yield.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Debt Obligations | |||||||||||||||||||
U.S. Government | $ | 31,727,400 | $ | 22,458,592 | $ | 19,712,379 | $ | 73,898,371 | |||||||||||
Foreign Government Obligations | — | — | 5,855,303 | 5,855,303 | |||||||||||||||
Asset-Backed Securities | — | 1,891,825 | 10,451,193 | 12,343,018 | |||||||||||||||
Corporate Debt | — | 1,342,443 | — | 1,342,443 | |||||||||||||||
TOTAL DEBT OBLIGATIONS | 31,727,400 | 25,692,860 | 36,018,875 | 93,439,135 | |||||||||||||||
Mutual Funds | 251,711,141 | 50,683 | — | 251,761,824 | |||||||||||||||
Short-Term Investments | 1,659,236 | — | — | 1,659,236 | |||||||||||||||
Total Investments | 285,097,777 | 25,743,543 | 36,018,875 | 346,860,195 |
20
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
ASSET VALUATION INPUTS — continued
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Swap Agreements Interest rate risk | $ | — | $ | 876,548 | $ | — | $ | 876,548 | |||||||||||
Futures Contracts Interest rate risk | 995,456 | — | — | 995,456 | |||||||||||||||
Forward Currency Contracts Foreign exchange risk | — | 3,633,076 | — | 3,633,076 | |||||||||||||||
Total | $ | 286,093,233 | $ | 30,253,167 | $ | 36,018,875 | $ | 352,365,275 |
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Swap Agreements Credit risk | $ | — | $ | (401,741 | ) | $ | — | $ | (401,741 | ) | |||||||||
Futures Contracts Interest rate risk | (218,561 | ) | — | — | (218,561 | ) | |||||||||||||
Forward Currency Contracts Foreign exchange risk | — | (3,771,213 | ) | — | (3,771,213 | ) | |||||||||||||
Total | $ | (218,561 | ) | $ | (4,172,954 | ) | $ | — | $ | (4,391,515 | ) |
The underlying funds held at period end are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements. The aggregate net values of the Fund's investments (both direct and indirect) in securities and other financial instruments using Level 3 inputs were 36.00% and (0.08)% of total net assets, respectively.
21
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2010 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Transfers into Level 3* | Transfers out of Level 3* | Balances as of August 31, 2010 | ||||||||||||||||||||||||||||
Debt Obligations | |||||||||||||||||||||||||||||||||||
U.S. Government Agency | $ | 19,347,600 | $ | — | $ | 598,768 | $ | — | $ | (233,989 | ) | $ | — | $ | — | $ | 19,712,379 | ||||||||||||||||||
Foreign Government Obligations | — | — | 172,170 | — | 399,079 | 5,284,054 | — | 5,855,303 | |||||||||||||||||||||||||||
Asset-Backed Securities | 12,731,231 | (2,821,135 | ) | 121,737 | 245,910 | 208,920 | — | (35,470 | )** | 10,451,193 | |||||||||||||||||||||||||
Total Debt Obligations | 32,078,831 | (2,821,135 | ) | 892,675 | 245,910 | 374,010 | 5,284,054 | (35,470 | ) | 36,018,875 | |||||||||||||||||||||||||
Preferred Stock | 900,000 | (1,564,100 | ) | — | (574,751 | ) | 1,238,851 | — | — | — | |||||||||||||||||||||||||
Swap Agreements | (341,027 | ) | — | 8,139 | (8,139 | ) | (60,714 | ) | — | 401,741 | ** | — | |||||||||||||||||||||||
Total | $ | 32,637,804 | $ | (4,385,235 | ) | $ | 900,814 | $ | (336,980 | ) | $ | 1,552,147 | $ | 5,284,054 | $ | 366,271 | $ | 36,018,875 |
* The Fund recognizes investments and derivatives transferred into Level 3 at the value at the beginning of the period and transferred out of Level 3 at the value at the end of the period.
** Financial assets transferred between Level 2 and Level 3 were due to a change in observable and/or unobservable inputs.
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are inclu ded with the net realized and unrealized gain or loss on investment securities.
Repurchase agreements
The Fund may enter into repurchase agreements. Under a repurchase agreement the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an
22
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
agreed upon price and date. The Fund, through its custodian, takes possession of securities it acquired under the repurchase agreement. The value of the securities acquired is required by contract to be marked to market daily so that their market value is at least equal to the amount owed to the Fund by the seller. If the seller of a repurchase agreement defaults or enters into insolvency proceedings and/or the value of the securities subject to the repurchase agreement is insufficient, the Fund's recovery of cash from the seller may be delayed and the Fund may incur a loss equal to the difference between the cash it paid and the value of the securities. The Fund had no repurchase agreements outstanding at the end of the period.
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at an agreed upon price and date. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which generally causes the Fund's portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the even t of a buyer's bankruptcy or insolvency, the Fund's use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund's right to repurchase the securities. The Fund had no reverse repurchase agreements outstanding at the end of the period.
Inflation-indexed bonds
The Fund may invest in inflation indexed bonds. Inflation indexed bonds are fixed income securities whose principal value is adjusted periodically according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that reflects inflation in the principal value of the bond. Most other issuers pay out any inflation related accruals as part of a semiannual coupon.
The value of inflation indexed bonds is expected to change in response to changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal interest rates (i.e., stated interest rates) and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate than nominal interest rates, real interest rates (i.e. nominal interest rate minus inflation) might decline, leading to an increase in value of inflation indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation indexed bonds. There can be no assurance, however, that the value of inflation indexed bonds will be directly correlated to changes in nominal interest rates, and short term increases in inflation may lead to a decline in their value. Coupon payments received by the Fund from inflation indexed bonds are included in the Fund's gross income for the period in which they accrue. In addition, any increase or decrease in the principal amount of an inflation indexed bond will increase or decrease taxable ordinary income to the Fund, even though
23
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
principal is not paid until maturity. Inflation-indexed bonds outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund elected to defer to March 1, 2010 post-October capital losses of $904,238.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2014 | $ | (34,693,380 | ) | ||||
2/28/2015 | (2,795,728 | ) | |||||
2/29/2016 | (33,008,915 | ) | |||||
2/28/2017 | (74,050,257 | ) | |||||
2/28/2018 | (17,147,333 | ) | |||||
Total | $ | (161,695,613 | ) |
24
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 376,720,398 | $ | 4,888,600 | $ | (34,748,803 | ) | $ | (29,860,203 | ) |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which co llection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying
25
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 5).
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
For the period ended August 31, 2010, the Fund did not charge a premium on cash purchases or fee on cash redemptions of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by a Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund sha res executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
Other matters
SPHF, an investment of the Fund, has litigation pending against various entities related to the 2002 fraud and related default of securities previously held by SPHF. The outcome of the lawsuits against the remaining defendants is not known and any potential recoveries are not reflected in the net asset value of SPHF. For the period ended August 31, 2010, the Fund received no distributions from SPHF in connection with settlement agreements related to litigation.
26
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Fixed Income Securities — Typically, the value of the Fund's fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset backed and other fixed income securities.
• Credit and Counterparty Risk — The Fund runs the risk that the issuer or guarantor of a fixed income security, the counterparty to an over-the-counter derivatives contract, a borrower of the Fund's securities or the obligor of an obligation underlying an asset-backed security will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise honor its obligations. This risk is particularly pronounced for the Fund because it typically uses over-the-counter derivatives, including swap contracts with longer-term maturities, and may have significant exposure to a single counterparty. The risk of counterparty default is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type ev idenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions.
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in underlying funds, including the risk that the underlying funds in which it invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments.
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
Other principal risks of an investment in the Fund include Foreign Investment Risk (risk that the market prices of foreign securities will fluctuate more rapidly and to a greater extent than those of U.S. securities); Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Leveraging Risk (increased risk of loss from use of reverse repurchase agreements and other derivatives and securities lending); Focused Investment Risk (increased risk from the
27
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Fund's focus on investments in countries, regions, sectors or companies with high positive correlations to one another); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, accredited investors, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
The most significant market risk for Funds investing in fixed income securities is that the securities in which they invest experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. These risks apply to the Fund because it invests in asset-backed securities. Asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as "collateralized debt obligations" or "collateralized loan obligations") and by the fees earned by service providers. Payment of interest on asset-backed securities and repayment of principal largely depend on t he cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. Many asset-backed securities owned (directly or indirectly) by the Fund that were once rated investment grade are now rated below investment grade as of the date of this Report.
With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e .g., automobiles) financed by those loans, and the inability of borrowers to refinance existing
28
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and a Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.
The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution's business may have a material impact on multiple investments.
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps or other derivatives on an index, a single security or a basket of securities to gain investment exposures (e.g., by selling protection under a credit default swap). The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). For example, the Fund may use credit default swaps to take a short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
29
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund's exposure to the credit of an issuer through the debt instrument, but adjust the Fund's interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed versus variable rates and shorter duration versus longer duration exposure. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedin gs. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be secured by collateral (e.g., foreign currency forwards; see "Currency Risk" above), that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
30
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value. At August 31, 2010, amounts reported as a miscellaneous payable include amounts that were ca lculated by the Fund as being owed to Lehman Brothers upon the termination of the contracts pursuant to the terms of those contracts. The amounts reported as payable are subject to settlement discussions with Lehman Brothers' bankruptcy estate and may vary significantly upon final settlement with the estate.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts.
During the period ended August 31, 2010, the Fund used forward currency contracts to adjust exposure to foreign currencies and otherwise adjust currency exchange rate risk. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
31
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. During the period ended August 31, 2010, the Fund used futures contracts to adjust interest-rate exposure and enhance the diversity and liquidity of the portfolio. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased options contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an of fsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the
32
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
33
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the pe riod ended August 31, 2010, the Fund used swap agreements to adjust interest rate exposure, adjust exposure to certain markets, achieve exposure to a reference entity's credit, and/or provide a measure of protection against default loss. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
34
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Unrealized appreciation on futures contracts* | $ | 995,456 | $ | — | $ | — | $ | — | $ | — | $ | 995,456 | |||||||||||||||
Unrealized appreciation on forward currency contracts | — | 3,633,076 | — | — | — | 3,633,076 | |||||||||||||||||||||
Unrealized appreciation on swap agreements | 876,548 | — | — | — | — | 876,548 | |||||||||||||||||||||
Total | $ | 1,872,004 | $ | 3,633,076 | $ | — | $ | — | $ | — | $ | 5,505,080 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Unrealized depreciation on futures contracts* | $ | (218,561 | ) | $ | — | $ | — | $ | — | $ | — | $ | (218,561 | ) | |||||||||||||
Unrealized depreciation on forward currency contracts | — | (3,771,213 | ) | — | — | — | (3,771,213 | ) | |||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | (401,741 | ) | — | — | (401,741 | ) | |||||||||||||||||||
Total | $ | (218,561 | ) | $ | (3,771,213 | ) | $ | (401,741 | ) | $ | — | $ | — | $ | (4,391,515 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments.
35
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Period Ended August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Futures contracts | $ | 1,210,491 | $ | — | $ | — | $ | — | $ | — | $ | 1,210,491 | |||||||||||||||
Forward currency contracts | — | (339,485 | ) | — | — | — | (339,485 | ) | |||||||||||||||||||
Swap contracts | 15,153,604 | — | 8,139 | — | — | 15,161,743 | |||||||||||||||||||||
Total | $ | 16,364,095 | $ | (339,485 | ) | $ | 8,139 | $ | — | $ | — | $ | 16,032,749 | ||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Futures contracts | $ | 557,869 | $ | — | $ | — | $ | — | $ | — | $ | 557,869 | |||||||||||||||
Forward currency contracts | — | (450,172 | ) | — | — | — | (450,172 | ) | |||||||||||||||||||
Swap contracts | (1,301,898 | ) | — | (60,714 | ) | — | — | (1,362,612 | ) | ||||||||||||||||||
Total | $ | (744,029 | ) | $ | (450,172 | ) | $ | (60,714 | ) | $ | — | $ | — | $ | (1,254,915 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
The volume of derivative activity, based on absolute values (forward currency contracts and futures contracts) or notional amounts (swap agreements) outstanding at each month-end, was as follows for the period ended August 31, 2010:
Forward Currency Contracts | Futures Contracts | Swap Agreements | |||||||||||||
Average amount outstanding | $ | 135,415,507 | $ | 116,504,399 | $ | 316,976,011 |
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.25% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets of each class at the annual rate of 0.15% for Class III shares and 0.10% for Class IV shares. The Manager has contractually agreed through at least June 30, 2011 to waive the Fund's shareholder service fee to the extent that the aggregate of any direct and indirect shareholder service fees
36
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
borne by a class of shares of the Fund exceeds 0.15% for Class III shares and 0.10% for Class IV shares; provided, however, that the amount of this waiver will not exceed the respective Class's shareholder service fee.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.25% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investme nt company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in other GMO Funds (excluding those Funds' Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund's Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $3,280 and $1,288, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Indirect Interest Expense | Total Indirect Expenses | ||||||||||||
0.019 | % | 0.004 | % | 0.011 | % | 0.034 | % |
37
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
6. Purchases and sales of securities
For the period ended August 31, 2010, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | 30,121,289 | $ | — | |||||||
Investments (non-U.S. Government securities) | 69,534,215 | 66,989,691 |
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, 92.26% of the outstanding shares of the Fund were held by five shareholders, each holding more than 10% of the Fund's outstanding shares.
As of August 31, 2010, 0.03% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 47.71% of the Fund's shares were held by accounts for which the Manager had investment discretion.
38
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 426,614 | $ | 3,029,427 | 8,422 | $ | 55,888 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 7,063 | 51,629 | 143,966 | 944,061 | |||||||||||||||
Shares repurchased | (1,369,020 | ) | (10,054,220 | ) | (4,319,478 | ) | (26,871,884 | ) | |||||||||||
Redemption fees | — | — | — | 16,973 | |||||||||||||||
Net increase (decrease) | (935,343 | ) | $ | (6,973,164 | ) | (4,167,090 | ) | $ | (25,854,962 | ) | |||||||||
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 1,222,346 | $ | 8,917,723 | 735,754 | $ | 4,833,902 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 442,566 | 3,244,007 | 1,212,971 | 8,296,723 | |||||||||||||||
Shares repurchased | (2,062,445 | ) | (15,015,000 | ) | (938,917 | ) | (6,091,837 | ) | |||||||||||
Redemption fees | — | — | — | 75,321 | |||||||||||||||
Net increase (decrease) | (397,533 | ) | $ | (2,853,270 | ) | 1,009,808 | $ | 7,114,109 |
39
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
10. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income* | Distributions of Realized Gains* | Return of Capital* | Value, end of period | ||||||||||||||||||||||||
GMO Emerging Country Debt Fund, Class IV | $ | 13,942,458 | $ | 430,791 | $ | 4,700,000 | $ | 430,791 | $ | — | $ | — | $ | 11,194,970 | |||||||||||||||||
GMO Short-Duration Collateral Fund | 111,107,471 | — | — | 814,654 | — | 28,073,770 | 86,631,192 | ||||||||||||||||||||||||
GMO Special Purpose Holding Fund | 51,622 | — | — | — | — | — | 50,683 | ||||||||||||||||||||||||
GMO U.S. Treasury Fund | 72,662,938 | 69,103,424 | 57,950,000 | 47,024 | 6,400 | — | 83,815,480 | ||||||||||||||||||||||||
GMO World Opportunity Overlay Fund | 67,319,816 | — | — | — | — | — | 70,069,499 | ||||||||||||||||||||||||
Totals | $ | 265,084,305 | $ | 69,534,215 | $ | 62,650,000 | $ | 1,292,469 | $ | 6,400 | $ | 28,073,770 | $ | 251,761,824 |
* The table above includes estimated sources of all distributions paid by the underlying funds during the period March 1, 2010 through August 31, 2010. The actual tax character of all distributions paid by the underlying funds will be determined through fiscal year ending February 28, 2011.
40
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of a composite of accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three-, five-, seven- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications
41
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took in to account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also con sidered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of other funds of the Trust in which it invests. The Trustees noted in particular that certain underlying funds do not charge any advisory fees, and that with respect to all other underlying funds, pursuant to a contractual expense reimbursement arrangement in place with the Fund, the Manager effectively reimburses the Fund for management fees, shareholder servicing fees and most other expenses of the underlying funds that the Fund would otherwise bear as a result of its investments in those other funds. In addition, the Trustees considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economie s of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources,
42
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determ ination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
43
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.43 | % | $ | 1,000.00 | $ | 1,083.60 | $ | 2.26 | |||||||||||
2) Hypothetical | 0.43 | % | $ | 1,000.00 | $ | 1,023.04 | $ | 2.19 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.38 | % | $ | 1,000.00 | $ | 1,085.00 | $ | 2.00 | |||||||||||
2) Hypothetical | 0.38 | % | $ | 1,000.00 | $ | 1,023.29 | $ | 1.94 |
* Expenses are calculated using each Class's annualized net expense ratio (including interest expense and indirect expenses incurred) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
44
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 82.9 | % | |||||
Short-Term Investments | 18.8 | ||||||
Options Purchased | 1.9 | ||||||
Futures Contracts | 0.3 | ||||||
Loan Participations | 0.2 | ||||||
Loan Assignments | 0.1 | ||||||
Rights and Warrants | 0.0 | ||||||
Promissory Notes | 0.0 | ||||||
Swap Agreements | (0.4 | ) | |||||
Forward Currency Contracts | (0.9 | ) | |||||
Reverse Repurchase Agreements | (1.3 | ) | |||||
Written Options | (1.5 | ) | |||||
Other | (0.1 | ) | |||||
100.0 | % | ||||||
Country / Region Summary** | % of Investments | ||||||
Euro Region*** | 74.2 | % | |||||
United Kingdom | 13.4 | ||||||
Canada | 8.3 | ||||||
Emerging**** | 3.2 | ||||||
Sweden | 1.8 | ||||||
United States | 1.4 | ||||||
Switzerland | 0.0 | ||||||
Norway | 0.0 | ||||||
New Zealand | 0.0 | ||||||
Australia | (0.3 | ) | |||||
Japan | (2.0 | ) | |||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds. The table excludes short-term investments. The table includes exposure through the use of derivative contracts. The table is based on duration adjusted exposures, taking into account the market value of securities and the notional amounts of swaps and other derivative contracts. Duration is based on the Manager's models. The greater the duration of a bond, the greater its contribution to the concentration percentage. Credit default swap exposures (both positive and negative) are factored into the duration-adjusted exposure using the reference security and applying the same methodology to that security.
*** The "Euro Region" is comprised of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
**** The "Emerging" exposure is associated only with investments in the GMO Emerging Country Debt Fund, which is exposed to emerging countries primarily comprised of Russia, Argentina, Brazil, Philippines, Mexico, Venezuela, Colombia, Ukraine, Turkey, and Indonesia. Additional information about the fund's emerging country exposure is available in the financial statements of the GMO Emerging Country Debt Fund.
1
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value | Description | Value ($) | |||||||||
DEBT OBLIGATIONS — 27.4% | |||||||||||
Canada — 2.0% | |||||||||||
Foreign Government Obligations | |||||||||||
CAD | 3,000,000 | Government of Canada, 3.50%, due 06/01/20 | 2,985,794 | ||||||||
France — 5.0% | |||||||||||
Foreign Government Obligations | |||||||||||
EUR | 5,000,000 | Government of France, 4.00%, due 10/25/38 | 7,530,002 | ||||||||
Germany — 5.7% | |||||||||||
Foreign Government Obligations | |||||||||||
EUR | 5,000,000 | Republic of Deutschland, 4.75%, due 07/04/34 (a) | 8,602,730 | ||||||||
Italy — 4.3% | |||||||||||
Foreign Government Obligations | |||||||||||
EUR | 5,500,000 | Republic of Italy, 4.00%, due 02/01/37 | 6,461,425 | ||||||||
Spain — 2.4% | |||||||||||
Foreign Government Obligations | |||||||||||
EUR | 3,000,000 | Government of Spain, 4.70%, due 07/30/41 | 3,718,037 | ||||||||
United Kingdom — 5.4% | |||||||||||
Foreign Government Obligations | |||||||||||
GBP | 5,000,000 | United Kingdom Gilt, 3.75%, due 09/07/19 | 8,259,475 | ||||||||
United States — 2.6% | |||||||||||
U.S. Government | |||||||||||
USD | 3,843,595 | U.S. Treasury Inflation Indexed Note, 2.38%, due 04/15/11 (a)(b) | 3,891,340 | ||||||||
TOTAL DEBT OBLIGATIONS (COST $38,150,372) | 41,448,803 |
See accompanying notes to the financial statements.
2
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
MUTUAL FUNDS — 71.6% | |||||||||||
United States — 71.6% | |||||||||||
Affiliated Issuers | |||||||||||
916,025 | GMO U.S. Treasury Fund | 22,900,624 | |||||||||
484,013 | GMO Emerging Country Debt Fund, Class III | 4,598,123 | |||||||||
4,332,356 | GMO Short-Duration Collateral Fund | 50,601,917 | |||||||||
5,496 | GMO Special Purpose Holding Fund (c) | 2,967 | |||||||||
1,357,510 | GMO World Opportunity Overlay Fund | 30,095,996 | |||||||||
108,199,627 | |||||||||||
Total United States | 108,199,627 | ||||||||||
TOTAL MUTUAL FUNDS (COST $117,080,118) | 108,199,627 | ||||||||||
SHORT-TERM INVESTMENTS — 0.8% | |||||||||||
Money Market Funds — 0.4% | |||||||||||
514,086 | State Street Institutional Treasury Plus Money Market Fund-Institutional Class | 514,086 | |||||||||
Total Money Market Funds (Cost $514,086) | 514,086 | ||||||||||
U.S. Government — 0.4% | |||||||||||
625,000 | U.S. Treasury Bill, 0.21%, due 06/30/11 (a)(d) | 623,899 | |||||||||
Total U.S. Government (Cost $623,469) | 623,899 | ||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $1,137,555) | 1,137,985 | ||||||||||
TOTAL INVESTMENTS — 99.8% (Cost $156,368,045) | 150,786,415 | ||||||||||
Other Assets and Liabilities (net) — 0.2% | 295,972 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 151,082,387 |
See accompanying notes to the financial statements.
3
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
A summary of outstanding financial instruments at August 31, 2010 is as follows:
Forward Currency Contracts
Settlement Date | Counterparty | Deliver/ Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||
Buys † | |||||||||||||||||||||||
10/26/10 | Citibank | AUD | 400,000 | $ | 353,610 | $ | (7,614 | ) | |||||||||||||||
10/26/10 | Deutsche Bank AG | AUD | 6,700,000 | 5,922,974 | 55,463 | ||||||||||||||||||
10/26/10 | Royal Bank of Scotland PLC | AUD | 1,800,000 | 1,591,247 | (11,115 | ) | |||||||||||||||||
11/02/10 | Deutsche Bank AG | CAD | 4,600,000 | 4,309,482 | (141,279 | ) | |||||||||||||||||
11/02/10 | Royal Bank of Scotland PLC | CAD | 600,000 | 562,106 | (16,779 | ) | |||||||||||||||||
10/05/10 | Citibank | CHF | 900,000 | 886,742 | 20,250 | ||||||||||||||||||
10/05/10 | Deutsche Bank AG | CHF | 10,200,000 | 10,049,746 | 432,546 | ||||||||||||||||||
10/05/10 | Royal Bank of Scotland PLC | CHF | 500,000 | 492,635 | 11,192 | ||||||||||||||||||
10/12/10 | Deutsche Bank AG | EUR | 5,000,000 | 6,335,933 | (90,885 | ) | |||||||||||||||||
10/12/10 | Royal Bank of Scotland PLC | EUR | 600,000 | 760,312 | (1,928 | ) | |||||||||||||||||
9/07/10 | Citibank | GBP | 900,000 | 1,380,238 | (51,821 | ) | |||||||||||||||||
9/07/10 | Deutsche Bank AG | GBP | 700,000 | 1,073,518 | (24,457 | ) | |||||||||||||||||
10/19/10 | Deutsche Bank AG | JPY | 694,800,000 | 8,274,620 | 363,686 | ||||||||||||||||||
9/21/10 | Deutsche Bank AG | NZD | 6,000,000 | 4,177,595 | 146,315 | ||||||||||||||||||
$ | 46,170,758 | $ | 683,574 | ||||||||||||||||||||
Sales # | |||||||||||||||||||||||
11/02/10 | Deutsche Bank AG | CAD | 12,300,000 | $ | 11,523,180 | $ | 268,941 | ||||||||||||||||
11/02/10 | Royal Bank of Scotland PLC | CAD | 3,200,000 | 2,997,901 | 38,265 | ||||||||||||||||||
10/05/10 | Deutsche Bank AG | CHF | 11,900,000 | 11,724,704 | (913,549 | ) | |||||||||||||||||
10/12/10 | Deutsche Bank AG | EUR | 27,900,000 | 35,354,507 | (661,815 | ) | |||||||||||||||||
9/07/10 | Barclays | GBP | 7,000,000 | 10,735,182 | (668,692 | ) | |||||||||||||||||
9/07/10 | Deutsche Bank AG | GBP | 500,000 | 766,799 | 8,781 | ||||||||||||||||||
9/07/10 | Royal Bank of Scotland PLC | GBP | 1,100,000 | 1,686,957 | 34,988 | ||||||||||||||||||
10/19/10 | Deutsche Bank AG | JPY | 50,000,000 | 595,468 | (12,921 | ) | |||||||||||||||||
10/19/10 | Royal Bank of Scotland PLC | JPY | 40,000,000 | 476,374 | (4,161 | ) | |||||||||||||||||
9/21/10 | Citibank | NZD | 800,000 | 557,013 | 24,587 | ||||||||||||||||||
9/21/10 | Deutsche Bank AG | NZD | 900,000 | 626,639 | 8,779 | ||||||||||||||||||
9/21/10 | Royal Bank of Scotland PLC | NZD | 3,300,000 | 2,297,677 | 79,514 | ||||||||||||||||||
$ | 79,342,401 | $ | (1,797,283 | ) |
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.
See accompanying notes to the financial statements.
4
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Forward Cross Currency Contracts
Settlement Date | Counterparty | Deliver/Units of Currency | Receive/In Exchange For | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
9/14/10 | Deutsche Bank AG | NOK | 20,761,434 | EUR | 2,600,000 | $ | 5,256 | ||||||||||||
9/28/10 | Deutsche Bank AG | SEK | 14,304,006 | EUR | 1,500,000 | (33,614 | ) | ||||||||||||
9/14/10 | Deutsche Bank AG | EUR | 4,600,000 | NOK | 36,392,736 | (63,017 | ) | ||||||||||||
9/14/10 | Royal Bank of Scotland PLC | EUR | 600,000 | NOK | 4,801,044 | 363 | |||||||||||||
$ | (91,012 | ) |
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
70 | Canadian Government Bond 10 Yr. | December 2010 | $ | 8,290,242 | $ | 39,797 | |||||||||||||
135 | Euro Bund | September 2010 | 22,998,125 | 894,347 | |||||||||||||||
15 | U.S. Treasury Bond 30 Yr. (CBT) | September 2010 | 2,046,563 | 151,314 | |||||||||||||||
1 | U.S. Treasury Note 2 Yr. (CBT) | December 2010 | 219,141 | 13 | |||||||||||||||
23 | U.S. Treasury Note 5 Yr. (CBT) | December 2010 | 2,767,367 | 6,335 | |||||||||||||||
84 | UK Gilt Long Bond | December 2010 | 16,136,826 | 15,291 | |||||||||||||||
$ | 52,458,264 | $ | 1,107,097 | ||||||||||||||||
Sales | |||||||||||||||||||
3 | Australian Government Bond 3 Yr. | September 2010 | $ | 279,631 | $ | (2,825 | ) | ||||||||||||
2 | Australian Government Bond 10 Yr. | September 2010 | 195,335 | (4,979 | ) | ||||||||||||||
32 | Euro BOBL | September 2010 | 4,972,082 | (92,130 | ) | ||||||||||||||
2 | Japanese Government Bond 10 Yr. (TSE) | September 2010 | 3,404,119 | (38,866 | ) | ||||||||||||||
9 | U.S. Treasury Note 10 Yr. (CBT) | September 2010 | 1,138,500 | (54,886 | ) | ||||||||||||||
$ | 9,989,667 | $ | (193,686 | ) |
See accompanying notes to the financial statements.
5
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Swap Agreements
Credit Default Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay)^ | Annual Premium | Implied Credit Spread (1) | Deliverable on Default | Maximum Potential Amount of Future Payments by the Fund Under the Contract (2) | Market Value | |||||||||||||||||||||||||||||||||||
28,000,000 | USD | 3/14/2014 | Deutsche Bank AG | (Pay) | 1.70 | % | 2.2 | % | Republic of Italy | NA | $ | 374,405 | |||||||||||||||||||||||||||||||
20,000,000 | USD | 3/20/2019 | Deutsche Bank AG | Receive | 1.66 | % | 2.33 | % | Republic of Italy | 20,000,000 | USD | (851,983 | ) | ||||||||||||||||||||||||||||||
$ | (477,578 | ) | |||||||||||||||||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
^ Receive - Fund receives premium and sells credit protection.
(Pay) - Fund pays premium and buys credit protection.
(1) Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on the reference security, as of August 31, 2010, serve as an indicator of the current status of the payment/performance risk and reflect the likelihood or risk of default for the reference entity. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection. Wider (i.e.. higher) credit spreads represent a deterioration of the referenced entity's credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.
(2) The maximum potential amount the Fund could be required to pay as a seller of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.
See accompanying notes to the financial statements.
6
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Interest Rate Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay)# | Fixed Rate | Variable Rate | Market Value | |||||||||||||||||||||||||
5,500,000 | CHF | 3/16/2016 | Barclays | Receive | 1.30 | % | 6 Month CHF LIBOR | $ | 19,770 | ||||||||||||||||||||||
2,800,000 | CHF | 3/16/2016 | JPMorgan | Receive | 1.30 | % | 6 Month CHF LIBOR | 10,065 | |||||||||||||||||||||||
28,000,000 | SEK | 9/15/2015 | Barclays | Receive | 2.50 | % | 3 Month SEK STIBOR | 75,953 | |||||||||||||||||||||||
40,000,000 | EUR | 2/4/2013 | Deutsche Bank AG | Receive | 2.48 | % | 6 Month EUR LIBOR | 1,087,236 | |||||||||||||||||||||||
30,000,000 | EUR | 5/20/2013 | Deutsche Bank AG | Receive | 1.79 | % | 6 Month EUR LIBOR | 225,431 | |||||||||||||||||||||||
$ | 1,418,455 | ||||||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | (16,006 | ) |
# Receive - Fund receives fixed rate and pays variable rate.
(Pay) - Fund pays fixed rate and receives variable rate.
As of August 31, 2010, for forward currency contracts, futures contracts, swap agreements and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
Notes to Schedule of Investments:
BOBL - Bundesobligationen
CBT - Chicago Board of Trade
CHF LIBOR - London Interbank Offered Rate denominated in Swiss Franc.
EUR LIBOR - London Interbank Offered Rate denominated in Euros.
SEK STIBOR - Stockholm Interbank Offered Rate denominated in Swedish Krona.
TSE - Tokyo Stock Exchange
(a) All or a portion of this security has been pledged to cover margin requirements on open financial futures contracts and/or collateral on open swap contracts (Note 4).
(b) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic (Note 2).
(c) Underlying investment represents interests in defaulted claims.
(d) Rate shown represents yield-to-maturity.
See accompanying notes to the financial statements.
7
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Currency Abbreviations:
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
EUR - Euro
GBP - British Pound
JPY - Japanese Yen
NOK - Norwegian Krone
NZD - New Zealand Dollar
SEK - Swedish Krona
USD - United States Dollar
See accompanying notes to the financial statements.
8
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $39,287,927) (Note 2) | $ | 42,586,788 | |||||
Investments in affiliated issuers, at value (cost $117,080,118) (Notes 2 and 10) | 108,199,627 | ||||||
Dividends and interest receivable | 505,465 | ||||||
Unrealized appreciation on open forward currency contracts (Note 4) | 1,498,926 | ||||||
Receivable for collateral on open futures contracts (Note 4) | 94,945 | ||||||
Receivable for variation margin on open futures contracts (Note 4) | 48,286 | ||||||
Receivable for open swap contracts (Note 4) | 1,792,860 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 14,963 | ||||||
Total assets | 154,741,860 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 2,625 | ||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 31,489 | ||||||
Shareholder service fee | 18,894 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 226 | ||||||
Payable to broker for closed futures contracts | 111 | ||||||
Unrealized depreciation on open forward currency contracts (Note 4) | 2,703,647 | ||||||
Payable for open swap contracts (Note 4) | 851,983 | ||||||
Accrued expenses | 50,498 | ||||||
Total liabilities | 3,659,473 | ||||||
Net assets | $ | 151,082,387 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 159,771,741 | |||||
Distributions in excess of net investment income | (22,886,663 | ) | |||||
Accumulated net realized gain | 19,160,216 | ||||||
Net unrealized depreciation | (4,962,907 | ) | |||||
$ | 151,082,387 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 151,082,387 | |||||
Shares outstanding: | |||||||
Class III | 17,217,722 | ||||||
Net asset value per share: | |||||||
Class III | $ | 8.77 |
See accompanying notes to the financial statements.
9
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 10) | $ | 661,855 | |||||
Interest | 647,785 | ||||||
Dividends | 104 | ||||||
Total investment income | 1,309,744 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 180,109 | ||||||
Shareholder service fee – Class III (Note 5) | 108,065 | ||||||
Audit and tax fees | 35,696 | ||||||
Custodian, fund accounting agent and transfer agent fees | 31,280 | ||||||
Legal fees | 3,772 | ||||||
Trustees fees and related expenses (Note 5) | 1,337 | ||||||
Registration fees | 1,104 | ||||||
Miscellaneous | 1,288 | ||||||
Total expenses | 362,651 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (72,220 | ) | |||||
Expense reductions (Note 2) | (6 | ) | |||||
Indirectly incurred fees waived or borne by Manager (Note 5) | (9,852 | ) | |||||
Shareholder service fee waived (Note 5) | (3,478 | ) | |||||
Net expenses | 277,095 | ||||||
Net investment income (loss) | 1,032,649 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | 491,573 | ||||||
Investments in affiliated issuers | (168,193 | ) | |||||
Realized gains distributions from affiliated issuers (Note 10) | 1,741 | ||||||
Closed futures contracts | 4,395,325 | ||||||
Closed swap contracts | (313,314 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 2,421,626 | ||||||
Net realized gain (loss) | 6,828,758 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | 2,661,234 | ||||||
Investments in affiliated issuers | 3,965,642 | ||||||
Open futures contracts | 274,089 | ||||||
Open swap contracts | 637,821 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (1,665,992 | ) | |||||
Net unrealized gain (loss) | 5,872,794 | ||||||
Net realized and unrealized gain (loss) | 12,701,552 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 13,734,201 |
See accompanying notes to the financial statements.
10
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 1,032,649 | $ | 1,550,734 | |||||||
Net realized gain (loss) | 6,828,758 | 760,571 | |||||||||
Change in net unrealized appreciation (depreciation) | 5,872,794 | 23,482,671 | |||||||||
Net increase (decrease) in net assets from operations | 13,734,201 | 25,793,976 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | — | (7,460,660 | ) | ||||||||
Return of capital | |||||||||||
Class III | — | (1,339,340 | ) | ||||||||
— | (8,800,000 | ) | |||||||||
Net share transactions (Note 9): | |||||||||||
Class III | 47,530 | (6,882,359 | ) | ||||||||
Purchase premiums and redemption fees (Notes 2 and 9): | |||||||||||
Class III | — | 107,884 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and redemption fees | 47,530 | (6,774,475 | ) | ||||||||
Total increase (decrease) in net assets | 13,781,731 | 10,219,501 | |||||||||
Net assets: | |||||||||||
Beginning of period | 137,300,656 | 127,081,155 | |||||||||
End of period (including distributions in excess of net investment income of $22,886,663 and $23,919,312, respectively) | $ | 151,082,387 | $ | 137,300,656 |
See accompanying notes to the financial statements.
11
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 7.98 | $ | 7.00 | $ | 8.79 | $ | 9.21 | $ | 9.04 | $ | 9.59 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.06 | 0.09 | 0.26 | 0.33 | 0.17 | 0.18 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.73 | 1.39 | (1.49 | ) | (0.62 | ) | 0.15 | 0.39 | |||||||||||||||||||
Total from investment operations | 0.79 | 1.48 | (1.23 | ) | (0.29 | ) | 0.32 | 0.57 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | — | (0.42 | ) | (0.56 | ) | (0.01 | ) | — | (1.00 | )(b) | |||||||||||||||||
From net realized gains | — | — | — | — | (0.14 | ) | (0.12 | ) | |||||||||||||||||||
Return of capital | — | (0.08 | ) | — | (0.12 | ) | (0.01 | ) | — | ||||||||||||||||||
Total distributions | — | (0.50 | ) | (0.56 | ) | (0.13 | ) | (0.15 | ) | (1.12 | ) | ||||||||||||||||
Net asset value, end of period | $ | 8.77 | $ | 7.98 | $ | 7.00 | $ | 8.79 | $ | 9.21 | $ | 9.04 | |||||||||||||||
Total Return(c) | 9.90 | %** | 22.19 | % | (13.93 | )% | (3.08 | )% | 3.58 | % | 6.01 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 151,082 | $ | 137,301 | $ | 127,081 | $ | 155,952 | $ | 274,422 | $ | 953,894 | |||||||||||||||
Net expenses to average daily net assets(d) | 0.38 | %(e)* | 0.39 | %(e) | 0.39 | %(e) | 0.38 | %(e) | 0.39 | % | 0.39 | % | |||||||||||||||
Net investment income (loss) to average daily net assets(a) | 1.43 | %* | 1.19 | % | 3.24 | % | 3.62 | % | 1.93 | % | 1.91 | % | |||||||||||||||
Portfolio turnover rate | 10 | %** | 31 | % | 28 | % | 55 | % | 25 | % | 49 | % | |||||||||||||||
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets:(f) | 0.12 | %* | 0.12 | % | 0.13 | % | 0.09 | % | 0.06 | % | 0.06 | % | |||||||||||||||
Redemption fees consisted of the following per share amounts:† | $ | 0.00 | (g) | $ | 0.01 | $ | 0.00 | (h) | — | — | — |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(b) Distributions from net investment income include amounts (approximately $0.49 per share) from foreign currency transactions which are treated as realized capital gain for book purposes.
(c) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(e) The net expense ratio does not include the effect of expense reductions (Note 2).
(f) Ratios include reimbursement of direct operating expenses and waiver of expenses indirectly incurred through investment in the underlying funds (See Note 5).
(g) There were no redemption fees during the period.
(h) Redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
* Annualized
** Not Annualized.
See accompanying notes to the financial statements.
12
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO Currency Hedged International Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks total return in excess of that of its benchmark, the J.P. Morgan Non-U.S. Government Bond Index (Hedged) (ex-Japan). The Fund seeks to add value relative to its benchmark by exploiting misvaluations in global interest rates, sectors, currencies, credit and emerging country debt markets. As a result, the Fund's interest rate, sector, credit and currency exposures will differ from those of its benchmark.
The Manager uses fundamental investment techniques and quantitative models to determine the relative values of the interest rate and currency markets, to determine currency and interest rate exposures, and to identify investments the Manager believes are undervalued or are likely to provide downside protection. The Manager selects investments based on an evaluation of various factors including, but not limited to, fundamental factors such as inflation and current account positions, as well as price-based factors such as interest and exchange rates.
Under normal circumstances, the Fund invests directly and indirectly (e.g., through the GMO Funds in which the Fund invests, collectively referred to as the "underlying funds", or derivatives) at least 80% of its assets in bonds. The term "bond" refers to any fixed income security, which includes (i) obligations of an issuer to make payments of principal and/or interest on future dates, (ii) synthetic debt instruments created by the Manager by using derivatives (e.g., a futures contract, swap contract, currency forward or option), and (iii) instruments with variable interest payments.
The Fund implements its investment program by investing in or holding: exchange-traded and over-the-counter ("OTC") derivatives, including without limitation, futures contracts, currency options, interest rate options, currency forwards, reverse repurchase agreements, credit default swaps, and other swap contracts (to gain exposure to the global interest rate, credit, and currency markets); investment-grade bonds denominated in various currencies, including foreign and U.S. government securities, asset-backed securities issued by foreign governments and U.S. government agencies (including securities neither guaranteed nor insured by the U.S. government), corporate bonds, and mortgage-backed and other asset-backed securities issued by private issuers; shares of GMO Short-Duration Collateral Fund ("SDCF") (a fund that invests primarily in asset-backed securities); shares of GMO World Opportunity Overlay Fund
13
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
("Overlay Fund") (to attempt to exploit misvaluations in world interest rates, currencies and credit markets); shares of GMO Emerging Country Debt Fund ("ECDF") (to gain exposure to emerging country debt markets); shares of GMO High Quality Short-Duration Bond Fund (to seek to generate a return in excess of that of the J.P. Morgan U.S. 3 Month Cash Index by investing in a wide variety of high quality U.S. and foreign debt investments); shares of GMO Debt Opportunities Fund (to seek to generate a positive return by investing in a wide variety of U.S. and foreign debt investments without regard to the credit quality of the investment); and shares of GMO U.S. Treasury Fund (for liquidity management purposes). In addition, the Fund may invest in unaffiliated money market funds. The Fund generally attempts to hedge at least 75% of its net foreign currency exposure into U.S. dollars.
Historically, the Fund has used derivatives and investments in other GMO Funds as the principal means to gain investment exposure. As a result, the Fund has substantial holdings of SDCF and Overlay Fund (a fund that invests in asset-backed securities and uses derivatives to attempt to exploit misvaluations in world interest rates, currencies and credit markets). Because of the deterioration in credit markets that became acute in 2008, the Fund, including through its investment in SDCF and Overlay Fund, currently has and may continue to have material exposure to below investment grade securities. This is in addition to the Fund's below investment grade emerging country debt investments. The Fund is not limited in its use of derivatives or in the absolute face value of its derivatives positions, and, as a result, the Fund may be leveraged in relation to its assets.
The Manager normally seeks to maintain the Fund's estimated interest rate duration within +/- 2 years of the benchmark's duration. The Fund, if deemed prudent by the Manager, will take temporary defensive measures until the Manager has determined that normal conditions have returned or that it is otherwise prudent to resume investing in accordance with the Fund's normal investment strategies. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
The financial statements of the underlying funds should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect). As of August 31, 2010, shares of SDCF, GMO Special Purpose Holding Fund ("SPHF") and Overlay Fund were not publicly available for direct purchase.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
14
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the OTC market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or who se values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of August 31, 2010, the total value of securities held indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 0.8% of net assets. The underlying funds classify such securities (as defined below) as Level 3. During the period ended August 31, 2010, the Manager has evaluated the Fund's OTC derivatives contracts and determined that no reduction in value was warranted on account of the creditworthiness of a counterparty. See note 4 for a further discussion on valuation of derivative financial instruments.
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. Although alternative prices are available for securities held by the Fund and the underlying funds, those alternative sources are not typically part of the valuation process and would not necessarily confirm the security price used by the Fund and the underlying funds. Therefore, the existence of those alternative sou rces does not necessarily provide greater certainty about the prices used by the Fund and the underlying funds. As of August 31, 2010, the total value of securities held directly and indirectly for which no alternative pricing source was available represented 4.9% of the net assets of the Fund.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The
15
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data. The Fund also used third party valuation services (which use industry models and market data from pricing vendors) to value credit default swaps.
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Debt Obligations | |||||||||||||||||||
U.S. Government | $ | — | $ | 3,891,340 | $ | — | $ | 3,891,340 | |||||||||||
Foreign Government Obligations | — | 37,557,463 | — | 37,557,463 | |||||||||||||||
TOTAL DEBT OBLIGATIONS | — | 41,448,803 | — | 41,448,803 | |||||||||||||||
Mutual Funds | 108,196,660 | 2,967 | — | 108,199,627 | |||||||||||||||
Short-Term Investments | 1,137,985 | — | — | 1,137,985 | |||||||||||||||
Total Investments | 109,334,645 | 41,451,770 | — | 150,786,415 | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts | |||||||||||||||||||
Forward Exchange Risk | — | 1,498,926 | — | 1,498,926 | |||||||||||||||
Futures Contracts | |||||||||||||||||||
Interest Rate Risk | 1,107,097 | — | — | 1,107,097 | |||||||||||||||
Swap Agreements | |||||||||||||||||||
Interest Rate Risk | — | 1,418,455 | — | 1,418,455 | |||||||||||||||
Credit Risk | — | 374,405 | — | 374,405 | |||||||||||||||
Total | $ | 110,441,742 | $ | 44,743,556 | $ | — | $ | 155,185,298 |
16
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts | |||||||||||||||||||
Forward Exchange Risk | $ | — | $ | (2,703,647 | ) | $ | — | $ | (2,703,647 | ) | |||||||||
Futures Contracts | |||||||||||||||||||
Interest Rate Risk | (193,686 | ) | — | — | (193,686 | ) | |||||||||||||
Swap Agreements | |||||||||||||||||||
Credit Risk | — | (851,983 | ) | — | (851,983 | ) | |||||||||||||
Total | $ | (193,686 | ) | $ | (3,555,630 | ) | $ | — | $ | (3,749,316 | ) |
The underlying funds held at period end are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements. The aggregate net values of the Fund's investments (both direct and indirect) in securities and other financial instruments using Level 3 inputs were 30.98% and (0.08)% of the total net assets, respectively.
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2010 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Transfers into of Level 3* | Transfers out of Level 3* | Balances as of August 31, 2010 | ||||||||||||||||||||||||||||
Swaps | $ | 23,924 | $ | 72,800 | $ | — | $ | (72,800 | ) | $ | (501,502 | ) | $ | — | $ | 477,578 | ** | $ | — | ||||||||||||||||
Total | $ | 23,924 | $ | 72,800 | $ | — | $ | (72,800 | ) | $ | (501,502 | ) | $ | — | $ | 477,578 | $ | — |
* The Fund recognizes investments and derivatives transferred into Level 3 at the value at the beginning of the period and transferred out of Level 3 at the value at the end of the period.
** Financial assets transferred between Level 2 and Level 3 were due to a change in observable and/or unobservable inputs.
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on 4 p.m. New York time exchange rates each business day. Income and expenses
17
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
denominated in foreign currencies are translated at 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on 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 investment securities.
Repurchase agreements
The Fund may enter into repurchase agreements. Under a repurchase agreement the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities it acquired under the repurchase agreement. The value of the securities acquired is required by contract to be marked to market daily so that their market value is at least equal to the amount owed to the Fund by the seller. If the seller of a repurchase agreement defaults or enters into insolvency proceedings and/or the value of the securities subject to the repurchase agreement is insufficient, the Fund's recovery of cash from the seller may be delayed and the Fund may incur a loss equal to the difference between the cash it paid and the value of the securities. The Fund had no repurchase agreements outstanding at the end of the period.
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at an agreed upon price and date. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which generally causes the Fund's portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the even t of a buyer's bankruptcy or insolvency, the Fund's use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund's right to repurchase the securities. The Fund had no reverse repurchase agreements outstanding at the end of the period.
Inflation-indexed bonds
The Fund may invest in inflation indexed bonds. Inflation indexed bonds are fixed income securities whose principal value is adjusted periodically according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that reflects inflation in the principal value of the bond. Most other issuers pay out any inflation related accruals as part of a semiannual coupon.
18
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The value of inflation indexed bonds is expected to change in response to changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal interest rates (i.e., stated interest rates) and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate than nominal interest rates, real interest rates (i.e. nominal interest rate minus inflation) might decline, leading to an increase in value of inflation indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation indexed bonds. There can be no assurance, however, that the value of inflation indexed bonds will be directly correlated to changes in nominal interest rates, and short term increases in inflation may lead to a decline in their value. Coupon payments received by the Fund from inflation indexed bonds are included in the Fund's gross income for the period in which they accrue. In addition, any increase or decrease in the principal amount of an inflation indexed bond will increase or decrease taxable ordinary income to the Fund, even though principal is not paid until maturity. Inflation-indexed bonds outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country's tax treaty with the United States. The foreign withholding rates applicable to a Fund's investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from
19
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (3,082,431 | ) | ||||
2/28/2018 | (3,328,985 | ) | |||||
Total | $ | (6,411,416 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 161,021,770 | $ | 3,322,140 | $ | (13,557,495 | ) | $ | (10,235,355 | ) |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on
20
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds (See Note 5).
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
For the period ended August 31, 2010, the Fund did not charge a premium on cash purchases or fee on cash redemptions of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by a Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component.
21
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
Other matters
SPHF, an investment of the Fund, has litigation pending against various entities related to the 2002 fraud and related default of securities previously held by SPHF. The outcome of the lawsuits against the remaining defendants is not known and any potential recoveries are not reflected in the net asset value of SPHF. For the period ended August 31, 2010, the Fund received no distributions from SPHF in connection with settlement agreements related to litigation.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Fixed Income Securities — Typically, the value of fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.
• Credit and Counterparty Risk — The Fund runs the risk that the issuer or guarantor of a fixed income security, the counterparty to an over-the-counter derivatives contract, a borrower of the Fund's securities or the obligor of an obligation underlying an asset-backed security, will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise honor its obligations. This risk is particularly pronounced for the Fund because it typically uses over-the-counter derivatives, including swap contracts with longer-term maturities, and may have significant exposure to a single counterparty. The risk of counterparty default is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type e videnced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions.
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable
22
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in underlying funds, including the risk that the underlying funds in which it invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments.
Other principal risks of an investment in the Fund include Foreign Investment Risk (risk that the market prices of foreign securities will fluctuate more rapidly and to a greater extent than those of U.S. securities); Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Leveraging Risk (increased risk of loss from use of reverse repurchase agreements and other derivatives and securities lending); Currency Risk (risk that fluctuations in exchange rates will adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies); Focused Investment Risk (increased risk from the Fund's focus on investments in countries, regions, sectors or companies with high positive correlations to one another); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produ ce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
The most significant market risk for Funds investing in fixed income securities is that the securities in which they invest experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. These risks apply to the Fund because it invests in asset-backed securities. Asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as "collateralized debt obligations" or "collateralized loan obligations") and by the fees earned by service providers. Payment of interest on asset-backed securities and repayment of principal largely depend on t he cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit
23
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. Many asset-backed securities owned (directly or indirectly) by the Fund that were once rated investment grade are now rated below investment grade as of the date of this Report.
With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e .g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and a Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.
The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution's business may have a material impact on multiple investments.
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange
24
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps or other derivatives on an index, a single security or a basket of securities to gain investment exposures (e.g., by selling protection under a credit default swap). The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). For example, the Fund may use credit default swaps to take a short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund's exposure to the credit of an issuer through the debt instrument, but adjust the Fund's interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed versus variable rates and shorter duration versus longer duration exposure. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedin gs. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
25
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be secured by collateral (e.g., foreign currency forwards; see "Currency Risk" above), that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
26
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. During the period ended August 31, 2010, the Fund used forward currency contracts to adjust exposure to foreign currencies and otherwise adjust currency exchange rate risk. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. During the period ended August 31, 2010, the Fund used futures contracts to adjust interest-rate exposure and enhance the diversity and liquidity of the portfolio. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
27
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. During the period ended August 31, 2010, the Fund used purchased option contracts to adjust interest rate exposure. The Fund had no purchased option contracts outstanding at the end o f the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an of fsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance
28
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price
29
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the pe riod ended August 31, 2010, the Fund used swap agreements to adjust interest rate exposure, achieve exposure to a reference entity's credit, and/or provide a measure of protection against default loss. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
30
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Unrealized appreciation on future contracts* | $ | 1,107,097 | $ | — | $ | — | $ | — | $ | — | $ | 1,107,097 | |||||||||||||||
Unrealized appreciation on forward currency contracts | — | 1,498,926 | — | — | — | 1,498,926 | |||||||||||||||||||||
Unrealized appreciation on swap contracts | 1,418,455 | — | 374,405 | — | — | 1,792,860 | |||||||||||||||||||||
Total | $ | 2,525,552 | $ | 1,498,926 | $ | 374,405 | $ | — | $ | — | $ | 4,398,883 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Unrealized depreciation on future contracts* | $ | (193,686 | ) | $ | — | $ | — | $ | — | $ | — | $ | (193,686 | ) | |||||||||||||
Unrealized depreciation on forward currency contracts | — | (2,703,647 | ) | — | — | — | (2,703,647 | ) | |||||||||||||||||||
Unrealized depreciation on swap contracts | — | — | (851,983 | ) | — | — | (851,983 | ) | |||||||||||||||||||
Total | $ | (193,686 | ) | $ | (2,703,647 | ) | $ | (851,983 | ) | $ | — | $ | — | $ | (3,749,316 | ) |
The Effect of Derivative Instruments on the Statement of Operations for the period ended August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | — | $ | 490,381 | $ | — | $ | — | $ | — | $ | 490,381 | |||||||||||||||
Future contracts | 4,395,325 | — | — | — | — | 4,395,325 | |||||||||||||||||||||
Forward currency contracts | — | 2,398,261 | — | — | — | 2,398,261 | |||||||||||||||||||||
Swap contracts | (240,514 | ) | — | (72,800 | ) | — | — | (313,314 | ) | ||||||||||||||||||
Total | $ | 4,154,811 | $ | 2,888,642 | $ | (72,800 | ) | $ | — | $ | — | $ | 6,970,653 | ||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | — | $ | (278,556 | ) | $ | — | $ | — | $ | — | $ | (278,556 | ) | |||||||||||||
Future contracts | 274,089 | — | — | — | — | 274,089 | |||||||||||||||||||||
Forward currency contracts | — | (1,670,280 | ) | — | — | — | (1,670,280 | ) | |||||||||||||||||||
Swap contracts | 1,139,323 | — | (501,502 | ) | — | — | 637,821 | ||||||||||||||||||||
Total | $ | 1,413,412 | $ | (1,948,836 | ) | $ | (501,502 | ) | $ | — | $ | — | $ | (1,036,926 | ) |
31
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments.
The volume of derivative activity, based on absolute values (forward currency contracts, futures contracts), principal amounts (options), or notional amounts (swap agreements) outstanding at each month-end, was as follows for the period ended August 31, 2010:
Forward Currency Contracts | Futures Contracts | Swap Agreements | Options | ||||||||||||||||
Average amount outstanding | $ | 82,642,899 | $ | 91,942,164 | $ | 138,757,475 | $ | 20,218,752 |
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.25% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares. The Manager has contractually agreed through at least June 30, 2011 to waive the Fund's shareholder service fee to the extent that the aggregate of any direct and indirect shareholder service fees borne by the Fund exceeds 0.15%; provided, however, that the amount of this waiver will not exceed 0.15%.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.25% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investme nt company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses
32
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
incurred indirectly by the Fund through its direct or indirect investment in other GMO Funds (excluding those Funds' Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund's Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ending August 31, 2010 was $1,337 and $552, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Indirect Interest Expense | Total Indirect Expenses | ||||||||||||
0.017 | % | 0.005 | % | 0.011 | % | 0.033 | % |
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended August 31, 2010 aggregated $38,790,693 and $14,700,589, respectively.
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
33
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
8. Principal shareholders and related parties
As of August 31, 2010, 99.79% of the outstanding shares of the Fund were held by two shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund. One of the shareholders is another fund of the Trust.
As of August 31, 2010, 0.02% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 99.79% of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 5,935 | $ | 47,530 | 1,015 | $ | 7,425 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 1,976 | 14,179 | |||||||||||||||
Shares repurchased | — | — | (952,161 | ) | (6,903,963 | ) | |||||||||||||
Redemption fees | — | — | — | 107,884 | |||||||||||||||
Net increase (decrease) | 5,935 | $ | 47,530 | (949,170 | ) | $ | (6,774,475 | ) |
34
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
10. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income* | Distributions of Realized Gains* | Return of Capital* | Value, end of period | ||||||||||||||||||||||||
GMO Emerging Country Debt Fund, Class III | $ | 4,905,670 | $ | 176,405 | $ | 1,050,000 | $ | 176,406 | $ | — | $ | — | $ | 4,598,123 | |||||||||||||||||
GMO Short-Duration Collateral Fund | 64,898,691 | — | — | 475,845 | — | 16,398,094 | 50,601,917 | ||||||||||||||||||||||||
GMO Special Purpose Holding Fund | 3,023 | — | — | — | — | — | 2,967 | ||||||||||||||||||||||||
GMO U.S. Treasury Fund | 8,291,499 | 27,511,344 | 12,900,000 | 9,604 | 1,741 | — | 22,900,624 | ||||||||||||||||||||||||
GMO World Opportunity Overlay Fund | 27,663,640 | 1,300,000 | — | — | — | — | 30,095,996 | ||||||||||||||||||||||||
Totals | $ | 105,762,523 | $ | 28,987,749 | $ | 13,950,000 | $ | 661,855 | $ | 1,741 | $ | 16,398,094 | $ | 108,199,627 |
* The table above includes estimated sources of all distributions paid by the underlying funds during the period of March 1, 2010 through August 31, 2010. The actual tax characterization of distributions paid by the underlying funds will be determined through the fiscal year ending February 28, 2011.
35
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three-, five-, seven- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received
36
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took in to account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also con sidered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of other funds of the Trust in which it invests. The Trustees noted in particular that certain underlying funds do not charge any advisory fees, and that with respect to all other underlying funds, pursuant to a contractual expense reimbursement arrangement in place with the Fund, the Manager effectively reimburses the Fund for management fees, shareholder servicing fees and most other expenses of the underlying funds that the Fund would otherwise bear as a result of its investments in those other funds. In addition, the Trustees considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economie s of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory
37
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
38
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including indirect management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.41 | % | $ | 1,000.00 | $ | 1,099.00 | $ | 2.17 | |||||||||||
2) Hypothetical | 0.41 | % | $ | 1,000.00 | $ | 1,023.14 | $ | 2.09 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
39
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 93.4 | % | |||||
Short-Term Investments | 5.0 | ||||||
Preferred Stocks | 0.4 | ||||||
Forward Currency Contracts | 0.3 | ||||||
Options Purchased | 0.0 | ||||||
Swap Agreements | (0.0 | ) | |||||
Written Options | (0.0 | ) | |||||
Futures Contracts | (0.1 | ) | |||||
Other | 1.0 | ||||||
100.0 | % | ||||||
Country/Region Summary** | % of Investments | ||||||
Euro Region*** | 27.3 | % | |||||
United Kingdom | 23.2 | ||||||
Japan | 23.2 | ||||||
Switzerland | 9.0 | ||||||
Sweden | 4.4 | ||||||
Singapore | 4.0 | ||||||
Australia | 2.5 | ||||||
Denmark | 2.3 | ||||||
Hong Kong | 1.8 | ||||||
Norway | 1.2 | ||||||
Canada | 0.7 | ||||||
New Zealand | 0.2 | ||||||
Israel | 0.2 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds. The table excludes short-term investments. The table includes exposure through the use of derivative contracts. The Fund attempts to hedge at least 70% of the foreign currency exposure in the underlying fund's investments relative to the U.S. Dollar. Therefore, the Fund's currency exposures will be different than the country exposures noted above.
*** The "Euro Region" is comprised of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
1
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares/ Par Value | Description | Value ($) | |||||||||||||
MUTUAL FUNDS — 97.8% | |||||||||||||||
United States — 97.8% | |||||||||||||||
Affiliated Issuers | |||||||||||||||
8,233,512 | GMO International Growth Equity Fund, Class IV | 159,730,131 | |||||||||||||
8,323,889 | GMO International Intrinsic Value Fund, Class IV | 157,071,792 | |||||||||||||
316,801,923 | |||||||||||||||
TOTAL MUTUAL FUNDS (COST $329,287,145) | 316,801,923 | ||||||||||||||
SHORT-TERM INVESTMENTS — 1.7% | |||||||||||||||
Time Deposits — 1.7% | |||||||||||||||
USD | 1,000,000 | Bank of Tokyo-Mitsubishi (Tokyo) Time Deposit, 0.21%, due 09/01/10 | 1,000,000 | ||||||||||||
DKK | 26 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.10%, due 09/01/10 | 13 | ||||||||||||
USD | 1,000,000 | Commerzbank (Frankfurt) Time Deposit, 0.21%, due 09/01/10 | 1,000,000 | ||||||||||||
USD | 1,000,000 | DnB Nor Bank (Oslo) Time Deposit, 0.21%, due 09/01/10 | 1,000,000 | ||||||||||||
USD | 1,000,000 | Nordea Bank Norge ASA (Oslo) Time Deposit, 0.21%, due 09/01/10 | 1,000,000 | ||||||||||||
USD | 1,000,000 | Skandinaviska Enskilda Banken, AB (Stockholm) Time Deposit, 0.21%, due 09/01/10 | 1,000,000 | ||||||||||||
USD | 472,793 | Societe Generale (Paris) Time Deposit, 0.21%, due 09/01/10 | 472,793 | ||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $5,472,806) | 5,472,806 | ||||||||||||||
TOTAL INVESTMENTS — 99.5% (Cost $334,759,951) | 322,274,729 | ||||||||||||||
Other Assets and Liabilities (net) — 0.5% | 1,631,551 | ||||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 323,906,280 |
See accompanying notes to the financial statements.
2
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
A summary of outstanding financial instruments at August 31, 2010 is as follows:
Forward Currency Contracts
Settlement Date | Counterparty | Deliver/ Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||
Buys † | |||||||||||||||||||||||
10/22/10 | JP Morgan Chase Bank | AUD | 880,000 | $ | 778,161 | $ | (5,281 | ) | |||||||||||||||
10/22/10 | Bank of America | CAD | 2,898,713 | 2,716,178 | (47,226 | ) | |||||||||||||||||
10/22/10 | Deutsche Bank AG | CAD | 181,000 | 169,602 | (3,927 | ) | |||||||||||||||||
10/22/10 | JP Morgan Chase Bank | CAD | 834,215 | 781,684 | (15,041 | ) | |||||||||||||||||
10/22/10 | Royal Bank of Scotland PLC | CAD | 398,073 | 373,006 | (8,037 | ) | |||||||||||||||||
10/22/10 | Bank of New York Mellon | CHF | 1,226,000 | 1,208,134 | 20,731 | ||||||||||||||||||
10/22/10 | JP Morgan Chase Bank | EUR | 2,083,000 | 2,639,502 | 2,560 | ||||||||||||||||||
10/22/10 | Royal Bank of Scotland PLC | EUR | 1,939,000 | 2,457,030 | (17,132 | ) | |||||||||||||||||
10/22/10 | Barclays | GBP | 1,406,000 | 2,155,569 | (24,093 | ) | |||||||||||||||||
10/22/10 | Bank of New York Mellon | JPY | 266,504,000 | 3,174,053 | 84,728 | ||||||||||||||||||
10/22/10 | Barclays | JPY | 89,745,000 | 1,068,860 | 6,361 | ||||||||||||||||||
10/22/10 | Bank of America | NOK | 2,798,000 | 442,400 | 2,543 | ||||||||||||||||||
10/22/10 | JP Morgan Chase Bank | SGD | 703,000 | 518,619 | 1,803 | ||||||||||||||||||
$ | 18,482,798 | $ | (2,011 | ) | |||||||||||||||||||
Sales # | |||||||||||||||||||||||
10/22/10 | Bank of America | AUD | 8,730,409 | $ | 7,720,075 | $ | 28,329 | ||||||||||||||||
10/22/10 | Barclays | AUD | 6,901,572 | 6,102,882 | 36,205 | ||||||||||||||||||
10/22/10 | JP Morgan Chase Bank | AUD | 11,730,572 | 10,373,042 | 54,686 | ||||||||||||||||||
10/22/10 | Morgan Stanley | AUD | 5,504,591 | 4,867,568 | 32,625 | ||||||||||||||||||
10/22/10 | Bank of America | CAD | 3,543,000 | 3,319,893 | 66,254 | ||||||||||||||||||
10/22/10 | Bank of New York Mellon | CHF | 10,148,000 | 10,000,118 | (223,672 | ) | |||||||||||||||||
10/22/10 | Barclays | CHF | 2,682,967 | 2,643,869 | (59,870 | ) | |||||||||||||||||
10/22/10 | Brown Brothers Harriman & Co. | CHF | 7,194,000 | 7,089,165 | (153,853 | ) | |||||||||||||||||
10/22/10 | JP Morgan Chase Bank | CHF | 6,308,000 | 6,216,077 | (128,977 | ) | |||||||||||||||||
10/22/10 | State Street Bank And Trust Co. | CHF | 7,164,000 | 7,059,603 | (288,016 | ) | |||||||||||||||||
10/22/10 | Bank of New York Mellon | DKK | 22,063,000 | 3,755,654 | 47,984 | ||||||||||||||||||
10/22/10 | Brown Brothers Harriman & Co. | DKK | 24,152,155 | 4,111,278 | 52,312 | ||||||||||||||||||
10/22/10 | JP Morgan Chase Bank | DKK | 18,116,000 | 3,083,779 | 34,332 | ||||||||||||||||||
10/22/10 | Morgan Stanley | DKK | 15,592,000 | 2,654,134 | 35,612 | ||||||||||||||||||
10/22/10 | Bank of New York Mellon | EUR | 9,691,000 | 12,280,084 | 161,900 | ||||||||||||||||||
10/22/10 | Barclays | EUR | 4,040,528 | 5,120,011 | 67,947 |
See accompanying notes to the financial statements.
3
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Forward Currency Contracts — (Continued)
Settlement Date | Counterparty | Deliver/ Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||
10/22/10 | Brown Brothers Harriman & Co. | EUR | 2,341,513 | $ | 2,967,080 | $ | 37,549 | ||||||||||||||||
10/22/10 | Deutsche Bank AG | EUR | 8,085,456 | 10,245,597 | 149,713 | ||||||||||||||||||
10/22/10 | JP Morgan Chase Bank | EUR | 13,087,579 | 16,584,105 | 192,613 | ||||||||||||||||||
10/22/10 | Morgan Stanley | EUR | 5,567,904 | 7,055,446 | 97,145 | ||||||||||||||||||
10/22/10 | Royal Bank of Scotland PLC | EUR | 19,115,714 | 24,222,739 | 313,828 | ||||||||||||||||||
10/22/10 | Bank of America | GBP | 8,632,000 | 13,233,905 | 290,712 | ||||||||||||||||||
10/22/10 | Bank of New York Mellon | GBP | 6,776,000 | 10,388,432 | 228,476 | ||||||||||||||||||
10/22/10 | Barclays | GBP | 10,741,670 | 16,468,286 | 366,382 | ||||||||||||||||||
10/22/10 | Deutsche Bank AG | GBP | 6,778,000 | 10,391,498 | 196,958 | ||||||||||||||||||
10/22/10 | JP Morgan Chase Bank | GBP | 7,642,000 | 11,716,115 | 235,395 | ||||||||||||||||||
10/22/10 | Bank of New York Mellon | HKD | 12,981,380 | 1,669,434 | 1,551 | ||||||||||||||||||
10/22/10 | Brown Brothers Harriman & Co. | HKD | 7,745,000 | 996,024 | 848 | ||||||||||||||||||
10/22/10 | JP Morgan Chase Bank | HKD | 14,503,000 | 1,865,118 | 1,810 | ||||||||||||||||||
10/22/10 | Bank of America | JPY | 1,583,355,394 | 18,857,704 | (293,549 | ) | |||||||||||||||||
10/22/10 | Barclays | JPY | 86,073,187 | 1,025,128 | (15,224 | ) | |||||||||||||||||
10/22/10 | Brown Brothers Harriman & Co. | JPY | 1,249,867,303 | 14,885,873 | (233,267 | ) | |||||||||||||||||
10/22/10 | JP Morgan Chase Bank | JPY | 1,637,105,686 | 19,497,868 | (304,864 | ) | |||||||||||||||||
10/22/10 | Morgan Stanley | JPY | 1,835,681,487 | 21,862,899 | (329,725 | ) | |||||||||||||||||
10/22/10 | Bank of America | NOK | 8,172,774 | 1,292,222 | 33,433 | ||||||||||||||||||
10/22/10 | Barclays | NOK | 56,658,000 | 8,958,370 | 231,450 | ||||||||||||||||||
10/22/10 | Brown Brothers Harriman & Co. | NOK | 5,999,750 | 948,639 | 21,300 | ||||||||||||||||||
10/22/10 | Morgan Stanley | NOK | 9,867,000 | 1,560,102 | 32,583 | ||||||||||||||||||
10/22/10 | JP Morgan Chase Bank | NZD | 1,299,000 | 902,048 | 9,147 | ||||||||||||||||||
10/22/10 | Morgan Stanley | NZD | 1,810,000 | 1,256,896 | 14,718 | ||||||||||||||||||
10/22/10 | Brown Brothers Harriman & Co. | SEK | 29,452,539 | 3,981,346 | 8,594 | ||||||||||||||||||
10/22/10 | JP Morgan Chase Bank | SEK | 16,795,011 | 2,270,322 | (831 | ) | |||||||||||||||||
10/22/10 | Royal Bank of Scotland PLC | SEK | 18,307,458 | 2,474,772 | 8,174 | ||||||||||||||||||
10/22/10 | Bank of America | SGD | 1,938,572 | 1,430,128 | (5,929 | ) | |||||||||||||||||
10/22/10 | JP Morgan Chase Bank | SGD | 4,955,000 | 3,655,416 | (15,130 | ) | |||||||||||||||||
$ | 329,060,744 | $ | 1,037,658 |
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.
As of August 31, 2010, for futures contracts, swap agreements and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
See accompanying notes to the financial statements.
4
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Currency Abbreviations:
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
DKK - Danish Krone
EUR - Euro
GBP - British Pound
HKD - Hong Kong Dollar
JPY - Japanese Yen
NOK - Norwegian Krone
NZD - New Zealand Dollar
SEK - Swedish Krona
SGD - Singapore Dollar
USD - United States Dollar
See accompanying notes to the financial statements.
5
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $5,472,806) (Note 2) | $ | 5,472,806 | |||||
Investments in affiliated issuers, at value (cost $329,287,145) (Notes 2 and 10) | 316,801,923 | ||||||
Receivable for Fund shares sold | 669,854 | ||||||
Unrealized appreciation on open forward currency contracts (Note 4) | 3,209,291 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 175,730 | ||||||
Total assets | 326,329,604 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 151,396 | ||||||
Shareholder service fee | 42,055 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 120 | ||||||
Unrealized depreciation on open forward currency contracts (Note 4) | 2,173,644 | ||||||
Accrued expenses | 56,109 | ||||||
Total liabilities | 2,423,324 | ||||||
Net assets | $ | 323,906,280 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 355,538,568 | |||||
Accumulated undistributed net investment income | 1,013,023 | ||||||
Accumulated net realized loss | (21,195,736 | ) | |||||
Net unrealized depreciation | (11,449,575 | ) | |||||
$ | 323,906,280 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 323,906,280 | |||||
Shares outstanding: | |||||||
Class III | 123,577,501 | ||||||
Net asset value per share: | |||||||
Class III | $ | 2.62 |
See accompanying notes to the financial statements.
6
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 10) | $ | 1,217,075 | |||||
Interest | 1,084 | ||||||
Total investment income | 1,218,159 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 660,492 | ||||||
Shareholder service fee – Class III (Note 5) | 183,470 | ||||||
Audit and tax fees | 31,740 | ||||||
Custodian and fund accounting agent fees | 28,336 | ||||||
Transfer agent fees | 13,800 | ||||||
Legal fees | 3,772 | ||||||
Registration fees | 1,932 | ||||||
Trustees fees and related expenses (Note 5) | 1,732 | ||||||
Miscellaneous | 1,473 | ||||||
Total expenses | 926,747 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (80,500 | ) | |||||
Indirectly incurred fees waived or borne by Manager (Note 5) | (591,659 | ) | |||||
Shareholder service fee waived (Note 5) | (106,499 | ) | |||||
Net expenses | 148,089 | ||||||
Net investment income (loss) | 1,070,070 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | (504,079 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | (8,518,136 | ) | |||||
Net realized gain (loss) | (9,022,215 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in affiliated issuers | (13,197,738 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 974,446 | ||||||
Net unrealized gain (loss) | (12,223,292 | ) | |||||
Net realized and unrealized gain (loss) | (21,245,507 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (20,175,437 | ) |
See accompanying notes to the financial statements.
7
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 1,070,070 | $ | 902,826 | |||||||
Net realized gain (loss) | (9,022,215 | ) | (13,368,507 | ) | |||||||
Change in net unrealized appreciation (depreciation) | (12,223,292 | ) | 19,958,116 | ||||||||
Net increase (decrease) in net assets from operations | (20,175,437 | ) | 7,492,435 | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | — | (2,756,296 | ) | ||||||||
Net share transactions (Note 9): | |||||||||||
Class III | 318,686,515 | (4,758,078 | ) | ||||||||
Total increase (decrease) in net assets | 298,511,078 | (21,939 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 25,395,202 | 25,417,141 | |||||||||
End of period (including accumulated undistributed net investment income of $1,013,023 and distributions in excess of net investment income of $57,047, respectively) | $ | 323,906,280 | $ | 25,395,202 |
See accompanying notes to the financial statements.
8
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 2.64 | $ | 2.26 | $ | 5.32 | $ | 7.45 | $ | 9.07 | $ | 8.38 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.01 | 0.08 | 0.15 | 0.03 | 0.10 | 0.07 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.03 | ) | 0.55 | (1.60 | ) | (0.29 | ) | 1.17 | 2.17 | ||||||||||||||||||
Total from investment operations | (0.02 | ) | 0.63 | (1.45 | ) | (0.26 | ) | 1.27 | 2.24 | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | — | (0.25 | )(b) | (0.20 | ) | — | (0.12 | ) | (0.71 | )(b) | |||||||||||||||||
From net realized gains | — | — | (1.41 | ) | (1.87 | ) | (2.77 | ) | (0.84 | ) | |||||||||||||||||
Total distributions | — | (0.25 | ) | (1.61 | ) | (1.87 | ) | (2.89 | ) | (1.55 | ) | ||||||||||||||||
Net asset value, end of period | $ | 2.62 | $ | 2.64 | $ | 2.26 | $ | 5.32 | $ | 7.45 | $ | 9.07 | |||||||||||||||
Total Return(c) | (0.76 | )%** | 29.15 | % | (35.57 | )% | (6.75 | )% | 15.60 | % | 28.42 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 323,906 | $ | 25,395 | $ | 25,417 | $ | 30,273 | $ | 227,096 | $ | 728,814 | |||||||||||||||
Net expenses to average daily net assets(d) | 0.12 | %* | 0.11 | % | 0.11 | %(e) | 0.08 | %(e) | 0.07 | % | 0.05 | % | |||||||||||||||
Net investment income (loss) to average daily net assets(a) | 0.87 | %* | 3.25 | % | 3.96 | % | 0.42 | % | 1.23 | % | 0.82 | % | |||||||||||||||
Portfolio turnover rate | 12 | %** | 15 | % | 17 | % | 11 | % | 18 | % | 36 | % | |||||||||||||||
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets:(f) | 0.64 | %* | 1.16 | % | 1.24 | % | 0.71 | % | 0.68 | % | 0.67 | % |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(b) Distributions from net investment income include amounts (approximately $0.25 per share for 2010 and $0.07 per share for 2006) from foreign currency transactions which are treated as realized capital gain for book purposes.
(c) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions.
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(e) The net expense ratio does not include the effect of expense reductions (Note 2).
(f ) Ratios include reimbursement of direct operating expenses and waiver of expenses indirectly incurred through investment in the underlying funds (See Note 5).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
9
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO Currency Hedged International Equity Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks total return greater than that of its benchmark, the MSCI EAFE Index (Europe, Australasia, and Far East) (Hedged). The Fund is a fund of funds and invests primarily in other GMO Funds. The Fund may invest in GMO International Core Equity Fund, GMO International Intrinsic Value Fund, GMO International Growth Equity Fund, GMO International Small Companies Fund, and GMO Flexible Equities Fund (GMO Funds in which the Fund invests are collectively referred to as "underlying funds"). In addition, the Fund may invest in securities directly, rather than through the underlying funds. Under normal circumstances, the Fund invests directly and indirectly (through investment in the underlying funds) at least 80% of its assets in equity investments. The term "equity investments" refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and de positary receipts.
The Manager uses proprietary quantitative models and fundamental investment techniques to select the underlying funds and decide how much to invest in each. The models use multi-year forecasts of relative value and risk among major sectors in the international equity markets (e.g., large-cap value, large-cap growth, large-cap core, small- and mid-cap value and small- and mid-cap growth). The Manager shifts investments among the underlying funds in response to changes in its investment outlook and market valuations and may use redemption/purchase activity to rebalance the Fund's investments.
The Manager assesses the currency exposure of the underlying funds' holdings and then attempts to hedge at least 70% of that exposure relative to the U.S. dollar through the use of currency forwards and other derivatives. While the Fund's benchmark is fully hedged, the Fund may take active overweighted and underweighted positions in particular currencies relative to its benchmark. The Fund may invest in unaffiliated money market funds, and the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund also may lend its portfolio securities. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
The financial statements of the underlying funds should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request by calling (617) 346-7646 (collect) or visiting GMO's website at www.gmo.com.
10
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Shares of the underlying funds and other investment funds are generally valued at their net asset value. Investments held by the underlying funds are valued as follows. Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the over-the-counter ("OTC") market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximat es market value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. Additionally, because many foreign equity securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund and the underlying funds generally value foreign equity securities as of the NYSE close using fair value prices, which are based on local closing prices and adjustments supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2010, 91.0% of the net assets of the Fund, through investments in the underlying funds, were valued using fair value prices based on those adjustments. Those underlying funds classify such securities (as defined below) as Level 2. See note 4 for a further discussion on valuation of derivative financial instruments.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The
11
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Mutual Funds | |||||||||||||||||||
United States | $ | 316,801,923 | $ | — | $ | — | $ | 316,801,923 | |||||||||||
TOTAL MUTUAL FUNDS | 316,801,923 | — | — | 316,801,923 | |||||||||||||||
Short-Term Investments | 5,472,806 | — | — | 5,472,806 | |||||||||||||||
Total Investments | 322,274,729 | — | — | 322,274,729 | |||||||||||||||
Forward Currency Contracts | |||||||||||||||||||
Foreign Exchange risk | — | 3,209,291 | — | 3,209,291 | |||||||||||||||
Total | $ | 322,274,729 | $ | 3,209,291 | $ | — | $ | 325,484,020 |
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Forward Currency Contracts | |||||||||||||||||||
Foreign Exchange risk | $ | — | $ | (2,173,644 | ) | $ | — | $ | (2,173,644 | ) | |||||||||
Total | $ | — | $ | (2,173,644 | ) | $ | — | $ | (2,173,644 | ) |
12
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements.
The Fund held no investments or other financial instruments at either August 31, 2010 or February 28, 2010, whose fair value was determined using Level 3 inputs.
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are inclu ded with the net realized and unrealized gain or loss on investment securities.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country's tax treaty with the United States. The foreign withholding rates applicable to a Fund's investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or
13
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund elected to defer to March 1, 2010 post-October capital losses of $91,878.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2018 | $ | (7,792,722 | ) | ||||
Total | $ | (7,792,722 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 342,108,532 | $ | — | $ | (19,833,803 | ) | $ | (19,833,803 | ) |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
14
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which co llection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 5).
Brown Brothers Harriman & Co. ("BBH") serves as the Fund's custodian and fund accounting agent. State Street Bank and Trust Company ("State Street") serves as the Fund's transfer agent. BBH's and State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. References to investments include those held directly by the Fund and indirectly through the Fund's investments in the underlying funds. The Fund and some of the underlying funds are non-diversified investment companies under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund or an underlying fund may affect the Fund's or the underlying fund's performance more than if the Fund or underlying fund were diversified. The principal risks of investing in the Fund are summarized below, including those risks to which the Fund is exposed as a re sult of its investments in the underlying funds. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
15
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund and the underlying funds normally do not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund's investments.
• Derivatives risk — The use of derivatives involves the risk that their value may not correlate with the value of the relevant underlying assets, rates or indices. Derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The risk to the Fund of using derivatives is particularly pronounced because the Fund often uses currency forwards and other derivatives for hedging purposes.
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund or the underlying funds may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund or the underlying funds need to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund or the underlying funds to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund's investments.
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in the underlying funds, including the risk that the underlying funds in which it invests will not perform as expected or that the Fund will invest in underlying funds with higher fees or expenses.
Other principal risks of an investment in the Fund include Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Market Risk — Value Securities (risk that the price of investments held by the Fund will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Market Risk — Growth Securities (greater price fl uctuations resulting from dependence on future earnings expectations); Currency Risk (risk that fluctuations in exchange rates may adversely affect the value of investments denominated in foreign currencies, or that
16
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
the U.S. dollar will decline in value relative to the foreign currency being hedged by the Fund or an underlying fund); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund's securities); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on
17
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
another index (to synthetically "buy" exposure to that index). The Funds also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedin gs. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be secured by collateral (e.g., foreign currency forwards; see "Currency Risk" above), that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to
18
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. During the period ended August 31, 2010, the Fund used forward currency contracts to hedge foreign currency exposure in the underlying Funds' investments relative to the U.S. dollar. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or
19
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because regular trad ing on many foreign exchanges closes prior to the close of the NYSE, closing prices for foreign futures contracts on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures contracts using fair value prices, which are based on adjustments to local closing prices, and supplied by a third party vendor based on that vendor's proprietary models. As of August 31, 2010, futures contracts representing (0.1%) of the net assets of the Fund, through investments in the underlying funds, were valued using fair value prices based on those adjustments. The Fund had no futures contracts outstanding at the end of the period.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an of fsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
20
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to
21
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and
22
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Unrealized appreciation on forward currency contracts | $ | — | $ | 3,209,291 | $ | — | $ | — | $ | — | $ | 3,209,291 | |||||||||||||||
Total | $ | — | $ | 3,209,291 | $ | — | $ | — | $ | — | $ | 3,209,291 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Unrealized depreciation on forward currency contracts | $ | — | $ | (2,173,644 | ) | $ | — | $ | — | $ | — | $ | (2,173,644 | ) | |||||||||||||
Total | $ | — | $ | (2,173,644 | ) | $ | — | $ | — | $ | — | $ | (2,173,644 | ) |
The Effect of Derivative Instruments on the Statement of Operations for the Period Ended August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Forward currency contracts | $ | — | $ | (8,427,138 | ) | $ | — | $ | — | $ | — | $ | (8,427,138 | ) | |||||||||||||
Total | $ | — | $ | (8,427,138 | ) | $ | — | $ | — | $ | — | $ | (8,427,138 | ) | |||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Forward currency contracts | $ | — | $ | 974,446 | $ | — | $ | — | $ | — | $ | 974,446 | |||||||||||||||
Total | $ | — | $ | 974,446 | $ | — | $ | — | $ | — | $ | 974,446 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
23
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The volume of derivative activity, based on absolute values (forward currency contracts) outstanding at each month-end, was as follows for the period ended August 31, 2010:
Forward Currency Contracts | |||||||
Average amount outstanding | $ | 295,898,992 |
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.54% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares. The Manager contractually agreed through at least June 30, 2011 to waive the Fund's shareholder service fee to the extent that the aggregate of any direct and indirect shareholder service fees borne by the Fund exceeds 0.15%; provided, however, that the amount of this waiver will not exceed 0.15%.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.54% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investme nt company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in other GMO Funds (excluding those Funds' Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund's Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $1,732 and $552, respectively. The compensation
24
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees) | Indirect Shareholder Service Fees | Total Indirect Expenses | |||||||||
0.490 | % | 0.088 | % | 0.578 | % |
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended August 31, 2010 aggregated $332,247,075 and $26,920,000, respectively.
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, 87.99% of the outstanding shares of the Fund were held by two shareholders. On that date, no other shareholder owned more than 10% of outstanding shares of the Fund. One of the shareholders is another fund of the Trust.
As of August 31, 2010, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and 99.99% of the Fund's shares were held by accounts for which the Manager had investment discretion.
25
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 122,118,556 | $ | 340,046,073 | — | $ | — | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 1,188,047 | 2,756,270 | |||||||||||||||
Shares repurchased | (8,144,390 | ) | (21,359,558 | ) | (2,835,798 | ) | (7,514,348 | ) | |||||||||||
Net increase (decrease) | 113,974,166 | $ | 318,686,515 | (1,647,751 | ) | $ | (4,758,078 | ) |
10. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO International Growth Equity Fund, Class IV | $ | 12,603,325 | $ | 166,643,630 | $ | 13,635,000 | $ | 553,630 | $ | — | $ | 159,730,131 | |||||||||||||||
GMO International Intrinsic Value Fund, Class IV | 12,573,339 | 165,603,445 | 13,285,000 | 663,445 | — | 157,071,792 | |||||||||||||||||||||
Totals | $ | 25,176,664 | $ | 332,247,075 | $ | 26,920,000 | $ | 1,217,075 | $ | — | $ | 316,801,923 |
11. Subsequent events
On October 5, 2010, the Fund's Board of Trustees approved a reverse stock split for the Fund. It is anticipated that the reverse split will be effective for shareholders of record after the close of the NYSE on or about November 12, 2010. The Fund will trade at its post-split price on or about November 15, 2010, and the ticker symbol and cusip for the Fund will not change.
The reverse split will reduce the number of shares outstanding for the Fund, and result in a proportionate increase in the price per share of the Fund. The reverse split does not change the value of a shareholder's investment. For example, for a 1-for-8 reverse split, every eight pre-split shares held by a shareholder will result in the receipt of one post-split share, which will be priced eight times higher than the pre-split shares.
26
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three-, five-, seven- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
27
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took in to account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also con sidered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of other funds of the Trust in which it invests. The Trustees noted in particular that certain underlying funds do not charge any advisory fees, and that with respect to all other underlying funds, pursuant to a contractual expense reimbursement arrangement in place with the Fund, the Manager effectively reimburses the Fund for management fees, shareholder servicing fees and most other expenses of the underlying funds that the Fund would otherwise bear as a result of its investments in those other funds. In addition, the Trustees considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economie s of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating
28
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
29
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.70 | % | $ | 1,000.00 | $ | 992.40 | $ | 3.52 | |||||||||||
2) Hypothetical | 0.70 | % | $ | 1,000.00 | $ | 1,021.68 | $ | 3.57 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
30
GMO Developed World Stock Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Developed World Stock Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 95.5 | % | |||||
Short-Term Investments | 3.1 | ||||||
Preferred Stocks | 0.3 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Futures Contracts | (0.1 | ) | |||||
Other | 1.2 | ||||||
100.0 | % | ||||||
Country Summary | % of Equity Investments* | ||||||
United States | 48.9 | % | |||||
United Kingdom | 12.8 | ||||||
Japan | 11.5 | ||||||
France | 6.5 | ||||||
Italy | 4.6 | ||||||
Singapore | 3.8 | ||||||
Germany | 2.9 | ||||||
Sweden | 1.7 | ||||||
Netherlands | 1.2 | ||||||
Canada | 1.1 | ||||||
Spain | 1.1 | ||||||
Switzerland | 1.1 | ||||||
Australia | 0.9 | ||||||
Hong Kong | 0.9 | ||||||
Belgium | 0.6 | ||||||
Ireland | 0.2 | ||||||
Austria | 0.1 | ||||||
Greece | 0.1 | ||||||
100.0 | % |
* Equity investments may consist of common stocks, preferred stocks and rights and warrants. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
1
GMO Developed World Stock Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2010 (Unaudited)
Industry Group Summary | % of Equity Investments* | ||||||
Pharmaceuticals, Biotechnology & Life Sciences | 13.4 | % | |||||
Energy | 10.4 | ||||||
Capital Goods | 9.8 | ||||||
Banks | 8.5 | ||||||
Food, Beverage & Tobacco | 6.3 | ||||||
Technology Hardware & Equipment | 5.5 | ||||||
Materials | 5.4 | ||||||
Software & Services | 5.1 | ||||||
Automobiles & Components | 3.6 | ||||||
Insurance | 3.5 | ||||||
Utilities | 3.5 | ||||||
Telecommunication Services | 3.4 | ||||||
Retailing | 2.8 | ||||||
Food & Staples Retailing | 2.7 | ||||||
Transportation | 2.7 | ||||||
Health Care Equipment & Services | 2.5 | ||||||
Diversified Financials | 2.5 | ||||||
Consumer Durables & Apparel | 2.1 | ||||||
Media | 1.8 | ||||||
Real Estate | 1.7 | ||||||
Household & Personal Products | 1.1 | ||||||
Consumer Services | 0.9 | ||||||
Semiconductors & Semiconductor Equipment | 0.7 | ||||||
Commercial & Professional Services | 0.1 | ||||||
100.0 | % |
* Equity investments may consist of common stocks, preferred stocks and rights and warrants. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
2
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
COMMON STOCKS — 95.5% | |||||||||||||||
Australia — 0.8% | |||||||||||||||
25,082 | BHP Billiton Ltd | 832,167 | |||||||||||||
29,579 | Commonwealth Bank of Australia | 1,329,415 | |||||||||||||
9,715 | Rio Tinto Ltd | 610,150 | |||||||||||||
Total Australia | 2,771,732 | ||||||||||||||
Austria — 0.1% | |||||||||||||||
5,826 | Erste Group Bank AG | 210,117 | |||||||||||||
Belgium — 0.6% | |||||||||||||||
26,533 | Anheuser-Busch InBev NV | 1,374,284 | |||||||||||||
150,823 | Dexia SA * | 626,025 | |||||||||||||
Total Belgium | 2,000,309 | ||||||||||||||
Canada — 1.1% | |||||||||||||||
14,000 | Bank of Nova Scotia | 672,856 | |||||||||||||
12,900 | Canadian Pacific Railway Ltd | 759,834 | |||||||||||||
34,100 | EnCana Corp | 935,364 | |||||||||||||
29,800 | Husky Energy Inc | 694,173 | |||||||||||||
15,500 | Teck Resources Ltd Class B | 518,484 | |||||||||||||
Total Canada | 3,580,711 | ||||||||||||||
France — 6.2% | |||||||||||||||
11,705 | ArcelorMittal | 339,254 | |||||||||||||
46,045 | AXA | 709,310 | |||||||||||||
67,895 | BNP Paribas | 4,206,188 | |||||||||||||
23,667 | Bouygues SA | 955,480 | |||||||||||||
9,337 | Casino Guichard-Perrachon SA | 754,285 | |||||||||||||
30,676 | CNP Assurances | 520,364 | |||||||||||||
15,434 | Compagnie de Saint-Gobain | 563,743 | |||||||||||||
9,788 | GDF Suez | 301,833 | |||||||||||||
4,929 | L'Oreal SA | 488,051 | |||||||||||||
6,350 | Lafarge SA | 291,318 |
See accompanying notes to the financial statements.
3
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
France — continued | |||||||||||||||
7,388 | LVMH Moet Hennessy Louis Vuitton SA | 855,959 | |||||||||||||
24,387 | Peugeot SA * | 637,271 | |||||||||||||
5,320 | PPR | 689,648 | |||||||||||||
26,274 | Renault SA * | 1,061,383 | |||||||||||||
36,719 | Sanofi-Aventis | 2,102,027 | |||||||||||||
3,695 | Schneider Electric SA | 390,499 | |||||||||||||
26,635 | Societe Generale | 1,343,148 | |||||||||||||
65,220 | Total SA | 3,033,670 | |||||||||||||
5,040 | Vallourec SA | 431,451 | |||||||||||||
27,398 | Vivendi SA | 635,673 | |||||||||||||
Total France | 20,310,555 | ||||||||||||||
Germany — 2.5% | |||||||||||||||
13,967 | Allianz SE (Registered) | 1,425,839 | |||||||||||||
11,024 | BASF AG | 579,816 | |||||||||||||
6,567 | Bayerische Motoren Werke AG | 345,049 | |||||||||||||
6,736 | Daimler AG (Registered) * | 325,888 | |||||||||||||
31,590 | Deutsche Post AG (Registered) | 515,541 | |||||||||||||
17,741 | E.ON AG | 497,941 | |||||||||||||
10,117 | Hannover Rueckversicherung AG (Registered) | 446,898 | |||||||||||||
65,627 | Infineon Technologies AG * | 363,924 | |||||||||||||
7,956 | Metro AG | 404,058 | |||||||||||||
3,124 | Muenchener Rueckversicherungs-Gesellschaft AG (Registered) | 398,100 | |||||||||||||
16,701 | RWE AG | 1,093,127 | |||||||||||||
6,150 | Salzgitter AG | 373,781 | |||||||||||||
30,922 | Suedzucker AG | 562,821 | |||||||||||||
25,816 | ThyssenKrupp AG | 705,109 | |||||||||||||
Total Germany | 8,037,892 | ||||||||||||||
Greece — 0.1% | |||||||||||||||
31,729 | National Bank of Greece SA * | 393,941 | |||||||||||||
Hong Kong — 0.9% | |||||||||||||||
358,000 | BOC Hong Kong Holdings Ltd | 945,432 | |||||||||||||
39,500 | CLP Holdings Ltd | 301,576 |
See accompanying notes to the financial statements.
4
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Hong Kong — continued | |||||||||||||||
86,237 | Esprit Holdings Ltd | 486,551 | |||||||||||||
78,000 | Hong Kong Electric Holdings Ltd | 475,357 | |||||||||||||
49,000 | Sun Hung Kai Properties Ltd | 691,015 | |||||||||||||
Total Hong Kong | 2,899,931 | ||||||||||||||
Ireland — 0.2% | |||||||||||||||
43,830 | CRH Plc | 674,842 | |||||||||||||
Italy — 4.4% | |||||||||||||||
573,140 | Enel SPA | 2,719,823 | |||||||||||||
229,968 | ENI SPA | 4,543,730 | |||||||||||||
40,910 | Finmeccanica SPA | 409,682 | |||||||||||||
93,363 | Mediaset SPA | 576,657 | |||||||||||||
64,471 | Mediobanca SPA * | 504,577 | |||||||||||||
100,162 | Parmalat SPA | 240,340 | |||||||||||||
20,294 | Saipem SPA | 706,378 | |||||||||||||
856,402 | Telecom Italia SPA | 1,153,992 | |||||||||||||
803,741 | Telecom Italia SPA-Di RISP | 881,692 | |||||||||||||
14,811 | Tenaris SA | 249,787 | |||||||||||||
55,587 | Terna SPA | 223,146 | |||||||||||||
927,292 | UniCredit SPA | 2,161,581 | |||||||||||||
Total Italy | 14,371,385 | ||||||||||||||
Japan — 11.0% | |||||||||||||||
40,000 | Asahi Glass Co Ltd | 390,287 | |||||||||||||
6,600 | Astellas Pharma Inc | 227,915 | |||||||||||||
152,000 | Cosmo Oil Co Ltd | 363,472 | |||||||||||||
5,800 | Fanuc Ltd | 624,208 | |||||||||||||
4,800 | Fast Retailing Co Ltd | 662,981 | |||||||||||||
33,000 | Fuji Heavy Industries Ltd * | 184,696 | |||||||||||||
141,000 | Hitachi Ltd * | 572,986 | |||||||||||||
79,300 | Honda Motor Co Ltd | 2,626,593 | |||||||||||||
61 | INPEX Corp | 276,214 | |||||||||||||
155,000 | Itochu Corp | 1,263,609 |
See accompanying notes to the financial statements.
5
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
381,520 | JX Holdings Inc * | 1,931,609 | |||||||||||||
142,000 | Kawasaki Kisen Kaisha Ltd * | 528,835 | |||||||||||||
223 | KDDI Corp | 1,075,453 | |||||||||||||
33,200 | Komatsu Ltd | 674,115 | |||||||||||||
2,900 | Kyocera Corp | 246,329 | |||||||||||||
173,000 | Marubeni Corp | 890,679 | |||||||||||||
238,000 | Mazda Motor Corp | 532,094 | |||||||||||||
68,000 | Mitsubishi Chemical Holdings Corp | 321,730 | |||||||||||||
30,500 | Mitsubishi Corp | 653,536 | |||||||||||||
48,800 | Mitsui & Co Ltd | 635,254 | |||||||||||||
96,000 | Mitsui OSK Lines Ltd | 603,434 | |||||||||||||
234,300 | Mizuho Financial Group Inc | 359,350 | |||||||||||||
12,100 | Murata Manufacturing Co Ltd | 574,862 | |||||||||||||
5,500 | Nidec Corp | 484,416 | |||||||||||||
1,600 | Nintendo Co Ltd | 443,568 | |||||||||||||
46,300 | Nippon Telegraph & Telephone Corp | 1,990,797 | |||||||||||||
205,000 | Nippon Yusen KK | 789,601 | |||||||||||||
351,900 | Nissan Motor Co Ltd * | 2,682,180 | |||||||||||||
7,000 | Nitto Denko Corp | 224,639 | |||||||||||||
117 | NTT Data Corp | 366,404 | |||||||||||||
391 | NTT Docomo Inc | 662,559 | |||||||||||||
13,760 | ORIX Corp | 1,034,670 | |||||||||||||
613 | Rakuten Inc | 464,610 | |||||||||||||
71,000 | Ricoh Company Ltd | 909,981 | |||||||||||||
13,600 | Sankyo Co Ltd | 687,951 | |||||||||||||
69,800 | Showa Shell Sekiyu KK | 505,845 | |||||||||||||
385,800 | Sojitz Corp | 620,563 | |||||||||||||
168,000 | Sumitomo Corp | 1,924,540 | |||||||||||||
216,000 | Taisei Corp | 426,116 | |||||||||||||
8,000 | Taisho Pharmaceutical Co Ltd | 159,774 | |||||||||||||
37,800 | Takeda Pharmaceutical Co Ltd | 1,737,342 | |||||||||||||
4,900 | TDK Corp | 257,081 | |||||||||||||
62,000 | TonenGeneral Sekiyu KK | 560,173 | |||||||||||||
86,000 | Toshiba Corp * | 404,230 |
See accompanying notes to the financial statements.
6
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
52,500 | Toyota Motor Corp | 1,781,105 | |||||||||||||
53,400 | Toyota Tsusho Corp | 764,258 | |||||||||||||
Total Japan | 36,102,644 | ||||||||||||||
Netherlands — 1.2% | |||||||||||||||
15,185 | ASML Holding NV | 375,735 | |||||||||||||
5,922 | Heineken NV | 264,685 | |||||||||||||
198,415 | ING Groep NV * | 1,752,118 | |||||||||||||
11,168 | Koninklijke DSM NV | 462,138 | |||||||||||||
35,418 | Koninklijke Philips Electronics NV | 986,985 | |||||||||||||
Total Netherlands | 3,841,661 | ||||||||||||||
Singapore — 3.7% | |||||||||||||||
145,000 | DBS Group Holdings Ltd | 1,489,408 | |||||||||||||
427,000 | Genting Singapore Plc * | 534,045 | |||||||||||||
3,349,000 | Golden Agri-Resources Ltd | 1,389,666 | |||||||||||||
136,000 | Keppel Corp Ltd | 901,296 | |||||||||||||
292,000 | Neptune Orient Lines Ltd * | 413,090 | |||||||||||||
545,818 | Noble Group Ltd | 636,492 | |||||||||||||
233,000 | Oversea-Chinese Banking Corp Ltd | 1,494,193 | |||||||||||||
187,000 | Sembcorp Industries Ltd | 589,925 | |||||||||||||
107,200 | Singapore Airlines Ltd | 1,196,361 | |||||||||||||
72,000 | Singapore Exchange Ltd | 400,416 | |||||||||||||
393,600 | Singapore Telecommunications | 896,862 | |||||||||||||
86,000 | United Overseas Bank Ltd | 1,190,132 | |||||||||||||
183,000 | Wilmar International Ltd | 847,438 | |||||||||||||
Total Singapore | 11,979,324 | ||||||||||||||
Spain — 1.1% | |||||||||||||||
74,618 | Banco Bilbao Vizcaya Argentaria SA | 898,794 | |||||||||||||
126,645 | Banco Santander SA | 1,474,690 | |||||||||||||
19,889 | Gas Natural SDG SA | 299,591 | |||||||||||||
41,056 | Repsol YPF SA | 934,536 | |||||||||||||
Total Spain | 3,607,611 |
See accompanying notes to the financial statements.
7
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Sweden — 1.6% | |||||||||||||||
19,617 | Assa Abloy AB Class B | 390,580 | |||||||||||||
37,787 | Atlas Copco AB Class A | 572,479 | |||||||||||||
23,579 | Boliden AB | 266,178 | |||||||||||||
28,524 | Electrolux AB Class B | 547,916 | |||||||||||||
60,924 | Nordea Bank AB | 543,285 | |||||||||||||
43,918 | Sandvik AB | 518,171 | |||||||||||||
19,604 | SKF AB Class B | 350,376 | |||||||||||||
60,986 | Svenska Cellulosa AB Class B | 807,862 | |||||||||||||
95,894 | Swedbank AB Class A * | 1,069,075 | |||||||||||||
27,736 | Volvo AB Class B * | 319,767 | |||||||||||||
Total Sweden | 5,385,689 | ||||||||||||||
Switzerland — 1.0% | |||||||||||||||
10,947 | Compagnie Financiere Richemont SA Class A | 423,344 | |||||||||||||
31,825 | Novartis AG (Registered) | 1,668,321 | |||||||||||||
1,004 | Swisscom AG (Registered) | 389,707 | |||||||||||||
2,756 | Synthes Inc | 303,105 | |||||||||||||
2,926 | Zurich Financial Services AG | 650,196 | |||||||||||||
Total Switzerland | 3,434,673 | ||||||||||||||
United Kingdom — 12.2% | |||||||||||||||
53,915 | 3i Group Plc | 214,439 | |||||||||||||
24,058 | Anglo American Plc | 858,057 | |||||||||||||
82,185 | ARM Holdings Plc | 458,625 | |||||||||||||
68,050 | AstraZeneca Plc | 3,345,024 | |||||||||||||
250,994 | Aviva Plc | 1,449,874 | |||||||||||||
338,583 | Barclays Plc | 1,554,442 | |||||||||||||
40,132 | BHP Billiton Plc | 1,119,106 | |||||||||||||
189,931 | BP Plc | 1,096,138 | |||||||||||||
670,179 | BT Group Plc | 1,366,692 | |||||||||||||
9,516 | Carnival Plc | 307,728 | |||||||||||||
69,902 | Compass Group Plc | 569,904 | |||||||||||||
173,388 | GlaxoSmithKline Plc | 3,235,664 | |||||||||||||
77,904 | Home Retail Group Plc | 259,642 |
See accompanying notes to the financial statements.
8
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
United Kingdom — continued | |||||||||||||||
114,711 | HSBC Holdings Plc | 1,123,556 | |||||||||||||
26,364 | Kazakhmys Plc | 464,029 | |||||||||||||
11,410 | Kingfisher Plc | 35,611 | |||||||||||||
441,030 | Legal & General Group Plc | 623,892 | |||||||||||||
88,644 | Marks & Spencer Group Plc | 468,356 | |||||||||||||
23,310 | Next Plc | 704,870 | |||||||||||||
659,852 | Old Mutual Plc | 1,282,343 | |||||||||||||
17,370 | Pearson Plc | 257,577 | |||||||||||||
37,583 | Rio Tinto Plc | 1,890,352 | |||||||||||||
1,927,009 | Royal Bank of Scotland Group Plc * | 1,305,080 | |||||||||||||
10,973 | Royal Dutch Shell Plc A Shares (Amsterdam) | 290,511 | |||||||||||||
192,970 | Royal Dutch Shell Plc A Shares (London) | 5,110,589 | |||||||||||||
138,667 | Royal Dutch Shell Plc B Shares (London) | 3,534,233 | |||||||||||||
23,026 | SABMiller Plc | 653,849 | |||||||||||||
44,132 | Scottish & Southern Energy Plc | 774,307 | |||||||||||||
28,167 | Standard Chartered Plc | 752,202 | |||||||||||||
100,955 | Tomkins Plc | 500,022 | |||||||||||||
14,243 | Vedanta Resources Plc | 410,372 | |||||||||||||
986,203 | Vodafone Group Plc | 2,367,931 | |||||||||||||
34,643 | Wolseley Plc * | 666,239 | |||||||||||||
45,320 | WPP Plc | 448,043 | |||||||||||||
39,808 | Xstrata Plc | 621,219 | |||||||||||||
Total United Kingdom | 40,120,518 | ||||||||||||||
United States — 46.8% | |||||||||||||||
37,500 | 3M Co. | 2,945,625 | |||||||||||||
77,300 | Abbott Laboratories | 3,813,982 | |||||||||||||
53,200 | Accenture Plc.-Class A | 1,947,120 | |||||||||||||
5,000 | ACE, Ltd. | 267,350 | |||||||||||||
13,600 | AFLAC, Inc. | 642,600 | |||||||||||||
11,300 | Agilent Technologies, Inc. * | 304,761 | |||||||||||||
3,500 | Alcon, Inc. | 567,700 | |||||||||||||
31,400 | Allstate Corp. (The) | 866,640 | |||||||||||||
63,700 | Altria Group, Inc. | 1,421,784 |
See accompanying notes to the financial statements.
9
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
United States — continued | |||||||||||||||
5,700 | Amazon.com, Inc. * | 711,531 | |||||||||||||
13,500 | AMDOCS Ltd. * | 354,105 | |||||||||||||
18,900 | Ameren Corp. | 530,523 | |||||||||||||
24,700 | American Express Co. | 984,789 | |||||||||||||
13,600 | Ameriprise Financial, Inc. | 592,688 | |||||||||||||
26,200 | Annaly Capital Management, Inc. REIT | 455,356 | |||||||||||||
35,400 | Apple, Inc. * | 8,615,298 | |||||||||||||
10,400 | Assurant, Inc. | 380,224 | |||||||||||||
47,500 | Automatic Data Processing, Inc. | 1,833,975 | |||||||||||||
4,200 | AvalonBay Communities, Inc. REIT | 441,924 | |||||||||||||
25,900 | Baxter International, Inc. | 1,102,304 | |||||||||||||
14,800 | Becton, Dickinson & Co. | 1,009,212 | |||||||||||||
12,300 | Best Buy Co., Inc. | 386,097 | |||||||||||||
2,900 | BlackRock, Inc. | 411,655 | |||||||||||||
4,700 | Boston Properties, Inc. REIT | 382,580 | |||||||||||||
23,500 | Bristol–Myers Squibb Co. | 612,880 | |||||||||||||
14,400 | Broadcom Corp.-Class A | 431,568 | |||||||||||||
7,300 | C.R. Bard, Inc. | 560,859 | |||||||||||||
15,600 | Capital One Financial Corp. | 590,616 | |||||||||||||
14,600 | Caterpillar, Inc. | 951,336 | |||||||||||||
35,700 | CenterPoint Energy, Inc. | 528,003 | |||||||||||||
16,100 | Chevron Corp. | 1,193,976 | |||||||||||||
15,900 | CH Robinson Worldwide, Inc. | 1,033,341 | |||||||||||||
4,600 | Cimarex Energy Co. | 300,932 | |||||||||||||
46,200 | Cisco Systems, Inc. * | 926,310 | |||||||||||||
33,000 | Coach, Inc. | 1,182,720 | |||||||||||||
122,600 | Coca–Cola Co. (The) | 6,855,792 | |||||||||||||
15,600 | Cognizant Technology Solutions Corp.-Class A * | 898,638 | |||||||||||||
10,400 | Comerica, Inc. | 357,864 | |||||||||||||
20,900 | Computer Sciences Corp. | 832,029 | |||||||||||||
60,153 | ConocoPhillips | 3,153,822 | |||||||||||||
10,200 | Danaher Corp. | 370,566 | |||||||||||||
6,100 | Deere & Co. | 385,947 | |||||||||||||
12,900 | Dow Chemical Co. (The) | 314,373 |
See accompanying notes to the financial statements.
10
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
United States — continued | |||||||||||||||
19,400 | DTE Energy Co. | 908,890 | |||||||||||||
45,600 | Duke Energy Corp. | 783,864 | |||||||||||||
12,100 | E.I. du Pont de Nemours & Co. | 493,317 | |||||||||||||
5,500 | Eaton Corp. | 382,140 | |||||||||||||
25,000 | Ecolab, Inc. | 1,185,000 | |||||||||||||
64,700 | Eli Lilly & Co. | 2,171,332 | |||||||||||||
14,500 | Emerson Electric Co. | 676,425 | |||||||||||||
12,500 | Equity Residential REIT | 572,875 | |||||||||||||
20,900 | Expeditors International of Washington, Inc. | 827,431 | |||||||||||||
5,500 | FedEx Corp. | 429,275 | |||||||||||||
10,200 | FLIR Systems, Inc. * | 256,224 | |||||||||||||
6,100 | FMC Technologies, Inc. * | 377,285 | |||||||||||||
65,400 | Ford Motor Co. * | 738,366 | |||||||||||||
17,200 | Forest Laboratories, Inc. * | 469,388 | |||||||||||||
7,500 | Franklin Resources, Inc. | 723,825 | |||||||||||||
8,400 | Freeport–McMoRan Copper & Gold, Inc. | 604,632 | |||||||||||||
14,400 | Gannett Co., Inc. | 174,096 | |||||||||||||
117,700 | General Electric Co. | 1,704,296 | |||||||||||||
28,800 | General Dynamics Corp. | 1,609,056 | |||||||||||||
17,600 | General Mills, Inc. | 636,416 | |||||||||||||
9,300 | Genuine Parts Co. | 389,949 | |||||||||||||
22,300 | Genworth Financial, Inc.-Class A * | 241,509 | |||||||||||||
11,000 | Google, Inc.-Class A * | 4,950,220 | |||||||||||||
24,600 | Hewlett-Packard Co. | 946,608 | |||||||||||||
33,000 | Home Depot, Inc. | 917,730 | |||||||||||||
8,200 | Honeywell International, Inc. | 320,538 | |||||||||||||
17,600 | Hospitality Properties Trust REIT | 344,080 | |||||||||||||
22,900 | Host Hotels & Resorts, Inc. REIT | 300,677 | |||||||||||||
11,300 | Illinois Tool Works, Inc. | 466,238 | |||||||||||||
33,900 | Intel Corp. | 600,708 | |||||||||||||
3,200 | IntercontinentalExchange, Inc. * | 305,792 | |||||||||||||
214,300 | Johnson & Johnson | 12,219,386 | |||||||||||||
39,500 | Kimberly–Clark Corp. | 2,543,800 | |||||||||||||
11,600 | Limited Brands, Inc. | 273,760 |
See accompanying notes to the financial statements.
11
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
United States — continued | |||||||||||||||
2,800 | Lubrizol Corp. | 261,268 | |||||||||||||
4,800 | M&T Bank Corp. | 411,072 | |||||||||||||
41,000 | Macy's, Inc. | 797,040 | |||||||||||||
37,800 | Marathon Oil Corp. | 1,152,522 | |||||||||||||
11,300 | Marriott International, Inc.-Class A | 361,713 | |||||||||||||
6,200 | McDonald's Corp. | 452,972 | |||||||||||||
47,100 | Medtronic, Inc. | 1,482,708 | |||||||||||||
181,600 | Merck & Co., Inc. | 6,385,056 | |||||||||||||
88,900 | Microsoft Corp. | 2,087,372 | |||||||||||||
14,000 | NetApp, Inc. * | 566,160 | |||||||||||||
6,500 | Newfield Exploration Co. * | 312,065 | |||||||||||||
6,800 | Newmont Mining Corp. | 416,976 | |||||||||||||
44,700 | News Corp.-Class A | 561,879 | |||||||||||||
28,200 | Nike, Inc.-Class B | 1,974,000 | |||||||||||||
37,200 | NiSource, Inc. | 645,048 | |||||||||||||
10,600 | Nordstrom, Inc. | 306,552 | |||||||||||||
6,300 | Norfolk Southern Corp. | 338,184 | |||||||||||||
37,000 | Oracle Corp. | 809,560 | |||||||||||||
45,800 | Paychex, Inc. | 1,139,962 | |||||||||||||
8,000 | Peabody Energy Corp. | 342,400 | |||||||||||||
28,900 | Pepco Holdings, Inc. | 518,755 | |||||||||||||
88,600 | PepsiCo, Inc. | 5,686,348 | |||||||||||||
242,073 | Pfizer, Inc. | 3,856,223 | |||||||||||||
6,600 | Pinnacle West Capital Corp. | 263,010 | |||||||||||||
12,500 | PNC Financial Services Group, Inc. | 637,000 | |||||||||||||
9,500 | Prudential Financial, Inc. | 480,415 | |||||||||||||
4,800 | Public Storage REIT | 470,496 | |||||||||||||
35,700 | Qualcomm, Inc. | 1,367,667 | |||||||||||||
12,100 | Rockwell Collins, Inc. | 652,553 | |||||||||||||
19,100 | RR Donnelley & Sons Co. | 289,269 | |||||||||||||
7,400 | Ryder System, Inc. | 283,938 | |||||||||||||
10,500 | Sigma–Aldrich Corp. | 558,285 | |||||||||||||
6,300 | Simon Property Group, Inc. REIT | 569,835 | |||||||||||||
19,700 | Southern Copper Corp. | 595,728 |
See accompanying notes to the financial statements.
12
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
United States — continued | |||||||||||||||
27,700 | Southwest Airlines Co. | 306,085 | |||||||||||||
24,800 | Starbucks Corp. | 570,152 | |||||||||||||
24,100 | Stryker Corp. | 1,040,879 | |||||||||||||
9,400 | St Jude Medical, Inc. * | 324,958 | |||||||||||||
7,800 | Sunoco, Inc. | 262,704 | |||||||||||||
18,242 | Supervalu, Inc. | 177,312 | |||||||||||||
42,900 | Sysco Corp. | 1,179,321 | |||||||||||||
7,600 | T. Rowe Price Group, Inc. | 332,728 | |||||||||||||
6,300 | Time Warner Cable, Inc. | 325,143 | |||||||||||||
12,100 | Time Warner, Inc. | 362,758 | |||||||||||||
23,200 | TJX Cos. (The), Inc. | 920,808 | |||||||||||||
7,700 | Torchmark Corp. | 379,995 | |||||||||||||
20,700 | Tyco Electronics Ltd. | 507,564 | |||||||||||||
6,200 | United Parcel Service, Inc.-Class B | 395,560 | |||||||||||||
24,215 | UnitedHealth Group, Inc. | 768,100 | |||||||||||||
29,500 | United Technologies Corp. | 1,923,695 | |||||||||||||
9,700 | Urban Outfitters, Inc. * | 294,104 | |||||||||||||
53,900 | Valero Energy Corp. | 850,003 | |||||||||||||
7,300 | Ventas, Inc. REIT | 368,723 | |||||||||||||
8,100 | VF Corp. | 572,022 | |||||||||||||
17,000 | Viacom, Inc.-Class B | 534,140 | |||||||||||||
16,800 | Virgin Media, Inc. | 349,608 | |||||||||||||
7,200 | Visa, Inc.-Class A | 496,656 | |||||||||||||
10,500 | Vornado Realty Trust REIT | 851,130 | |||||||||||||
42,300 | Walt Disney Co. (The) | 1,378,557 | |||||||||||||
117,900 | Wal–Mart Stores, Inc. | 5,911,506 | |||||||||||||
14,400 | WellPoint, Inc. * | 715,392 | |||||||||||||
11,000 | Western Digital Corp. * | 265,650 | |||||||||||||
5,100 | Whirlpool Corp. | 378,216 | |||||||||||||
49,300 | Xerox Corp. | 416,092 | |||||||||||||
18,100 | XL Group Plc | 324,171 | |||||||||||||
Total United States | 153,514,286 | ||||||||||||||
TOTAL COMMON STOCKS (COST $344,521,409) | 313,237,821 |
See accompanying notes to the financial statements.
13
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares / Par Value | Description | Value ($) | |||||||||||||
PREFERRED STOCKS — 0.3% | |||||||||||||||
Germany — 0.3% | |||||||||||||||
11,827 | Henkel AG & Co KGaA 1.40% | 554,328 | |||||||||||||
7,769 | Porsche Automobil Holding SE 0.13% | 362,352 | |||||||||||||
Total Germany | 916,680 | ||||||||||||||
TOTAL PREFERRED STOCKS (COST $995,497) | 916,680 | ||||||||||||||
SHORT-TERM INVESTMENTS — 3.1% | |||||||||||||||
Time Deposits — 3.1% | |||||||||||||||
AUD | 43,542 | Bank of America (Charlotte) Time Deposit, 4.44%, due 09/01/10 | 38,740 | ||||||||||||
USD | 2,500,000 | Bank of Tokyo-Mitsubishi (Tokyo) Time Deposit, 0.21%, due 09/01/10 | 2,500,000 | ||||||||||||
JPY | 1,809,080 | BNP Paribas (Paris) Time Deposit, 0.04%, due 09/01/10 | 21,534 | ||||||||||||
DKK | 68,982 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.10%, due 09/01/10 | 11,742 | ||||||||||||
SEK | 70,950 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.20%, due 09/01/10 | 9,599 | ||||||||||||
CAD | 14,564 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.70%, due 09/01/10 | 13,658 | ||||||||||||
NOK | 58,429 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 1.89%, due 09/01/10 | 9,264 | ||||||||||||
CHF | 10,629 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.02%, due 09/01/10 | 10,470 | ||||||||||||
EUR | 11,700 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.28%, due 09/01/10 | 14,827 | ||||||||||||
USD | 2,361,107 | Commerzbank (Frankfurt) Time Deposit, 0.21%, due 09/01/10 | 2,361,107 | ||||||||||||
USD | 2,500,000 | DnB Nor Bank (Oslo) Time Deposit, 0.21%, due 09/01/10 | 2,500,000 | ||||||||||||
HKD | 406,252 | HSBC Bank (Hong Kong) Time Deposit, 0.03%, due 09/01/10 | 52,226 | ||||||||||||
SGD | 98,565 | HSBC Bank (Hong Kong) Time Deposit, 0.13%, due 09/01/10 | 72,715 | ||||||||||||
GBP | 13,979 | JPMorgan Chase (New York) Time Deposit, 0.46%, due 09/01/10 | 21,438 | ||||||||||||
USD | 2,500,000 | Nordea Bank Norge ASA (Oslo) Time Deposit, 0.21%, due 09/01/10 | 2,500,000 | ||||||||||||
Total Time Deposits | 10,137,320 | ||||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $10,137,320) | 10,137,320 | ||||||||||||||
TOTAL INVESTMENTS — 98.9% (Cost $355,654,226) | 324,291,821 | ||||||||||||||
Other Assets and Liabilities (net) — 1.1% | 3,469,242 | ||||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 327,761,063 |
See accompanying notes to the financial statements.
14
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
A summary of outstanding financial instruments at August 31, 2010 is as follows:
Forward Currency Contracts
Settlement Date | Counterparty | Deliver/ Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||
Buys † | |||||||||||||||||||||||
10/22/10 | Barclays | CAD | 7,365,579 | $ | 6,901,760 | $ | (146,304 | ) | |||||||||||||||
10/22/10 | Royal Bank Of Scotland PLC | CAD | 7,365,579 | 6,901,760 | (148,712 | ) | |||||||||||||||||
10/22/10 | Bank Of America | CHF | 5,502,403 | 5,422,219 | 127,710 | ||||||||||||||||||
10/22/10 | Royal Bank Of Scotland PLC | CHF | 5,502,403 | 5,422,219 | 112,506 | ||||||||||||||||||
10/22/10 | Barclays | DKK | 2,226,349 | 378,978 | (4,981 | ) | |||||||||||||||||
10/22/10 | Brown Brothers Harriman & Co. | SEK | 6,333,349 | 856,132 | (1,848 | ) | |||||||||||||||||
10/22/10 | Barclays | SEK | 50,755,468 | 6,861,042 | (24,977 | ) | |||||||||||||||||
10/22/10 | Mellon Bank | SEK | 8,167,074 | 1,104,012 | (4,109 | ) | |||||||||||||||||
$ | 33,848,122 | $ | (90,715 | ) | |||||||||||||||||||
Sales # | |||||||||||||||||||||||
10/22/10 | Bank Of America | AUD | 1,207,450 | $ | 1,067,717 | $ | 3,918 | ||||||||||||||||
10/22/10 | J.P. Morgan Chase Bank | AUD | 1,452,715 | 1,284,598 | 6,773 | ||||||||||||||||||
10/22/10 | Brown Brothers Harriman & Co. | EUR | 4,447,864 | 5,636,172 | 71,327 | ||||||||||||||||||
10/22/10 | Bank Of America | EUR | 5,105,970 | 6,470,100 | 87,288 | ||||||||||||||||||
10/22/10 | Deutsche Bank AG | EUR | 4,955,795 | 6,279,803 | 91,763 | ||||||||||||||||||
10/22/10 | Deutsche Bank AG | GBP | 1,348,769 | 2,067,827 | 39,193 | ||||||||||||||||||
10/22/10 | Mellon Bank | HKD | 3,811,482 | 490,165 | 455 | ||||||||||||||||||
10/22/10 | Mellon Bank | JPY | 65,501,775 | 780,124 | (11,774 | ) | |||||||||||||||||
10/22/10 | J.P. Morgan Chase Bank | JPY | 503,167,901 | 5,992,711 | (93,701 | ) | |||||||||||||||||
10/22/10 | Mellon Bank | SGD | 6,838,412 | 5,044,851 | (23,069 | ) | |||||||||||||||||
$ | 35,114,068 | $ | 172,173 |
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.
See accompanying notes to the financial statements.
15
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
17 | DAX | September 2010 | $ | 3,172,754 | $ | (76,059 | ) | ||||||||||||
42 | FTSE 100 | September 2010 | 3,333,382 | (6,034 | ) | ||||||||||||||
64 | FTSE/MIB | September 2010 | 7,959,853 | (138,089 | ) | ||||||||||||||
33 | MSCI Singapore | September 2010 | 1,699,467 | 35,682 | |||||||||||||||
47 | TOPIX | September 2010 | 4,475,602 | (444,396 | ) | ||||||||||||||
$ | 20,641,058 | $ | (628,896 | ) | |||||||||||||||
Sales | |||||||||||||||||||
17 | IBEX 35 | September 2010 | $ | 2,183,712 | $ | 34,165 | |||||||||||||
23 | SPI 200 | September 2010 | 2,253,485 | 84,703 | |||||||||||||||
23 | S&P Toronto 60 | September 2010 | 2,990,744 | (57,395 | ) | ||||||||||||||
106 | S&P 500 E-Mini Index | September 2010 | 5,555,725 | 195,327 | |||||||||||||||
$ | 12,983,666 | $ | 256,800 |
As of August 31, 2010, for futures contracts, swap agreements and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
Notes to Schedule of Investments:
MSCI - Morgan Stanley Capital International
REIT - Real Estate Investment Trust
* Non-income producing security.
Currency Abbreviations:
AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc DKK - Danish Krone EUR - Euro GBP - British Pound | HKD - Hong Kong Dollar JPY - Japanese Yen NOK - Norwegian Krone SEK - Swedish Krona SGD - Singapore Dollar USD - United States Dollar | ||||||
See accompanying notes to the financial statements.
16
GMO Developed World Stock Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments, at value (cost $355,654,226) (Note 2) | $ | 324,291,821 | |||||
Dividends receivable | 922,574 | ||||||
Foreign taxes receivable | 63,073 | ||||||
Unrealized appreciation on open forward currency contracts (Note 4) | 540,933 | ||||||
Receivable for collateral on open futures contracts (Note 4) | 2,892,911 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 34,162 | ||||||
Total assets | 328,745,474 | ||||||
Liabilities: | |||||||
Foreign currency due to custodian (cost $63,622) | 63,717 | ||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 129,890 | ||||||
Shareholder service fee | 36,217 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 628 | ||||||
Payable for variation margin on open futures contracts (Note 4) | 159,851 | ||||||
Unrealized depreciation on open forward currency contracts (Note 4) | 459,475 | ||||||
Accrued expenses | 134,633 | ||||||
Total liabilities | 984,411 | ||||||
Net assets | $ | 327,761,063 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 468,873,137 | |||||
Accumulated undistributed net investment income | 3,862,512 | ||||||
Accumulated net realized loss | (113,313,772 | ) | |||||
Net unrealized depreciation | (31,660,814 | ) | |||||
$ | 327,761,063 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 166,918,654 | |||||
Class IV shares | $ | 160,842,409 | |||||
Shares outstanding: | |||||||
Class III | 10,701,681 | ||||||
Class IV | 10,300,513 | ||||||
Net asset value per share: | |||||||
Class III | $ | 15.60 | |||||
Class IV | $ | 15.61 |
See accompanying notes to the financial statements.
17
GMO Developed World Stock Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $319,465) | $ | 5,151,657 | |||||
Interest | 2,570 | ||||||
Total investment income | 5,154,227 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 776,642 | ||||||
Shareholder service fee – Class III (Note 5) | 132,173 | ||||||
Shareholder service fee – Class IV (Note 5) | 84,472 | ||||||
Custodian and fund accounting agent fees | 110,860 | ||||||
Audit and tax fees | 39,284 | ||||||
Transfer agent fees | 27,232 | ||||||
Legal fees | 8,464 | ||||||
Trustees fees and related expenses (Note 5) | 3,648 | ||||||
Registration fees | 1,564 | ||||||
Miscellaneous | 11,316 | ||||||
Total expenses | 1,195,655 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (197,432 | ) | |||||
Expense reductions (Note 2) | (13 | ) | |||||
Net expenses | 998,210 | ||||||
Net investment income (loss) | 4,156,017 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | (3,285,982 | ) | |||||
Closed futures contracts | (904,611 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 721,078 | ||||||
Net realized gain (loss) | (3,469,515 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | (10,590,832 | ) | |||||
Open futures contracts | 193,730 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (9,786 | ) | |||||
Net unrealized gain (loss) | (10,406,888 | ) | |||||
Net realized and unrealized gain (loss) | (13,876,403 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (9,720,386 | ) |
See accompanying notes to the financial statements.
18
GMO Developed World Stock Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 4,156,017 | $ | 6,710,356 | |||||||
Net realized gain (loss) | (3,469,515 | ) | (58,783,013 | ) | |||||||
Change in net unrealized appreciation (depreciation) | (10,406,888 | ) | 178,199,951 | ||||||||
Net increase (decrease) in net assets from operations | (9,720,386 | ) | 126,127,294 | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (2,321,473 | ) | (4,837,784 | ) | |||||||
Class IV | (2,237,445 | ) | (3,886,700 | ) | |||||||
Total distributions from net investment income | (4,558,918 | ) | (8,724,484 | ) | |||||||
Net share transactions (Note 9): | |||||||||||
Class III | 2,391,681 | (52,270,384 | ) | ||||||||
Class IV | 2,356,178 | 3,886,700 | |||||||||
Increase (decrease) in net assets resulting from net share transactions | 4,747,859 | (48,383,684 | ) | ||||||||
Purchase premiums and redemption fees (Notes 2 and 9): | |||||||||||
Class III | 5,482 | 269,314 | |||||||||
Increase in net assets resulting from purchase premiums and redemption fees | 5,482 | 269,314 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees | 4,753,341 | (48,114,370 | ) | ||||||||
Total increase (decrease) in net assets | (9,525,963 | ) | 69,288,440 | ||||||||
Net assets: | |||||||||||
Beginning of period | 337,287,026 | 267,998,586 | |||||||||
End of period (including accumulated undistributed net investment income of $3,862,512 and $4,265,413, respectively) | $ | 327,761,063 | $ | 337,287,026 |
See accompanying notes to the financial statements.
19
GMO Developed World Stock Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006(a) | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 16.28 | $ | 11.34 | $ | 21.88 | $ | 24.58 | $ | 22.24 | $ | 20.00 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.20 | 0.29 | 0.51 | 0.54 | 0.43 | 0.15 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.66 | ) | 5.03 | (10.20 | ) | (0.74 | ) | 2.84 | 2.15 | ||||||||||||||||||
Total from investment operations | (0.46 | ) | 5.32 | (9.69 | ) | (0.20 | ) | 3.27 | 2.30 | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.22 | ) | (0.38 | ) | (0.64 | ) | (0.67 | ) | (0.32 | ) | (0.06 | ) | |||||||||||||||
From net realized gains | — | — | (0.21 | ) | (1.83 | ) | (0.61 | ) | — | ||||||||||||||||||
Total distributions | (0.22 | ) | (0.38 | ) | (0.85 | ) | (2.50 | ) | (0.93 | ) | (0.06 | ) | |||||||||||||||
Net asset value, end of period | $ | 15.60 | $ | 16.28 | $ | 11.34 | $ | 21.88 | $ | 24.58 | $ | 22.24 | |||||||||||||||
Total Return(b) | (2.85 | )%** | 47.03 | % | (45.56 | )% | (1.73 | )% | 14.87 | % | 11.51 | %** | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 166,919 | $ | 171,842 | $ | 155,560 | $ | 309,609 | $ | 282,446 | $ | 179,466 | |||||||||||||||
Net expenses to average daily net assets | 0.60 | %(c)* | 0.60 | %(c) | 0.61 | %(d) | 0.62 | %(d) | 0.62 | % | 0.62 | %* | |||||||||||||||
Net investment income (loss) to average daily net assets | 2.39 | %* | 1.93 | % | 2.79 | % | 2.15 | % | 1.83 | % | 1.27 | %* | |||||||||||||||
Portfolio turnover rate | 18 | %** | 47 | % | 50 | % | 53 | % | 43 | % | 15 | %††** | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.11 | %* | 0.11 | % | 0.12 | % | 0.11 | % | 0.12 | % | 0.20 | %* | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.00 | (e) | $ | 0.02 | $ | 0.01 | $ | 0.02 | $ | 0.03 | $ | 0.07 |
(a) Period from August 1, 2005 (commencement of operations) through February 28, 2006.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(c) The net expense ratio does not include the effect of expense reductions (Note 2).
(d) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions. (Note 2)
(e) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the period August 1, 2005 through February 28, 2006.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
20
GMO Developed World Stock Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006(a) | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 16.30 | $ | 11.35 | $ | 21.90 | $ | 24.59 | $ | 22.25 | $ | 20.24 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.20 | 0.30 | 0.51 | 0.56 | 0.45 | 0.12 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.67 | ) | 5.04 | (10.20 | ) | (0.74 | ) | 2.82 | 1.95 | ||||||||||||||||||
Total from investment operations | (0.47 | ) | 5.34 | (9.69 | ) | (0.18 | ) | 3.27 | 2.07 | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.22 | ) | (0.39 | ) | (0.65 | ) | (0.68 | ) | (0.32 | ) | (0.06 | ) | |||||||||||||||
From net realized gains | — | — | (0.21 | ) | (1.83 | ) | (0.61 | ) | — | ||||||||||||||||||
Total distributions | (0.22 | ) | (0.39 | ) | (0.86 | ) | (2.51 | ) | (0.93 | ) | (0.06 | ) | |||||||||||||||
Net asset value, end of period | $ | 15.61 | $ | 16.30 | $ | 11.35 | $ | 21.90 | $ | 24.59 | $ | 22.25 | |||||||||||||||
Total Return(b) | (2.90 | )%** | 47.16 | % | (45.52 | )% | (1.66 | )% | 14.88 | % | 10.23 | %** | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 160,842 | $ | 165,445 | $ | 112,438 | $ | 206,408 | $ | 209,937 | $ | 137,409 | |||||||||||||||
Net expenses to average daily net assets | 0.55 | %(c)* | 0.55 | %(c) | 0.56 | %(d) | 0.57 | %(d) | 0.57 | % | 0.57 | %* | |||||||||||||||
Net investment income (loss) to average daily net assets | 2.43 | %* | 1.94 | % | 2.82 | % | 2.22 | % | 1.93 | % | 1.20 | %* | |||||||||||||||
Portfolio turnover rate | 18 | %** | 47 | % | 50 | % | 53 | % | 43 | % | 15 | %††** | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.11 | %* | 0.11 | % | 0.12 | % | 0.11 | % | 0.12 | % | 0.17 | %* | |||||||||||||||
Redemption fees consisted of the following per share amounts:† | — | (e) | — | (e) | — | (e) | — | (e) | $ | 0.02 | $ | 0.06 |
(a) Period from September 1, 2005 (commencement of operations) through February 28, 2006.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(c) The net expense ratio does not include the effect of expense reductions (Note 2).
(d) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions. (Note 2)
(e) The class received no purchase premiums or redemption fees.
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the period August 1, 2005 through February 28, 2006.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
21
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO Developed World Stock Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks high total return. The Fund seeks to achieve its investment objective by outperforming its benchmark, the MSCI World Index. Under normal circumstances, the Fund invests directly and indirectly (e.g., through the GMO Funds in which the Fund invests, collectively referred to as the "underlying funds" or derivatives) at least 80% of its assets in stocks tied economically to developed markets. For this purpose, the term "stocks" refers to investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts, and the term "developed markets" refers to those countries included in the MSCI World Index, a global developed markets equity index, and countries with similar characteristics.
The Manager relies principally on proprietary quantitative models and also employs fundamental investment techniques to evaluate and select individual stocks, countries, and currencies. The Manager selects stocks it believes (i) are undervalued (e.g., stocks trading at prices below what the Manager believes to be their fundamental value); (ii) have superior fundamentals (e.g., earnings stability); and/or (iii) have shown indications of improving investor sentiment (e.g., positive price movement or upgraded analyst ratings). In selecting countries in which to invest and determining the Fund's currency exposures, the Manager considers many factors, which may include aggregate stock market valuations, global competitiveness, and investor sentiment. The Manager also uses proprietary techniques to adjust the composition of the portfolio for other factors such as position size, country, industry and sector weights, and market capitali zation. The factors considered and the models used by the Manager may change over time based on the Manager's assessment of what combination of models and factors are best positioned to achieve the Fund's investment objective.
The Fund may make investments tied economically to emerging countries. In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the-counter ("OTC") derivatives, including options, futures, and swap contracts, (i) as a substitute for direct investment; (ii) in an attempt to reduce investment exposures (which may result in a reduction below zero); (iii) to effect transactions intended as substitutes for securities lending; and/or (iv) in an attempt to adjust elements of its investment and/or foreign currency exposure. The Fund's foreign currency exposure may differ from the currency exposure represented by its equity investments. In addition, the Fund may take active overweighted and underweighted positions in particular currencies relative to its benchmark. In addition, the Fund may lend its portfolio securities.
22
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
Throughout the period ended August 31, 2010, the Fund had two classes of shares outstanding: Class III and Class IV. Each class of shares bears a different shareholder service fee.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the OTC market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or who se values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. Additionally, because many foreign equity securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on local closing prices and adjustments supplied by a third party vendor using that v endor's proprietary models. As of August 31, 2010, 47.9% of the net assets of the Fund were valued using fair value prices based on those adjustments and are classified as using Level 2 inputs in the table below. See note 4 for a further discussion on valuation of derivative financial instruments.
23
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include: fair value adjustments applied to closing prices of foreign securities due to market events that have occurred since the local market close but before the Fund's daily NAV calculation.
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | |||||||||||||||||||
Australia | $ | — | $ | 2,771,732 | $ | — | $ | 2,771,732 | |||||||||||
Austria | — | 210,117 | — | 210,117 | |||||||||||||||
Belgium | — | 2,000,309 | — | 2,000,309 | |||||||||||||||
Canada | 3,580,711 | — | — | 3,580,711 | |||||||||||||||
France | — | 20,310,555 | — | 20,310,555 | |||||||||||||||
Germany | — | 8,037,892 | — | 8,037,892 | |||||||||||||||
Greece | — | 393,941 | — | 393,941 | |||||||||||||||
Hong Kong | — | 2,899,931 | — | 2,899,931 | |||||||||||||||
Ireland | — | 674,842 | — | 674,842 | |||||||||||||||
Italy | — | 14,371,385 | — | 14,371,385 | |||||||||||||||
Japan | — | 36,102,644 | — | 36,102,644 | |||||||||||||||
Netherlands | — | 3,841,661 | — | 3,841,661 | |||||||||||||||
Singapore | — | 11,979,324 | — | 11,979,324 | |||||||||||||||
Spain | — | 3,607,611 | — | 3,607,611 | |||||||||||||||
Sweden | — | 5,385,689 | — | 5,385,689 | |||||||||||||||
Switzerland | — | 3,434,673 | — | 3,434,673 |
24
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
ASSET VALUATION INPUTS — continued
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
United Kingdom | $ | — | $ | 40,120,518 | $ | — | $ | 40,120,518 | |||||||||||
United States | 153,514,286 | — | — | 153,514,286 | |||||||||||||||
TOTAL COMMON STOCKS | 157,094,997 | 156,142,824 | — | 313,237,821 | |||||||||||||||
Preferred Stocks | |||||||||||||||||||
Germany | — | 916,680 | — | 916,680 | |||||||||||||||
TOTAL PREFERRED STOCKS | — | 916,680 | — | 916,680 | |||||||||||||||
Short-Term Investments | 10,137,320 | — | — | 10,137,320 | |||||||||||||||
Total Investments | 167,232,317 | 157,059,504 | — | 324,291,821 | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts | |||||||||||||||||||
Foreign Exchange risk | — | 540,933 | — | 540,933 | |||||||||||||||
Futures Contracts | |||||||||||||||||||
Equity risk | 195,327 | 154,550 | — | 349,877 | |||||||||||||||
Total Derivatives | 195,327 | 695,483 | — | 890,810 | |||||||||||||||
Total | $ | 167,427,644 | $ | 157,754,987 | $ | — | $ | 325,182,631 |
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts | |||||||||||||||||||
Foreign Exchange risk | $ | — | $ | (459,475 | ) | $ | — | $ | (459,475 | ) | |||||||||
Futures Contracts | |||||||||||||||||||
Equity risk | (57,395 | ) | (664,578 | ) | — | (721,973 | ) | ||||||||||||
Total Derivatives | (57,395 | ) | (1,124,053 | ) | — | (1,181,448 | ) | ||||||||||||
Total | $ | (57,395 | ) | $ | (1,124,053 | ) | $ | — | $ | (1,181,448 | ) |
25
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund held no investments or other financial instruments at either August 31, 2010 or February 28, 2010, whose fair value was determined using Level 3 inputs.
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are inclu ded with the net realized and unrealized gain or loss on investment securities.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country's tax treaty with the United States. The foreign withholding rates applicable to a Fund's investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if paid by the shareholders of the Fund.
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Transaction based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments
26
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund elected to defer to March 1, 2010 post-October capital losses of $13,229,513.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (12,590,155 | ) | ||||
2/28/2018 | (76,431,352 | ) | |||||
Total | $ | (89,021,507 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 361,612,939 | $ | 16,563,323 | $ | (53,884,441 | ) | $ | (37,321,118 | ) |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
27
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which co llection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. Investment income, common expenses and realized and unrealized gains and losses are allocated among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class's operations.
Brown Brothers Harriman & Co. ("BBH") serves as the Fund's custodian and fund accounting agent. State Street Bank and Trust Company ("State Street") serves as the Fund's transfer agent. BBH's and State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
For the period ended August 31, 2010, the premium on cash purchases of Fund shares and the fee on cash redemptions were each 0.25% of the amount invested or redeemed. An additional purchase premium and redemption fee of 0.005% is charged for any purchases/redemptions (or any portion of a purchase/redemption) effected in a currency other than the U.S. dollar. Purchase premiums and redemption fees are paid to and retained by a Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by rein vestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to
28
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through bro kers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund's investments.
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to rec eipt) may expose the Fund to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund's investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund's
29
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
Other principal risks of an investment in the Fund include Market Risk — Value Securities (risk that the price of the Fund's investments will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Credit and Counterpar ty Risk (risk of default of a derivatives counterparty or a borrower of the Fund's securities); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
30
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index). The Funds also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedin gs. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be secured by collateral (e.g., foreign currency forwards; see "Currency Risk" above), that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
31
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency
32
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
contracts are not collateralized. During the period ended August 31, 2010, the Fund used forward currency contracts to manage against anticipated currency exchange rate changes and adjust exposure to foreign currencies. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because regular trading on many foreign exchanges closes prior to the close of the NYSE, closing prices for foreign futures contracts on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures contracts using fair value prices, which are based on adjustments to local closing prices, and supplied by a third party vendor based on that vendor's proprietary models. As of August 31, 2010, futures contracts representing (0.1)% of the net assets of the Fund were valued using fair value prices based on those adjustments and are classified using Level 2 inputs in the table above. During the period ended August 31, 2010, the Fund used futures contracts to adjust exposure to certain securities markets and maintain the diversity and liquidity of the portfolio. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
33
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an of fsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket
34
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility
35
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Unrealized appreciation on futures contracts* | $ | — | $ | — | $ | — | $ | 349,877 | $ | — | $ | 349,877 | |||||||||||||||
Unrealized appreciation on forward currency contracts | — | 540,933 | — | — | — | 540,933 | |||||||||||||||||||||
Total | $ | — | $ | 540,933 | $ | — | $ | 349,877 | $ | — | $ | 890,810 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Unrealized depreciation on futures contracts* | $ | — | $ | — | $ | — | $ | (721,973 | ) | $ | — | $ | (721,973 | ) | |||||||||||||
Unrealized depreciation on forward currency contracts | — | (459,475 | ) | — | — | — | (459,475 | ) | |||||||||||||||||||
Total | $ | — | $ | (459,475 | ) | $ | — | $ | (721,973 | ) | $ | — | $ | (1,181,448 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments.
36
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the period ended August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Futures contracts | $ | — | $ | — | $ | — | $ | (904,611 | ) | $ | — | $ | (904,611 | ) | |||||||||||||
Forward currency contracts | — | 740,326 | — | — | — | 740,326 | |||||||||||||||||||||
Total | $ | — | $ | 740,326 | $ | — | $ | (904,611 | ) | $ | — | $ | (164,285 | ) | |||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Futures contracts | $ | — | $ | — | $ | — | $ | 193,730 | $ | — | $ | 193,730 | |||||||||||||||
Forward currency contracts | — | (6,461 | ) | — | — | — | (6,461 | ) | |||||||||||||||||||
Total | $ | — | $ | (6,461 | ) | $ | — | $ | 193,730 | $ | — | $ | 187,269 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
The derivative financial instruments outstanding as of period end (as disclosed in the Notes to Schedules of Investments) and the amounts of realized and changes in unrealized gains and losses on derivative financial instruments during the period (as disclosed in the Statements of Operations) serve as indicators of the volume of derivative activity for the Fund during the period.
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.45% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares and 0.10% for Class IV shares.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.45% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities
37
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund's Expense Reimbursement Amount. These contractual expense limitat ions will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $3,648 and $1,288, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended August 31, 2010 aggregated $63,457,595 and $58,402,919, respectively.
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, 71.23% of the outstanding shares of the Fund were held by four shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2010, less than 0.01% of the Fund were held by senior management of the Manager and GMO Trust officers and none of the Fund's shares were held by accounts for which the Manager had investment discretion.
38
GMO Developed World Stock Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 85,208 | $ | 1,443,421 | 1,741,328 | $ | 25,959,247 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 114,730 | 1,812,738 | 218,646 | 3,473,940 | |||||||||||||||
Shares repurchased | (52,706 | ) | (864,478 | ) | (5,124,626 | ) | (81,703,571 | ) | |||||||||||
Purchase premiums | — | 3,618 | — | 65,061 | |||||||||||||||
Redemption fees | — | 1,864 | — | 204,253 | |||||||||||||||
Net increase (decrease) | 147,232 | $ | 2,397,163 | (3,164,652 | ) | $ | (52,001,070 | ) | |||||||||||
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 7,244 | $ | 118,733 | — | $ | — | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 141,521 | 2,237,445 | 244,409 | 3,886,700 | |||||||||||||||
Net increase (decrease) | 148,765 | $ | 2,356,178 | 244,409 | $ | 3,886,700 |
39
GMO Developed World Stock Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of a composite of accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one- and three-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications and experience of the
40
GMO Developed World Stock Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparis on to the Manager's separate account clients and the expenses and risks borne by the Manager as a result of the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by , for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating
41
GMO Developed World Stock Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
42
GMO Developed World Stock Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1 | ) Actual | 0.60 | % | $ | 1,000.00 | $ | 971.50 | $ | 2.98 | ||||||||||
2 | ) Hypothetical | 0.60 | % | $ | 1,000.00 | $ | 1,022.18 | $ | 3.06 | ||||||||||
Class IV | |||||||||||||||||||
1 | ) Actual | 0.55 | % | $ | 1,000.00 | $ | 971.00 | $ | 2.73 | ||||||||||
2 | ) Hypothetical | 0.55 | % | $ | 1,000.00 | $ | 1,022.43 | $ | 2.80 |
* Expenses are calculated using each Class's annualized net expense ratio for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
43
GMO Domestic Bond Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Domestic Bond Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 93.6 | % | |||||
Short-Term Investments | 6.4 | ||||||
Swap Agreements | (0.0 | ) | |||||
Forward Currency Contracts | (0.0 | ) | |||||
Other | 0.0 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
1
GMO Domestic Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
DEBT OBLIGATIONS — 7.1% | |||||||||||
Corporate Debt — 1.6% | |||||||||||
9,312,000 | Health Care Property Investors, Inc., Series G, MTN, 5.63%, due 02/28/13 | 9,894,000 | |||||||||
U.S. Government — 5.3% | |||||||||||
33,219,643 | U.S. Treasury Inflation Indexed Note, 2.38%, due 04/15/11 (a) | 33,632,297 | |||||||||
U.S. Government Agency — 0.2% | |||||||||||
565,980 | Agency for International Development Floater (Support of Jamaica), 6 mo. U.S. Treasury Bill + 0.75%, 0.94%, due 03/30/19 (b) | 551,445 | |||||||||
700,003 | Agency for International Development Floater (Support of Zimbabwe), 3 mo. U.S. Treasury Bill x 115%, 0.17%, due 01/01/12 (b) | 691,757 | |||||||||
Total U.S. Government Agency | 1,243,202 | ||||||||||
TOTAL DEBT OBLIGATIONS (COST $44,407,353) | 44,769,499 | ||||||||||
MUTUAL FUNDS — 92.8% | |||||||||||
Affiliated Issuers — 92.8% | |||||||||||
47,223,590 | GMO Short-Duration Collateral Fund | 551,571,528 | |||||||||
1,483 | GMO Special Purpose Holding Fund (c) | 800 | |||||||||
1,352,741 | GMO U.S. Treasury Fund | 33,818,527 | |||||||||
TOTAL MUTUAL FUNDS (COST $618,224,726) | 585,390,855 | ||||||||||
SHORT-TERM INVESTMENTS — 0.0% | |||||||||||
Money Market Funds — 0.0% | |||||||||||
140,457 | State Street Institutional Treasury Plus Money Market Fund-Institutional Class | 140,457 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $140,457) | 140,457 | ||||||||||
TOTAL INVESTMENTS — 99.9% (Cost $662,772,536) | 630,300,811 | ||||||||||
Other Assets and Liabilities (net) — 0.1% | 389,630 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 630,690,441 |
See accompanying notes to the financial statements.
2
GMO Domestic Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
A summary of outstanding financial instruments at August 31, 2010 is as follows:
Swap Agreements
Credit Default Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay)^ | Annual Premium | Implied Credit Spread (1) | Deliverable on Default | Maximum Potential Amount of Future Payments by the Fund Under the Contract (2) | Market Value | |||||||||||||||||||||||||||||||
11,500,000 | USD3/20/2013 | Barclays | (Pay) | 0.61 | % | 1.48 | % | Health Care | NA | $ | 234,681 | ||||||||||||||||||||||||||||
Bank PLC | Properties | ||||||||||||||||||||||||||||||||||||||
$ | 234,681 | ||||||||||||||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
^ Receive - Fund receives premium and sells credit protection.
(Pay) - Fund pays premium and buys credit protection.
(1) Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on the reference security, as of August 31, 2010, serve as an indicator of the current status of the payment/performance risk and reflect the likelihood or risk of default for the reference entity. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection. Wider (i.e.. higher) credit spreads represent a deterioration of the referenced entity's credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.
(2) The maximum potential amount the Fund could be required to pay as a seller of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.
As of August 31, 2010, for futures contracts, swap agreements and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
See accompanying notes to the financial statements.
3
GMO Domestic Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Notes to Schedule of Investments:
MTN - Medium Term Note
The rates shown on variable rate notes are the current interest rates at August 31, 2010, which are subject to change based on the terms of the security.
(a) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic (Note 2).
(b) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
(c) Underlying investment represents interests in defaulted claims.
Currency Abbreviations:
USD - United States Dollar
See accompanying notes to the financial statements.
4
GMO Domestic Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $44,547,810) (Note 2) | $ | 44,909,956 | |||||
Investments in affiliated issuers, at value (cost $618,224,726) (Notes 2 and 10) | 585,390,855 | ||||||
Dividends and interest receivable | 309,440 | ||||||
Receivable for open swap contracts (Note 4) | 234,681 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 44,281 | ||||||
Total assets | 630,889,213 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 54,960 | ||||||
Shareholder service fee | 41,569 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 1,366 | ||||||
Accrued expenses | 100,877 | ||||||
Total liabilities | 198,772 | ||||||
Net assets | $ | 630,690,441 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 683,415,044 | |||||
Accumulated undistributed net investment income | 66,268 | ||||||
Accumulated net realized loss | (20,553,827 | ) | |||||
Net unrealized depreciation | (32,237,044 | ) | |||||
$ | 630,690,441 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 136,946,738 | |||||
Class VI shares | $ | 493,743,703 | |||||
Shares outstanding: | |||||||
Class III | 28,475,744 | ||||||
Class VI | 102,504,788 | ||||||
Net asset value per share: | |||||||
Class III | $ | 4.81 | |||||
Class VI | $ | 4.82 |
See accompanying notes to the financial statements.
5
GMO Domestic Bond Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 10) | $ | 5,208,613 | |||||
Interest | 478,427 | ||||||
Dividends | 21,903 | ||||||
Total investment income | 5,708,943 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 364,587 | ||||||
Shareholder service fee – Class III (Note 5) | 119,384 | ||||||
Shareholder service fee – Class VI (Note 5) | 156,748 | ||||||
Custodian, fund accounting agent and transfer agent fees | 52,256 | ||||||
Audit and tax fees | 28,888 | ||||||
Legal fees | 21,436 | ||||||
Trustees fees and related expenses (Note 5) | 7,904 | ||||||
Registration fees | 552 | ||||||
Miscellaneous | 6,900 | ||||||
Total expenses | 758,655 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (286,621 | ) | |||||
Expense reductions (Note 2) | (3 | ) | |||||
Net expenses | 472,031 | ||||||
Net investment income (loss) | 5,236,912 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | (809,754 | ) | |||||
Investments in affiliated issuers | (1,000 | ) | |||||
Realized gains distributions from affiliated issuers (Note 10) | 3,340 | ||||||
Closed swap contracts | (35,465 | ) | |||||
Net realized gain (loss) | (842,879 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | 1,487,162 | ||||||
Investments in affiliated issuers | 22,905,827 | ||||||
Open swap contracts | (109,079 | ) | |||||
Net unrealized gain (loss) | 24,283,910 | ||||||
Net realized and unrealized gain (loss) | 23,441,031 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 28,677,943 |
See accompanying notes to the financial statements.
6
GMO Domestic Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 5,236,912 | $ | 12,335,502 | |||||||
Net realized gain (loss) | (842,879 | ) | 276,315 | ||||||||
Change in net unrealized appreciation (depreciation) | 24,283,910 | 174,476,751 | |||||||||
Net increase (decrease) in net assets from operations | 28,677,943 | 187,088,568 | |||||||||
Distributions to shareholders from (Note 2): | |||||||||||
Net investment income | |||||||||||
Class III | (1,069,676 | ) | (6,119,682 | ) | |||||||
Class VI | (4,096,268 | ) | (15,263,975 | ) | |||||||
Total distributions from net investment income | (5,165,944 | ) | (21,383,657 | ) | |||||||
Net realized gains | |||||||||||
Class III | — | (19,446,942 | ) | ||||||||
Class VI | — | (41,539,732 | ) | ||||||||
Total distributions from net realized gains | — | (60,986,674 | ) | ||||||||
Return of capital | |||||||||||
Class III | (38,784,998 | ) | (105,823,350 | ) | |||||||
Class VI | (138,949,063 | ) | (263,406,325 | ) | |||||||
Total distributions from return of capital | (177,734,061 | ) | (369,229,675 | ) | |||||||
(182,900,005 | ) | (451,600,006 | ) | ||||||||
Net share transactions (Note 9): | |||||||||||
Class III | (3,021,144 | ) | (85,021,180 | ) | |||||||
Class VI | (100,000 | ) | 79,276,331 | ||||||||
Increase (decrease) in net assets resulting from net share transactions | (3,121,144 | ) | (5,744,849 | ) | |||||||
Redemption fees (Notes 2 and 9): | |||||||||||
Class III | — | 10,529 | |||||||||
Class VI | — | 24,504 | |||||||||
Increase in net assets resulting from redemption fees | — | 35,033 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and redemption fees | (3,121,144 | ) | (5,709,816 | ) | |||||||
Total increase (decrease) in net assets | (157,343,206 | ) | (270,221,254 | ) | |||||||
Net assets: | |||||||||||
Beginning of period | 788,033,647 | 1,058,254,901 | |||||||||
End of period (including accumulated undistributed net investment income of $66,268 and distributions in excess of net investment income of $4,700, respectively) | $ | 630,690,441 | $ | 788,033,647 |
See accompanying notes to the financial statements.
7
GMO Domestic Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 5.99 | $ | 7.99 | $ | 9.47 | $ | 9.81 | $ | 9.81 | $ | 9.84 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.04 | 0.09 | 0.39 | 0.42 | 0.43 | 0.13 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.18 | 1.33 | (1.36 | ) | (0.01 | ) | 0.06 | 0.16 | |||||||||||||||||||
Total from investment operations | 0.22 | 1.42 | (0.97 | ) | 0.41 | 0.49 | 0.29 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.04 | ) | (0.16 | ) | (0.50 | ) | (0.75 | ) | (0.49 | ) | (0.16 | ) | |||||||||||||||
From net realized gains | — | (0.46 | ) | (0.01 | ) | — | — | (0.16 | ) | ||||||||||||||||||
Return of capital | (1.36 | ) | (2.80 | ) | — | — | — | — | |||||||||||||||||||
Total distributions | (1.40 | ) | (3.42 | ) | (0.51 | ) | (0.75 | ) | (0.49 | ) | (0.32 | ) | |||||||||||||||
Net asset value, end of period | $ | 4.81 | $ | 5.99 | $ | 7.99 | $ | 9.47 | $ | 9.81 | $ | 9.81 | |||||||||||||||
Total Return(b) | 3.94 | %** | 23.87 | % | (10.39 | )% | 4.35 | % | 5.09 | % | 3.02 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 136,947 | $ | 173,619 | $ | 337,524 | $ | 144,286 | $ | 94,159 | $ | 125,188 | |||||||||||||||
Net expenses to average daily net assets(c) | 0.20 | %*(d) | 0.21 | % | 0.26 | %(d) | 0.25 | %(d) | 0.25 | % | 0.25 | % | |||||||||||||||
Net investment income (loss) to average daily net assets(a) | 1.36 | %* | 1.37 | % | 4.43 | % | 4.28 | % | 4.42 | % | 1.30 | % | |||||||||||||||
Portfolio turnover rate | 0 | %(e)** | 30 | % | 68 | % | 22 | % | 17 | % | 24 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.08 | %* | 0.07 | % | 0.02 | % | 0.03 | % | 0.03 | % | 0.02 | % | |||||||||||||||
Redemption fees consisted of the following per share amounts:† | — | 0.00 | (f) | 0.00 | (f) | — | — | — |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(d) The net expense ratio does not include the effect of expense reductions (Note 2).
(e) The portfolio turnover rate was less than 1%.
(f) Redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
8
GMO Domestic Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class VI share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006(a) | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 5.99 | $ | 7.99 | $ | 9.48 | $ | 9.82 | $ | 9.82 | $ | 9.93 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(b)† | 0.04 | 0.09 | 0.44 | 0.57 | 0.48 | 0.24 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.19 | 1.33 | (1.41 | ) | (0.15 | ) | 0.02 | (0.14 | )(c) | ||||||||||||||||||
Total from investment operations | 0.23 | 1.42 | (0.97 | ) | 0.42 | 0.50 | 0.10 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.04 | ) | (0.17 | ) | (0.51 | ) | (0.76 | ) | (0.50 | ) | (0.21 | ) | |||||||||||||||
From net realized gains | — | (0.46 | ) | (0.01 | ) | — | — | — | |||||||||||||||||||
Return of capital | (1.36 | ) | (2.79 | ) | — | — | — | — | |||||||||||||||||||
Total distributions | (1.40 | ) | (3.42 | ) | (0.52 | ) | (0.76 | ) | (0.50 | ) | (0.21 | ) | |||||||||||||||
Net asset value, end of period | $ | 4.82 | $ | 5.99 | $ | 7.99 | $ | 9.48 | $ | 9.82 | $ | 9.82 | |||||||||||||||
Total Return(d) | 4.16 | %** | 23.87 | % | (10.40 | )% | 4.42 | % | 5.19 | % | 0.97 | %** | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 493,744 | $ | 614,415 | $ | 720,731 | $ | 581,526 | $ | 327,796 | $ | 359,958 | |||||||||||||||
Net expenses to average daily net assets(e) | 0.11 | %*(f) | 0.12 | % | 0.16 | %(f) | 0.16 | %(f) | 0.16 | % | 0.16 | %* | |||||||||||||||
Net investment income (loss) to average daily net assets(b) | 1.46 | %* | 1.43 | % | 5.02 | % | 5.87 | % | 4.85 | % | 2.38 | %(g) | |||||||||||||||
Portfolio turnover rate | 0 | %(h)** | 30 | % | 68 | % | 22 | % | 17 | % | 24 | %†† | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.08 | %* | 0.08 | % | 0.02 | % | 0.03 | % | 0.03 | % | 0.02 | %* | |||||||||||||||
Redemption fees consisted of the following per share amounts:† | — | 0.00 | (i) | 0.00 | (i) | — | — | — |
(a) Period from July 26, 2005 (commencement of operations) through February 28, 2006.
(b) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(c) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain (loss) on investments due to the timing of purchases and redemptions of Fund shares in relation to fluctuating market values of the investments of the Fund.
(d) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(e) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(f) The net expense ratio does not include the effect of expense reductions (Note 2).
(g) The ratio for the period ended February 28, 2006 has not been annualized since the Fund believes it would not be appropriate because the Fund's net income is not earned ratably throughout the fiscal year.
(h) The portfolio turnover rate was less than 1%.
(i) Redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the year ended February 28, 2006.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
9
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO Domestic Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks total return in excess of that of its benchmark, the Barclays Capital U.S. Government Index. The Fund is not currently pursuing an active investment program. Under normal circumstances, the Fund invests directly and indirectly (e.g., through the GMO Funds in which the Fund invests, collectively referred to as the "underlying funds" or derivatives) at least 80% of its assets in bonds tied economically to the U.S. The term "bond" refers to any fixed income security, which includes (i) obligations of an issuer to make payments of principal and/or interest on future dates, (ii) synthetic debt instruments created by the Manager by using derivatives (e.g., a futures contract, swap contract, currency forward or option), and (iii) instruments with variable interest payments.
Historically, the Fund has implemented its strategies: (i) synthetically by using exchange-traded and over-the-counter ("OTC") derivatives and investing in other GMO Funds and/or (ii) directly by purchasing bonds. The Fund has used derivatives and investments in other GMO Funds as the principal means to gain investment exposure. As a result, the Fund has substantial holdings of GMO Short-Duration Collateral Fund ("SDCF") (a fund that invests primarily in asset-backed securities).
In implementing its investment strategies, the Fund has invested in and may continue to hold: U.S. government securities and other investment-grade bonds, including asset-backed securities (including securities neither guaranteed nor insured by the U.S. government); derivatives, including without limitation, futures contracts, reverse repurchase agreements, credit default swaps, and other swap contracts; shares of SDCF (a fund that primarily holds asset-backed securities); shares of GMO U.S. Treasury Fund (for liquidity management purposes); and foreign bonds. Because of the deterioration in credit markets that became acute in 2008, the Fund, including through its investment in SDCF, currently has and may continue to have material exposure to below investment grade securities. The Fund is not limited in its use of derivatives or in the absolute face value of its derivatives positions, and, as a result, the Fund may be leveraged in relation to its assets. The Manager does not seek to maintain a specified interest rate duration for the Fund.
As of August 31, 2010, the Fund had two classes of shares outstanding: Class III and Class VI. Each class of shares bears a different shareholder service fee.
10
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Since April 2009, the Fund has declared and paid distributions when it has acquired a meaningful cash position rather than reinvesting that cash in portfolio securities. The Fund currently intends to continue this practice. A substantial portion of any such distributions could constitute a return of capital to shareholders for tax purposes.
The financial statements of the underlying funds should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect). As of August 31, 2010, shares of SCDF and GMO Special Purpose Holding Fund ("SPHF") were not publicly available for direct purchase.
The Fund currently limits subscriptions.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the OTC market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or who se values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of August 31, 2010, the total value of securities held directly and indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 1.9% of net assets. The Fund and the underlying funds classify such securities (as defined below) as Level 3.
11
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
During the period ended August 31, 2010, the Manager has evaluated the Fund's OTC derivatives contracts and determined that no reduction in value was warranted on account of the creditworthiness of a counterparty. See note 4 for a further discussion on valuation of derivative financial instruments.
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. Although alternative prices are available for securities held by the Fund and the underlying funds, those alternative sources are not typically part of the valuation process and would not necessarily confirm the security price used by the Fund and the underlying funds. Therefore, the existence of those alternative sou rces does not necessarily provide greater certainty about the prices used by the Fund and the underlying funds. As of August 31, 2010, the total value of securities held directly and indirectly for which no alternative pricing source was available represented 8.1% of the net assets of the Fund.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data. The Fund also used third party valuation services (which use industry models and market data from pricing vendors) to value credit default swaps.
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund used the following fair value techniques on Level 3 investments: The Fund valued certain debt securities using a specified spread above the LIBOR Rate.
12
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Debt Obligations | |||||||||||||||||||
Corporate Debt | $ | — | $ | 9,894,000 | $ | — | $ | 9,894,000 | |||||||||||
U.S. Government | — | 33,632,297 | — | 33,632,297 | |||||||||||||||
U.S. Government Agency | — | — | 1,243,202 | 1,243,202 | |||||||||||||||
TOTAL DEBT OBLIGATIONS | — | 43,526,297 | 1,243,202 | 44,769,499 | |||||||||||||||
Mutual Funds | 585,390,055 | 800 | — | 585,390,855 | |||||||||||||||
Short-Term Investments | 140,457 | — | — | 140,457 | |||||||||||||||
Total Investments | 585,530,512 | 43,527,097 | 1,243,202 | 630,300,811 | |||||||||||||||
Derivatives | |||||||||||||||||||
Swap Agreements | |||||||||||||||||||
Credit Risk | — | 234,681 | — | 234,681 | |||||||||||||||
Total | $ | 585,530,512 | $ | 43,761,778 | $ | 1,243,202 | $ | 630,535,492 |
The underlying funds held at period end are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements. The aggregate net values of the Fund's investments (both direct and indirect) in securities and other financial instruments using Level 3 inputs were 57.7% and (0.1)% of total net assets, respectively.
13
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2010 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Tranfers into Level 3* | Transfers out of Level 3* | Balances as of August 31, 2010 | ||||||||||||||||||||||||||||
Debt Obligations | |||||||||||||||||||||||||||||||||||
U.S. Government Agency | $ | 1,501,469 | $ | (264,777 | ) | $ | (22 | ) | $ | (23 | ) | $ | 6,555 | $ | — | $ | — | $ | 1,243,202 | ||||||||||||||||
Preferred Stock | 720,000 | (1,251,280 | ) | — | (809,689 | ) | 1,340,969 | — | — | — | |||||||||||||||||||||||||
Swap Agreements | 343,760 | 35,465 | — | (35,465 | ) | (109,079 | ) | — | (234,681 | )** | — | ||||||||||||||||||||||||
Total | $ | 2,565,229 | $ | (1,480,592 | ) | $ | (22 | ) | $ | (845,177 | ) | $ | 1,238,445 | $ | — | $ | (234,681 | ) | $ | 1,243,202 |
* The Fund recognizes investments and derivatives transferred into Level 3 at the value at the beginning of the period and transferred out of Level 3 at the value at the end of the period.
** Financial assets transferred between Level 2 and Level 3 were due to a change in observable and/or unobservable inputs.
Repurchase agreements
The Fund may enter into repurchase agreements. Under a repurchase agreement the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities it acquired under the repurchase agreement. The value of the securities acquired is required by contract to be marked to market daily so that their market value is at least equal to the amount owed to the Fund by the seller. If the seller of a repurchase agreement defaults or enters into insolvency proceedings and/or the value of the securities subject to the repurchase agreement is insufficient, the Fund's recovery of cash from the seller may be delayed and the Fund may incur a loss equal to the difference between the cash it paid and the value of the securities. The Fund had no repurchase agreements outstanding at the end of the period.
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at an agreed upon price and date. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which generally causes the Fund's portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the even t of a buyer's bankruptcy or insolvency, the Fund's use of proceeds from the sale of its securities may be
14
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
restricted while the other party or its trustee or receiver determines whether to honor the Fund's right to repurchase the securities. The Fund had no reverse repurchase agreements outstanding at the end of the period.
Inflation-indexed bonds
The Fund may invest in inflation indexed bonds. Inflation indexed bonds are fixed income securities whose principal value is adjusted periodically according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that reflects inflation in the principal value of the bond. Most other issuers pay out any inflation related accruals as part of a semiannual coupon.
The value of inflation indexed bonds is expected to change in response to changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal interest rates (i.e., stated interest rates) and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate than nominal interest rates, real interest rates (i.e. nominal interest rate minus inflation) might decline, leading to an increase in value of inflation indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation indexed bonds. There can be no assurance, however, that the value of inflation indexed bonds will be directly correlated to changes in nominal interest rates, and short term increases in inflation may lead to a decline in their value. Coupon payments received by the Fund from inflation indexed bonds are included in the Fund's gross income for the period in which they accrue. In addition, any increase or decrease in the principal amount of an inflation indexed bond will increase or decrease taxable ordinary income to the Fund, even though principal is not paid until maturity. Inflation-indexed bonds outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, quarterly, and from net realized short-term and long-term capital gain, if any, at least annually. The Fund is permitted to, and will from time to time, declare and pay distributions more frequently (e.g. monthly). As of August 31, 2010, all distributions have been paid in cash. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are
15
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes. Such amounts are estimated for the six months ended August 31, 2010.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2018 | $ | (3,229,648 | ) | ||||
Total | $ | (3,229,648 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 679,272,223 | $ | 595,184 | $ | (49,566,596 | ) | $ | (48,971,412 | ) |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
16
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which co llection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. Investment income, common expenses and realized and unrealized gains and losses are allocated among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class's operations. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 5).
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
For the period ended August 31, 2010, the Fund did not charge a premium on cash purchases or fee on cash redemptions of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by a Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines
17
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of a Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
Other matters
SPHF, an investment of the Fund, has litigation pending against various entities related to the 2002 fraud and related default of securities previously held by SPHF. The outcome of the lawsuits against the remaining defendants is not known and any potential recoveries are not reflected in the net asset value of SPHF. For the period ended August 31, 2010, the Fund received no distributions from SPHF in connection with settlement agreements related to litigation.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Fixed Income Securities — Typically, the value of the Fund's fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.
• Derivatives Risk — The use of derivatives involves the risk that their value may not correlate with the value of the relevant underlying assets, rates or indices. Derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk.
18
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. In addition, holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
• Focused Investment Risk — Focusing investments in countries, regions, sectors or companies with high positive correlations to one another creates additional risk. This risk may be particularly pronounced for the Fund because of its exposure to asset-backed securities secured by different types of consumer debt (e.g., credit-card receivables, automobile loans and home equity loans).
Other principal risks of an investment in the Fund include Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments); Credit and Counterparty Risk (risk of default of an issuer or guarantor of fixed income securities, a derivatives counterparty, or a borrower of the Fund's securities); Leveraging Risk (increased risk of loss from use of reverse repurchase ag reements and other derivatives and securities lending); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by redeeming Fund shares in large amounts and/or on a frequent basis).
The most significant market risk for Funds investing in fixed income securities is that the securities in which they invest experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. These risks apply to the Fund because it invests in asset-backed securities. Asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as "collateralized debt obligations" or "collateralized loan obligations") and by the fees earned by service providers. Payment of interest on asset-backed securities and repayment of principal largely depend on t he cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy,
19
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
insolvency and other laws affecting the rights and remedies of creditors. Many asset-backed securities owned (directly or indirectly) by the Fund that were once rated investment grade are now rated below investment grade as of the date of this Report.
With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e .g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and a Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.
The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution's business may have a material impact on multiple investments.
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
20
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps or other derivatives on an index, a single security or a basket of securities to gain investment exposures (e.g., by selling protection under a credit default swap). The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). For example, the Fund may use credit default swaps to take a short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund's exposure to the credit of an issuer through the debt instrument, but adjust the Fund's interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed versus variable rates and shorter duration versus longer duration exposure. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedin gs. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be
21
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
secured by collateral, that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash,
22
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount tha t the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. The Fund had no futures contracts outstanding at the end of the period.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an of fsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains
23
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap
24
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the pe riod ended August 31, 2010, the Fund used credit default swap agreements to provide a measure of protection against default loss. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and
25
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Unrealized appreciation on swap agreements | $ | — | $ | — | $ | 234,681 | $ | — | $ | — | $ | 234,681 | |||||||||||||||
Total | $ | — | $ | — | $ | 234,681 | $ | — | $ | — | $ | 234,681 |
The Effect of Derivative Instruments on the Statement of Operations for the period ended August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Swap contracts | $ | — | $ | — | $ | (35,465 | ) | $ | — | $ | — | $ | (35,465 | ) | |||||||||||||
Total | $ | — | $ | — | $ | (35,465 | ) | $ | — | $ | — | $ | (35,465 | ) | |||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Swap contracts | $ | — | $ | — | $ | (109,079 | ) | $ | — | $ | — | $ | (109,079 | ) | |||||||||||||
Total | $ | — | $ | — | $ | (109,079 | ) | $ | — | $ | — | $ | (109,079 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
The derivative financial instruments outstanding as of period end (as disclosed in the Schedule of Investments) and the amounts of realized and changes in unrealized gains and losses on derivative financial instruments during the period (as disclosed in the Statements of Operations) serve as indicators of the volume of derivative activity for the Fund during the period.
26
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.10% of average daily net assets. The Manager has voluntarily agreed to waive the Fund's management fee by 0.05% and to reimburse the Fund to the extent the Fund's total annual operating expenses exceed 0.05% of the Fund's average daily net assets (excluding the Fund's Excluded Fund Fees and Expenses described below). The Manager may change or terminate these voluntary waivers and reimbursements at any time, and these voluntary waivers and reimbursements are in addition to the Manager's contractual expense reimbursement agreement described below. During any period for which these voluntary waivers and reimbursements are in effect, the Fund will incur management fees at an annual rate lower than 0.10% of the Fund's average daily net assets, and, as a result, total annual operating expenses after expense reimburs ement for the Fund will be lower. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares and 0.055% for Class VI shares. The Manager has contractually agreed through at least June 30, 2011 to waive the Fund's shareholder service fee to the extent that the aggregate of any direct and indirect shareholder service fees borne by a class of shares of the Fund exceeds 0.15% for Class III shares and 0.055% for Class VI shares; provided, however, that the amount of this waiver will not exceed the respective Class's shareholder service fee.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.10% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investme nt company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). The Manager also has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Expense Reimbursement Amount. These contractual expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
27
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $7,904 and $2,852, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
The Fund incurs fees and expenses indirectly as a shareholder of the underlying funds. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Indirect Interest Expense | Total Indirect Expenses | ||||||||||||
0.004 | % | 0.000 | % | 0.007 | % | 0.011 | % |
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended August 31, 2010 aggregated $2,285,976 and $2,764,777, respectively.
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, 79.67% of the shares outstanding of the Fund were held by three shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund. One of the shareholders is another fund of the Trust.
As of August 31, 2010, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and 97.91% of the Fund's shares were held by accounts for which the Manager had investment discretion.
28
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | — | $ | — | — | $ | — | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | — | — | |||||||||||||||
Shares repurchased | (529,788 | ) | (3,021,144 | ) | (13,246,482 | ) | (85,021,180 | ) | |||||||||||
Redemption fees | — | — | — | 10,529 | |||||||||||||||
Net increase (decrease) | (529,788 | ) | $ | (3,021,144 | ) | (13,246,482 | ) | $ | (85,010,651 | ) | |||||||||
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class VI: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | — | $ | — | 12,490,708 | $ | 80,209,775 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | — | — | |||||||||||||||
Shares repurchased | (18,182 | ) | (100,000 | ) | (144,024 | ) | (933,444 | ) | |||||||||||
Redemption fees | — | — | — | 24,504 | |||||||||||||||
Net increase (decrease) | (18,182 | ) | $ | (100,000 | ) | 12,346,684 | $ | 79,300,835 |
29
GMO Domestic Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
10. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income* | Return of Capital* | Distributions of Realized Gains* | Value, end of period | ||||||||||||||||||||||||
GMO Short-Duration Collateral Fund | $ | 707,409,374 | $ | — | $ | — | $ | 5,186,812 | $ | 178,742,688 | $ | — | $ | 551,571,528 | |||||||||||||||||
GMO Special Purpose Holding Fund | 815 | — | — | — | — | — | 800 | ||||||||||||||||||||||||
GMO U.S. Treasury Fund | 34,032,551 | 2,285,976 | 2,500,000 | 21,801 | — | 3,340 | 33,818,527 | ||||||||||||||||||||||||
Totals | $ | 741,442,740 | $ | 2,285,976 | $ | 2,500,000 | $ | 5,208,613 | $ | 178,742,688 | $ | 3,340 | $ | 585,390,855 |
* The table above includes estimated sources of all distributions paid by the underlying funds during the period March 1, 2010 through August 31, 2010. The actual tax characterization of distributions paid by the underlying funds will be determined through fiscal year ending February 28, 2011.
30
GMO Domestic Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three-, five-, seven- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received
31
GMO Domestic Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took in to account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also con sidered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of other funds of the Trust in which it invests. The Trustees noted in particular that certain underlying funds do not charge any advisory fees, and that with respect to all other underlying funds, pursuant to a contractual expense reimbursement arrangement in place with the Fund, the Manager effectively reimburses the Fund for management fees, shareholder servicing fees and most other expenses of the underlying funds that the Fund would otherwise bear as a result of its investments in those other funds. In addition, the Trustees considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economie s of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory
32
GMO Domestic Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
33
GMO Domestic Bond Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.21 | % | $ | 1,000.00 | $ | 1,039.40 | $ | 1.08 | |||||||||||
2) Hypothetical | 0.21 | % | $ | 1,000.00 | $ | 1,024.15 | $ | 1.07 | |||||||||||
Class VI | |||||||||||||||||||
1) Actual | 0.12 | % | $ | 1,000.00 | $ | 1,041.60 | $ | 0.62 | |||||||||||
2) Hypothetical | 0.12 | % | $ | 1,000.00 | $ | 1,024.60 | $ | 0.61 |
* Expenses are calculated using each Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
34
GMO Domestic Bond Fund
(A Series of GMO Trust)
Note Concerning Distributions
August 31, 2010 (Unaudited)
The Fund previously reported the estimated sources of any dividends, short-term capital gains, long-term capital gains, and return of capital distributions paid on a per share basis. Pursuant to Rule 19a-1(e) of the Investment Company Act of 1940, the table below serves as an update to the previously reported estimated sources of the distributions paid to shareholders. The Statement of Changes in Net Assets includes the updated amounts on a dollar basis.
Updated Estimated Sources | |||||||||||||||||||||||||||||||
Class | Record Date | Ex-Date | Payable Date | Dividend Paid from Current and/or Prior Years Accumulated Undistributed Net Income* | Net Short-Term Capital Gains From Sale of Securities & Other Property ^ | Net Long-Term Capital Gains From Sale of Securities & Other Property ^ | Distribution from Return of Capital | ||||||||||||||||||||||||
III | March 2, 2010 | March 3, 2010 | March 4, 2010 | $ | 0.00349216 | $ | 0.00000000 | $ | 0.00000000 | $ | 0.12117161 | ||||||||||||||||||||
III | April 1, 2010 | April 5, 2010 | April 6, 2010 | $ | 0.00807536 | $ | 0.00000000 | $ | 0.00000000 | $ | 0.29044911 | ||||||||||||||||||||
III | May 3, 2010 | May 4, 2010 | May 5, 2010 | $ | 0.00143706 | $ | 0.00000000 | $ | 0.00000000 | $ | 0.06149815 | ||||||||||||||||||||
III | June 1, 2010 | June 2, 2010 | June 3, 2010 | $ | 0.00350837 | $ | 0.00000000 | $ | 0.00000000 | $ | 0.13040604 | ||||||||||||||||||||
III | July 14, 2010 | July 15, 2010 | July 16, 2010 | $ | 0.00815826 | $ | 0.00000000 | $ | 0.00000000 | $ | 0.30012370 | ||||||||||||||||||||
III | August 4, 2010 | August 5, 2010 | August 6, 2010 | $ | 0.01036566 | $ | 0.00000000 | $ | 0.00000000 | $ | 0.36355174 | ||||||||||||||||||||
III | August 27, 2010 | August 30, 2010 | August 31, 2010 | $ | 0.00227858 | $ | 0.00000000 | $ | 0.00000000 | $ | 0.08829114 | ||||||||||||||||||||
VI | March 2, 2010 | March 3, 2010 | March 4, 2010 | $ | 0.00352300 | $ | 0.00000000 | $ | 0.00000000 | $ | 0.12117161 | ||||||||||||||||||||
VI | April 1, 2010 | April 5, 2010 | April 6, 2010 | $ | 0.00852694 | $ | 0.00000000 | $ | 0.00000000 | $ | 0.29044911 | ||||||||||||||||||||
VI | May 3, 2010 | May 4, 2010 | May 5, 2010 | $ | 0.00188163 | $ | 0.00000000 | $ | 0.00000000 | $ | 0.06149815 | ||||||||||||||||||||
VI | June 1, 2010 | June 2, 2010 | June 3, 2010 | $ | 0.00386121 | $ | 0.00000000 | $ | 0.00000000 | $ | 0.13040604 | ||||||||||||||||||||
VI | July 14, 2010 | July 15, 2010 | July 16, 2010 | $ | 0.00886295 | $ | 0.00000000 | $ | 0.00000000 | $ | 0.30012370 | ||||||||||||||||||||
VI | August 4, 2010 | August 5, 2010 | August 6, 2010 | $ | 0.01060079 | $ | 0.00000000 | $ | 0.00000000 | $ | 0.36355174 | ||||||||||||||||||||
VI | August 27, 2010 | August 30, 2010 | August 31, 2010 | $ | 0.00264081 | $ | 0.00000000 | $ | 0.00000000 | $ | 0.08829114 |
Notes:
* Net investment income may include amounts derived from dividends, interest, net foreign currency gains and net amounts from transacting in certain derivative contracts.
^ Short-term and long-term capital gains may include amounts derived from the sale of securities/other property and net amounts from transacting in certain derivative contracts.
35
GMO Emerging Countries Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Emerging Countries Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 89.4 | % | |||||
Preferred Stocks | 8.0 | ||||||
Short-Term Investments | 0.8 | ||||||
Investment Funds | 0.2 | ||||||
Rights and Warrants | 0.0 | ||||||
Other | 1.6 | ||||||
100.0 | % | ||||||
Country Summary | % of Equity Investments* | ||||||
South Korea | 20.2 | % | |||||
Russia | 15.3 | ||||||
Brazil | 11.8 | ||||||
Taiwan | 7.9 | ||||||
China | 7.2 | ||||||
Turkey | 7.1 | ||||||
Thailand | 7.1 | ||||||
India | 6.4 | ||||||
South Africa | 2.9 | ||||||
Czech Republic | 2.2 | ||||||
Indonesia | 2.1 | ||||||
Mexico | 1.8 | ||||||
Hungary | 1.7 | ||||||
Egypt | 1.6 | ||||||
Malaysia | 1.6 | ||||||
Poland | 1.1 | ||||||
Philippines | 0.8 | ||||||
Chile | 0.5 | ||||||
Morocco | 0.2 | ||||||
United States | 0.2 | ||||||
Hong Kong | 0.1 | ||||||
Peru | 0.1 | ||||||
Sri Lanka | 0.1 | ||||||
Argentina | 0.0 | ||||||
100.0 | % |
* Equity investments may consist of common stocks, preferred stocks and rights and warrants. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
1
GMO Emerging Countries Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2010 (Unaudited)
Industry Group Summary | % of Equity Investments* | ||||||
Banks | 21.2 | % | |||||
Energy | 17.8 | ||||||
Materials | 12.2 | ||||||
Telecommunication Services | 10.4 | ||||||
Semiconductors & Semiconductor Equipment | 6.7 | ||||||
Capital Goods | 5.7 | ||||||
Technology Hardware & Equipment | 4.2 | ||||||
Utilities | 3.9 | ||||||
Automobiles & Components | 3.2 | ||||||
Food, Beverage & Tobacco | 2.4 | ||||||
Software & Services | 2.0 | ||||||
Diversified Financials | 1.9 | ||||||
Food & Staples Retailing | 1.6 | ||||||
Retailing | 1.5 | ||||||
Consumer Durables & Apparel | 1.0 | ||||||
Transportation | 0.9 | ||||||
Household & Personal Products | 0.7 | ||||||
Pharmaceuticals, Biotechnology & Life Sciences | 0.7 | ||||||
Real Estate | 0.7 | ||||||
Consumer Services | 0.6 | ||||||
Miscellaneous | 0.2 | ||||||
Insurance | 0.2 | ||||||
Media | 0.2 | ||||||
Health Care Equipment & Services | 0.1 | ||||||
100.0 | % |
* Equity investments may consist of common stocks, preferred stocks and rights and warrants. This table excludes exposure to derivative contracts and exchange traded funds, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
2
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
COMMON STOCKS — 89.4% | |||||||||||||||
Argentina — 0.0% | |||||||||||||||
158 | Cresud SA Sponsored ADR | 2,184 | |||||||||||||
6,744 | Petrobras Energia SA ADR | 100,890 | |||||||||||||
Total Argentina | 103,074 | ||||||||||||||
Brazil — 5.7% | |||||||||||||||
18,202 | Banco Bradesco ADR | 320,901 | |||||||||||||
87,000 | Banco do Brasil SA | 1,410,824 | |||||||||||||
29,230 | Banco Santander Brasil SA ADR 144A | 367,713 | |||||||||||||
44,900 | BM&F BOVESPA SA | 327,243 | |||||||||||||
31,080 | Brasil Telecom SA ADR * | 597,668 | |||||||||||||
5,950 | Centrais Eletricas Brasileiras SA ADR | 87,168 | |||||||||||||
1,870 | Cia de Saneamento Basico do Estado de Sao Paulo ADR | 71,060 | |||||||||||||
10,400 | Cia de Saneamento de Minas Gerais-Copasa MG | 146,503 | |||||||||||||
2,800 | Cia Paranaense de Energia Sponsored ADR | 62,272 | |||||||||||||
40,400 | Companhia Brasileira de Meios de Pagamento | 345,053 | |||||||||||||
3,300 | Companhia de Bebidas das Americas | 313,794 | |||||||||||||
750 | Companhia de Bebidas das Americas ADR | 83,018 | |||||||||||||
16,320 | Companhia Energetica de Minas Gerais Sponsored ADR | 269,606 | |||||||||||||
20,809 | Companhia Saneamento Basico Sao Paulo | 395,860 | |||||||||||||
16,174 | Duratex SA | 163,927 | |||||||||||||
16,200 | Electrobras (Centro) | 197,121 | |||||||||||||
17,040 | Empresa Brasileira de Aeronautica SA ADR | 422,422 | |||||||||||||
9,100 | Gafisa SA | 62,696 | |||||||||||||
7,150 | Gafisa SA ADR | 98,456 | |||||||||||||
15,700 | Gerdau SA | 155,369 | |||||||||||||
65,020 | Itau Unibanco Holding SA ADR | 1,402,481 | |||||||||||||
27,900 | Lojas Renner SA | 900,743 | |||||||||||||
18,000 | Natura Cosmeticos SA | 433,537 | |||||||||||||
52,470 | Petroleo Brasileiro SA (Petrobras) ADR | 1,749,875 | |||||||||||||
43,200 | Redecard SA | 590,349 | |||||||||||||
2,530 | Telecomunicacoes de Sao Paulo SA ADR | 57,633 |
See accompanying notes to the financial statements.
3
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Brazil — continued | |||||||||||||||
53,200 | Vale SA | 1,420,080 | |||||||||||||
26,870 | Vale SA Sponsored ADR | 718,773 | |||||||||||||
Total Brazil | 13,172,145 | ||||||||||||||
Chile — 0.5% | |||||||||||||||
6,900 | Administradora de Fondos de Pensiones Provida SA | 24,827 | |||||||||||||
270 | Banco de Chile ADR | 21,908 | |||||||||||||
402,610 | Banco Santander Chile | 33,414 | |||||||||||||
1,260 | Banco Santander Chile SA ADR | 108,763 | |||||||||||||
17,300 | Cencosud SA | 103,687 | |||||||||||||
9,100 | Cia Cervecerias Unidas SA | 105,824 | |||||||||||||
1,350 | Compania Cervecerias Unidas ADR | 78,219 | |||||||||||||
1,940 | Embotelladora Andina SA ADR Class A | 45,454 | |||||||||||||
1,060 | Embotelladora Andina SA ADR Class B | 28,970 | |||||||||||||
39,300 | Empresa Nacional de Electricidad SA | 67,577 | |||||||||||||
1,190 | Empresa Nacional de Electricidad SA Sponsored ADR | 61,083 | |||||||||||||
16,830 | Enersis SA Sponsored ADR | 370,260 | |||||||||||||
1,500 | Lan Airlines SA | 40,105 | |||||||||||||
2,480 | Lan Airlines SA Sponsored ADR | 66,315 | |||||||||||||
Total Chile | 1,156,406 | ||||||||||||||
China — 7.1% | |||||||||||||||
94,000 | Anta Sports Products Ltd | 194,270 | |||||||||||||
12,110 | AsiaInfo-Linkage Inc * | 216,285 | |||||||||||||
19,530 | Baidu.com Inc Sponsored ADR * | 1,531,738 | |||||||||||||
3,604,000 | Bank of China Ltd Class H | 1,820,751 | |||||||||||||
154,000 | Bank of Communications Co Ltd Class H | 164,493 | |||||||||||||
292,000 | BaWang International Group Holding Ltd | 133,953 | |||||||||||||
242,000 | Belle International Holdings Ltd | 426,778 | |||||||||||||
618,000 | Chaoda Modern Agriculture Holdings Ltd | 467,402 | |||||||||||||
1,246,000 | China Construction Bank Class H | 1,035,814 | |||||||||||||
400,000 | China Minsheng Banking Corp Ltd | 364,223 | |||||||||||||
292,664 | China Mobile Ltd | 2,991,090 | |||||||||||||
13,982 | China Mobile Ltd Sponsored ADR | 717,556 |
See accompanying notes to the financial statements.
4
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
China — continued | |||||||||||||||
1,589,083 | China Petroleum & Chemical Corp Class H | 1,259,817 | |||||||||||||
134,000 | CNOOC Ltd | 230,490 | |||||||||||||
276,000 | Dongfeng Motor Group Co Ltd | 432,059 | |||||||||||||
782,000 | GOME Electrical Appliances Holdings Ltd * | 239,534 | |||||||||||||
46,000 | Hengan International Group Co Ltd | 408,603 | |||||||||||||
172,000 | Hopson Development Holdings Ltd | 204,202 | |||||||||||||
1,624,000 | Industrial and Commercial Bank of China Ltd Class H | 1,186,005 | |||||||||||||
66,000 | Kingboard Chemical Holdings Ltd | 312,745 | |||||||||||||
216,000 | Kingboard Laminates Holdings Ltd | 207,777 | |||||||||||||
280,000 | Lee & Man Paper Manufacturing Ltd | 195,765 | |||||||||||||
54,000 | Lianhua Supermarket Holdings Co Ltd | 210,724 | |||||||||||||
48,000 | Maoye International Holdings | 21,172 | |||||||||||||
855,553 | PetroChina Co Ltd Class H | 930,980 | |||||||||||||
106,000 | Yanzhou Coal Mining Co Ltd Class H | 219,057 | |||||||||||||
176,000 | Zhongsheng Group Holdings Ltd * | 308,883 | |||||||||||||
Total China | 16,432,166 | ||||||||||||||
Czech Republic — 2.2% | |||||||||||||||
63,160 | CEZ AS | 2,643,454 | |||||||||||||
6,100 | Komercni Banka AS | 1,174,720 | |||||||||||||
22,900 | New World Resources NV Class A * | 250,628 | |||||||||||||
4,045 | Pegas Nonwovens SA | 88,221 | |||||||||||||
356 | Philip Morris CR AS | 160,282 | |||||||||||||
26,100 | Telefonica 02 Czech Republic AS | 584,963 | |||||||||||||
9,300 | Unipetrol AS * | 106,349 | |||||||||||||
Total Czech Republic | 5,008,617 | ||||||||||||||
Egypt — 1.6% | |||||||||||||||
12,052 | Alexandria Mineral Oils Co | 99,404 | |||||||||||||
184,940 | Commercial International Bank | 1,254,319 | |||||||||||||
77,300 | EFG-Hermes Holding SAE | 396,700 | |||||||||||||
7,467 | Egyptian Co for Mobile Services | 227,999 | |||||||||||||
14,070 | ElSwedy Electric Co * | 165,772 | |||||||||||||
10,400 | Orascom Construction Industries | 461,000 |
See accompanying notes to the financial statements.
5
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Egypt — continued | |||||||||||||||
114,200 | Orascom Telecom Holding SAE * | 106,564 | |||||||||||||
18,577 | Oriental Weavers Co | 101,875 | |||||||||||||
94,427 | Sidi Kerir Petrochemicals Co | 202,173 | |||||||||||||
96,391 | South Valley Cement | 88,294 | |||||||||||||
172,600 | Talaat Moustafa Group * | 221,301 | |||||||||||||
135,354 | Telecom Egypt | 399,805 | |||||||||||||
Total Egypt | 3,725,206 | ||||||||||||||
Hong Kong — 0.1% | |||||||||||||||
116,000 | Citic Pacific Ltd | 238,508 | |||||||||||||
Hungary — 1.7% | |||||||||||||||
1,320 | Egis Gyogyszergyar Nyrt | 118,049 | |||||||||||||
111,650 | Magyar Telekom Nyrt | 338,269 | |||||||||||||
14,780 | MOL Hungarian Oil and Gas Nyrt * | 1,368,281 | |||||||||||||
63,510 | OTP Bank Nyrt * | 1,343,808 | |||||||||||||
3,520 | Richter Gedeon Nyrt | 726,764 | |||||||||||||
Total Hungary | 3,895,171 | ||||||||||||||
India — 6.2% | |||||||||||||||
12,296 | Aurobindo Pharma Ltd | 271,115 | |||||||||||||
49,298 | Bank of Baroda | 867,439 | |||||||||||||
26,800 | Bank of India | 252,231 | |||||||||||||
11,743 | BGR Energy Systems Ltd | 197,819 | |||||||||||||
135,553 | Bharti Airtel Ltd | 946,042 | |||||||||||||
26,470 | Canara Bank Ltd | 287,451 | |||||||||||||
5,373 | Grasim Industries Ltd | 239,116 | |||||||||||||
25,137 | Great Eastern Shipping Co Ltd (The) | 158,417 | |||||||||||||
15,300 | HDFC Bank Ltd | 696,449 | |||||||||||||
62,300 | Hindalco Industries Ltd | 221,119 | |||||||||||||
20,530 | Hindustan Petroleum Corp Ltd * | 231,056 | |||||||||||||
194,700 | IFCI Ltd | 243,187 | |||||||||||||
41,800 | Indian Oil Corp Ltd | 364,353 | |||||||||||||
8,750 | Infosys Technologies Ltd | 503,917 |
See accompanying notes to the financial statements.
6
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
India — continued | |||||||||||||||
8,210 | Infosys Technologies Ltd Sponsored ADR | 470,351 | |||||||||||||
35,200 | Ipca Laboratories Ltd | 215,389 | |||||||||||||
7,400 | Larsen & Toubro Ltd | 284,900 | |||||||||||||
11,300 | Maruti Suzuki India Ltd | 305,308 | |||||||||||||
55,500 | Oil & Natural Gas Corp Ltd | 1,579,568 | |||||||||||||
13,000 | Punjab National Bank Ltd | 357,280 | |||||||||||||
121,100 | Reliance Communications Ltd * | 402,099 | |||||||||||||
26,400 | Reliance Industries Ltd | 514,034 | |||||||||||||
101,910 | Rural Electrification Corp Ltd 144A | 733,885 | |||||||||||||
117,761 | Shree Renuka Sugars Ltd | 160,223 | |||||||||||||
36,172 | Shriram Transport Finance Co Ltd | 551,524 | |||||||||||||
38,700 | Sintex Industries Ltd | 292,891 | |||||||||||||
20,200 | State Bank of India | 1,192,722 | |||||||||||||
40,600 | Steel Authority of India Ltd | 161,514 | |||||||||||||
47,700 | Sterlite Industries India Ltd | 153,449 | |||||||||||||
34,804 | Tata Consultancy Services Ltd | 625,329 | |||||||||||||
9,400 | Tata Motors Ltd | 201,592 | |||||||||||||
6,510 | Tata Motors Ltd Sponsored ADR | 139,379 | |||||||||||||
16,100 | Tata Steel Ltd | 178,817 | |||||||||||||
24,693 | Torrent Power Ltd | 179,218 | |||||||||||||
2,285 | Ultratech Cement Ltd | 44,153 | |||||||||||||
31,801 | Union Bank of India | 230,503 | |||||||||||||
Total India | 14,453,839 | ||||||||||||||
Indonesia — 2.0% | |||||||||||||||
303,000 | Adaro Energy Tbk PT | 64,002 | |||||||||||||
116,500 | Astra International Tbk PT | 616,486 | |||||||||||||
333,500 | Bank Mandiri Tbk PT | 218,816 | |||||||||||||
884,500 | Bank Rakyat Tbk PT | 913,887 | |||||||||||||
4,264,000 | Bumi Resources Tbk PT | 788,211 | |||||||||||||
33,500 | Gudang Garam Tbk PT | 146,404 | |||||||||||||
994,000 | Indah Kiat Pulp and Paper Corp Tbk PT * | 223,560 | |||||||||||||
788,000 | Kalbe Farma Tbk PT | 203,452 | |||||||||||||
359,000 | Semen Gresik Persero Tbk PT | 346,719 |
See accompanying notes to the financial statements.
7
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Indonesia — continued | |||||||||||||||
78,000 | Tambang Batubara Bukit Asam Tbk PT | 151,460 | |||||||||||||
624,000 | Telekomunikasi Indonesia Tbk PT | 602,226 | |||||||||||||
200,000 | United Tractors Tbk PT | 408,992 | |||||||||||||
Total Indonesia | 4,684,215 | ||||||||||||||
Malaysia — 1.5% | |||||||||||||||
224,800 | AMMB Holdings Berhad * | 401,273 | |||||||||||||
113,200 | CIMB Group Holdings Berhad | 279,911 | |||||||||||||
23,600 | Genting Berhad | 70,691 | |||||||||||||
385,100 | Genting Malaysia Berhad | 368,473 | |||||||||||||
55,900 | Kulim Malaysia Berhad | 149,521 | |||||||||||||
176,400 | Landmarks Berhad | 65,594 | |||||||||||||
284,919 | Lion Industries Corp Berhad | 144,710 | |||||||||||||
154,100 | Malayan Banking Berhad | 409,680 | |||||||||||||
143,100 | Multi-Purpose Holdings Berhad | 95,359 | |||||||||||||
25,400 | PPB Group Berhad | 137,207 | |||||||||||||
89,055 | Public Bank Berhad | 340,822 | |||||||||||||
101,319 | RHB Capital Berhad | 213,119 | |||||||||||||
839,900 | Scomi Group Berhad * | 104,037 | |||||||||||||
129,600 | Telekom Malaysia Berhad | 145,505 | |||||||||||||
96,900 | Tenaga Nasional Berhad | 273,066 | |||||||||||||
204,200 | TM International Berhad * | 288,658 | |||||||||||||
505,300 | Zelan Berhad * | 96,361 | |||||||||||||
Total Malaysia | 3,583,987 | ||||||||||||||
Mexico — 1.8% | |||||||||||||||
24,800 | Alfa SA de CV Class A | 168,835 | |||||||||||||
35,600 | America Movil SAB de CV Class L ADR | 1,660,028 | |||||||||||||
68,273 | Cemex SAB de CV Sponsored ADR * | 529,116 | |||||||||||||
34,400 | Corporacion GEO SA de CV Class B * | 88,610 | |||||||||||||
135,100 | Grupo Financiero Banorte SAB de CV Class O | 483,414 | |||||||||||||
36,474 | Grupo Mexico SA Class B | 93,704 | |||||||||||||
43,100 | Grupo Televisa SA-Series CPO | 159,510 | |||||||||||||
39,200 | Kimberly-Clark de Mexico SAB de CV (Series A) | 227,192 |
See accompanying notes to the financial statements.
8
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Mexico — continued | |||||||||||||||
33,700 | Mexichem SAB de CV | 86,884 | |||||||||||||
417,900 | Sare Holding SA de CV Class B * | 82,001 | |||||||||||||
22,020 | Telefonos de Mexico SAB de CV Class L Sponsored ADR | 307,619 | |||||||||||||
124,400 | Wal-Mart de Mexico SA de CV Class V | 281,986 | |||||||||||||
Total Mexico | 4,168,899 | ||||||||||||||
Morocco — 0.2% | |||||||||||||||
2,380 | Attijariwafa Bank | 84,444 | |||||||||||||
1,040 | Banque Centrale Populaire | 38,845 | |||||||||||||
400 | Credit Immobilier et Hotelier | 14,407 | |||||||||||||
2,460 | Douja Promotion Groupe Addoha SA * | 29,963 | |||||||||||||
93 | Douja Promotion Groupe Addoha SA * | 1,137 | |||||||||||||
17,349 | Maroc Telecom | 290,135 | |||||||||||||
53 | Societe Nationale De Siderurgie | 14,114 | |||||||||||||
Total Morocco | 473,045 | ||||||||||||||
Peru — 0.1% | |||||||||||||||
8,200 | Minsur SA | 19,642 | |||||||||||||
578 | Sociedad Minera Cerro Verde SA | 13,988 | |||||||||||||
83,381 | Volcan Compania Minera SA Class B | 90,923 | |||||||||||||
Total Peru | 124,553 | ||||||||||||||
Philippines — 0.8% | |||||||||||||||
214,400 | Aboitiz Power Corp | 89,229 | |||||||||||||
583,400 | Alliance Global Group Inc | 81,744 | |||||||||||||
202,700 | Ayala Land Inc | 73,779 | |||||||||||||
381,200 | Energy Development Corp | 39,157 | |||||||||||||
2,171,300 | Lopez Holding Corp. * | 248,175 | |||||||||||||
2,935,700 | Megaworld Corp | 120,258 | |||||||||||||
247,700 | Metropolitan Bank & Trust Co | 349,929 | |||||||||||||
5,900 | Philippine Long Distance Telephone Co | 317,327 | |||||||||||||
232,800 | Robinsons Land Corp | 72,689 | |||||||||||||
63,200 | Security Bank Corp | 104,398 | |||||||||||||
3,700 | SM Investments Corp | 38,609 |
See accompanying notes to the financial statements.
9
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Philippines — continued | |||||||||||||||
181,100 | Universal Robina Corp | 138,113 | |||||||||||||
1,761,900 | Vista Land & Lifescapes Inc | 105,119 | |||||||||||||
Total Philippines | 1,778,526 | ||||||||||||||
Poland — 1.1% | |||||||||||||||
12,346 | Asseco Poland SA | 214,584 | |||||||||||||
2,680 | Bank Handlowy W Warszawie SA | 65,777 | |||||||||||||
1,610 | Bank Pekao SA | 77,962 | |||||||||||||
2,250 | Bank Zachodni WBK SA | 133,250 | |||||||||||||
24,770 | Getin Holding SA * | 75,085 | |||||||||||||
9,470 | Grupa Lotos SA * | 88,855 | |||||||||||||
15,960 | KGHM Polska Miedz SA | 537,119 | |||||||||||||
9,860 | Kopex SA * | 55,227 | |||||||||||||
32,750 | Polski Koncern Naftowy Orlen SA * | 401,127 | |||||||||||||
43,670 | Powszechna Kasa Oszczednosci Bank Polski SA | 524,378 | |||||||||||||
78,850 | Telekomunikacja Polska SA | 425,805 | |||||||||||||
Total Poland | 2,599,169 | ||||||||||||||
Russia — 14.0% | |||||||||||||||
74,890 | Aeroflot - Russian Airlines | 148,651 | |||||||||||||
45,000 | Cherepovets MK Severstal GDR (Registered Shares) * | 539,237 | |||||||||||||
26,189,060 | Federal Hydrogenerating Co. * | 1,340,670 | |||||||||||||
33,860 | Gazprom Neft Class S | 126,688 | |||||||||||||
1,500 | Gazprom Neft JSC Sponsored ADR * | 27,873 | |||||||||||||
455,944 | Gazprom OAO Sponsored ADR | 9,375,024 | |||||||||||||
62,000 | KamAZ * | 144,214 | |||||||||||||
85,280 | Lukoil OAO ADR | 4,523,290 | |||||||||||||
40,900 | Magnit OJSC Sponsored GDR (Registered Shares) | 871,199 | |||||||||||||
38,000 | Magnitogorsk Iron & Steel Works Sponsored GDR (Registered Shares) | 421,581 | |||||||||||||
31,720 | Mechel Sponsored ADR | 721,630 | |||||||||||||
97,400 | MMC Norilsk Nickel JSC ADR | 1,643,116 | |||||||||||||
111,180 | Mobile Telesystems Sponsored ADR | 2,319,215 | |||||||||||||
12,600 | NovaTek OAO Sponsored GDR (Registered Shares) | 920,130 | |||||||||||||
23,720 | Novolipetsk Steel Class S | 69,420 |
See accompanying notes to the financial statements.
10
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Russia — continued | |||||||||||||||
10,600 | Novolipetsk Steel GDR (Registered Shares) | 306,533 | |||||||||||||
36,766 | OAO Tatneft Sponsored GDR (Registered Shares) | 1,095,936 | |||||||||||||
161,300 | Rosneft OJSC GDR (Registered Shares) * | 1,017,301 | |||||||||||||
921,530 | Sberbank Class S | 2,332,954 | |||||||||||||
39,300 | Sistema JSFC Sponsored GDR (Registered Shares) | 1,008,012 | |||||||||||||
210,500 | Surgutneftegas Sponsored ADR | 1,969,208 | |||||||||||||
328,000 | United Co RUSAL Plc * | 331,482 | |||||||||||||
14,130 | VimpelCom Ltd Sponsored ADR * | 211,244 | |||||||||||||
152,300 | VTB Bank OJSC GDR (Registered Shares) | 780,857 | |||||||||||||
10,200 | X5 Retail Group NV GDR (Registered Shares) * | 369,955 | |||||||||||||
Total Russia | 32,615,420 | ||||||||||||||
South Africa — 2.8% | |||||||||||||||
16,700 | Absa Group Ltd | 278,232 | |||||||||||||
66,567 | Aveng Ltd | 342,014 | |||||||||||||
34,700 | Discovery Holdings Ltd | 164,691 | |||||||||||||
331,400 | FirstRand Ltd | 865,481 | |||||||||||||
80,900 | Growthpoint Properties Ltd | 184,785 | |||||||||||||
8,000 | Impala Platinum Holdings Ltd | 188,383 | |||||||||||||
16,400 | Imperial Holdings Ltd | 226,589 | |||||||||||||
5,000 | Kumba Iron Ore Ltd | 226,780 | |||||||||||||
11,200 | Massmart Holdings Ltd | 185,626 | |||||||||||||
16,000 | MTN Group Ltd | 260,812 | |||||||||||||
25,700 | Murray & Roberts Holdings Ltd | 144,454 | |||||||||||||
14,600 | Reunert Ltd | 113,928 | |||||||||||||
60,700 | Sanlam Ltd | 191,093 | |||||||||||||
39,800 | Shoprite Holdings Ltd | 487,423 | |||||||||||||
11,900 | Standard Bank Group Ltd | 168,025 | |||||||||||||
225,768 | Steinhoff International Holdings Ltd * | 575,321 | |||||||||||||
73,200 | Telkom South Africa Ltd | 333,413 | |||||||||||||
21,824 | Tiger Brands Ltd | 534,274 | |||||||||||||
19,500 | Truworths International Ltd | 154,516 | |||||||||||||
42,900 | Vodacom Group (Pty) Ltd | 358,940 |
See accompanying notes to the financial statements.
11
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
South Africa — continued | |||||||||||||||
16,300 | Wilson Bayly Holmes-Ovcon Ltd | 249,429 | |||||||||||||
89,200 | Woolworths Holdings Ltd | 297,256 | |||||||||||||
Total South Africa | 6,531,465 | ||||||||||||||
South Korea — 18.4% | |||||||||||||||
368 | Amorepacific Corp | 337,956 | |||||||||||||
36,960 | Busan Bank | 393,758 | |||||||||||||
6,761 | Cheil Industries Inc | 590,966 | |||||||||||||
544 | CJ O Shopping Co Ltd (a) * | 58,919 | |||||||||||||
23,782 | Daegu Bank | 276,898 | |||||||||||||
8,658 | Daelim Industrial Co Ltd | 546,569 | |||||||||||||
12,433 | Daewoo Shipbuilding & Marine Engineering Co Ltd | 241,878 | |||||||||||||
6,637 | Dongbu Insurance Co Ltd | 186,998 | |||||||||||||
3,902 | GS Engineering & Construction Corp | 279,282 | |||||||||||||
11,401 | GS Holdings Corp | 468,913 | |||||||||||||
34,566 | Hana Financial Group Inc | 889,903 | |||||||||||||
29,535 | Hanwha Chemical Corp | 663,705 | |||||||||||||
15,612 | Hanwha Corp | 581,238 | |||||||||||||
4,923 | Honam Petrochemical Corp | 770,254 | |||||||||||||
77,763 | Hynix Semiconductor Inc * | 1,369,378 | |||||||||||||
14,576 | Hyundai Heavy Industries Co Ltd | 3,216,305 | |||||||||||||
2,890 | Hyundai Mipo Dockyard | 387,277 | |||||||||||||
12,432 | Hyundai Mobis | 2,254,944 | |||||||||||||
19,859 | Hyundai Motor Co | 2,351,477 | |||||||||||||
2,827 | Hyundai Steel Co | 255,204 | |||||||||||||
47,434 | Industrial Bank of Korea | 574,743 | |||||||||||||
9,153 | INTOPS Co Ltd | 150,586 | |||||||||||||
40,863 | Kangwon Land Inc | 748,596 | |||||||||||||
47,470 | KB Financial Group Inc | 1,928,958 | |||||||||||||
28,348 | Kia Motors Corp | 730,964 | |||||||||||||
43,991 | Korea Exchange Bank | 464,733 | |||||||||||||
7,151 | Korea Investment Holdings Co Ltd | 188,060 | |||||||||||||
1,675 | Korea Zinc Co Ltd | 374,235 | |||||||||||||
5,200 | Korean Air Lines Co Ltd * | 316,700 |
See accompanying notes to the financial statements.
12
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
South Korea — continued | |||||||||||||||
12,292 | KT Corp | 448,613 | |||||||||||||
13,910 | KT Corp Sponsored ADR | 259,700 | |||||||||||||
25,800 | KT&G Corp | 1,313,857 | |||||||||||||
4,138 | LG Chem Ltd | 1,194,111 | |||||||||||||
13,427 | LG Corp | 963,066 | |||||||||||||
24,571 | LG Display Co Ltd | 688,236 | |||||||||||||
1,844 | LG Electronics Inc | 148,316 | |||||||||||||
44,040 | LG Telecom Ltd | 275,348 | |||||||||||||
2,494 | Lotte Shopping Co Ltd | 809,257 | |||||||||||||
892 | OCI Company Ltd. | 277,208 | |||||||||||||
5,071 | POSCO | 2,054,896 | |||||||||||||
47,580 | Samho International Co Ltd * | 110,463 | |||||||||||||
5,612 | Samsung C&T Corp | 264,423 | |||||||||||||
5,935 | Samsung Electro Mechanics Co Ltd | 565,658 | |||||||||||||
18,948 | Samsung Heavy Industries Co Ltd | 422,035 | |||||||||||||
10,248 | Samsung Electronics Co Ltd | 6,479,257 | |||||||||||||
44,941 | Shinhan Financial Group Co Ltd | 1,721,179 | |||||||||||||
412 | Shinsegae Co Ltd | 197,859 | |||||||||||||
2,625 | SK Telecom Co Ltd | 354,916 | |||||||||||||
46,009 | SK Telecom Co Ltd ADR | 737,064 | |||||||||||||
13,109 | SK Holdings Co Ltd | 1,007,945 | |||||||||||||
20,330 | STX Pan Ocean Co Ltd | 194,664 | |||||||||||||
63,071 | Woori Finance Holdings Co Ltd | 710,244 | |||||||||||||
Total South Korea | 42,797,712 | ||||||||||||||
Sri Lanka — 0.1% | |||||||||||||||
52,600 | Hatton National Bank Plc | 135,046 | |||||||||||||
Taiwan — 7.7% | |||||||||||||||
219,983 | Advanced Semiconductor Engineering Inc | 151,100 | |||||||||||||
104,800 | Asustek Computer Inc | 697,946 | |||||||||||||
534,000 | China Petrochemical Development Corp. * | 314,799 | |||||||||||||
228,307 | China Steel Corp | 215,746 | |||||||||||||
318,136 | Chinatrust Financial Holding Co Ltd | 178,133 |
See accompanying notes to the financial statements.
13
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Taiwan — continued | |||||||||||||||
479,003 | Chunghwa Telecom Co Ltd | 983,784 | |||||||||||||
654,589 | Compal Electronics Inc | 734,974 | |||||||||||||
166,000 | Delta Electronics Inc | 629,381 | |||||||||||||
169,000 | Far Eastone Telecommunications Co Ltd | 219,340 | |||||||||||||
538,500 | First Financial Holding Co Ltd | 310,814 | |||||||||||||
219,000 | Formosa Chemicals & Fibre Co | 485,486 | |||||||||||||
153,000 | Formosa Plastics Corp | 339,021 | |||||||||||||
139,642 | Fubon Financial Holding Co Ltd | 162,363 | |||||||||||||
384,674 | Hon Hai Precision Industry Co Ltd | 1,356,352 | |||||||||||||
87,031 | HTC Corp | 1,596,247 | |||||||||||||
23,000 | Largan Precision Co Ltd | 414,264 | |||||||||||||
172,028 | Lite-On Technology Corp | 198,493 | |||||||||||||
20,025 | MediaTek Inc | 272,831 | |||||||||||||
851,000 | Mega Financial Holding Co Ltd | 513,097 | |||||||||||||
727,289 | Nan Ya Plastics Corp | 1,401,031 | |||||||||||||
81,793 | Novatek Microelectronics Corp Ltd | 195,677 | |||||||||||||
196,962 | Pegatron Corp * | 246,556 | |||||||||||||
318,641 | Pou Chen Corp | 257,571 | |||||||||||||
165,000 | Powertech Technology Inc | 489,860 | |||||||||||||
2,372,000 | ProMOS Technologies Inc * | 110,764 | |||||||||||||
397,715 | Quanta Computer Inc | 604,355 | |||||||||||||
9,129 | Synnex Technology International Corp | 18,789 | |||||||||||||
631,545 | Taishin Financial Holding Co Ltd * | 257,722 | |||||||||||||
1,761,606 | Taiwan Semiconductor Manufacturing Co Ltd | 3,221,535 | |||||||||||||
799,000 | United Microelectronics Corp | 321,120 | |||||||||||||
324,839 | Wistron Corp | 508,867 | |||||||||||||
262,800 | WPG Holdings Co Ltd | 486,512 | |||||||||||||
Total Taiwan | 17,894,530 | ||||||||||||||
Thailand — 6.9% | |||||||||||||||
367,690 | Advanced Info Service Pcl (Foreign Registered) (a) | 1,085,420 | |||||||||||||
169,000 | Airports of Thailand Pcl (Foreign Registered) (a) | 214,659 | |||||||||||||
1,050,340 | Asian Property Development Pcl (Foreign Registered) (a) | 221,935 | |||||||||||||
32,000 | Bangkok Bank Pcl | 150,958 |
See accompanying notes to the financial statements.
14
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Thailand — continued | |||||||||||||||
156,250 | Bangkok Bank Pcl NVDR | 737,098 | |||||||||||||
311,300 | Bangkok Dusit Medical Service Pcl (Foreign Registered) (a) | 328,386 | |||||||||||||
388,000 | Bank of Ayudhya Pcl NVDR(Foreign Registered) (a) | 270,389 | |||||||||||||
36,070 | Banpu Pcl (Foreign Registered) (a) | 707,419 | |||||||||||||
2,930 | Banpu Pcl NVDR | 57,464 | |||||||||||||
1,166,000 | Charoen Pokphand Foods Pcl (Foreign Registered) (a) | 952,081 | |||||||||||||
672,000 | CP ALL Pcl (Foreign Registered) (a) | 853,648 | |||||||||||||
140,000 | Electricity Generating Pcl (Foreign Registered) (a) | 419,575 | |||||||||||||
2,625,950 | IRPC Pcl (Foreign Registered) (a) | 338,212 | |||||||||||||
200,010 | Kasikornbank Pcl (Foreign Registered) (a) | 729,324 | |||||||||||||
255,770 | Kasikornbank Pcl NVDR | 887,653 | |||||||||||||
1,289,000 | Krung Thai Bank Pcl (Foreign Registered) (a) | 592,771 | |||||||||||||
827,000 | LPN Development Pcl (Foreign Registered) (a) | 254,757 | |||||||||||||
465,000 | PTT Aromatics & Refining Pcl (Foreign Registered) (a) | 348,551 | |||||||||||||
170,000 | PTT Chemical Pcl (Foreign Registered) (a) | 577,013 | |||||||||||||
139,000 | PTT Exploration & Production Pcl (Foreign Registered) (a) | 638,912 | |||||||||||||
231,722 | PTT Pcl (Foreign Registered) (a) | 1,965,149 | |||||||||||||
69,039 | Siam Cement Pcl (Foreign Registered) (a) | 685,589 | |||||||||||||
62,000 | Siam Cement Pcl NVDR | 587,883 | |||||||||||||
377,150 | Siam Commercial Bank Pcl (Foreign Registered) (a) | 1,148,592 | |||||||||||||
328,000 | Thai Airways International Pcl (Foreign Registered) (a) | 394,514 | |||||||||||||
287,770 | Thai Oil Pcl (Foreign Registered) (a) | 405,413 | |||||||||||||
278,000 | Thoresen Thai Agencies Pcl (Foreign Registered) (a) | 215,650 | |||||||||||||
160,000 | Total Access Communication Pcl | 238,282 | |||||||||||||
Total Thailand | 16,007,297 | ||||||||||||||
Turkey — 6.9% | |||||||||||||||
297,683 | Akbank TAS | 1,564,546 | |||||||||||||
21,640 | Anadolu Efes Biracilik ve Malt Sanayii AS | 290,107 | |||||||||||||
79,900 | Arcelik AS | 375,803 | |||||||||||||
76,000 | Asya Katilim Bankasi AS | 167,034 | |||||||||||||
187,470 | Dogan Sirketler Grubu Holdings AS | 121,933 | |||||||||||||
52,034 | Enka Insaat ve Sanayi AS | 187,526 | |||||||||||||
49,650 | Ford Otomotiv Sanayi AS | 378,120 |
See accompanying notes to the financial statements.
15
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Turkey — continued | |||||||||||||||
97,223 | Haci Omer Sabanci Holding AS | 436,005 | |||||||||||||
248,100 | Kardemir Karabuk Demir Celik Sanayi ve Ticaret AS Class A * | 169,018 | |||||||||||||
304,470 | KOC Holding AS | 1,173,456 | |||||||||||||
38,784 | Tupras-Turkiye Petrol Rafineriler AS | 863,596 | |||||||||||||
150,371 | Turk Hava Yollari Anonim Ortakligi * | 468,776 | |||||||||||||
157,544 | Turk Sise ve Cam Fabrikalari AS * | 233,395 | |||||||||||||
334,880 | Turk Telekomunikasyon AS | 1,375,035 | |||||||||||||
177,787 | Turkcell Iletisim Hizmet AS | 1,117,054 | |||||||||||||
676,790 | Turkiye Garanti Bankasi | 3,251,825 | |||||||||||||
362,450 | Turkiye IS Bankasi Class C | 1,318,918 | |||||||||||||
155,314 | Turkiye Sinai Kalkinma Bankasi AS | 220,090 | |||||||||||||
134,570 | Turkiye Vakiflar Bankasi TAO Class D | 360,686 | |||||||||||||
138,160 | Turkiye Halk Bankasi AS | 1,117,227 | |||||||||||||
293,900 | Yapi ve Kredi Bankasi AS * | 870,332 | |||||||||||||
Total Turkey | 16,060,482 | ||||||||||||||
TOTAL COMMON STOCKS (COST $189,655,938) | 207,639,478 | ||||||||||||||
PREFERRED STOCKS — 8.0% | |||||||||||||||
Brazil — 5.8% | |||||||||||||||
40,100 | AES Tiete SA 8.84% | 486,794 | |||||||||||||
66,308 | Banco Bradesco SA 0.57% | 1,150,031 | |||||||||||||
33,400 | Banco do Estado do Rio Grande do Sul SA Class B 0.81% | 294,395 | |||||||||||||
10,900 | Bradespar SA 0.62% | 227,154 | |||||||||||||
27,400 | Centrais Eletricas Brasileiras SA Class B 7.31% | 395,652 | |||||||||||||
44,685 | Cia Energetica de Minas Gerais 2.43% | 712,416 | |||||||||||||
1,739 | Companhia de Bebidas das Americas 3.74% | 191,589 | |||||||||||||
18,700 | Companhia Paranaense de Energia Class B 0.19% | 409,403 | |||||||||||||
10,900 | Eletropaulo Metropolitana SA 5.84% | 204,811 | |||||||||||||
156,152 | Itausa-Investimentos Itau SA 0.45% | 1,093,620 | |||||||||||||
22,324 | Petroleo Brasileiro SA (Petrobras) 0.51% | 331,253 | |||||||||||||
90,410 | Petroleo Brasileiro SA Sponsored ADR 0.50% | 2,672,520 | |||||||||||||
27,760 | Tele Norte Leste Participacoes ADR 12.00% | 376,426 |
See accompanying notes to the financial statements.
16
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Brazil — continued | |||||||||||||||
500 | Tele Norte Leste Participacoes SA 12.99% | 6,804 | |||||||||||||
5,500 | Telecomunicacoes de Sao Paulo SA 4.53% | 126,238 | |||||||||||||
10,700 | Usinas Siderrurgicas de Minas Gerais SA Class A 1.81% | 268,254 | |||||||||||||
44,456 | Vale SA Preference A 2.00% | 1,048,719 | |||||||||||||
150,530 | Vale SA Sponsored ADR 1.98% | 3,555,519 | |||||||||||||
Total Brazil | 13,551,598 | ||||||||||||||
Chile — 0.0% | |||||||||||||||
5,310 | Embotelladora Andina SA A Shares 1.76% | 20,478 | |||||||||||||
9,000 | Embotelladora Andina SA B Shares 1.63% | 41,203 | |||||||||||||
Total Chile | 61,681 | ||||||||||||||
Russia — 0.9% | |||||||||||||||
2,822,650 | Surgutneftegaz Class S 8.20% | 1,177,900 | |||||||||||||
840 | Transneft 0.75% | 898,126 | |||||||||||||
Total Russia | 2,076,026 | ||||||||||||||
South Korea — 1.3% | |||||||||||||||
5,327 | Hyundai Motor Co 2.46% | 224,808 | |||||||||||||
6,022 | Samsung Electronics Co Ltd (Non Voting) 2.32% | 2,678,826 | |||||||||||||
Total South Korea | 2,903,634 | ||||||||||||||
TOTAL PREFERRED STOCKS (COST $17,818,915) | 18,592,939 | ||||||||||||||
INVESTMENT FUNDS — 0.2% | |||||||||||||||
United States — 0.2% | |||||||||||||||
13,612 | iShares MSCI Emerging Markets Index Fund (b) | 545,433 | |||||||||||||
TOTAL INVESTMENT FUNDS (COST $511,487) | 545,433 |
See accompanying notes to the financial statements.
17
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares / Par Value | Description | Value ($) | |||||||||||||
RIGHTS AND WARRANTS — 0.0% | |||||||||||||||
China — 0.0% | |||||||||||||||
7,000 | Kingboard Chemical Holdings Ltd Warrants, Expires 10/31/12 * | 3,078 | |||||||||||||
TOTAL RIGHTS AND WARRANTS (COST $308) | 3,078 | ||||||||||||||
SHORT-TERM INVESTMENTS — 0.8% | |||||||||||||||
Time Deposits — 0.8% | |||||||||||||||
ZAR | 37,961 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 6.24%, due 09/01/10 | 5,154 | ||||||||||||
HKD | 52,255 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.03%, due 09/01/10 | 6,718 | ||||||||||||
USD | 1,752,919 | DnB Nor Bank (Oslo) Time Deposit, 0.21%, due 09/01/10 | 1,752,919 | ||||||||||||
Total Time Deposits | 1,764,791 | ||||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $1,764,791) | 1,764,791 | ||||||||||||||
TOTAL INVESTMENTS — 98.4% (Cost $209,751,439) | 228,545,719 | ||||||||||||||
Other Assets and Liabilities (net) — 1.6% | 3,799,865 | ||||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 232,345,584 |
See accompanying notes to the financial statements.
18
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Notes to Schedule of Investments:
144A - Securities 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.
ADR - American Depositary Receipt
GDR - Global Depository Receipt
MSCI - Morgan Stanley Capital International
NVDR - Non-Voting Depository Receipt
* Non-income producing security.
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
(b) Represents an investment to equitize cash in the iShares® MSCI Emerging Markets Index Fund, which is a separate investment portfolio of iShares, Inc., a registered investment company. The iShares® MSCI Emerging Markets Index Fund invests in global emerging markets and seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the MSCI Emerging Markets Index. iShares® is a registered trademark of BlackRock. Neither BlackRock nor the iShares® Funds make any representations regarding the advisability of investing in the iShares® MSCI Emerging Markets Index Fund.
Currency Abbreviations:
HKD - Hong Kong Dollar
USD - United States Dollar
ZAR - South African Rand
See accompanying notes to the financial statements.
19
GMO Emerging Countries Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments, at value (cost $209,751,439) (Note 2) | $ | 228,545,719 | |||||
Foreign currency, at value (cost $2,894,267) (Note 2) | 2,884,632 | ||||||
Receivable for investments sold | 399,401 | ||||||
Receivable for Fund shares sold | 57,244 | ||||||
Dividends and interest receivable | 826,080 | ||||||
Foreign taxes receivable | 117,369 | ||||||
Receivable for foreign currency sold | 170 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 32,913 | ||||||
Miscellaneous receivable | 30,750 | ||||||
Total assets | 232,894,278 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 110,444 | ||||||
Payable for Fund shares repurchased | 40,665 | ||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 130,761 | ||||||
Shareholder service fee | 26,010 | ||||||
Administration fee – Class M | 5,557 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 389 | ||||||
Payable for 12b-1 fee – Class M | 13,610 | ||||||
Accrued expenses | 221,258 | ||||||
Total liabilities | 548,694 | ||||||
Net assets | $ | 232,345,584 |
See accompanying notes to the financial statements.
20
GMO Emerging Countries Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited) — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 273,003,103 | |||||
Accumulated undistributed net investment income | 2,054,629 | ||||||
Accumulated net realized loss | (61,331,934 | ) | |||||
Net unrealized appreciation | 18,619,786 | ||||||
$ | 232,345,584 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 200,472,088 | |||||
Class M shares | $ | 31,873,496 | |||||
Shares outstanding: | |||||||
Class III | 20,492,353 | ||||||
Class M | 3,306,007 | ||||||
Net asset value per share: | |||||||
Class III | $ | 9.78 | |||||
Class M | $ | 9.64 |
See accompanying notes to the financial statements.
21
GMO Emerging Countries Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $486,714) | $ | 3,530,566 | |||||
Dividends from affiliated issuers (Note 10) | 364 | ||||||
Interest | 234 | ||||||
Total investment income | 3,531,164 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 733,992 | ||||||
Shareholder service fee – Class III (Note 5) | 144,889 | ||||||
12b-1 fee – Class M (Note 5) | 40,822 | ||||||
Administration fee – Class M (Note 5) | 32,658 | ||||||
Custodian and fund accounting agent fees | 440,404 | ||||||
Audit and tax fees | 52,900 | ||||||
Transfer agent fees | 27,048 | ||||||
Registration fees | 12,972 | ||||||
Legal fees | 5,704 | ||||||
Trustees fees and related expenses (Note 5) | 2,370 | ||||||
Miscellaneous | 15,916 | ||||||
Total expenses | 1,509,675 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (144,721 | ) | |||||
Expense reductions (Note 2) | (16 | ) | |||||
Net expenses | 1,364,938 | ||||||
Net investment income (loss) | 2,166,226 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers (net of capital gains tax of $185,810) | 14,854,391 | ||||||
Investments in affiliated issuers | (239 | ) | |||||
Realized gains distributions from affiliated issuers (Note 10) | 73 | ||||||
Foreign currency, forward contracts and foreign currency related transactions (net of foreign capital gains tax of $191 and Brazilian IOF tax of $499) (Note 2) | (149,759 | ) | |||||
Net realized gain (loss) | 14,704,466 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers (net of change in foreign capital gains tax of 81,701 $) (Note 2) | (3,860,561 | ) | |||||
Investments in affiliated issuers | 239 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (12,381 | ) | |||||
Net unrealized gain (loss) | (3,872,703 | ) | |||||
Net realized and unrealized gain (loss) | 10,831,763 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 12,997,989 |
See accompanying notes to the financial statements.
22
GMO Emerging Countries Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 2,166,226 | $ | 1,876,303 | |||||||
Net realized gain (loss) | 14,704,466 | 9,818,239 | |||||||||
Change in net unrealized appreciation (depreciation) | (3,872,703 | ) | 79,466,031 | ||||||||
Net increase (decrease) in net assets from operations | 12,997,989 | 91,160,573 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (45,099 | ) | (2,129,850 | ) | |||||||
Class M | (1,004 | ) | (354,273 | ) | |||||||
Total distributions from net investment income | (46,103 | ) | (2,484,123 | ) | |||||||
Net realized gains | |||||||||||
Class III | — | (400,445 | ) | ||||||||
Class M | — | (80,952 | ) | ||||||||
Total distributions from net realized gains | — | (481,397 | ) | ||||||||
(46,103 | ) | (2,965,520 | ) | ||||||||
Net share transactions (Note 9): | |||||||||||
Class III | 14,370,281 | 12,118,023 | |||||||||
Class M | (1,492,320 | ) | (4,647,521 | ) | |||||||
Increase (decrease) in net assets resulting from net share transactions | 12,877,961 | 7,470,502 | |||||||||
Total increase (decrease) in net assets | 25,829,847 | 95,665,555 | |||||||||
Net assets: | |||||||||||
Beginning of period | 206,515,737 | 110,850,182 | |||||||||
End of period (including accumulated undistributed net investment income of $2,054,629 and distributions in excess of net investment income of $65,494, respectively) | $ | 232,345,584 | $ | 206,515,737 |
See accompanying notes to the financial statements.
23
GMO Emerging Countries Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 9.24 | $ | 5.06 | $ | 15.26 | $ | 16.04 | $ | 19.20 | $ | 15.99 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.10 | 0.09 | 0.24 | 0.23 | 0.32 | 0.28 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.44 | 4.23 | (8.10 | ) | 4.87 | 2.50 | 5.09 | ||||||||||||||||||||
Total from investment operations | 0.54 | 4.32 | (7.86 | ) | 5.10 | 2.82 | 5.37 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.00 | )(a) | (0.12 | ) | (0.22 | ) | (0.30 | ) | (0.36 | ) | (0.35 | ) | |||||||||||||||
From net realized gains | — | (0.02 | ) | (2.12 | ) | (5.58 | ) | (5.62 | ) | (1.81 | ) | ||||||||||||||||
Total distributions | (0.00 | ) | (0.14 | ) | (2.34 | ) | (5.88 | ) | (5.98 | ) | (2.16 | ) | |||||||||||||||
Net asset value, end of period | $ | 9.78 | $ | 9.24 | $ | 5.06 | $ | 15.26 | $ | 16.04 | $ | 19.20 | |||||||||||||||
Total Return | 5.87 | %(b)** | 85.52 | %(b) | (58.58 | )%(b) | 30.68 | %(b) | 16.20 | % | 36.38 | %(b) | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 200,472 | $ | 174,933 | $ | 89,902 | $ | 371,540 | $ | 339,268 | $ | 346,018 | |||||||||||||||
Net expenses to average daily net assets | 1.17 | %(c)(e)* | 1.17 | %(c) | 1.16 | %(d) | 1.11 | %(d) | 1.06 | % | 1.10 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 1.96 | %* | 1.10 | % | 2.25 | % | 1.31 | % | 1.74 | % | 1.68 | % | |||||||||||||||
Portfolio turnover rate | 51 | %** | 138 | % | 128 | % | 72 | % | 58 | % | 35 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.13 | %* | 0.25 | % | 0.14 | % | 0.03 | % | — | 0.01 | % |
(a) Distributions from net investment income were less than $0.01 per share.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(c) The net expense ratio does not include the effect of expense reductions (Note 2).
(d) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions. (Note 2)
(e) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
24
GMO Emerging Countries Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class M share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 9.12 | $ | 5.00 | $ | 15.07 | $ | 15.90 | $ | 19.05 | $ | 15.87 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.08 | 0.07 | 0.16 | 0.18 | 0.30 | 0.27 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.44 | 4.17 | (7.92 | ) | 4.82 | 2.44 | 5.00 | ||||||||||||||||||||
Total from investment operations | 0.52 | 4.24 | (7.76 | ) | 5.00 | 2.74 | 5.27 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.00 | )(a) | (0.10 | ) | (0.19 | ) | (0.25 | ) | (0.27 | ) | (0.28 | ) | |||||||||||||||
From net realized gains | — | (0.02 | ) | (2.12 | ) | (5.58 | ) | (5.62 | ) | (1.81 | ) | ||||||||||||||||
Total distributions | (0.00 | ) | (0.12 | ) | (2.31 | ) | (5.83 | ) | (5.89 | ) | (2.09 | ) | |||||||||||||||
Net asset value, end of period | $ | 9.64 | $ | 9.12 | $ | 5.00 | $ | 15.07 | $ | 15.90 | $ | 19.05 | |||||||||||||||
Total Return | 5.71 | %(b)** | 84.90 | %(b) | (58.67 | )%(b) | 30.29 | %(b) | 15.89 | % | 35.99 | %(b) | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 31,873 | $ | 31,582 | $ | 20,948 | $ | 31,386 | $ | 29,423 | $ | 57,136 | |||||||||||||||
Net expenses to average daily net assets | 1.47 | %(c)(d)* | 1.47 | %(d) | 1.48 | %(e) | 1.41 | %(e) | 1.36 | % | 1.39 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 1.67 | %* | 0.83 | % | 1.68 | % | 0.99 | % | 1.63 | % | 1.65 | % | |||||||||||||||
Portfolio turnover rate | 51 | %** | 138 | % | 128 | % | 72 | % | 58 | % | 35 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.13 | %* | 0.25 | % | 0.23 | % | 0.03 | % | — | 0.01 | % |
(a) Distributions from net investment income were less than $0.01 per share.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(d) The net expense ratio does not include the effect of expense reductions (Note 2).
(e) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions. (Note 2)
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
25
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO Emerging Countries Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks total return in excess of that of its benchmark, the S&P/IFCI Composite Index. The Fund typically makes equity investments directly and indirectly (e.g., through the GMO Funds in which the Fund invests, collectively referred to as the "underlying funds" or derivatives) in companies tied economically to emerging countries. "Emerging countries" include all countries that are not considered to be "developed market countries" by the MSCI World Index or MSCI EAFE Index. The term "equity investments" refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts. Under normal circumstances, the Fund invests directly and indirectly at least 80% of its assets in investments tied economically to emerging countries.
The Manager uses proprietary quantitative models and fundamental analysis to evaluate and select countries, sectors, and equity investments. The Manager evaluates and selects countries, sectors, and equity investments based on value, momentum, and quality models (that take into account various factors including, but not limited to, historical profitability, earnings stability and low debt to equity ratios), and also evaluates countries and sectors based on macroeconomic models (that take into account various factors including, but not limited to, currency valuations, inflation, and current account deficits). The models used by the Manager may change over time.
In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the-counter derivatives (including options, futures, warrants, swap contracts, and reverse repurchase agreements) and exchange-traded funds ("ETFs") (i) as a substitute for direct investment; (ii) in an attempt to reduce investment exposures (which may result in a reduction below zero); (iii) to effect transactions intended as substitutes for securities lending; and/or (iv) in an attempt to adjust elements of its investment and/or foreign currency exposure. The Fund's foreign currency exposure may differ from the currency exposure represented by its equity investments. In addition, the Fund may take active overweighted and underweighted positions in particular currencies relative to its benchmark. In addition, the Fund may lend its portfolio securities.
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
26
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Throughout the period ended August 31, 2010, the Fund had two classes of shares outstanding: Class III and Class M. Class M shares bear an administration fee and a 12b-1 fee while Class III shares bear a shareholder service fee (See Note 5). The principal economic difference between the classes of shares is the type and level of fees they bear.
The Fund currently limits subscriptions due to capacity considerations.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the over-the-counter ("OTC") market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not rea dily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of August 31, 2010, the total value of securities held directly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 6.6% of net assets. The Fund classifies such securities (as defined below) as Level 3. Additionally, because many foreign equity securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on local closing prices and adjustments supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2010, 74.4% of the net assets of the Fund were valued using fair value prices based on those
27
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
adjustments and are classified as using Level 2 inputs in the table below. See note 4 for a further discussion on valuation of derivative financial instruments.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include: fair value adjustments applied to closing prices of foreign securities due to market events that have occurred since the local market close but before the Fund's daily NAV calculation.
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund used the following fair value techniques on Level 3 investments: Certain of the Fund's securities in Thailand were valued at the local price as adjusted by applying a premium or discount when the holdings exceed foreign ownership limitations. The Fund valued certain equity securities based on the value of underlying securities or an underlying index to which the securities are linked.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | |||||||||||||||||||
Argentina | $ | 103,074 | $ | — | $ | — | $ | 103,074 | |||||||||||
Brazil | 13,172,145 | — | — | 13,172,145 | |||||||||||||||
Chile | 1,156,406 | — | — | 1,156,406 | |||||||||||||||
China | 2,696,069 | 13,736,097 | — | 16,432,166 | |||||||||||||||
Czech Republic | — | 5,008,617 | — | 5,008,617 | |||||||||||||||
Egypt | — | 3,725,206 | — | 3,725,206 | |||||||||||||||
Hong Kong | — | 238,508 | — | 238,508 | |||||||||||||||
Hungary | — | 3,895,171 | — | 3,895,171 | |||||||||||||||
India | 609,730 | 11,844,463 | 1,999,646 | 14,453,839 | |||||||||||||||
Indonesia | — | 4,684,215 | — | 4,684,215 |
28
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
ASSET VALUATION INPUTS — continued
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Malaysia | $ | — | $ | 3,583,987 | $ | — | $ | 3,583,987 | |||||||||||
Mexico | 4,168,899 | — | — | 4,168,899 | |||||||||||||||
Morocco | 1,137 | 471,908 | — | 473,045 | |||||||||||||||
Peru | 124,553 | — | — | 124,553 | |||||||||||||||
Philippines | — | 1,778,526 | — | 1,778,526 | |||||||||||||||
Poland | — | 2,599,169 | — | 2,599,169 | |||||||||||||||
Russia | 3,252,089 | 29,363,331 | — | 32,615,420 | |||||||||||||||
South Africa | — | 6,531,465 | — | 6,531,465 | |||||||||||||||
South Korea | 996,764 | 41,742,029 | 58,919 | 42,797,712 | |||||||||||||||
Sri Lanka | — | 135,046 | — | 135,046 | |||||||||||||||
Taiwan | 246,556 | 17,647,974 | — | 17,894,530 | |||||||||||||||
Thailand | — | 2,659,338 | 13,347,959 | 16,007,297 | |||||||||||||||
Turkey | — | 16,060,482 | — | 16,060,482 | |||||||||||||||
TOTAL COMMON STOCKS | 26,527,422 | 165,705,532 | 15,406,524 | 207,639,478 | |||||||||||||||
Preferred Stocks | |||||||||||||||||||
Brazil | 13,551,598 | — | — | 13,551,598 | |||||||||||||||
Chile | 61,681 | — | — | 61,681 | |||||||||||||||
Russia | — | 2,076,026 | — | 2,076,026 | |||||||||||||||
South Korea | — | 2,903,634 | — | 2,903,634 | |||||||||||||||
TOTAL PREFERRED STOCKS | 13,613,279 | 4,979,660 | — | 18,592,939 | |||||||||||||||
Investment Funds | |||||||||||||||||||
United States | 545,433 | — | — | 545,433 | |||||||||||||||
TOTAL INVESTMENT FUNDS | 545,433 | — | — | 545,433 | |||||||||||||||
Rights and Warrants | |||||||||||||||||||
China | — | 3,078 | — | 3,078 | |||||||||||||||
TOTAL RIGHTS AND WARRANTS | — | 3,078 | — | 3,078 | |||||||||||||||
Short-Term Investments | 1,764,791 | — | — | 1,764,791 | |||||||||||||||
Total Investments | 42,450,925 | 170,688,270 | 15,406,524 | 228,545,719 | |||||||||||||||
Total | $ | 42,450,925 | $ | 170,688,270 | $ | 15,406,524 | $ | 228,545,719 |
29
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The aggregate net value of the Fund's direct investments in securities using Level 3 inputs were 6.6% of total net assets.
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2010 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Transfer into Level 3* | Transfers out of Level 3* | Balances as of August 31, 2010 | ||||||||||||||||||||||||||||
Common Stocks | |||||||||||||||||||||||||||||||||||
India | $ | — | $ | 953,115 | $ | — | $ | 139,554 | $ | 76,954 | $ | 830,023 | ** | $ | — | $ | 1,999,646 | ||||||||||||||||||
Thailand | 10,959,643 | 1,369,416 | — | 608,831 | 2,831,125 | — | (2,421,056 | )** | 13,347,959 | ||||||||||||||||||||||||||
South Korea | — | 33,894 | — | 19,844 | 5,181 | — | — | 58,919 | |||||||||||||||||||||||||||
Total | $ | 10,959,643 | $ | 2,356,425 | $ | — | $ | 768,229 | $ | 2,913,260 | $ | 830,023 | $ | (2,421,056 | ) | $ | 15,406,524 |
* The Fund recognizes transfers in investments and derivatives transferred into Level 3 at the beginning of the period and transferred out of Level 3 at the end of the period.
** Financial assets transferred between Level 2 and Level 3 were due to a change in observable and/or unobservable inputs.
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are inclu ded with the net realized and unrealized gain or loss on investment securities.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country's tax treaty with the United States. The foreign withholding rates applicable to a Fund's investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.
30
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if paid by the shareholders of the Fund.
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Transaction based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
The Fund is subject to a Imposto sobre Operacoes Financeiras (IOF) transaction tax levied by the Brazilian government on certain foreign exchange transactions. The IOF tax has been included in net realized gain (loss) from foreign currency transactions in the Statement of Operations.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2018 | $ | (66,924,180 | ) | ||||
Total | $ | (66,924,180 | ) |
31
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 216,380,545 | $ | 21,263,980 | $ | (9,098,806 | ) | $ | 12,165,174 |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which co llection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds (See Note 5).
32
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Brown Brothers Harriman & Co. ("BBH") serves as the Fund's custodian and fund accounting agent. State Street Bank and Trust Company ("State Street") serves as the Fund's transfer agent. BBH's and State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — Equity securities may decline in value due to factors affecting the issuing companies, theirindustries, or the economy and equity markets generally. Because the Fund generally seeks to be fully invested and normally does nottake temporary defensive positions, declines in stock market prices generally are likely to result in declines in the value of the Fund's investments.
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to rec eipt) may expose the Fund to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund's investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund's investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
33
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind. These risks are particularly pronounced for the Fund because it typically makes equity investments in companies tied economically to emerging countries and may make investments in companies with smaller market capitalizations. In addition, the Fund may buy securities that are less liquid than those in its benchmark.
• Market Disruption and Geopolitical Risk — Geopolitical events may disrupt securities markets and adversely affect global economies and markets. Those events as well as other changes in foreign and domestic economic and political conditions could adversely affect the value of the Fund's investments.
• Smaller Company Risk — The securities of small- and mid-cap companies often are less widely held and trade less frequently and in lesser quantities, and their market prices often fluctuate more, than the securities of companies with larger market capitalizations. The Fund may buy securities that have smaller market capitalizations than those in its benchmark.
Other principal risks of an investment in the Fund include Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund's securities); Focused Investment Risk (increased risk from the Fund's focus on investments in a limited number of countries and geographic regions); Market Risk — Value Securities (risk that the price of the Fund's investments will not increase to what the Manager believes to be their fundamental value or that the Manage r has overestimated their fundamental value); Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Fund of Funds Risk (risk that the underlying funds (including exchange-traded funds (ETFs)) in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments); Leveraging Risk (increased risk of loss from use of reverse repurchase agreements and other derivatives and securities lending); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange
34
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index). The Funds also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedin gs. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
35
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be secured by collateral (e.g., foreign currency forwards; see "Currency Risk" above), that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on
36
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. The Fund had no forward currency contracts outstanding at the end of the period.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because regular trading on many foreign exchanges closes prior to the close of the NYSE, closing prices for foreign futures contracts on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures contracts using fair value prices, which are based on adjustments to local closing prices, and supplied by a third party vendor based on that vendor's proprietary models. The Fund had no futures contracts outstanding at the end of the period.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is
37
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an of fsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
38
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
39
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. During the period ended August 31, 2010, the Fund held rights and warrants received as a result of a corporate action. Rights and warrants held by the Fun d at the end of the period are listed in the Fund's Schedule of Investments.
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (rights and warrants) | $ | — | $ | — | $ | — | $ | 3,078 | $ | — | $ | 3,078 | |||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 3,078 | $ | — | $ | 3,078 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
40
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the period ended August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (rights and warrants) | $ | — | $ | — | $ | — | $ | (15,338 | ) | $ | — | $ | (15,338 | ) | |||||||||||||
Total | $ | — | $ | — | $ | — | $ | (15,338 | ) | $ | — | $ | (15,338 | ) | |||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (rights and warrants) | $ | — | $ | — | $ | — | $ | (238 | ) | $ | — | $ | (238 | ) | |||||||||||||
Total | $ | — | $ | — | $ | — | $ | (238 | ) | $ | — | $ | (238 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
The volume of derivative activity, based on absolute values (rights and warrants) outstanding at each month-end, was as follows for the period ended August 31, 2010.
Right/ Warrants | |||||||
Average amount outstanding | $ | 13,794 |
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.65% of average daily net assets. The Fund has adopted a Shareholder Service Plan underwhich the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares.
Holders of Class M shares of the Fund pay GMO an administration fee for support services provided to Class M shareholders. That fee is paid monthly at the annual rate of 0.20% of the average daily net assets of Class M shares. Pursuant to a Rule 12b-1 distribution and service plan adopted by the Fund, holders of Class M shares of the Fund may pay a fee, at the annual rate of up to 1.00% of average daily net assets of Class M shares, for any activities or expenses primarily intended to result in the sale of Class M shares of the Fund and/or for the provision of services to Class M shareholders. The Trustees currently limit payments on Class M shares to 0.25% of the Fund's average daily net assets of Class M shares.
41
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 1.00% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means administration fees and distribution (12b-1) fees (Class M Shares only), shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (inc luding an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund's Expense Reimbursement Amount. These contractual expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $2,370 and $828, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
The Fund incurs fees and expenses indirectly as a shareholder of the underlying funds. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Total Indirect Expenses | |||||||||
< 0.001% | 0.000 | % | < 0.001% |
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended August 31, 2010 aggregated $123,284,756 and $110,623,080, respectively.
42
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, 52.66% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2010, 0.17% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 2.86% of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 2,502,423 | $ | 23,404,118 | 4,133,669 | $ | 35,599,651 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 3,391 | 32,249 | 226,027 | 2,048,239 | |||||||||||||||
Shares repurchased | (944,653 | ) | (9,066,086 | ) | (3,185,221 | ) | (25,529,867 | ) | |||||||||||
Net increase (decrease) | 1,561,161 | $ | 14,370,281 | 1,174,475 | $ | 12,118,023 |
43
GMO Emerging Countries Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class M: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 83,896 | $ | 802,940 | 367,766 | $ | 2,886,620 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 107 | 1,004 | 48,468 | 435,225 | |||||||||||||||
Shares repurchased | (241,536 | ) | (2,296,264 | ) | (1,142,455 | ) | (7,969,366 | ) | |||||||||||
Net increase (decrease) | (157,533 | ) | $ | (1,492,320 | ) | (726,221 | ) | $ | (4,647,521 | ) |
10. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO U.S. Treasury Fund | $ | 1,299,863 | $ | 6,000,430 | $ | 7,300,293 | $ | 364 | $ | 73 | $ | — | |||||||||||||||
Totals | $ | 1,299,863 | $ | 6,000,430 | $ | 7,300,293 | $ | 364 | $ | 73 | $ | — |
44
GMO Emerging Countries Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three-, five-, seven- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received
45
GMO Emerging Countries Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparis on to the Manager's separate account clients and the expenses and risks borne by the Manager as a result of the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by , for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating
46
GMO Emerging Countries Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
47
GMO Emerging Countries Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, distribution (12b-1) and/or administration fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
This example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 1.17 | % | $ | 1,000.00 | $ | 1,058.70 | $ | 6.07 | |||||||||||
2) Hypothetical | 1.17 | % | $ | 1,000.00 | $ | 1,019.31 | $ | 5.96 | |||||||||||
Class M | |||||||||||||||||||
1) Actual | 1.47 | % | $ | 1,000.00 | $ | 1,057.10 | $ | 7.62 | |||||||||||
2) Hypothetical | 1.47 | % | $ | 1,000.00 | $ | 1,017.80 | $ | 7.48 |
* Expenses are calculated using each Class's annualized net expense ratio (including indirect expenses incurred) for six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
48
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 106.2 | % | |||||
Loan Participations | 6.3 | ||||||
Loan Assignments | 1.9 | ||||||
Short-Term Investments | 1.7 | ||||||
Rights and Warrants | 0.5 | ||||||
Options Purchased | 0.3 | ||||||
Promissory Notes | 0.1 | ||||||
Futures Contracts | (0.0 | ) | |||||
Written Options | (0.1 | ) | |||||
Forward Currency Contracts | (0.9 | ) | |||||
Swap Agreements | (2.6 | ) | |||||
Reverse Repurchase Agreements | (14.6 | ) | |||||
Other | 1.2 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
1
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2010 (Unaudited)
Country / Region Summary** | % of Investments | ||||||
Argentina | 9.9 | % | |||||
Philippines | 9.5 | ||||||
Russia | 8.8 | ||||||
Venezuela | 6.6 | ||||||
Brazil | 6.1 | ||||||
Turkey | 5.7 | ||||||
Colombia | 4.9 | ||||||
Indonesia | 4.7 | ||||||
Mexico | 4.5 | ||||||
Uruguay | 3.0 | ||||||
Ukraine | 3.0 | ||||||
Dominican Republic | 2.8 | ||||||
Ivory Coast | 2.6 | ||||||
Congo | 2.6 | ||||||
United States | 2.2 | ||||||
Iraq | 2.2 | ||||||
Peru | 1.9 | ||||||
Vietnam | 1.8 | ||||||
United Kingdom | 1.6 | ||||||
Pakistan | 1.3 | ||||||
South Africa | 1.2 | ||||||
El Salvador | 1.0 | ||||||
Bahamas | 1.0 | ||||||
Italy | 0.9 | ||||||
Austria | 0.8 | ||||||
South Korea | 0.8 | ||||||
Tunisia | 0.8 | ||||||
Belize | 0.7 | ||||||
Serbia | 0.7 | ||||||
Israel | 0.7 | ||||||
Sri Lanka | 0.7 | ||||||
Trinidad | 0.6 | ||||||
Angola | 0.6 | ||||||
Greece | 0.5 | ||||||
Qatar | 0.4 | ||||||
Chile | 0.4 | ||||||
Gabon | 0.4 | ||||||
Bosnia | 0.3 | ||||||
Lithuania | 0.3 | ||||||
Croatia | 0.3 | ||||||
Aruba | 0.3 |
2
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2010 (Unaudited)
Country / Region Summary** | % of Investments | ||||||
Egypt | 0.3 | % | |||||
Jamaica | 0.2 | ||||||
Albania | 0.2 | ||||||
Kazakhstan | 0.1 | ||||||
Malaysia | 0.1 | ||||||
Georgia | 0.1 | ||||||
Ecuador | 0.1 | ||||||
Nicaragua | 0.1 | ||||||
India | 0.0 | ||||||
Ghana | 0.0 | ||||||
Costa Rica | 0.0 | ||||||
Guatemala | 0.0 | ||||||
Bulgaria | 0.0 | ||||||
China | 0.0 | ||||||
Poland | 0.0 | ||||||
Morocco | 0.0 | ||||||
Nigeria | 0.0 | ||||||
Romania | 0.0 | ||||||
Thailand | 0.0 | ||||||
Panama | (0.1 | ) | |||||
Lebanon | (0.1 | ) | |||||
Hungary | (0.1 | ) | |||||
100.0 | % |
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds. The table excludes short-term investments. The table includes exposure through the use of derivative contracts. The table is based on duration adjusted exposures, taking into account the market value of securities and the notional amounts of swaps and other derivative contracts. Duration is based on the Manager's models. The greater the duration of a bond, the greater its contribution to the concentration percentage. Credit default swap exposures (positive for long positions and negative for short positions) are factored into the duration-adjusted exposure using the reference security and applying the same methodology to that security. The table reflects net country exposures, including exposures achieved with leveraging associated with reverse repurchase agreements.
3
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value | Description | Value ($) | |||||||||
DEBT OBLIGATIONS — 102.1% | |||||||||||
Albania — 0.2% | |||||||||||
Foreign Government Obligations | |||||||||||
USD | 9,639,573 | Republic of Albania Par Bond, Zero Coupon, due 08/31/25 (a) | 3,952,225 | ||||||||
Argentina — 13.1% | |||||||||||
Foreign Government Obligations — 12.0% | |||||||||||
USD | 9,000,000 | Province of Buenos Aires, Reg S, Step Up, 4.00%, due 05/15/35 | 3,600,000 | ||||||||
USD | 101,177 | Republic of Argentina Discount Bond, 8.28%, due 12/31/33 | 73,505 | ||||||||
USD | 48,223,060 | Republic of Argentina Discount Bond, 8.28%, due 12/31/33 | 36,167,317 | ||||||||
USD | 1,081,139 | Republic of Argentina Discount Bond, 8.28%, due 12/31/33 | 727,068 | ||||||||
EUR | 16,703,814 | Republic of Argentina Discount Bond, 7.82%, due 12/31/33 | 14,129,587 | ||||||||
USD | 97,831,990 | Republic of Argentina Discount Bond, Zero Coupon, due 12/15/35 | 9,685,367 | ||||||||
USD | 24,185,690 | Republic of Argentina Discount Bond, 8.28%, due 12/31/33 | 17,570,903 | ||||||||
DEM | 3,830,000 | Republic of Argentina Discount Bond, Series DM, 6 mo. DEM LIBOR + .81%, 0.00%, due 03/31/23 (b) | 1,364,875 | ||||||||
EUR | 312,220,524 | Republic of Argentina GDP Linked, 2.84%, due 12/15/35 (c) | 34,620,390 | ||||||||
USD | 2,486,532 | Republic of Argentina GDP Linked, 3.17%, due 12/15/35 (c) | 238,707 | ||||||||
ARS | 28,000,000 | Republic of Argentina GDP Linked, 3.72%, due 12/15/35 (c) (d) | 502,812 | ||||||||
ARS | 28,000,000 | Republic of Argentina Global Par Bond, Step Up, 0.63%, due 12/31/38 (d) | 2,750,380 | ||||||||
USD | 21,000,000 | Republic of Argentina Par Bond, Step Up, 2.50%, due 12/31/38 | 7,276,500 | ||||||||
EUR | 250,000,000 | Republic of Argentina Par Bond, Step Up, 2.26%, due 12/31/38 | 99,795,956 | ||||||||
228,503,367 | |||||||||||
Judgments — 1.1% | |||||||||||
USD | 32,000,000 | Republic of Argentina Discount Bond, Series L-GL, 6 mo. LIBOR + .81%, 1.44%, due 03/31/23 (b) (d) (e) | 14,960,000 | ||||||||
USD | 15,000,000 | Republic of Argentina Global Par Bond, Series L-GP, Step Up, 6.00%, due 03/31/23 (b) (d) (e) | 7,012,500 | ||||||||
21,972,500 | |||||||||||
Total Argentina | 250,475,867 |
See accompanying notes to the financial statements.
4
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value | Description | Value ($) | |||||||||
Aruba — 0.3% | |||||||||||
Foreign Government Obligations | |||||||||||
USD | 5,000,000 | Government of Aruba, 6.19%, due 10/30/12 | 5,175,000 | ||||||||
Bahamas — 0.5% | |||||||||||
Foreign Government Obligations | |||||||||||
USD | 9,000,000 | Commonwealth of Bahamas, Reg S, 6.95%, due 11/20/29 | 9,292,500 | ||||||||
Barbados — 0.3% | |||||||||||
Foreign Government Obligations | |||||||||||
USD | 4,800,000 | Government of Barbados, 144A, 7.00%, due 08/04/22 | 4,980,000 | ||||||||
Belize — 0.6% | |||||||||||
Foreign Government Obligations | |||||||||||
USD | 12,925,000 | Government of Belize, Reg S, Step Up, 6.00%, due 02/20/29 | 10,857,000 | ||||||||
Bosnia & Herzegovina — 0.5% | |||||||||||
Foreign Government Obligations | |||||||||||
DEM | 19,942,760 | Bosnia & Herzegovina, Series A, 6 mo. DEM LIBOR + .81%, 1.77%, due 12/11/17 | 9,497,383 | ||||||||
Brazil — 5.0% | |||||||||||
Corporate Debt — 0.5% | |||||||||||
USD | 9,000,000 | Petrobras International Finance Co., 6.88%, due 01/20/40 | 9,810,000 | ||||||||
Foreign Government Agency — 0.5% | |||||||||||
USD | 9,000,000 | Banco Nacional de Desenvolvimento Economico e Social, Reg S, 5.50%, due 07/12/20 | 9,708,750 | ||||||||
Foreign Government Obligations — 4.0% | |||||||||||
USD | 5,891,903 | Brazilian Government International Exit Bonds, 6.00%, due 09/15/13 | 6,009,738 | ||||||||
USD | 230,689 | Brazilian Government International Exit Bonds, Odd Lot, 6.00%, due 09/15/13 | 224,922 | ||||||||
USD | 42,000,000 | Republic of Brazil, 8.25%, due 01/20/34 (f) | 60,060,000 | ||||||||
USD | 8,000,000 | Republic of Brazil, 7.13%, due 01/20/37 | 10,360,000 | ||||||||
76,654,660 | |||||||||||
Total Brazil | 96,173,410 |
See accompanying notes to the financial statements.
5
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value | Description | Value ($) | |||||||||
Chile — 0.1% | |||||||||||
Foreign Government Agency | |||||||||||
USD | 1,700,000 | Empresa Nacional del Petroleo, 144A, 5.25%, due 08/10/20 | 1,734,000 | ||||||||
Colombia — 1.4% | |||||||||||
Foreign Government Agency — 0.5% | |||||||||||
USD | 8,000,000 | Ecopetrol SA, 7.63%, due 07/23/19 | 9,600,000 | ||||||||
Foreign Government Obligations — 0.9% | |||||||||||
USD | 3,800,000 | Republic of Colombia, 11.85%, due 03/09/28 | 6,998,600 | ||||||||
USD | 8,000,000 | Republic of Colombia, 8.70%, due 02/15/16 | 9,840,000 | ||||||||
16,838,600 | |||||||||||
Total Colombia | 26,438,600 | ||||||||||
Congo Republic (Brazzaville) — 3.2% | |||||||||||
Foreign Government Obligations | |||||||||||
USD | 107,015,600 | Republic of Congo, Series US, 2.50%, due 06/30/29 | 60,463,814 | ||||||||
USD | 1,425,000 | Republic of Congo, Series INTL, 2.50%, due 06/30/29 | 815,813 | ||||||||
Total Congo Republic (Brazzaville) | 61,279,627 | ||||||||||
Dominican Republic — 3.5% | |||||||||||
Asset-Backed Securities — 1.2% | |||||||||||
USD | 25,366,175 | Autopistas Del Nordeste Ltd., Reg S, 9.39%, due 04/15/24 | 22,322,230 | ||||||||
USD | 1,123,889 | Autopistas Del Nordeste Ltd., 144A, 9.39%, due 04/15/24 | 989,022 | ||||||||
23,311,252 | |||||||||||
Foreign Government Obligations — 2.3% | |||||||||||
USD | 8,000,000 | Dominican Republic, Reg S, 8.63%, due 04/20/27 | 9,240,000 | ||||||||
USD | 42,557,000 | Dominican Republic Discount Bond, 6 mo. LIBOR + .81%, 1.57%, due 08/30/24 | 34,896,740 | ||||||||
44,136,740 | |||||||||||
Total Dominican Republic | 67,447,992 |
See accompanying notes to the financial statements.
6
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value | Description | Value ($) | |||||||||
Ecuador — 0.1% | |||||||||||
Foreign Government Obligations | |||||||||||
USD | 13,587,000 | Republic of Ecuador, Step Up, Reg S, 10.00%, due 08/15/30 (b) | 2,038,050 | ||||||||
USD | 1,769,187 | Republic of Ecuador PDI (Global Bearer Capitalization Bond), PIK, 6 mo. LIBOR + .81%, 1.38%, due 02/27/15 (d) | 201,687 | ||||||||
Total Ecuador | 2,239,737 | ||||||||||
Egypt — 0.2% | |||||||||||
Corporate Debt — 0.0% | |||||||||||
USD | 794,794 | Petroleum Export Ltd., Reg S, 5.27%, due 06/15/11 | 798,768 | ||||||||
Foreign Government Agency — 0.2% | |||||||||||
USD | 3,000,000 | African Export-Import Bank, 8.75%, due 11/13/14 | 3,315,000 | ||||||||
Total Egypt | 4,113,768 | ||||||||||
El Salvador — 0.8% | |||||||||||
Foreign Government Obligations | |||||||||||
USD | 14,700,000 | Republic of El Salvador, Reg S, 7.65%, due 06/15/35 | 15,986,250 | ||||||||
Gabon — 0.4% | |||||||||||
Foreign Government Obligations | |||||||||||
USD | 7,000,000 | Gabonese Republic, Reg S, 8.20%, due 12/12/17 | 7,962,500 | ||||||||
Grenada — 0.3% | |||||||||||
Foreign Government Obligations | |||||||||||
USD | 10,350,000 | Republic of Grenada, Reg S, Step Up, 2.50%, due 09/15/25 | 5,382,000 | ||||||||
Indonesia — 2.7% | |||||||||||
Foreign Government Agency | |||||||||||
USD | 31,000,000 | Majapahit Holding BV, 144A, 7.88%, due 06/29/37 | 37,820,000 | ||||||||
USD | 10,600,000 | Majapahit Holding BV, 144 A, 7.75%, due 01/20/20 | 12,720,000 | ||||||||
Total Indonesia | 50,540,000 |
See accompanying notes to the financial statements.
7
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value | Description | Value ($) | |||||||||
Iraq — 0.7% | |||||||||||
Foreign Government Obligations | |||||||||||
USD | 15,000,000 | Republic of Iraq, Reg S, 5.80%, due 01/15/28 | 12,881,250 | ||||||||
Israel — 0.8% | |||||||||||
Foreign Government Agency | |||||||||||
USD | 13,000,000 | Israel Electric Corp. Ltd., Reg S, 7.25%, due 01/15/19 | 14,657,500 | ||||||||
Ivory Coast — 2.5% | |||||||||||
Foreign Government Agency | |||||||||||
USD | 84,439,000 | Ivory Coast Government International Bond, Reg S, Step Up, 2.50%, due 12/31/32 | 46,652,548 | ||||||||
Jamaica — 0.2% | |||||||||||
Foreign Government Agency | |||||||||||
USD | 3,214,286 | Air Jamaica Ltd., Reg S, 9.38%, due 07/08/15 | 3,254,464 | ||||||||
Lithuania — 0.2% | |||||||||||
Foreign Government Obligations | |||||||||||
USD | 4,000,000 | Republic of Lithuania, Reg S, 7.38%, due 02/11/20 | 4,490,000 | ||||||||
Malaysia — 0.7% | |||||||||||
Asset-Backed Securities | |||||||||||
MYR | 50,000,000 | Transshipment Megahub Berhad, Series F, 6.70%, due 11/02/12 | 13,399,614 | ||||||||
Mexico — 7.2% | |||||||||||
Foreign Government Agency — 4.6% | |||||||||||
EUR | 30,000,000 | Pemex Project Funding Master Trust, Reg S, 6.38%, due 08/05/16 | 41,773,644 | ||||||||
EUR | 26,500,000 | Pemex Project Funding Master Trust, Reg S, 5.50%, due 02/24/25 | 33,414,226 | ||||||||
GBP | 7,689,000 | Pemex Project Funding Master Trust, EMTN, 7.50%, due 12/18/13 | 13,059,905 | ||||||||
88,247,775 | |||||||||||
Foreign Government Obligations — 2.6% | |||||||||||
GBP | 29,994,000 | United Mexican States, GMTN, 6.75%, due 02/06/24 | 49,335,339 | ||||||||
Total Mexico | 137,583,114 |
See accompanying notes to the financial statements.
8
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value | Description | Value ($) | |||||||||
Nicaragua — 0.1% | |||||||||||
Foreign Government Obligations | |||||||||||
USD | 2,463,198 | Republic of Nicaragua BPI, Series E, 5.00%, due 02/01/11 | 2,340,038 | ||||||||
Pakistan — 0.8% | |||||||||||
Foreign Government Obligations | |||||||||||
USD | 20,000,000 | Islamic Republic of Pakistan, Reg S, 7.88%, due 03/31/36 | 15,600,000 | ||||||||
Peru — 1.7% | |||||||||||
Foreign Government Obligations | |||||||||||
USD | 12,452,000 | Peru Enhanced Pass-Through Finance Ltd., Reg S, Zero Coupon, due 06/02/25 | 6,381,650 | ||||||||
USD | 25,000,000 | Peru Par Bond, Series 30 Yr., Step Up, 3.00%, due 03/07/27 | 21,750,000 | ||||||||
USD | 4,625,077 | Peru Trust, Series 97-I-P, Class A3, Zero Coupon, due 12/31/15 (b) (d) | 3,039,025 | ||||||||
USD | 1,539,783 | Peru Trust, Series 1998 I-P, Zero Coupon, due 03/10/16 (b) (d) | 1,011,754 | ||||||||
USD | 1,640,372 | Peru Trust II, Series 98-A LB, Zero Coupon, due 02/28/16 (b) (d) | 1,077,848 | ||||||||
Total Peru | 33,260,277 | ||||||||||
Philippines — 7.8% | |||||||||||
Foreign Government Agency — 4.9% | |||||||||||
USD | 55,450,000 | National Power Corp., Global Bond, 9.63%, due 05/15/28 | 75,412,000 | ||||||||
USD | 8,500,000 | National Power Corp., Global Bond, 8.40%, due 12/15/16 | 10,710,000 | ||||||||
USD | 6,296,000 | Power Sector Assets & Liabilities Management Corp., 144A, 7.39%, due 12/02/24 | 7,665,380 | ||||||||
93,787,380 | |||||||||||
Foreign Government Obligations — 2.9% | |||||||||||
USD | 35,651,000 | Central Bank of Philippines, Series A, 8.60%, due 06/15/27 | 45,811,535 | ||||||||
USD | 5,000,000 | Republic of Philippines, 6.50%, due 01/20/20 | 5,912,500 | ||||||||
USD | 3,000,000 | Republic of Philippines, 8.38%, due 06/17/19 | 3,960,000 | ||||||||
55,684,035 | |||||||||||
Total Philippines | 149,471,415 |
See accompanying notes to the financial statements.
9
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value | Description | Value ($) | |||||||||
Qatar — 0.4% | |||||||||||
Foreign Government Agency | |||||||||||
USD | 4,000,000 | Qatari Diar Finance QSC, 144A, 5.00%, due 07/21/20 | 4,200,000 | ||||||||
USD | 3,500,000 | Qtel International Finance Ltd., Reg S, 7.88%, due 06/10/19 | 4,291,000 | ||||||||
Total Qatar | 8,491,000 | ||||||||||
Russia — 8.7% | |||||||||||
Corporate Debt — 7.9% | |||||||||||
USD | 77,200,000 | Gaz Capital SA, Reg S, 9.25%, due 04/23/19 | 93,026,000 | ||||||||
USD | 9,854,948 | Gazprom International SA, Reg S, 7.20%, due 02/01/20 | 10,520,157 | ||||||||
USD | 8,000,000 | Sberbank Capital SA, EMTN, 6.48%, due 05/15/13 | 8,440,000 | ||||||||
USD | 14,900,000 | Transcapital Ltd. (Transneft), Reg S, 8.70%, due 08/07/18 | 18,401,500 | ||||||||
USD | 19,000,000 | VTB Capital SA, Reg S, 6.25%, due 06/30/35 | 19,332,500 | ||||||||
149,720,157 | |||||||||||
Foreign Government Agency — 0.8% | |||||||||||
USD | 15,000,000 | RSHB Capital SA, Reg S, 6.30%, due 05/15/17 | 15,582,000 | ||||||||
Total Russia | 165,302,157 | ||||||||||
Senegal — 0.3% | |||||||||||
Foreign Government Obligations | |||||||||||
USD | 5,000,000 | Republic of Senegal, 8.75%, due 12/22/14 | 5,100,000 | ||||||||
Serbia — 0.8% | |||||||||||
Foreign Government Obligations | |||||||||||
USD | 14,467,159 | Republic of Serbia, Reg S, Step Up, 6.75%, due 11/01/24 | 14,250,152 | ||||||||
South Africa — 1.0% | |||||||||||
Foreign Government Agency — 0.3% | |||||||||||
ZAR | 163,000,000 | Eskom Holdings Ltd., Zero Coupon, due 12/31/32 | 2,232,934 | ||||||||
ZAR | 20,000,000 | Transnet Ltd., 13.50%, due 04/18/28 | 3,266,983 | ||||||||
5,499,917 |
See accompanying notes to the financial statements.
10
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value | Description | Value ($) | |||||||||
Foreign Government Obligations — 0.7% | |||||||||||
USD | 3,500,000 | Republic of South Africa, 5.88%, due 05/30/22 | 3,998,750 | ||||||||
USD | 8,500,000 | South Africa Government International Bond, 5.50%, due 03/09/20 | 9,435,000 | ||||||||
13,433,750 | |||||||||||
Total South Africa | 18,933,667 | ||||||||||
South Korea — 1.2% | |||||||||||
Foreign Government Agency — 0.9% | |||||||||||
USD | 8,000,000 | Export-Import Bank of Korea, 5.13%, due 06/29/20 | 8,622,400 | ||||||||
USD | 4,000,000 | Korea Gas Corp, Reg S, 6.00%, due 07/15/14 | 4,431,000 | ||||||||
USD | 4,000,000 | Korea Southern Power Co., Reg S, 5.38%, due 04/18/13 | 4,280,400 | ||||||||
17,333,800 | |||||||||||
Foreign Government Obligations — 0.3% | |||||||||||
USD | 5,000,000 | Republic of Korea, 5.75%, due 04/16/14 | 5,578,495 | ||||||||
Total South Korea | 22,912,295 | ||||||||||
Sri Lanka — 1.0% | |||||||||||
Foreign Government Obligations | |||||||||||
USD | 17,000,000 | Republic of Sri Lanka, Reg S, 8.25%, due 10/24/12 | 18,338,750 | ||||||||
USD | 1,000,000 | Republic of Sri Lanka, Reg S, 7.40%, due 01/22/15 | 1,072,500 | ||||||||
Total Sri Lanka | 19,411,250 | ||||||||||
Trinidad And Tobago — 0.7% | |||||||||||
Foreign Government Agency | |||||||||||
USD | 1,000,000 | Petroleum Company of Trinidad and Tobago Ltd., Reg. S, 9.75%, due 08/14/19 | 1,202,500 | ||||||||
USD | 9,500,000 | Petroleum Company of Trinidad and Tobago Ltd., 144A, 9.75%, due 08/14/19 | 11,423,750 | ||||||||
USD | 1,500,000 | Petroleum Company of Trinidad and Tobago Ltd., Reg. S, 6.00%, due 05/08/22 | 1,507,500 | ||||||||
Total Trinidad And Tobago | 14,133,750 | ||||||||||
Tunisia — 0.2% | |||||||||||
Foreign Government Agency | |||||||||||
JPY | 360,000,000 | Banque Centrale De Tunisie, Series 6BR, 4.35%, due 08/15/17 | 4,617,307 |
See accompanying notes to the financial statements.
11
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value | Description | Value ($) | |||||||||
Turkey — 2.4% | |||||||||||
Foreign Government Obligations | |||||||||||
USD | 41,000,000 | Republic of Turkey, 6.75%, due 05/30/40 (f) | 44,997,500 | ||||||||
Ukraine — 1.4% | |||||||||||
Foreign Government Agency — 0.5% | |||||||||||
USD | 9,000,000 | Credit Suisse First Boston, the EXIM of Ukraine, 6.80%, due 10/04/12 | 8,820,000 | ||||||||
Foreign Government Obligations — 0.9% | |||||||||||
USD | 18,000,000 | City of Kyiv, Reg S, 8.25%, due 11/26/12 | 17,550,000 | ||||||||
Total Ukraine | 26,370,000 | ||||||||||
United States — 17.8% | |||||||||||
Asset-Backed Securities — 2.8% | |||||||||||
USD | 3,770,803 | Aircraft Finance Trust, Series 99-1A, Class A1, 144A, 1 mo. LIBOR + .48%, 0.76%, due 05/15/24 | 1,696,862 | ||||||||
USD | 183,665 | Chevy Chase Mortgage Funding Corp., Series 03-4A, Class A1, 144A, AMBAC, 1 mo. LIBOR + .34%, 0.60%, due 10/25/34 | 110,199 | ||||||||
USD | 1,441,981 | CNL Commercial Mortgage Loan Trust, Series 03-2A, Class A1, 144A, AMBAC, 1 mo. LIBOR + .44%, 0.70%, due 10/25/30 | 865,189 | ||||||||
USD | 20,899,957 | Countrywide Home Equity Loan Trust, Series 05-F, Class 2A, AMBAC, 1 mo. LIBOR + .24%, 0.52%, due 12/15/35 | 7,105,985 | ||||||||
USD | 14,883,472 | Countrywide Home Equity Loan Trust, Series 05-H, Class 2A, FGIC, 1 mo. LIBOR + .24%, 0.52%, due 12/15/35 | 4,502,250 | ||||||||
USD | 10,009,213 | Countrywide Home Equity Loan Trust, Series 06-D, Class 2A, XL, 1 mo. LIBOR + .20%, 0.48%, due 05/15/36 | 2,327,142 | ||||||||
USD | 4,515,451 | First Franklin Mortgage Loan Asset Backed Certificates, Series 05-FF10, Class A6M, 1 mo. LIBOR + .35%, 0.61%, due 11/25/35 | 1,264,326 | ||||||||
USD | 2,687,973 | GSAMP Trust, Series 05-HE6, Class A2B, 1 mo. LIBOR + .19%, 0.45%, due 11/25/35 | 2,424,014 | ||||||||
USD | 9,250,000 | Home Equity Asset Trust, Series 07-1, Class 2A4, 1 mo. LIBOR + .23%, 0.49%, due 05/25/37 | 714,840 | ||||||||
USD | 8,880,168 | IXIS Real Estate Capital Trust, Series 06-HE2, Class A3, 1 mo. LIBOR + .16%, 0.42%, due 08/25/36 | 2,984,802 | ||||||||
USD | 13,000,000 | Master Asset-Backed Securities Trust, Series 06-NC3, Class A4, 1 mo. LIBOR + .16%, 0.42%, due 10/25/36 | 4,680,000 | ||||||||
USD | 8,378,943 | Morgan Stanley ABS Capital I, Series 06-NC3, Class A2C, 1 mo. LIBOR + .17%, 0.43%, due 03/25/36 | 4,713,156 |
See accompanying notes to the financial statements.
12
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value | Description | Value ($) | |||||||||
Asset-Backed Securities — continued | |||||||||||
USD | 15,000,000 | Morgan Stanley IXIS Real Estate Capital Trust, Series 06-2, Class A3, 1 mo. LIBOR + .15%, 0.41%, due 11/25/36 | 6,337,500 | ||||||||
USD | 15,200,000 | Morgan Stanley IXIS Real Estate Capital Trust, Series 06-2, Class A4, 1 mo. LIBOR + .22%, 0.48%, due 11/25/36 | 5,472,000 | ||||||||
USD | 12,868,000 | Option One Mortgage Loan Trust, Series 06-3, Class 2A4, 1 mo. LIBOR + .22%, 0.48%, due 02/25/37 | 4,761,160 | ||||||||
USD | 8,000,000 | Wamu Asset-Backed Certificates, Series 07-HE2, Class 2A4, 1 mo. LIBOR + .36%, 0.62%, due 04/25/37 | 3,020,000 | ||||||||
52,979,425 | |||||||||||
U.S. Government — 15.0% | |||||||||||
USD | 50,000,000 | U.S. Treasury Bond, 5.25%, due 02/15/29 (f) (g) | 64,367,200 | ||||||||
USD | 96,089,875 | U.S. Treasury Inflation Indexed Note, 2.38%, due 04/15/11 (c) (f) (g) | 97,283,503 | ||||||||
USD | 100,000,000 | U.S. Treasury Principal Strip Bond, due 11/15/21 (f) | 71,914,300 | ||||||||
USD | 30,000,000 | U.S. Treasury Strip Coupon Bond, due 05/15/23 (f) | 20,092,350 | ||||||||
USD | 50,000,000 | U.S. Treasury Strip Coupon Bond, due 11/15/23 (f) | 32,860,450 | ||||||||
286,517,803 | |||||||||||
Total United States | 339,497,228 | ||||||||||
Uruguay — 3.4% | |||||||||||
Foreign Government Obligations | |||||||||||
USD | 29,851,571 | Republic of Uruguay, 7.63%, due 03/21/36 | 38,807,037 | ||||||||
EUR | 10,000,000 | Republica Oriental de Uruguay, 6.88%, due 01/19/16 | 13,813,026 | ||||||||
JPY | 988,800,000 | Republica Oriental de Uruguay, Series 3BR, Step Up, 2.50%, due 03/14/11 (d) | 11,653,479 | ||||||||
Total Uruguay | 64,273,542 | ||||||||||
Venezuela — 5.6% | |||||||||||
Corporate Debt — 0.6% | |||||||||||
USD | 20,000,000 | Electricidad de Caracas Finance BV, 8.50%, due 04/10/18 | 11,000,000 | ||||||||
Foreign Government Agency — 0.3% | |||||||||||
USD | 8,750,000 | Petroleos de Venezuela SA, 5.25%, due 04/12/17 | 5,031,250 |
See accompanying notes to the financial statements.
13
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value | Description | Value ($) | |||||||||
Foreign Government Obligations — 4.7% | |||||||||||
USD | 110,500,000 | Republic of Venezuela, Reg S, 7.75%, due 10/13/19 | 70,996,250 | ||||||||
USD | 31,100,000 | Republic of Venezuela, Reg S, 8.25%, due 10/13/24 | 18,893,250 | ||||||||
89,889,500 | |||||||||||
Total Venezuela | 105,920,750 | ||||||||||
Vietnam — 1.3% | |||||||||||
Foreign Government Obligations | |||||||||||
USD | 6,000,000 | Socialist Republic of Vietnam, Reg S, 6.75%, due 01/29/20 | 6,495,000 | ||||||||
USD | 19,750,000 | Socialist Republic of Vietnam, Series 30 Yr., Step Up, 4.00%, due 03/12/28 | 15,207,500 | ||||||||
USD | 4,000,000 | Socialist Republic of Vietnam, Series 30 Yr., 6 mo. LIBOR + .81%, 1.25%, due 03/13/28 | 3,200,000 | ||||||||
24,902,500 | |||||||||||
Total Vietnam | 24,902,500 | ||||||||||
TOTAL DEBT OBLIGATIONS (COST $1,902,353,268) | 1,946,231,177 | ||||||||||
LOAN ASSIGNMENTS — 1.9% | |||||||||||
Angola — 0.2% | |||||||||||
USD | 2,300,000 | Angolan Ministry of Finance Loan Agreement, 6 mo. LIBOR + 5.50%, 6.14%, due 03/07/13 | 2,070,000 | ||||||||
USD | 2,300,000 | Angolan Ministry of Finance Loan Agreement, 6 mo. LIBOR + 5.50%, 6.14%, due 07/08/13 | 2,047,000 | ||||||||
Total Angola | 4,117,000 | ||||||||||
Dominican Republic — 0.2% | |||||||||||
USD | 4,000,165 | Dominican Republic, 6 mo. LIBOR + 1.75%, 2.34%, due 08/15/15 | 3,262,135 | ||||||||
Indonesia — 1.0% | |||||||||||
EUR | 1,992,811 | Republic of Indonesia, Indonesia Paris Club Debt, 8.84%, due 06/01/21 (h) | 1,881,416 | ||||||||
USD | 3,493,954 | Republic of Indonesia Loan Agreement, dated June 14, 1995, 6 mo. LIBOR + .88%, 1.44%, due 12/14/19 | 3,162,028 |
See accompanying notes to the financial statements.
14
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value | Description | Value ($) | |||||||||
Indonesia — continued | |||||||||||
USD | 3,493,954 | Republic of Indonesia Loan Agreement, dated June 14, 1995, 6 mo. LIBOR + .88%, 1.44%, due 12/14/19 | 3,162,028 | ||||||||
USD | 4,660,092 | Republic of Indonesia Loan Agreement, dated June 14, 1995, 6 mo. LIBOR + .88%, 1.44%, due 12/14/19 | 4,217,383 | ||||||||
USD | 1,738,076 | Republic of Indonesia Loan Agreement, dated September 29, 1994, 7.24%, due 12/01/19 | 1,599,030 | ||||||||
USD | 2,539,103 | Republic of Indonesia Loan Agreement, dated September 29, 1994, 6 mo. LIBOR + .75%, 1.63%, due 12/01/19 | 2,335,974 | ||||||||
JPY | 84,240,000 | Republic of Indonesia Loan Agreement, 6 mo. JPY LIBOR + .88%, 1.26%, due 03/28/13 | 947,587 | ||||||||
USD | 1,716,000 | Republic of Indonesia Loan Agreement, 6 mo. LIBOR +.88%, 1.50%, due 03/29/13 | 1,621,620 | ||||||||
Total Indonesia | 18,927,066 | ||||||||||
Vietnam — 0.5% | |||||||||||
USD | 16,000,000 | Vietnam Shipbuilding Industry Group Loan Agreement, 6 mo. LIBOR + 1.50%, 2.25%, due 06/26/15 (d) | 10,357,677 | ||||||||
TOTAL LOAN ASSIGNMENTS (COST $37,834,731) | 36,663,878 | ||||||||||
LOAN PARTICIPATIONS — 6.3% | |||||||||||
Egypt — 0.2% | |||||||||||
CHF | 4,305,359 | Paris Club Loan Agreement (Participation with Standard Chartered Bank), due 01/03/24 (h) | 3,607,959 | ||||||||
Indonesia — 1.8% | |||||||||||
USD | 430,025 | Republic of Indonesia Loan Agreement (Participation with Citibank), 6 mo. LIBOR +.88%, 1.44%, due 12/14/19 | 389,173 | ||||||||
USD | 573,550 | Republic of Indonesia Loan Agreement (Participation with Citibank), 6 mo. LIBOR +.88%, 1.44%, due 12/14/19 | 519,063 | ||||||||
USD | 430,025 | Republic of Indonesia Loan Agreement (Participation with Citibank), 6 mo. LIBOR +.88%, 1.44%, due 12/14/19 | 389,173 | ||||||||
USD | 7,044,026 | Republic of Indonesia Loan Agreement (Participation with Morgan Stanley), dated June 14, 1995, 6 mo. LIBOR + .88%, 1.44%, due 12/14/19 | 6,374,843 | ||||||||
JPY | 498,028,179 | Republic of Indonesia Loan Agreement (Participation with Deutsche Bank), 6 mo. JPY LIBOR +.88%, 1.26%, due 03/29/13 | 5,602,150 |
See accompanying notes to the financial statements.
15
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value | Description | Value ($) | |||||||||
Indonesia — continued | |||||||||||
USD | 14,481,024 | Republic of Indonesia Loan Agreement (Participation with Deutsche Bank), 3 mo. LIBOR + 1.25%, 1.65%, due 02/12/13 | 13,250,138 | ||||||||
USD | 9,191,306 | Republic of Indonesia Loan Agreement (Participation with Deutsche Bank), 6 mo. LIBOR +.88%, 1.31%, due 09/29/19 | 8,456,002 | ||||||||
Total Indonesia | 34,980,542 | ||||||||||
Iraq — 2.3% | |||||||||||
JPY | 639,938,866 | Republic of Iraq Paris Club Loan, T Chatani (Participation with Deutsche Bank), 4.85%, due 01/01/28 | 4,818,471 | ||||||||
USD | 3,402,097 | Republic of Iraq Paris Club Loan Agreement (Participation with Credit Suisse), 6 mo. LIBOR +.50%, 1.00%, due 01/01/28 | 1,501,345 | ||||||||
JPY | 4,897,603,039 | Republic of Iraq Paris Club Loan Agreement (Participation with Deutsche Bank), 4.85%, due 01/01/28 | 37,402,740 | ||||||||
Total Iraq | 43,722,556 | ||||||||||
Russia — 0.7% | |||||||||||
EUR | 57,042,402 | Russian Foreign Trade Obligations (Participation with GML International Ltd.), due 01/01/50 (b) (d) | 12,893,082 | ||||||||
Vietnam — 1.3% | |||||||||||
JPY | 2,363,574,226 | Socialist Republic of Vietnam Loan Agreement (Participation with Deutsche Bank), 6 mo. JPY LIBOR + .60%, 1.05%, due 09/01/17 | 24,758,306 | ||||||||
TOTAL LOAN PARTICIPATIONS (COST $139,122,620) | 119,962,445 | ||||||||||
PROMISSORY NOTES — 0.1% | |||||||||||
Dominican Republic — 0.1% | |||||||||||
USD | 817,249 | Dominican Republic Promissory Notes, 0.00%, due 09/15/11 | 661,972 | ||||||||
USD | 817,249 | Dominican Republic Promissory Notes, 0.00%, due 09/15/10 | 811,119 | ||||||||
Total Dominican Republic | 1,473,091 | ||||||||||
Ghana — 0.0% | |||||||||||
USD | 3,312,500 | Republic of Ghana Promissory Notes, 0.00%, due 08/07/07 (b) (i) | 331,250 | ||||||||
TOTAL PROMISSORY NOTES (COST $4,864,485) | 1,804,341 |
See accompanying notes to the financial statements.
16
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Principal Amount /Shares | Description | Value ($) | |||||||||||||
OPTIONS PURCHASED — 0.2% | |||||||||||||||
Options on Interest Rate Swaps — 0.2% | |||||||||||||||
KRW | 50,000,000,000 | KRW Swaption Call, Expires 03/21/11, Strike 5.64% | 3,271,207 | ||||||||||||
KRW | 50,000,000,000 | KRW Swaption Put, Expires 03/21/11, Strike 5.64% | 1,043 | ||||||||||||
Total Options on Interest Rate Swaps | 3,272,250 | ||||||||||||||
TOTAL OPTIONS PURCHASED (COST $1,935,983) | 3,272,250 | ||||||||||||||
MUTUAL FUNDS — 4.2% | |||||||||||||||
United States — 4.2% | |||||||||||||||
Affiliated Issuers | |||||||||||||||
3,976,082 | GMO Short-Duration Collateral Fund | 46,440,638 | |||||||||||||
21,409 | GMO Special Purpose Holding Fund (j) | 11,561 | |||||||||||||
4,586 | GMO U.S. Treasury Fund | 114,712 | |||||||||||||
1,515,449 | GMO World Opportunity Overlay Fund | 33,597,497 | |||||||||||||
Total United States | 80,164,408 | ||||||||||||||
TOTAL MUTUAL FUNDS (COST $85,406,195) | 80,164,408 | ||||||||||||||
RIGHTS AND WARRANTS — 0.5% | |||||||||||||||
Nigeria — 0.1% | |||||||||||||||
25,000 | Central Bank of Nigeria Warrants, Expires 11/15/20 * | 2,875,000 | |||||||||||||
Venezuela — 0.4% | |||||||||||||||
205,145 | Republic of Venezuela Oil Warrants, Expires 04/15/20 * | 5,436,343 | |||||||||||||
6,660 | Republic of Venezuela Oil Warrants, Expires 04/15/20 * | 176,490 | |||||||||||||
128,645 | Republic of Venezuela Oil Warrants, Expires 04/15/20 * (d) (k) | 1,704,546 | |||||||||||||
Total Venezuela | 7,317,379 | ||||||||||||||
Uruguay — 0.0% | |||||||||||||||
4,000,000 | Banco Central Del Uruguay Value Recovery Rights, VRRB, Expires 01/02/21 * (d) | — | |||||||||||||
TOTAL RIGHTS AND WARRANTS (COST $0) | 10,192,379 |
See accompanying notes to the financial statements.
17
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
SHORT-TERM INVESTMENTS — 1.5% | |||||||||||||||
Money Market Funds — 1.5% | |||||||||||||||
1,933,172 | State Street Institutional Liquid Reserves Fund-Institutional Class | 1,933,172 | |||||||||||||
25,563,975 | State Street Institutional Treasury Plus Money Market Fund-Institutional Class | 25,563,975 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $27,497,147) | 27,497,147 | ||||||||||||||
TOTAL INVESTMENTS — 116.8% (Cost $2,199,014,429) | 2,225,788,025 | ||||||||||||||
Other Assets and Liabilities (net) — (16.8%) | (319,953,000 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 1,905,835,025 |
See accompanying notes to the financial statements.
18
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
A summary of outstanding financial instruments at August 31, 2010 is as follows:
Forward Currency Contracts
Settlement Date | Counterparty | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||
Sales # | |||||||||||||||||||||||
10/12/10 | Deutsche Bank AG | EUR | 305,212,000 | $ | 386,760,573 | $ | (12,016,467 | ) | |||||||||||||||
9/07/10 | Barclays Bank | GBP | 30,000,000 | 46,007,924 | (2,865,824 | ) | |||||||||||||||||
10/19/10 | Deutsche Bank AG | JPY | 5,500,000,000 | 65,501,451 | (3,199,684 | ) | |||||||||||||||||
$ | 498,269,948 | $ | (18,081,975 | ) |
# Fund sells foreign currency; buys USD.
Reverse Repurchase Agreements
Face Value | Description | Market Value | |||||||||
USD | 16,597,500 | Barclays Bank PLC, 0.85%, dated 07/09/10, to be repurchased on demand at face value plus accrued interest. (l) | $ | (16,617,094 | ) | ||||||
USD | 31,937,500 | Barclays Bank PLC, 0.30%, dated 08/26/10, to be repurchased on demand at face value plus accrued interest with a stated maturity date of 10/08/10. | (31,937,766 | ) | |||||||
USD | 19,575,000 | Barclays Bank PLC, 0.30%, dated 08/26/10, to be repurchased on demand at face value plus accrued interest with a stated maturity date of 10/08/10. | (19,575,163 | ) | |||||||
USD | 61,556,250 | Barclays Bank PLC, 0.30%, dated 08/26/10, to be repurchased on demand at face value plus accrued interest with a stated maturity date of 10/08/10. | (61,556,762 | ) | |||||||
USD | 34,875,000 | Barclays Bank PLC, 0.30%, dated 08/26/10, to be repurchased on demand at face value plus accrued interest with a stated maturity date of 10/08/10. | (34,875,291 | ) | |||||||
USD | 27,500,000 | Deutsche Bank, 0.25%, dated 08/19/10, to be repurchased on demand at face value plus accrued interest with a stated maturity date of 09/17/10. | (27,502,483 | ) |
See accompanying notes to the financial statements.
19
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Reverse Repurchase Agreements — continued
Face Value | Description | Market Value | |||||||||
USD | 40,296,250 | Deutsche Bank AG, 0.60%, dated 12/02/09, to be repurchased on demand at face value plus accrued interest. (l) | $ | (40,478,255 | ) | ||||||
USD | 10,745,625 | JPMorgan Chase Bank, 0.65%, dated 07/21/10, to be repurchased on demand at face value plus accrued interest. (l) | (10,753,386 | ) | |||||||
USD | 32,750,000 | JPMorgan Chase Bank, 0.47%, dated 08/02/10, to be repurchased on demand at face value plus accrued interest with a stated maturity date of 09/02/10. | (32,762,827 | ) | |||||||
$ | (276,059,027 | ) |
Average balance outstanding | $ | (292,535,207 | ) | ||||
Average interest rate | 0.45 | % | |||||
Maximum balance outstanding | $ | (330,919,507 | ) |
Average balance outstanding was calculated based on daily face value balances outstanding during the period that the Fund has entered into reverse repurchase agreements.
Swap Agreements
Credit Default Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay)^ | Annual Premium | Implied Credit Spread (1) | Deliverable on Default | Maximum Potential Amount of Future Payments by the Fund Under the Contract (2) | Market Value | |||||||||||||||||||||||||||||||||||
35,000,000 | USD | 9/20/2010 | JP Morgan | (Pay) | 0.70 | % | 0.54 | % | Republic of | N/A | $ | (51,433 | ) | ||||||||||||||||||||||||||||||
Chase Bank | Philippines | ||||||||||||||||||||||||||||||||||||||||||
30,000,000 | USD | 9/20/2010 | JP Morgan Chase Bank | (Pay) | 0.97 | % | 1.36 | % | Gazprom OAO | N/A | (124,480 | ) | |||||||||||||||||||||||||||||||
20,000,000 | USD | 10/20/2010 | Goldman Sachs | (Pay) | 2.74 | % | 0.94 | % | Petroleos Mexicanos | N/A | (252,318 | ) | |||||||||||||||||||||||||||||||
5,000,000 | USD | 10/25/2010 | Deutsche | Receive | 4.60 | % | 7.07 | % | Government | 5,000,000 | USD | 62,348 | |||||||||||||||||||||||||||||||
Bank AG | of Ukraine |
See accompanying notes to the financial statements.
20
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Credit Default Swaps — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay)^ | Annual Premium | Implied Credit Spread (1) | Deliverable on Default | Maximum Potential Amount of Future Payments by the Fund Under the Contract (2) | Market Value | |||||||||||||||||||||||||||||||||||
10,000,000 | USD | 12/20/2010 | JP Morgan | (Pay) | 3.57 | % | 5.20 | % | Republic of | N/A | $ | (20,490 | ) | ||||||||||||||||||||||||||||||
Chase Bank | Argentina | ||||||||||||||||||||||||||||||||||||||||||
5,000,000 | USD | 12/20/2010 | JP Morgan Chase Bank | (Pay) | 3.43% | 5.20% | Republic of Argentina | N/A | (6,731 | ) | |||||||||||||||||||||||||||||||||
5,000,000 | USD | 1/25/2011 | Deutsche Bank AG | Receive | 4.63% | 7.17% | Government of Ukraine | 5,000,000 | USD | (27,580 | ) | ||||||||||||||||||||||||||||||||
7,000,000 | USD | 2/7/2011 | Deutsche Bank AG | Receive | 4.95% | 7.18% | Government of Ukraine | 7,000,000 | USD | (46,640 | ) | ||||||||||||||||||||||||||||||||
3,000,000 | USD | 2/25/2011 | Deutsche Bank AG | Receive | 3.50% | 27.16% | Deutsche Bank Loan to Ukrtelekom | 3,000,000 | USD | (319,897 | ) | ||||||||||||||||||||||||||||||||
10,000,000 | USD | 3/20/2011 | JP Morgan Chase Bank | (Pay) | 5.00% | 5.30% | Government of Ukraine | N/A | (82,253 | ) | |||||||||||||||||||||||||||||||||
5,000,000 | USD | 3/20/2011 | JP Morgan Chase Bank | (Pay) | 5.00% | 5.30% | Government of Ukraine | N/A | (41,126 | ) | |||||||||||||||||||||||||||||||||
8,000,000 | USD | 3/20/2011 | UBS AG | (Pay) | 3.55% | 5.60% | Republic of Iraq | N/A | (38,783 | ) | |||||||||||||||||||||||||||||||||
8,000,000 | USD | 3/20/2011 | Citigroup | (Pay) | 3.70% | 3.70% | Republic of Iraq | N/A | (133,255 | ) | |||||||||||||||||||||||||||||||||
5,000,000 | USD | 4/26/2011 | Deutsche Bank AG | Receive | 4.66% | 7.28% | Government of Ukraine | 5,000,000 | USD | (1,445 | ) | ||||||||||||||||||||||||||||||||
4,000,000 | USD | 5/20/2011 | JP Morgan Chase Bank | (Pay) | 5.00% | 5.39% | Republic of Jamaica | N/A | 4,922 | ||||||||||||||||||||||||||||||||||
6,000,000 | USD | 6/20/2011 | JP Morgan Chase Bank | Receive | 3.75% | 4.47% | Republic of Georgia | 6,000,000 | USD | 9,879 | |||||||||||||||||||||||||||||||||
10,000,000 | USD | 6/20/2011 | Deutsche Bank AG | (Pay) | 1.89% | 4.98% | Islamic Republic of Pakistan | N/A | 205,245 | ||||||||||||||||||||||||||||||||||
9,000,000 | USD | 7/17/2011 | UBS AG | Receive | 5.05% | 5.57% | Government of Ukraine | 9,000,000 | USD | 13,968 | |||||||||||||||||||||||||||||||||
5,000,000 | USD | 7/25/2011 | Deutsche Bank AG | Receive | 4.68% | 7.40% | Government of Ukraine | 5,000,000 | USD | (94,804 | ) | ||||||||||||||||||||||||||||||||
7,000,000 | USD | 8/5/2011 | Deutsche Bank AG | Receive | 5.00% | 7.41% | Government of Ukraine | 7,000,000 | USD | (126,241 | ) |
See accompanying notes to the financial statements.
21
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Credit Default Swaps — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay)^ | Annual Premium | Implied Credit Spread (1) | Deliverable on Default | Maximum Potential Amount of Future Payments by the Fund Under the Contract (2) | Market Value | |||||||||||||||||||||||||||||||||||
620,000,000 | MXN | 8/20/2011 | Deutsche | Receive | 0.40 | % | 0.47 | % | United | 620,000,000 | MXN | $ | (27,052 | ) | |||||||||||||||||||||||||||||
Bank AG | Mexican | ||||||||||||||||||||||||||||||||||||||||||
States | |||||||||||||||||||||||||||||||||||||||||||
20,000,000 | USD | 8/20/2011 | Deutsche Bank AG | (Pay) | 0.57% | 0.82% | United Mexican States | N/A | 46,115 | ||||||||||||||||||||||||||||||||||
3,000,000 | USD | 8/25/2011 | Deutsche Bank AG | Receive | 3.60% | 29.88% | Deutsche Bank Loan to Ukrtelekom | 3,000,000 | USD | (652,461 | ) | ||||||||||||||||||||||||||||||||
45,000,000 | USD | 10/20/2011 | Goldman Sachs | (Pay) | 12.35% | 7.43% | Republic of Argentina | N/A | (4,481,697 | ) | |||||||||||||||||||||||||||||||||
7,000,000 | USD | 10/20/2011 | JP Morgan Chase Bank | (Pay) | 2.75% | 7.43% | Republic of Argentina | N/A | 288,513 | ||||||||||||||||||||||||||||||||||
5,000,000 | USD | 10/25/2011 | Deutsche Bank AG | Receive | 4.70% | 7.39% | Government of Ukraine | 5,000,000 | USD | (65,092 | ) | ||||||||||||||||||||||||||||||||
8,000,000 | USD | 11/20/2011 | JP Morgan Chase Bank | (Pay) | 2.16% | 7.59% | Republic of Argentina | N/A | 460,175 | ||||||||||||||||||||||||||||||||||
4,791,760 | USD | 12/20/2011 | Deutsche Bank AG | Receive | 1.60% | 2.29% | Stemcor UK Ltd. | 4,791,760 | USD | 25,325 | |||||||||||||||||||||||||||||||||
8,500,000 | EUR | 1/20/2012 | Deutsche Bank AG | (Pay) | 0.42% | 1.41% | Republic of Kazakhstan | N/A | 141,825 | ||||||||||||||||||||||||||||||||||
4,100,000,000 | KZT | 1/20/2012 | Deutsche Bank AG | Receive | 0.32% | 1.06% | Republic of Kazakhstan | 4,100,000,000 | KZT | (273,644 | ) | ||||||||||||||||||||||||||||||||
3,000,000 | USD | 2/25/2012 | Deutsche Bank AG | Receive | 3.68% | 28.20% | Deutsche Bank Loan to Ukrtelekom | 3,000,000 | USD | (838,599 | ) | ||||||||||||||||||||||||||||||||
14,000,000 | EUR | 5/31/2012 | Deutsche Bank AG | Receive | 8.00% | 7.52% | Republic of Albania | 14,000,000 | USD | 508,244 | |||||||||||||||||||||||||||||||||
5,000,000 | USD | 7/30/2012 | JP Morgan Chase Bank | Receive | 3.05% | 0.34% | Republic of Chile | 5,000,000 | USD | 274,078 | |||||||||||||||||||||||||||||||||
5,000,000 | USD | 8/20/2012 | JP Morgan Chase Bank | Receive | 3.50% | 5.64% | Republic of Jamaica | 5,000,000 | USD | (192,484 | ) | ||||||||||||||||||||||||||||||||
3,000,000 | USD | 8/28/2012 | Deutsche Bank AG | Receive | 3.75% | 28.03% | Deutsche Bank Loan to Ukrtelekom | 3,000,000 | USD | (1,022,713 | ) |
See accompanying notes to the financial statements.
22
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Credit Default Swaps — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay)^ | Annual Premium | Implied Credit Spread (1) | Deliverable on Default | Maximum Potential Amount of Future Payments by the Fund Under the Contract (2) | Market Value | |||||||||||||||||||||||||||||||||||
2,000,000 | USD | 9/20/2012 | Goldman Sachs | (Pay) | 9.20 | % | 8.62 | % | Republic of | N/A | $ | (104,686 | ) | ||||||||||||||||||||||||||||||
Argentina | |||||||||||||||||||||||||||||||||||||||||||
15,000,000 | USD | 9/20/2012 | JP Morgan Chase Bank | (Pay) | 1.15% | 0.84% | Republic of Peru | N/A | (173,764 | ) | |||||||||||||||||||||||||||||||||
10,000,000 | USD | 9/20/2012 | JP Morgan Chase Bank | (Pay) | 1.25% | 2.27% | Gazprom OAO | N/A | 149,416 | ||||||||||||||||||||||||||||||||||
85,000,000 | PEN | 9/20/2012 | JP Morgan Chase Bank | Receive | 0.92% | 0.71% | Republic of Peru | 85,000,000 | PEN | 252,860 | |||||||||||||||||||||||||||||||||
10,000,000 | USD | 10/4/2012 | JP Morgan Chase Bank | Receive | 2.95% | 0.36% | Republic of Chile | 10,000,000 | USD | 664,773 | |||||||||||||||||||||||||||||||||
4,000,000 | USD | 10/20/2012 | UBS AG | (Pay) | 3.90% | 13.74% | Petroleos de Venezuela | N/A | 610,277 | ||||||||||||||||||||||||||||||||||
4,000,000 | USD | 10/20/2012 | UBS AG | (Pay) | 4.13% | 13.74% | Petroleos de Venezuela | N/A | 591,263 | ||||||||||||||||||||||||||||||||||
125,384,851 | USD | 12/20/2012 | Morgan Stanley | Receive | 0.71% | 0.16% | Reference security within CDX Index | 125,384,851 | USD | 1,771,330 | |||||||||||||||||||||||||||||||||
42,000,000 | USD | 12/20/2012 | Morgan Stanley | (Pay) | 1.20% | 0.26% | Reference security within CDX Index | N/A | (1,011,020 | ) | |||||||||||||||||||||||||||||||||
20,000,000 | USD | 3/20/2013 | Deutsche Bank AG | (Pay) | 1.48% | 1.07% | United Mexican States | N/A | (339,185 | ) | |||||||||||||||||||||||||||||||||
14,000,000 | USD | 6/20/2013 | JP Morgan Chase Bank | Receive | 3.72% | 2.48% | Russia AG Bank | 14,000,000 | USD | 573,120 | |||||||||||||||||||||||||||||||||
22,000,000 | USD | 6/20/2013 | Deutsche Bank AG | (Pay) | 5.79% | 8.92% | Republic of Argentina | N/A | 1,431,304 | ||||||||||||||||||||||||||||||||||
143,574,073 | RUB | 6/21/2013 | Deutsche Bank AG | Receive | 2.35% | 9.30% | VTB Leasing | 143,574,073 | RUB | (117,374 | ) | ||||||||||||||||||||||||||||||||
20,498,535 | USD | 6/24/2013 | JP Morgan Chase Bank | Receive | 1.37% | 4.22% | VTB Leasing | 20,498,535 | USD | (716,122 | ) | ||||||||||||||||||||||||||||||||
277,250,000 | PEN | 8/20/2013 | JP Morgan Chase Bank | Receive | 0.96% | 0.77% | Republic of Peru | 277,250,000 | PEN | 563,388 |
See accompanying notes to the financial statements.
23
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Credit Default Swaps — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay)^ | Annual Premium | Implied Credit Spread (1) | Deliverable on Default | Maximum Potential Amount of Future Payments by the Fund Under the Contract (2) | Market Value | |||||||||||||||||||||||||||||||||||
50,000,000 | USD | 8/20/2013 | JP Morgan | (Pay) | 1.20 | % | 0.88 | % | Republic of | N/A | $ | (493,150 | ) | ||||||||||||||||||||||||||||||
Chase Bank | Peru | ||||||||||||||||||||||||||||||||||||||||||
7,560,000,000 | JPY | 10/20/2013 | Deutsche Bank AG | (Pay) | 3.95% | 1.06% | Republic of Brazil | N/A | (9,067,223 | ) | |||||||||||||||||||||||||||||||||
130,000,000 | USD | 10/20/2013 | Deutsche Bank AG | Receive | 3.30% | 1.07% | Republic of Brazil | 130,000,000 | USD | 10,502,696 | |||||||||||||||||||||||||||||||||
80,000,000 | USD | 10/20/2013 | Deutsche Bank AG | Receive | 4.05% | 1.07% | Republic of Brazil | 80,000,000 | USD | 8,532,221 | |||||||||||||||||||||||||||||||||
12,600,000,000 | JPY | 10/20/2013 | Deutsche Bank AG | (Pay) | 3.20% | 1.06% | Republic of Brazil | N/A | (11,409,463 | ) | |||||||||||||||||||||||||||||||||
10,000,000 | USD | 12/24/2013 | JP Morgan Chase Bank | Receive | 3.80% | 1.60% | Republic of Turkey | 10,000,000 | USD | 779,163 | |||||||||||||||||||||||||||||||||
14,000,000 | USD | 3/20/2014 | Deutsche Bank AG | (Pay) | 1.45% | 0.57% | United Kingdom Government | N/A | (471,299 | ) | |||||||||||||||||||||||||||||||||
10,000,000 | USD | 3/20/2014 | Deutsche Bank AG | (Pay) | 1.85% | 2.20% | Republic of Italy | N/A | 80,874 | ||||||||||||||||||||||||||||||||||
39,000,000 | USD | 3/20/2014 | Deutsche Bank AG | (Pay) | 2.39% | 10.13% | Hellenic Republic of Greece | N/A | 7,874,277 | ||||||||||||||||||||||||||||||||||
39,000,000 | USD | 3/20/2014 | Deutsche Bank AG | (Pay) | 1.28% | 0.57% | United Kingdom Government | N/A | (1,068,510 | ) | |||||||||||||||||||||||||||||||||
14,000,000 | USD | 3/20/2014 | Deutsche Bank AG | (Pay) | 2.80% | 10.13% | Hellenic Republic of Greece | N/A | 2,662,122 | ||||||||||||||||||||||||||||||||||
14,000,000 | USD | 3/20/2014 | Deutsche Bank AG | (Pay) | 1.68% | 2.20% | Republic of Italy | N/A | 197,066 | ||||||||||||||||||||||||||||||||||
39,000,000 | USD | 3/20/2014 | Deutsche Bank AG | (Pay) | 1.49% | 0.78% | Republic of Austria | N/A | (1,077,370 | ) | |||||||||||||||||||||||||||||||||
28,000,000 | USD | 3/20/2014 | Deutsche Bank AG | (Pay) | 1.70% | 2.20% | Republic of Italy | N/A | 374,405 | ||||||||||||||||||||||||||||||||||
2,000,000 | USD | 8/24/2014 | Deutsche Bank AG | (Pay) | 4.25% | 2.70% | Lebanese Republic | N/A | (113,651 | ) | |||||||||||||||||||||||||||||||||
15,000,000 | USD | 9/20/2014 | Deutsche Bank AG | Receive | 3.77% | 1.73% | Russian Federation | 15,000,000 | USD | 1,440,851 |
See accompanying notes to the financial statements.
24
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Credit Default Swaps — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay)^ | Annual Premium | Implied Credit Spread (1) | Deliverable on Default | Maximum Potential Amount of Future Payments by the Fund Under the Contract (2) | Market Value | |||||||||||||||||||||||||||||||||||
15,000,000 | USD | 9/20/2014 | Deutsche | (Pay) | 4.03 | % | 1.90 | % | Sberbank | N/A | $ | (1,480,543 | ) | ||||||||||||||||||||||||||||||
Bank AG | |||||||||||||||||||||||||||||||||||||||||||
25,000,000 | USD | 3/20/2015 | JP Morgan Chase Bank | Receive | 5.00% | 5.65% | Government of Ukraine | 25,000,000 | USD | (380,621 | ) | ||||||||||||||||||||||||||||||||
8,000,000 | USD | 3/20/2015 | JP Morgan Chase Bank | Receive | 5.00% | 5.65% | Government of Ukraine | 8,000,000 | USD | (121,799 | ) | ||||||||||||||||||||||||||||||||
575,500,000 | EUR | 3/20/2015 | Deutsche Bank AG | (Pay) | 3.72% | 12.53% | Venezuela Eurobond | N/A | 189,318,224 | ||||||||||||||||||||||||||||||||||
765,000,000 | USD | 3/20/2015 | Deutsche Bank AG | Receive | 3.80% | 12.62% | Bolivarian Republic of Venezuela | 765,000,000 | USD | (200,216,193 | ) | ||||||||||||||||||||||||||||||||
5,000,000 | USD | 3/20/2015 | JP Morgan Chase Bank | Receive | 5.00% | 5.65% | Government of Ukraine | 5,000,000 | USD | (76,124 | ) | ||||||||||||||||||||||||||||||||
412,500,000 | USD | 4/20/2015 | Deutsche Bank AG | Receive | 4.40% | 12.60% | Bolivarian Republic of Venezuela | 412,500,000 | USD | (101,556,701 | ) | ||||||||||||||||||||||||||||||||
300,000,000 | EUR | 4/20/2015 | Deutsche Bank AG | (Pay) | 4.32% | 12.51% | Bolivarian Republic of Venezuela | N/A | 92,809,633 | ||||||||||||||||||||||||||||||||||
30,000,000 | USD | 6/20/2015 | Barclays | (Pay) | 5.00% | N/A | CDX 13 Emerging Sovereign | N/A | (3,460,833 | ) | |||||||||||||||||||||||||||||||||
40,000,000 | USD | 6/20/2015 | Barclays | (Pay) | 5.00% | N/A | CDX 13 Emerging Sovereign | N/A | (4,614,444 | ) | |||||||||||||||||||||||||||||||||
11,000,000 | USD | 6/20/2015 | Deutsche Bank | (Pay) | 5.00% | N/A | CDX 13 Emerging Sovereign | N/A | (1,268,972 | ) | |||||||||||||||||||||||||||||||||
15,000,000 | USD | 9/20/2015 | Barclays Bank | (Pay) | 1.00% | 1.32% | Republic of Colombia | N/A | 202,889 | ||||||||||||||||||||||||||||||||||
56,950,000,000 | COP | 11/20/2015 | Citigroup | Receive | 1.81% | 0.96% | Republic of Colombia | 56,950,000,000 | COP | 1,335,164 | |||||||||||||||||||||||||||||||||
15,000,000 | USD | 2/20/2016 | Citigroup | (Pay) | 2.16% | 1.35% | Republic of Colombia | N/A | (636,767 | ) |
See accompanying notes to the financial statements.
25
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Credit Default Swaps — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay)^ | Annual Premium | Implied Credit Spread (1) | Deliverable on Default | Maximum Potential Amount of Future Payments by the Fund Under the Contract (2) | Market Value | |||||||||||||||||||||||||||||||||||
56,700,000,000 | COP | 2/20/2016 | Citigroup | Receive | 1.46 | % | 0.97 | % | Republic of | 56,700,000,000 | COP | $ | 717,423 | ||||||||||||||||||||||||||||||
Colombia | |||||||||||||||||||||||||||||||||||||||||||
114,800,000,000 | COP | 4/20/2016 | Citigroup | Receive | 1.33% | 0.98% | Republic of Colombia | 114,800,000,000 | COP | 1,358,077 | |||||||||||||||||||||||||||||||||
25,000,000 | USD | 4/20/2016 | Citigroup | (Pay) | 1.90% | 1.36% | Republic of Colombia | N/A | (893,750 | ) | |||||||||||||||||||||||||||||||||
22,000,000 | EUR | 6/17/2016 | Deutsche Bank AG | Receive | 5.60% | 14.53% | Republic of Angola | 22,000,000 | EUR | (1,640,555 | ) | ||||||||||||||||||||||||||||||||
20,000,000 | USD | 8/20/2016 | Deutsche Bank AG | (Pay) | 0.87% | 1.45% | United Mexican States | N/A | 634,213 | ||||||||||||||||||||||||||||||||||
20,000,000 | USD | 8/20/2016 | Citigroup | (Pay) | 2.15% | 1.37% | Republic of Colombia | N/A | (877,630 | ) | |||||||||||||||||||||||||||||||||
97,680,000,000 | COP | 8/20/2016 | Citigroup | Receive | 1.51% | 0.99% | Republic of Colombia | 97,680,000,000 | COP | 1,392,734 | |||||||||||||||||||||||||||||||||
620,000,000 | MXN | 8/20/2016 | Deutsche Bank AG | Receive | 0.61% | 0.87% | United Mexican States | 620,000,000 | MXN | (591,140 | ) | ||||||||||||||||||||||||||||||||
32,500,000 | USD | 2/20/2017 | Deutsche Bank AG | Receive | 2.43% | 12.06% | Bolivarian Republic of Venezuela | 32,500,000 | USD | (12,136,666 | ) | ||||||||||||||||||||||||||||||||
32,000,000 | PEN | 5/20/2017 | Deutsche Bank AG | Receive | 0.79% | 1.02% | Republic of Peru | 32,000,000 | PEN | (127,702 | ) | ||||||||||||||||||||||||||||||||
2,500,000 | USD | 5/20/2017 | Deutsche Bank AG | (Pay) | 1.05% | 1.27% | Republic of Peru | N/A | 26,755 | ||||||||||||||||||||||||||||||||||
4,500,000 | USD | 7/20/2017 | JP Morgan Chase Bank | Receive | 3.30% | 6.74% | Republic of Jamaica | 4,500,000 | USD | (762,043 | ) | ||||||||||||||||||||||||||||||||
35,000,000 | USD | 7/20/2017 | UBS AG | Receive | 2.26% | 1.94% | Republic of Turkey | 35,000,000 | USD | 784,031 | |||||||||||||||||||||||||||||||||
15,000,000 | USD | 9/20/2017 | JP Morgan Chase Bank | Receive | 1.77% | 1.78% | Republic of Philippines | 15,000,000 | USD | 35,888 | |||||||||||||||||||||||||||||||||
21,000,000 | USD | 10/20/2017 | Deutsche Bank AG | Receive | 1.78% | 3.78% | Vneshtorg Bank Bond & Loan | 21,000,000 | USD | (2,281,909 | ) |
See accompanying notes to the financial statements.
26
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Credit Default Swaps — continued
Notional Amount | Expiration Date | Counterparty | Receive (Pay)^ | Annual Premium | Implied Credit Spread (1) | Deliverable on Default | Maximum Potential Amount of Future Payments by the Fund Under the Contract (2) | Market Value | |||||||||||||||||||||||||||||||||||
10,000,000 | USD | 12/20/2018 | Deutsche | Receive | 0.44 | % | 0.76 | % | United | 10,000,000 | USD | $ | (231,366 | ) | |||||||||||||||||||||||||||||
Bank AG | Kingdom | ||||||||||||||||||||||||||||||||||||||||||
Government | |||||||||||||||||||||||||||||||||||||||||||
10,000,000 | USD | 3/20/2019 | Deutsche Bank AG | Receive | 1.70% | 2.33% | Republic of Italy | 10,000,000 | USD | (397,675 | ) | ||||||||||||||||||||||||||||||||
30,000,000 | USD | 3/20/2019 | Deutsche Bank AG | Receive | 2.25% | 9.13% | Hellenic Republic of Greece | 30,000,000 | USD | (9,306,725 | ) | ||||||||||||||||||||||||||||||||
30,000,000 | USD | 3/20/2019 | Deutsche Bank AG | Receive | 1.25% | 0.76% | United Kingdom Government | 30,000,000 | USD | 1,187,308 | |||||||||||||||||||||||||||||||||
10,000,000 | USD | 3/20/2019 | Deutsche Bank AG | Receive | 2.61% | 9.13% | Hellenic Republic of Greece | 10,000,000 | USD | (2,930,505 | ) | ||||||||||||||||||||||||||||||||
10,000,000 | USD | 3/20/2019 | Deutsche Bank AG | Receive | 1.35% | 0.76% | United Kingdom Government | 10,000,000 | USD | 474,156 | |||||||||||||||||||||||||||||||||
10,000,000 | USD | 3/20/2019 | Deutsche Bank AG | Receive | 1.62% | 2.33% | Republic of Italy | 10,000,000 | USD | (454,308 | ) | ||||||||||||||||||||||||||||||||
30,000,000 | USD | 3/20/2019 | Deutsche Bank AG | Receive | 1.46% | 0.97% | Republic of Austria | 30,000,000 | USD | 1,185,390 | |||||||||||||||||||||||||||||||||
20,000,000 | USD | 3/20/2019 | Deutsche Bank AG | Receive | 1.66% | 2.33% | Republic of Italy | 20,000,000 | USD | (851,983 | ) | ||||||||||||||||||||||||||||||||
6,000,000 | USD | 3/20/2020 | Barclays Bank | Receive | 1.00% | 2.76% | Republic of Croatia | 6,000,000 | USD | (752,914 | ) | ||||||||||||||||||||||||||||||||
20,000,000 | USD | 8/15/2031 | Goldman Sachs | (Pay) | 1.84% | 1.73% | United Mexican States | N/A | (318,121 | ) | |||||||||||||||||||||||||||||||||
$ | (50,898,096 | ) | |||||||||||||||||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | 1,038,545 |
^ Receive - Fund receives premium and sells credit protection.
(Pay) - Fund pays premium and buys credit protection.
See accompanying notes to the financial statements.
27
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
(1) Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on the reference security, as of August 31, 2010, serve as an indicator of the current status of the payment/performance risk and reflect the likelihood or risk of default for the reference entity. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection. Wider (i.e.. higher) credit spreads represent a deterioration of the referenced entity's credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.
(2) The maximum potential amount the Fund could be required to pay as a seller of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.
Interest Rate Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay)# | Fixed Rate | Variable Rate | Market Value | |||||||||||||||||||||||||
46,800,000 | PEN | 4/21/2014 | JP Morgan Chase Bank | Receive | 5.03 | % | 6 month LIBOR | $ | 695,010 | ||||||||||||||||||||||
51,000,000 | BRL | 1/2/2013 | JP Morgan Chase Bank | Receive | 13.80 | % | Floating Rate CDI | 1,042,488 | |||||||||||||||||||||||
43,000,000 | PEN | 2/16/2011 | JP Morgan Chase Bank | (Pay) | 1.00 | % | 6 month LIBOR | (325,947 | ) | ||||||||||||||||||||||
75,000,000 | USD | 12/17/2018 | Bank of America | Receive | 2.75 | % | 3 month LIBOR | 2,801,025 | |||||||||||||||||||||||
$ | 4,212,576 | ||||||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
# Receive - Fund receives fixed rate and pays variable rate.
(Pay) - Fund pays fixed rate and receives variable rate.
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Fund Pays | Fund Receives | Market Value | ||||||||||||||||||||||
22,908,013 | USD | 12/19/2011 | JP Morgan | 3 month | Return on Prestamos | $ | (1,144,774 | ) | |||||||||||||||||||
Chase Bank | LIBOR + 0.35% | Garantizados | |||||||||||||||||||||||||
22,677,020 | USD | 12/19/2011 | JP Morgan Chase Bank | CER Index + 1.24% | 3 month LIBOR | (231,680) | |||||||||||||||||||||
13,989,203 | USD | 12/19/2011 | JP Morgan Chase Bank | 3 month LIBOR + 0.35% | Return on Prestamos Garantizados | 812,529 | |||||||||||||||||||||
13,989,203 | USD | 12/19/2011 | JP Morgan Chase Bank | CER Index + 3.59% | 3 month LIBOR | (498,513) | |||||||||||||||||||||
$ | (1,062,438 | ) | |||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
As of August 31, 2010, for forward currency contracts, futures contracts, swap agreements and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
See accompanying notes to the financial statements.
28
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Notes to Schedule of Investments:
144A - Securities 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.
AMBAC - Insured as to the payment of principal and interest by AMBAC Assurance Corporation.
BPI - Indemnification payment bonds
CDI - Certificado de Deposito Interbancario
CER - Coeficiente de Estabilizacion de Referencia
DEM LIBOR - London Interbank Offered Rate denominated in Deutsche Marks
EMTN - Euromarket Medium Term Note
FGIC - Insured as to the payment of principal and interest by Financial Guaranty Insurance Corporation.
GDP - Gross Domestic Product
GMTN - Global Medium Term Note
JPY LIBOR - London Interbank Offered Rate denominated in Japanese Yen
LIBOR - London Interbank Offered Rate
PDI - Past Due Interest
PIK - Payment In Kind
VRRB - Variable Rate Reduction Bond
XL - Insured as to the payment of principal and interest by XL Capital Assurance.
The rates shown on variable rate notes are the current interest rates at August 31, 2010, which are subject to change based on the terms of the security.
* Non-income producing security.
(a) Security is backed by the U.S. Government.
(b) Security is in default.
(c) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic (Note 2).
(d) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
(e) In July 2005, the Fund entered into litigation against the Government of Argentina ("Argentina") relating to Argentina's failure to make payments on sovereign debt held by the Fund. A judgment was awarded in the Fund's favor on September 24, 2007; however, the Fund's ability to collect on this judgment remains uncertain, and the Fund is not able to transfer or sell the judgment without court consent. The ineligible portion of the Fund's judgment, which continues to be valued according to the Fund's valuation policy, represents 1.1% of the net assets of the Fund as of August 31, 2010. Costs associated with this action are being borne by the Fund.
(f) All or a portion of this security has been pledged to cover collateral requirements on reverse repurchase agreements (Note 2).
See accompanying notes to the financial statements.
29
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
(g) All or a portion of this security has been pledged to cover collateral requirements on open swap contracts (Note 4).
(h) Non-performing. Borrower not currently paying interest.
(i) In July 2008, the Fund entered into litigation against GNPA Limited ("GNPA") (an entity wholly owned by the government of Ghana) seeking payment on an unconditional promissory note issued by GNPA. A judgment was awarded in the Fund's favor in February 2010; however, GNPA has appealed that judgment. The defaulted promissory note, which continues to be valued according to the Fund's valuation policy, represented less than 0.1% of the net assets of the Fund as of August 31, 2010. Costs associated with this action are borne by the Fund.
(j) Underlying investment represents interests in defaulted claims.
(k) Although the Fund acquired the warrants between 2000 and 2002 (in connection with the Fund's purchase of Venezuelan bonds), the warrants (and related payments on the warrants) have not been received in custody. The Fund's trading counterparties have acknowledged their delivery obligations. However, because there can be no assurance that the Fund will receive the warrants (and related payments), the Fund values the warrants (and related payments) at a discount from their market value.
(l) Reverse Repurchase Agreements have an open maturity date and can be closed on demand.
Currency Abbreviations:
ARS - Argentine Peso
BRL - Brazilian Real
CHF - Swiss Franc
COP - Colombian Peso
DEM - Deutsche Mark
EUR - Euro
GBP - British Pound
JPY - Japanese Yen
KRW - South Korean Won
KZT - Kazakhstan Tenge
MXN - Mexican Peso
MYR - Malaysian Ringgit
PEN - Peruvian Sol
RUB - Russian Ruble
USD - United States Dollar
ZAR - South African Rand
See accompanying notes to the financial statements.
30
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $2,113,608,234) (Note 2) | $ | 2,145,623,617 | |||||
Investments in affiliated issuers, at value (cost $85,406,195) (Notes 2 and 10) | 80,164,408 | ||||||
Foreign currency, at value (cost $2,235,448) (Note 2) | 1,661,824 | ||||||
Receivable for investments sold | 125,205 | ||||||
Dividends and interest receivable | 31,967,241 | ||||||
Interest receivable for open swap contracts | 1,748,268 | ||||||
Receivable for open swap contracts (Note 4) | 337,904,980 | ||||||
Receivable for collateral on open swap contracts (Note 4) | 7,650,000 | ||||||
Total assets | 2,606,845,543 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 850,538 | ||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 564,136 | ||||||
Shareholder service fee | 184,142 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 3,337 | ||||||
Unrealized depreciation on open forward currency contracts (Note 4) | 18,081,975 | ||||||
Payable for open swap contracts (Note 4) | 385,652,938 | ||||||
Payable for reverse repurchase agreements (Note 2) | 276,059,027 | ||||||
Miscellaneous payable (Note 4) | 19,099,139 | ||||||
Accrued expenses | 515,286 | ||||||
Total liabilities | 701,010,518 | ||||||
Net assets | $ | 1,905,835,025 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 2,001,609,572 | |||||
Undistributed net investment income | 69,866,697 | ||||||
Accumulated net realized loss | (126,855,035 | ) | |||||
Net unrealized depreciation | (38,786,209 | ) | |||||
$ | 1,905,835,025 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 542,988,628 | |||||
Class IV shares | $ | 1,362,846,397 | |||||
Shares outstanding: | |||||||
Class III | 57,174,173 | ||||||
Class IV | 143,606,295 | ||||||
Net asset value per share: | |||||||
Class III | $ | 9.50 | |||||
Class IV | $ | 9.49 |
See accompanying notes to the financial statements.
31
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Interest | $ | 156,566,722 | |||||
Dividends from affiliated issuers (Note 10) | 436,790 | ||||||
Dividends | 385,876 | ||||||
Total investment income | 157,389,388 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 3,273,352 | ||||||
Shareholder service fee – Class III (Note 5) | 412,999 | ||||||
Shareholder service fee – Class IV (Note 5) | 659,911 | ||||||
Interest expense (Note 2) | 1,048,552 | ||||||
Custodian, fund accounting agent and transfer agent fees | 582,912 | ||||||
Legal fees | 99,636 | ||||||
Audit and tax fees | 66,332 | ||||||
Trustees fees and related expenses (Note 5) | 19,673 | ||||||
Registration fees | 8,096 | ||||||
Miscellaneous | 16,928 | ||||||
Total expenses | 6,188,391 | ||||||
Expense reductions (Note 2) | (121 | ) | |||||
Net expenses | 6,188,270 | ||||||
Net investment income (loss) | 151,201,118 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | (85,826,068 | ) | |||||
Realized gains distributions from affiliated issuers (Note 10) | 12 | ||||||
Closed swap contracts | 10,874,672 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 42,492,953 | ||||||
Net realized gain (loss) | (32,458,431 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | 206,034,066 | ||||||
Investments in affiliated issuers | 3,246,744 | ||||||
Open swap contracts | (16,025,749 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | (19,653,722 | ) | |||||
Net unrealized gain (loss) | 173,601,339 | ||||||
Net realized and unrealized gain (loss) | 141,142,908 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 292,344,026 |
See accompanying notes to the financial statements.
32
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 151,201,118 | $ | 141,926,626 | |||||||
Net realized gain (loss) | (32,458,431 | ) | 39,683,769 | ||||||||
Change in net unrealized appreciation (depreciation) | 173,601,339 | 699,945,322 | |||||||||
Net increase (decrease) in net assets from operations | 292,344,026 | 881,555,717 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (21,667,522 | ) | (43,904,905 | ) | |||||||
Class IV | (53,363,339 | ) | (108,329,496 | ) | |||||||
Total distributions from net investment income | (75,030,861 | ) | (152,234,401 | ) | |||||||
Net share transactions (Note 9): | |||||||||||
Class III | (124,923,721 | ) | (160,150,869 | ) | |||||||
Class IV | (77,380,863 | ) | (517,798,203 | ) | |||||||
Increase (decrease) in net assets resulting from net share transactions | (202,304,584 | ) | (677,949,072 | ) | |||||||
Purchase premiums and redemption fees (Notes 2 and 9): | |||||||||||
Class III | 382,583 | 3,690,433 | |||||||||
Class IV | 882,628 | 8,047,100 | |||||||||
Increase in net assets resulting from purchase premiums and redemption fees | 1,265,211 | 11,737,533 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees | (201,039,373 | ) | (666,211,539 | ) | |||||||
Total increase (decrease) in net assets | 16,273,792 | 63,109,777 | |||||||||
Net assets: | |||||||||||
Beginning of period | 1,889,561,233 | 1,826,451,456 | |||||||||
End of period (including undistributed net investment income of $69,866,697 and distributions in excess of net investment income of $6,303,560, respectively) | $ | 1,905,835,025 | $ | 1,889,561,233 |
See accompanying notes to the financial statements.
33
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Statement of Cash Flows — Six Months Ended August 31, 2010 (Unaudited)
Cash flows from operating activities: | |||||||
Net increase (decrease) in net assets resulting from operations | $ | 292,344,026 | |||||
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities: | |||||||
Net change in unrealized (appreciation) depreciation | (173,601,339 | ) | |||||
Net realized (gain) loss† | (42,535,835 | ) | |||||
Net amortization of discount and premium | (18,494,241 | ) | |||||
Investments purchased | (404,623,715 | ) | |||||
Proceeds from sale of investments | 602,642,858 | ||||||
Short term investments, net | 40,403,732 | ||||||
Realized gain distributions from affiliated issuers | 12 | ||||||
Other proceeds (cost): | |||||||
Swap contracts | 27,471,283 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 42,383,002 | ||||||
Changes in assets and liabilities: | |||||||
(Increase) decrease in receivable for collateral on open swap contracts | (7,650,000 | ) | |||||
(Increase) decrease in dividends and interest receivable | (560,561 | ) | |||||
(Increase) decrease in interest receivable for open swap contracts | (344,488 | ) | |||||
(Increase) decrease in miscellaneous receivable | 267,366 | ||||||
Increase (decrease) in payable to affiliate for: | |||||||
Management fee | 38,839 | ||||||
Shareholder service fee payable | 12,954 | ||||||
Trustee and Chief Compliance Officer of GMO Trust fees | (303 | ) | |||||
Increase (decrease) in miscellaneous payable | 379,535 | ||||||
Increase (decrease) in accrued expenses | (280,087 | ) | |||||
Net cash provided by (used in) operating activities | 357,853,038 | ||||||
Cash flows from financing activities:* | |||||||
Proceeds from shares sold | 13,413,524 | ||||||
Shares repurchased | (308,706,591 | ) | |||||
Purchase premiums and redemption fees | 1,265,211 | ||||||
Cash distributions paid | (35,743,563 | ) | |||||
Increase (decrease) in payable for reverse repurchase agreements | (28,467,278 | ) | |||||
Net cash provided by (used in) financing activities | (358,238,697 | ) | |||||
Net increase in cash | (385,659 | ) | |||||
Cash and cash equivalents, beginning of period | 2,047,483 | ||||||
Cash and cash equivalents, end of period | $ | 1,661,824 |
Supplemental disclosure of cash flow information:
† Noncash operating activities not included herein consists of realized loss of $74,994,266 related to sovereign debt restructuring.
* Reinvestment of dividends and distributions $ 39,287,298
See accompanying notes to the financial statements.
34
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 8.47 | $ | 5.85 | $ | 10.06 | $ | 10.73 | $ | 11.30 | $ | 11.09 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.73 | (a) | 0.52 | 0.54 | 0.68 | 0.86 | 0.88 | ||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.68 | 2.70 | (3.77 | ) | (0.13 | ) | 0.30 | 1.14 | |||||||||||||||||||
Total from investment operations | 1.41 | 3.22 | (3.23 | ) | 0.55 | 1.16 | 2.02 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.38 | ) | (0.60 | ) | (0.77 | ) | (0.76 | ) | (0.94 | ) | (1.26 | ) | |||||||||||||||
From net realized gains | — | — | (0.21 | ) | (0.46 | ) | (0.79 | ) | (0.55 | ) | |||||||||||||||||
Total distributions | (0.38 | ) | (0.60 | ) | (0.98 | ) | (1.22 | ) | (1.73 | ) | (1.81 | ) | |||||||||||||||
Net asset value, end of period | $ | 9.50 | $ | 8.47 | $ | 5.85 | $ | 10.06 | $ | 10.73 | $ | 11.30 | |||||||||||||||
Total Return(b) | 16.97 | %** | 55.95 | % | (32.75 | )% | 5.07 | % | 10.98 | % | 19.50 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 542,989 | $ | 602,065 | $ | 535,194 | $ | 734,921 | $ | 876,598 | $ | 1,020,976 | |||||||||||||||
Net operating expenses to average daily net assets(c) | 0.59 | %(d)* | 0.58 | %(d) | 0.59 | %(d) | 0.57 | %(d) | 0.57 | % | 0.57 | % | |||||||||||||||
Interest expense to average daily net assets(e) | 0.11 | %* | 0.11 | % | 0.23 | % | 0.74 | % | 0.48 | % | 0.22 | % | |||||||||||||||
Total net expenses to average daily net assets | 0.70 | %(d)* | 0.69 | %(d) | 0.82 | %(d) | 1.31 | %(d) | 1.05 | % | �� | 0.79 | % | ||||||||||||||
Net investment income (loss) to average daily net assets | 16.12 | %*(f) | 6.98 | % | 6.36 | % | 6.36 | % | 7.91 | % | 7.75 | % | |||||||||||||||
Portfolio turnover rate | 8 | %** | 36 | % | 38 | % | 53 | % | 83 | % | 144 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.01 | $ | 0.05 | $ | 0.00 | (g) | $ | 0.01 | $ | 0.01 | $ | 0.01 |
(a) Includes income per share of $0.40 as a result of the Fund's participation in sovereign debt exchanges during the period. Excluding this income, the Fund's net investment income per share would have been $0.33.
(b) Calculation excludes purchase premiums and redemption fees which are borne by the shareholder and assumes the effect of reinvested distributions.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(d) The net expense ratio does not include the effect of expense reductions (Note 2).
(e) Interest expense incurred as a result of entering into reverse repurchase agreements and/or payables owed to Lehman Brothers in connection with the termination of derivative contracts in 2008 is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income.
(f) Includes income of 8.88% of average daily net assets as a result of the Fund's participation in sovereign debt exchanges. Excluding this income, the Fund's net investment income to average daily net assets would have been 7.24%.
(g) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
35
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 8.47 | $ | 5.85 | $ | 10.06 | $ | 10.73 | $ | 11.30 | $ | 11.09 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.73 | (a) | 0.53 | 0.53 | 0.69 | 0.87 | 0.88 | ||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.67 | 2.69 | (3.76 | ) | (0.13 | ) | 0.29 | 1.15 | |||||||||||||||||||
Total from investment operations | 1.40 | 3.22 | (3.23 | ) | 0.56 | 1.16 | 2.03 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.38 | ) | (0.60 | ) | (0.77 | ) | (0.77 | ) | (0.94 | ) | (1.27 | ) | |||||||||||||||
From net realized gains | — | — | (0.21 | ) | (0.46 | ) | (0.79 | ) | (0.55 | ) | |||||||||||||||||
Total distributions | (0.38 | ) | (0.60 | ) | (0.98 | ) | (1.23 | ) | (1.73 | ) | (1.82 | ) | |||||||||||||||
Net asset value, end of period | $ | 9.49 | $ | 8.47 | $ | 5.85 | $ | 10.06 | $ | 10.73 | $ | 11.30 | |||||||||||||||
Total Return(b) | 16.86 | %** | 56.02 | % | (32.66 | )% | 5.13 | % | 11.06 | % | 19.57 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,362,846 | $ | 1,287,496 | $ | 1,291,258 | $ | 2,114,181 | $ | 1,996,230 | $ | 1,799,792 | |||||||||||||||
Net operating expenses to average daily net assets(c) | 0.54 | %(d)* | 0.53 | %(d) | 0.54 | %(d) | 0.53 | %(d) | 0.52 | % | 0.52 | % | |||||||||||||||
Interest expense to average daily net assets(e) | 0.11 | %* | 0.11 | % | 0.23 | % | 0.74 | % | 0.48 | % | 0.22 | % | |||||||||||||||
Total net expenses to average daily net assets | 0.65 | %(d)* | 0.64 | %(d) | 0.77 | %(d) | 1.27 | %(d) | 1.00 | % | 0.74 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 16.19 | %*(f) | 7.03 | % | 6.46 | % | 6.45 | % | 7.97 | % | 7.75 | % | |||||||||||||||
Portfolio turnover rate | 8 | %** | 36 | % | 38 | % | 53 | % | 83 | % | 144 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.01 | $ | 0.04 | $ | 0.00 | (g) | $ | 0.00 | (g) | $ | 0.01 | $ | 0.00 | (g) |
(a) Includes income per share of $0.40 as a result of the Fund's participation in sovereign debt exchanges during the period. Excluding this income, the Fund's net investment income per share would have been $0.33.
(b) Calculation excludes purchase premiums and redemption fees which are borne by the shareholder and assumes the effect of reinvested distributions.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(d) The net expense ratio does not include the effect of expense reductions (Note 2).
(e) Interest expense incurred as a result of entering into reverse repurchase agreements and/or payables owed to Lehman Brothers in connection with the termination of derivative contracts in 2008 is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income.
(f) Includes income of 8.90% of average daily net assets as a result of the Fund's participation in sovereign debt exchanges. Excluding this income, the Fund's net investment income to average daily net assets would have been 7.29%.
(g) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
36
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO Emerging Country Debt Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks total return in excess of that of its benchmark, the J.P. Morgan Emerging Markets Bond Index Global ("EMBIG"). The Fund invests primarily in sovereign debt of emerging countries, although it also may invest in debt of entities related to, but not guaranteed by emerging countries, or of entities wholly unrelated to emerging countries. Under normal circumstances, the Fund invests directly and indirectly (e.g., through the GMO Funds in which the Fund invests, collectively referred to as the "underlying funds" or derivatives) at least 80% of its assets in debt investments tied economically to emerging countries. The term "emerging countries" means the world's less developed countries. The Fund typically gains its investment exposure by purchasing debt of sovereign issuers of emerging countries or by using derivatives, typically credit default swaps. The Fund also invests in asset-backed securities (including through G MO Short-Duration Collateral Fund ("SDCF") and GMO World Opportunity Overlay Fund ("Overlay Fund")). The Fund invests a substantial portion of its assets in below investment grade securities (also known as "junk bonds"). Generally, at least 75% of the Fund's assets are denominated in, or hedged into, U.S. dollars. In pursuing its investment objective, the Fund also typically uses exchange-traded and over-the-counter ("OTC") derivatives, including options, swap contracts (in addition to credit default swaps), currency forwards, reverse repurchase agreements, and futures. The Fund's performance is likely to be more volatile than that of its benchmark.
The Manager emphasizes a "bottom-up" approach to examining and selecting investments and uses analytical techniques to identify inefficiencies in the pricing of emerging country debt investments and to identify investments the Manager believes are undervalued. The Manager also determines country allocations based on its outlook for a country. In addition, the Fund may invest in unaffiliated money market funds.
The Fund is not limited in its use of derivatives or in the absolute face value of its derivatives positions, and, as a result, the Fund may be leveraged in relation to its assets. The Manager normally seeks to cause the Fund's estimated interest rate duration to approximate that of its benchmark. The Fund, if deemed prudent by the Manager, will take temporary defensive measures until the Manager has determined that normal conditions have returned or that it is otherwise prudent to resume investing in accordance with the Fund's normal investment strategies. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
37
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Throughout the period ended August 31, 2010, the Fund had two classes of shares outstanding: Class III and Class IV. Each class of shares bears a different shareholder service fee.
The financial statements of the series of the underlying funds should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect). As of August 31, 2010, shares of SDCF, GMO Special Purpose Holding Fund ("SPHF") and Overlay Fund were not publicly available for direct purchase.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the OTC market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or who se values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of August 31, 2010, the total value of securities held directly and indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 3.6% of net assets. The Fund and the underlying funds classify such securities (as defined below) as Level 3. During the period ended August 31, 2010, the Manager has evaluated the Fund's OTC derivatives contracts and determined that no reduction in value was warranted on account of the creditworthiness of a counterparty. See note 4 for a further discussion on valuation of derivative financial instruments.
38
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. Although alternative prices are available for securities held by the Fund and the underlying funds, those alternative sources are not typically part of the valuation process and would not necessarily confirm the security price used by the Fund and the underlying funds. Therefore, the existence of those alternative sou rces does not necessarily provide greater certainty about the prices used by the Fund and the underlying funds. As of August 31, 2010, the total value of securities held directly and indirectly for which no alternative pricing source was available represented 26.9% of the net assets of the Fund.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data. The Fund also used third party valuation services (which use industry models and market data from pricing vendors) to value certain credit default swaps.
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund used the following fair value techniques on Level 3 investments: The Fund valued certain debt securities using indicative bids received from primary pricing sources. In some cases, bids received from primary pricing sources or prices calculated by using industry models are adjusted by a specified discount for liquidity or other considerations (including the Argentine judgment described in Other Matters below). In addition, the Fund valued certain sovereign debt securities using comparable securities issued by the sovereign adjusted by a specified spread. The Fund valued certain debt securities using a specified spread above the LIBOR Rate. The Fund deemed certain defaulted securities to be worthless. The Fund also used third party valuation services to value certain credit default swaps using unobservable inputs.
39
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Debt Obligations | |||||||||||||||||||
Asset-Backed Securities | $ | — | $ | 1,696,862 | $ | 87,993,429 | $ | 89,690,291 | |||||||||||
Corporate Debt | — | 171,328,925 | — | 171,328,925 | |||||||||||||||
Foreign Government Agency | — | 141,765,675 | 259,240,766 | 401,006,441 | |||||||||||||||
Foreign Government Obligations | — | 393,348,207 | 582,367,010 | 975,715,217 | |||||||||||||||
Judgments | — | — | 21,972,500 | 21,972,500 | |||||||||||||||
U.S. Government | 64,367,200 | 222,150,603 | — | 286,517,803 | |||||||||||||||
TOTAL DEBT OBLIGATIONS | 64,367,200 | 930,290,272 | 951,573,705 | 1,946,231,177 | |||||||||||||||
Loan Assignments | — | — | 36,663,878 | 36,663,878 | |||||||||||||||
Loan Participations | — | — | 119,962,445 | 119,962,445 | |||||||||||||||
Mutual Funds | 80,152,847 | 11,561 | — | 80,164,408 | |||||||||||||||
Options Purchased | — | 3,272,250 | — | 3,272,250 | |||||||||||||||
Promissory Notes | — | — | 1,804,341 | 1,804,341 | |||||||||||||||
Rights and Warrants | — | 2,875,000 | 7,317,379 | 10,192,379 | |||||||||||||||
Short-Term Investments | 27,497,147 | — | — | 27,497,147 | |||||||||||||||
Total Investments | 172,017,194 | 936,449,083 | 1,117,321,748 | 2,225,788,025 | |||||||||||||||
Derivatives | |||||||||||||||||||
Swap Agreements | |||||||||||||||||||
Interest Rate Risk | — | 4,538,523 | 812,529 | 5,351,052 | |||||||||||||||
Credit Risk | — | 50,426,071 | 282,127,857 | 332,553,928 | |||||||||||||||
Total | $ | 172,017,194 | $ | 991,413,677 | $ | 1,400,262,134 | $ | 2,563,693,005 |
40
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts | |||||||||||||||||||
Foreign Exchange Risk | $ | — | $ | (18,081,975 | ) | $ | — | $ | (18,081,975 | ) | |||||||||
Swap Agreements | |||||||||||||||||||
Interest Rate Risk | — | (325,947 | ) | (1,144,774 | ) | (1,470,721 | ) | ||||||||||||
Credit Risk | — | (66,435,150 | ) | (317,016,874 | ) | (383,452,024 | ) | ||||||||||||
Other Risk | — | — | (730,193 | ) | (730,193 | ) | |||||||||||||
Total | $ | — | $ | (84,843,072 | ) | $ | (318,891,841 | ) | $ | (403,734,913 | ) |
The underlying funds held at period end are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements. The aggregate net values of the Fund's investments (both direct and indirect) in securities and other financial instruments using Level 3 inputs were 60.9% and (1.9)% of total net assets, respectively.
41
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2010 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Transfers into Level 3* | Transfers out of Level 3* | Balances as of August 31, 2010 | ||||||||||||||||||||||||||||
Debt Obligations | |||||||||||||||||||||||||||||||||||
Asset-Backed Securities | $ | 81,621,005 | $ | (10,410,660 | ) | $ | 54,469 | $ | (5,146,954 | ) | $ | 23,572,431 | $ | — | $ | (1,696,862 | )** | $ | 87,993,429 | ||||||||||||||||
Foreign Government Agency | 242,132,837 | 3,404,831 | 1,308,388 | (2,693,327 | ) | 13,960,537 | 1,127,500 | ** | — | 259,240,766 | |||||||||||||||||||||||||
Foreign Government Obligations | 642,295,330 | (151,653,097 | ) | 5,483,207 | 17,673,852 | 68,567,718 | — | — | 582,367,010 | ||||||||||||||||||||||||||
Judgments | 51,451,439 | (43,483,029 | ) | 368,272 | (17,760,028 | ) | 31,395,846 | — | — | 21,972,500 | |||||||||||||||||||||||||
Total Debt Obligations | 1,017,500,611 | (202,141,955 | ) | 7,214,336 | (7,926,457 | ) | 137,496,532 | 1,127,500 | (1,696,862 | ) | 951,573,705 | ||||||||||||||||||||||||
Loan Assignments | 35,331,584 | (1,594,834 | ) | 434,300 | 397,876 | 2,094,952 | — | — | 36,663,878 | ||||||||||||||||||||||||||
Loan Participations | 112,982,826 | 2,377,217 | 895,276 | 672,521 | 3,034,605 | — | — | 119,962,445 | |||||||||||||||||||||||||||
Promissory Notes | 1,653,559 | — | 74,984 | — | 75,798 | — | — | 1,804,341 | |||||||||||||||||||||||||||
Rights and Warrants | 8,618,130 | (2,282,313 | ) | — | 2,282,313 | (1,300,751 | ) | — | — | 7,317,379 | |||||||||||||||||||||||||
Total Investments | 1,176,086,710 | (203,641,885 | ) | 8,618,896 | (4,573,747 | ) | 141,401,136 | 1,127,500 | (1,696,862 | ) | 1,117,321,748 | ||||||||||||||||||||||||
Derivatives | |||||||||||||||||||||||||||||||||||
Swap Agreements | (33,379,332 | ) | 9,142,891 | — | (9,142,891 | ) | (18,581,204 | ) | — | 16,009,081 | ** | (35,951,455 | ) | ||||||||||||||||||||||
Total | $ | 1,142,707,378 | $ | (194,498,994 | ) | $ | 8,618,896 | $ | (13,716,638 | ) | $ | 122,819,932 | $ | 1,127,500 | $ | 14,312,219 | $ | 1,081,370,293 |
* The Fund recognizes investments and derivatives transferred into Level 3 at the value at the beginning of the period and transferred out of Level 3 at the value at the end of the period.
** Financial assets transferred between Level 2 and Level 3 were due to a change in observable and/or unobservable inputs.
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are inclu ded with the net realized and unrealized gain or loss on investment securities.
Loan agreements
The Fund may invest in loans to corporate, governmental, or other borrowers. The Fund's investments in loans may be in the form of participations in loans or assignments of all or a portion of loans. A loan is
42
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
often administered by a bank or other financial institution that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation, (i) the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the party from whom the Fund has purchased the participation and only upon receipt by that party of payments from the borrower and (ii) the Fund generally has no right to enforce compliance by the borrower with the terms of the loan agreement or to vote on matters arising under the loan agreement. Thus, the Fund may be subject to credit risk both of the party from whom it purchased the loan participation and the borrower and the Fund may have minimal control over the terms of any loan modification. When the Fund purchases assignments of loans, it acquires direct rights against the borrower. Loan agree ments outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Repurchase agreements
The Fund may enter into repurchase agreements. Under a repurchase agreement the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities it acquired under the repurchase agreement. The value of the securities acquired is required by contract to be marked to market daily so that their market value is at least equal to the amount owed to the Fund by the seller. If the seller of a repurchase agreement defaults or enters into insolvency proceedings and/or the value of the securities subject to the repurchase agreement is insufficient, the Fund's recovery of cash from the seller may be delayed and the Fund may incur a loss equal to the difference between the cash it paid and the value of the securities. The Fund had no repurchase agreements outstanding at the end of the period.
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at an agreed upon price and date. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which generally causes the Fund's portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the even t of a buyer's bankruptcy or insolvency, the Fund's use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund's right to repurchase the securities. As of August 31, 2010, the Fund had received $275,833,125 from reverse repurchase agreements relating to securities with a market value, plus accrued interest, of $287,967,704. Reverse repurchase agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
43
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Inflation-indexed bonds
The Fund may invest in inflation indexed bonds. Inflation indexed bonds are fixed income securities whose principal value is adjusted periodically according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that reflects inflation in the principal value of the bond. Most other issuers pay out any inflation related accruals as part of a semiannual coupon.
The value of inflation indexed bonds is expected to change in response to changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal interest rates (i.e., stated interest rates) and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate than nominal interest rates, real interest rates (i.e. nominal interest rate minus inflation) might decline, leading to an increase in value of inflation indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation indexed bonds. There can be no assurance, however, that the value of inflation indexed bonds will be directly correlated to changes in nominal interest rates, and short term increases in inflation may lead to a decline in their value. Coupon payments received by the Fund from inflation indexed bonds are included in the Fund's gross income for the period in which they accrue. In addition, any increase or decrease in the principal amount of an inflation indexed bond will increase or decrease taxable ordinary income to the Fund, even though principal is not paid until maturity. Inflation-indexed bonds outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country's tax treaty with the United States. The foreign withholding rates applicable to a Fund's investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Transaction based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
44
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund elected to defer to March 1, 2010 post-October capital losses of $1,446,684.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (92,251,262 | ) | ||||
Total | $ | (92,251,262 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 2,211,905,218 | $ | 248,321,085 | $ | (234,438,278 | ) | $ | 13,882,807 |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally
45
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which co llection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. Investment income, common expenses and realized and unrealized gains and losses are allocated among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class's operations. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 5).
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
For the period ended August 31, 2010, the premium on cash purchases and fee on cash redemptions of Fund shares were each 0.50% of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by a Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct
46
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subj ect to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
Other matters
In July 2005, the Fund entered into litigation against the Government of Argentina ("Argentina") relating to Argentina's failure to make payments on sovereign debt held by the Fund. A judgment was awarded in the Fund's favor on September 24, 2007; however, the Fund's ability to collect on this judgment remains uncertain, and the Fund is not able to transfer or sell the judgment without court consent. In late May 2010, Argentina commenced a public debt exchange in which certain defaulted debts, including legal judgments on those debts, were eligible to be exchanged for currently performing Argentina Bonds. The eligible portion of the Fund's judgment was tendered in the debt exchange and the Fund received new bonds in June 2010. The ineligible portion of the Fund's judgment, which continues to be valued according to the Fund's valuation policy, represented 1.1% of the net assets of the Fund as of August 31, 2010. Costs associated with this action are borne by the Fund.
In July 2008, the Fund entered into litigation against GNPA Limited ("GNPA") (an entity wholly owned by the government of Ghana) seeking payment on an unconditional promissory note issued by GNPA. A judgment was awarded in the Fund's favor in February 2010; however, GNPA has appealed that judgment. The defaulted promissory note, which continues to be valued according to the Fund's valuation policy, represented less than 0.1% of the net assets of the Fund as of August 31, 2010. Costs associated with this action are borne by the Fund.
SPHF, an investment of the Fund, has litigation pending against various entities related to the 2002 fraud and related default of securities previously held by SPHF. The outcome of the lawsuits against the remaining defendants is not known and any potential recoveries are not reflected in the net asset value of SPHF. For the period ended August 31, 2010, the Fund received no distributions from SPHF in connection with settlement agreements related to litigation.
47
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Fixed Income Securities — Typically, the value of the Fund's fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to rec eipt) may expose the Fund to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund's investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund's investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Credit and Counterparty Risk — The Fund runs the risk that the issuer or guarantor of a fixed income security, the counterparty to an over-the-counter derivatives contract, a borrower of the Fund's securities or the obligor of an obligation underlying an asset-backed security will be unable or unwilling to make timely principal, interest, or settlement payments or otherwise honor its obligations. This risk is particularly pronounced for the Fund because it invests primarily in sovereign debt of emerging countries, which is typically below investment grade. Below investment grade bonds have speculative characteristics, and changes in economic conditions or other circumstances are more likely to impair the capacity of issuers to make principal and interest payments than is the case with issuers of investment grade bonds. This risk is also particularly pronounced for the Fund because it typically uses over-the-counter derivatives, including swap contracts with longer-term maturities, and may have significant exposure to a single counterparty. The risk of counterparty default is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of
48
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Lehman Brothers in 2008 and subsequent market disruptions. Because the Fund typically invests in securities that are of lesser quality than those in its benchmark, in rapidly declining markets, the percentage decline in the value of the Fund is likely to exceed that of its benchmark.
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind. These risks are particularly pronounced for the Fund because it invests primarily in sovereign debt of emerging countries, which is not widely traded and which may be subject to purchase and sale restrictions. In addition, because the Fund typically invests in securities that are less liquid than those in its benchmark, in rapidly declining markets the percentage decline in the Fund's investments is likely to exceed that of its benchmark.
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
• Leveraging Risk — The Fund's use of reverse repurchase agreements and other derivatives and securities lending may cause its portfolio to be leveraged. Leverage increases the Fund's portfolio losses when the value of its investments decline.
Other principal risks of an investment in the Fund include Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Focused Investment Risk (increased risk from the Fund's focus on investments in a limited number of countries, regions, sectors or companies); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
The most significant market risk for Funds investing in fixed income securities is that the securities in which they invest experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. These risks apply to the Fund because it invests in asset-backed securities. Asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to
49
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
as "collateralized debt obligations" or "collateralized loan obligations") and by the fees earned by service providers. Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are s ubject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. Many asset-backed securities owned by the Fund that were once rated investment grade are now rated below investment grade as of the date of this Report.
With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e .g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and a Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.
The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution's business may have a material impact on multiple investments.
50
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps or other derivatives on an index, a single security or a basket of securities to gain investment exposures (e.g., by selling protection under a credit default swap). The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). For example, the Fund may use credit default swaps to take a short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund's exposure to the credit of an issuer through the debt instrument, but adjust the Fund's interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed versus variable rates and shorter duration versus longer duration exposure. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default)
51
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be secured by collateral (e.g., foreign currency forwards; see "Currency Risk" above), that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value. At August 31, 2010, amounts reported as a miscellaneous payable include amounts that were ca lculated by the Fund as being owed to Lehman Brothers upon the termination of the contracts pursuant to the terms of those contracts. The amounts reported as payable are subject to settlement discussions with Lehman Brothers' bankruptcy estate and may vary significantly upon final settlement with the estate.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
52
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. During the period ended August 31, 2010, the Fund used forward currency contracts to adjust exposure to foreign currencies and otherwise adjust currency exchange rate risk. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. The Fund had no futures contracts outstanding at the end of the period.
53
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. During the period ended August 31, 2010, the Fund used purchased option contracts to adjust interest rate exposure. Option contracts purchased by the Fund and outstanding at the end o f the period are listed in the Fund's Schedule of Investments.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an of fsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance
54
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price
55
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the pe riod ended August 31, 2010, the Fund used swap agreements to adjust interest rate exposure, adjust exposure to certain markets, achieve exposure to a reference entity's credit, and/or provide a measure of protection against default loss. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. During the period ended August 31, 2010, the Fund held rights and warrants to adjust exposure to certain markets. Rights and warrants held by the Fund at the end of the period are listed in the Fund's Schedule of Investments.
56
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (purchased options, rights and warrants) | $ | 3,272,250 | $ | — | $ | — | $ | — | $ | 10,192,379 | $ | 13,464,629 | |||||||||||||||
Unrealized appreciation on swap agreements | 5,351,052 | — | 332,553,928 | — | — | 337,904,980 | |||||||||||||||||||||
Total | $ | 8,623,302 | $ | — | $ | 332,553,928 | $ | — | $ | 10,192,379 | $ | 351,369,609 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Unrealized depreciation on forward currency contracts | $ | — | $ | (18,081,975 | ) | $ | — | $ | — | $ | — | $ | (18,081,975 | ) | |||||||||||||
Unrealized depreciation on swap agreements | (1,470,721 | ) | — | (383,452,024 | ) | — | (730,193 | ) | (385,652,938 | ) | |||||||||||||||||
Total | $ | (1,470,721 | ) | $ | (18,081,975 | ) | $ | (383,452,024 | ) | $ | — | $ | (730,193 | ) | $ | (403,734,913 | ) |
57
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Period Ended August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (purchased options, rights and warrants) | $ | (2,316,000 | ) | $ | — | $ | — | $ | — | $ | 2,282,313 | $ | (33,687 | ) | |||||||||||||
Forward currency contracts | — | 43,331,365 | — | — | — | 43,331,365 | |||||||||||||||||||||
Swap contracts | 25,848,696 | — | (14,518,500 | ) | — | (455,524 | ) | 10,874,672 | |||||||||||||||||||
Total | $ | 23,532,696 | $ | 43,331,365 | $ | (14,518,500 | ) | $ | — | $ | 1,826,789 | $ | 54,172,350 | ||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (purchased options, rights and warrants) | $ | 3,169,437 | $ | — | $ | — | $ | — | $ | (1,300,751 | ) | $ | 1,868,686 | ||||||||||||||
Forward currency contracts | — | (19,543,771 | ) | — | — | — | (19,543,771 | ) | |||||||||||||||||||
Swap contracts | (1,713,033 | ) | — | (10,897,909 | ) | — | (3,414,807 | ) | (16,025,749 | ) | |||||||||||||||||
Total | $ | 1,456,404 | $ | (19,543,771 | ) | $ | (10,897,909 | ) | $ | — | $ | (4,715,558 | ) | $ | (33,700,834 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
The volume of derivative activity, based on absolute values (forward currency contracts and rights and warrants), principal amounts (options), or notional amounts (swap agreements) outstanding at each month-end, was as follows for the period ended August 31, 2010.
Forward currency contracts | Swap agreements | Options | Rights/ Warrants | ||||||||||||||||
Average amount outstanding | $ | 425,138,040 | $ | 5,141,430,647 | $ | 101,989,588 | $ | 10,642,907 |
58
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.35% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets of each class at the annual rate of 0.15% for Class III shares and 0.10% for Class IV shares. The Manager has contractually agreed through at least June 30, 2011 to waive the Fund's shareholder service fee to the extent that the aggregate of any direct and indirect shareholder service fees borne by a class of shares of the Fund exceeds 0.15% for Class III shares and 0.10% for Class VI shares; provided, however, that the amount of this waiver will not exceed the respective Class's shareholder ser vice fee.
The Manager has contractually agreed to reimburse the Fund for an amount equal to the fees and expenses incurred indirectly by the Fund through its investment in other GMO Funds (excluded those Funds' Excluded Fund Fees and Expenses). "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company unde r the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). This expense limitation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ending August 31, 2010 was $19,673 and $7,084, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
59
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Indirect Interest Expense | Total Indirect Expenses | ||||||||||||
< 0.001% | 0.000 | % | 0.001 | % | 0.001 | % |
6. Purchases and sales of securities
For the period ended August 31, 2010, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | 23,448,675 | $ | — | |||||||
Investments (non-U.S. Government securities) | 137,840,052 | 327,254,511 |
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, 49.74% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2010, 0.11% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 17.80% of the Fund's shares were held by accounts for which the Manager had investment discretion.
60
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 627,321 | $ | 5,703,953 | 14,683,913 | $ | 118,494,974 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 1,304,303 | 11,556,124 | 3,120,928 | 24,355,278 | |||||||||||||||
Shares repurchased | (15,805,628 | ) | (142,183,798 | ) | (38,246,442 | ) | (303,001,121 | ) | |||||||||||
Purchase premiums | — | 8,270 | — | 43,155 | |||||||||||||||
Redemption fees | — | 374,313 | — | 3,647,278 | |||||||||||||||
Net increase (decrease) | (13,874,004 | ) | $ | (124,541,138 | ) | (20,441,601 | ) | $ | (156,460,436 | ) | |||||||||
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 625,151 | $ | 5,709,571 | 26,441,299 | $ | 211,558,176 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 3,133,466 | 27,731,174 | 2,362,819 | 18,939,047 | |||||||||||||||
Shares repurchased | (12,215,987 | ) | (110,821,608 | ) | (97,617,668 | ) | (748,295,426 | ) | |||||||||||
Purchase premiums | — | 20,412 | — | 87,391 | |||||||||||||||
Redemption fees | — | 862,216 | — | 7,959,709 | |||||||||||||||
Net increase (decrease) | (8,457,370 | ) | $ | (76,498,235 | ) | (68,813,550 | ) | $ | (509,751,103 | ) |
61
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
10. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income* | Distributions of Realized Gains* | Return of Capital* | Value, end of period | ||||||||||||||||||||||||
GMO Short-Duration Collateral Fund | $ | 59,561,708 | $ | — | $ | — | $ | 436,714 | $ | — | $ | 15,049,588 | $ | 46,440,638 | |||||||||||||||||
GMO Special Purpose Holding Fund | 11,775 | — | — | — | — | — | 11,561 | ||||||||||||||||||||||||
GMO U.S. Treasury Fund | 114,662 | 50 | — | 76 | 12 | — | 114,712 | ||||||||||||||||||||||||
GMO World Opportunity Overlay Fund | 32,279,057 | — | — | — | — | — | 33,597,497 | ||||||||||||||||||||||||
Totals | $ | 91,967,202 | $ | 50 | $ | — | $ | 436,790 | $ | 12 | $ | 15,049,588 | $ | 80,164,408 |
* The table above includes estimated sources of all distributions paid by the underlying funds during the period March 1, 2010 through August 31, 2010. The actual tax characterization of distributions paid by the underlying funds will be determined through fiscal year ending February 28, 2011.
62
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Board Review of Investments Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of a composite of accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three-, five-, seven- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications
63
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Board Review of Investments Management Agreement — (Continued)
August 31, 2010 (Unaudited)
and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparison to the Manager's separate account clients and the expenses and risks borne by the Manager as a result of the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client rela tionships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating
64
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Board Review of Investments Management Agreement — (Continued)
August 31, 2010 (Unaudited)
the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
65
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.70 | % | $ | 1,000.00 | $ | 1,169.70 | $ | 3.83 | |||||||||||
2) Hypothetical | 0.70 | % | $ | 1,000.00 | $ | 1,021.68 | $ | 3.57 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.65 | % | $ | 1,000.00 | $ | 1,168.60 | $ | 3.55 | |||||||||||
2) Hypothetical | 0.65 | % | $ | 1,000.00 | $ | 1,021.93 | $ | 3.31 |
* Expenses are calculated using each Class's annualized net expense ratio (including interest expense and indirect expenses incurred) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
66
GMO Emerging Markets Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Emerging Markets Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 88.1 | % | |||||
Preferred Stocks | 8.4 | ||||||
Short-Term Investments | 1.8 | ||||||
Debt Obligations | 0.5 | ||||||
Investment Funds | 0.4 | ||||||
Swap Agreements | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Mutual Funds | 0.0 | ||||||
Other | 0.8 | ||||||
100.0 | % | ||||||
Country Summary | % of Equity Investments* | ||||||
South Korea | 20.3 | % | |||||
Russia | 15.3 | ||||||
Brazil | 11.8 | ||||||
Taiwan | 7.9 | ||||||
China | 7.3 | ||||||
Thailand | 7.1 | ||||||
Turkey | 7.1 | ||||||
India | 6.8 | ||||||
South Africa | 2.8 | ||||||
Czech Republic | 2.2 | ||||||
Indonesia | 2.2 | ||||||
Mexico | 1.8 | ||||||
Egypt | 1.7 | ||||||
Malaysia | 1.6 | ||||||
Hungary | 1.5 | ||||||
Poland | 0.9 | ||||||
Philippines | 0.8 | ||||||
Chile | 0.5 | ||||||
Morocco | 0.2 | ||||||
Macau | 0.1 | ||||||
Sri Lanka | 0.1 | ||||||
Peru | 0.0 | ||||||
Argentina | 0.0 | ||||||
100.0 | % |
* Equity investments may consist of common stocks, preferred stocks and rights and warrants. This table excludes exposure to derivative contracts and ETFs, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
1
GMO Emerging Markets Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2010 (Unaudited)
Industry Group Summary | % of Equity Investments* | ||||||
Banks | 21.0 | % | |||||
Energy | 17.5 | ||||||
Materials | 12.0 | ||||||
Telecommunication Services | 10.2 | ||||||
Semiconductors & Semiconductor Equipment | 6.6 | ||||||
Capital Goods | 5.4 | ||||||
Technology Hardware & Equipment | 4.3 | ||||||
Utilities | 3.8 | ||||||
Automobiles & Components | 3.2 | ||||||
Food, Beverage & Tobacco | 2.3 | ||||||
Diversified Financials | 2.3 | ||||||
Software & Services | 2.0 | ||||||
Retailing | 1.7 | ||||||
Food & Staples Retailing | 1.5 | ||||||
Consumer Durables & Apparel | 0.9 | ||||||
Transportation | 0.9 | ||||||
Household & Personal Products | 0.9 | ||||||
Pharmaceuticals, Biotechnology & Life Sciences | 0.8 | ||||||
Consumer Services | 0.7 | ||||||
Miscellaneous | 0.6 | ||||||
Real Estate | 0.6 | ||||||
Health Care Equipment & Services | 0.4 | ||||||
Insurance | 0.2 | ||||||
Media | 0.2 | ||||||
100.0 | % |
* Equity investments may consist of common stocks, preferred stocks and rights and warrants. This table excludes exposure to derivative contracts and ETFs, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
2
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 88.1% | |||||||||||
Argentina — 0.0% | |||||||||||
167,790 | Petrobras Energia SA ADR | 2,510,140 | |||||||||
40,310 | Telecom Argentina SA Sponsored ADR | 758,231 | |||||||||
Total Argentina | 3,268,371 | ||||||||||
Brazil — 5.3% | |||||||||||
3,844,100 | Banco do Brasil SA | 62,337,348 | |||||||||
1,188,560 | Banco Santander Brasil SA ADR 144A | 14,952,085 | |||||||||
1,806,600 | BM&F BOVESPA SA | 13,166,964 | |||||||||
454,895 | Brasil Telecom SA ADR * | 8,747,631 | |||||||||
192,780 | Centrais Eletricas Brasileiras SA ADR | 2,824,227 | |||||||||
467,100 | Cia de Saneamento de Minas Gerais-Copasa MG | 6,579,960 | |||||||||
35,510 | Cia Paranaense de Energia Sponsored ADR | 789,742 | |||||||||
1,759,700 | Companhia Brasileira de Meios de Pagamento | 15,029,466 | |||||||||
45,440 | Companhia de Bebidas das Americas ADR | 5,029,754 | |||||||||
1,227,199 | Companhia Energetica de Minas Gerais Sponsored ADR | 20,273,327 | |||||||||
1,072,302 | Companhia Saneamento Basico Sao Paulo | 20,398,924 | |||||||||
930,556 | Duratex SA | 9,431,400 | |||||||||
702,292 | Electrobras (Centro) | 8,545,469 | |||||||||
740,880 | Empresa Brasileira de Aeronautica SA ADR | 18,366,415 | |||||||||
397,500 | Gafisa SA | 2,738,648 | |||||||||
230,410 | Gafisa SA ADR | 3,172,746 | |||||||||
703,700 | Gerdau SA | 6,963,875 | |||||||||
2,838,890 | Itau Unibanco Holding SA ADR | 61,234,857 | |||||||||
1,187,600 | Lojas Renner SA | 38,341,307 | |||||||||
744,300 | Natura Cosmeticos SA | 17,926,770 | |||||||||
2,307,010 | Petroleo Brasileiro SA (Petrobras) ADR | 76,938,784 | |||||||||
1,924,000 | Redecard SA | 26,292,384 | |||||||||
91,490 | Telecomunicacoes de Sao Paulo SA ADR | 2,084,142 | |||||||||
3,543,900 | Vale SA | 94,598,168 | |||||||||
Total Brazil | 536,764,393 |
See accompanying notes to the financial statements.
3
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Chile — 0.5% | |||||||||||
40,280 | AFP Provida SA | 2,225,470 | |||||||||
21,307,490 | Banco de Chile | 2,854,835 | |||||||||
11,449,030 | Banco Santander Chile | 950,198 | |||||||||
35,140 | Banco Santander Chile SA ADR | 3,033,285 | |||||||||
611,600 | Cencosud SA | 3,665,588 | |||||||||
378,500 | Cia Cervecerias Unidas SA | 4,401,600 | |||||||||
43,528 | Compania Cervecerias Unidas ADR | 2,522,012 | |||||||||
33,230 | Embotelladora Andina SA ADR Class A | 778,579 | |||||||||
17,820 | Embotelladora Andina SA ADR Class B | 487,020 | |||||||||
793,400 | Empresa Nacional de Electricidad SA | 1,364,260 | |||||||||
50,090 | Empresa Nacional de Electricidad SA Sponsored ADR | 2,571,120 | |||||||||
662,400 | Enersis SA Sponsored ADR | 14,572,800 | |||||||||
139,020 | Lan Airlines SA Sponsored ADR | 3,717,395 | |||||||||
49,386,245 | Madeco SA | 2,940,300 | |||||||||
928,900 | Quinenco SA | 2,954,458 | |||||||||
Total Chile | 49,038,920 | ||||||||||
China — 7.0% | |||||||||||
3,484,000 | Anta Sports Products Ltd | 7,200,382 | |||||||||
474,740 | AsiaInfo-Linkage Inc * | 8,478,856 | |||||||||
870,470 | Baidu.com Inc Sponsored ADR * | 68,270,962 | |||||||||
157,612,000 | Bank of China Ltd Class H | 79,626,038 | |||||||||
10,628,000 | BaWang International Group Holding Ltd | 4,875,505 | |||||||||
10,158,000 | Belle International Holdings Ltd | 17,914,097 | |||||||||
27,682,000 | Chaoda Modern Agriculture Holdings Ltd | 20,936,286 | |||||||||
54,118,000 | China Construction Bank Class H | 44,988,900 | |||||||||
11,652,000 | China Minsheng Banking Corp Ltd | 10,609,829 | |||||||||
16,007,742 | China Mobile Ltd | 163,602,615 | |||||||||
73,705,351 | China Petroleum & Chemical Corp Class H | 58,433,233 | |||||||||
21,196,000 | China Ting Group Holding Ltd | 3,283,731 | |||||||||
11,208,000 | Dongfeng Motor Group Co Ltd | 17,545,366 | |||||||||
30,530,000 | GOME Electrical Appliances Holdings Ltd * | 9,351,641 | |||||||||
1,946,000 | Hengan International Group Co Ltd | 17,285,671 | |||||||||
7,417,000 | Hopson Development Holdings Ltd | 8,805,625 |
See accompanying notes to the financial statements.
4
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
China — continued | |||||||||||
71,478,000 | Industrial and Commercial Bank of China Ltd Class H | 52,200,300 | |||||||||
2,970,500 | Kingboard Chemical Holdings Ltd | 14,075,880 | |||||||||
8,406,000 | Kingboard Laminates Holdings Ltd | 8,085,993 | |||||||||
10,750,000 | Lee & Man Paper Manufacturing Ltd | 7,515,991 | |||||||||
2,172,000 | Lianhua Supermarket Holdings Co Ltd | 8,475,774 | |||||||||
4,623,000 | Maoye International Holdings 144A | 2,039,118 | |||||||||
2,714,000 | Minth Group Ltd | 4,390,466 | |||||||||
6,356,172 | Peace Mark Holdings Ltd * (a) | — | |||||||||
39,561,101 | PetroChina Co Ltd Class H | 43,048,881 | |||||||||
22,462,789 | Pico Far East Holdings Ltd | 4,001,846 | |||||||||
2,374,000 | Ports Design Ltd | 5,826,021 | |||||||||
6,827,500 | Sinotruk Hong Kong Ltd | 6,517,142 | |||||||||
4,830,000 | Yanzhou Coal Mining Co Ltd Class H | 9,981,578 | |||||||||
6,990,000 | Zhongsheng Group Holdings Ltd * | 12,267,579 | |||||||||
Total China | 719,635,306 | ||||||||||
Czech Republic — 2.1% | |||||||||||
2,764,900 | CEZ AS | 115,720,150 | |||||||||
267,900 | Komercni Banka AS | 51,591,405 | |||||||||
1,022,500 | New World Resources NV Class A * | 11,190,697 | |||||||||
223,330 | Pegas Nonwovens SA | 4,870,788 | |||||||||
11,510 | Philip Morris CR AS | 5,182,144 | |||||||||
1,140,460 | Telefonica 02 Czech Republic AS | 25,560,431 | |||||||||
374,386 | Unipetrol AS * | 4,281,265 | |||||||||
Total Czech Republic | 218,396,880 | ||||||||||
Egypt — 1.6% | |||||||||||
844,016 | Alexandria Mineral Oils Co | 6,961,402 | |||||||||
8,598,670 | Commercial International Bank | 58,318,784 | |||||||||
3,593,100 | EFG-Hermes Holding SAE | 18,439,599 | |||||||||
351,261 | Egyptian Co for Mobile Services | 10,725,491 | |||||||||
593,300 | ElSwedy Electric Co * | 6,990,232 | |||||||||
492,000 | Orascom Construction Industries | 21,808,870 | |||||||||
4,138,070 | Sidi Kerir Petrochemicals Co | 8,859,816 |
See accompanying notes to the financial statements.
5
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Egypt — continued | |||||||||||
4,127,916 | South Valley Cement | 3,781,167 | |||||||||
7,928,800 | Talaat Moustafa Group * | 10,166,011 | |||||||||
6,015,759 | Telecom Egypt | 17,769,166 | |||||||||
Total Egypt | 163,820,538 | ||||||||||
Hungary — 1.5% | |||||||||||
55,470 | Egis Gyogyszergyar Nyrt | 4,960,736 | |||||||||
4,902,760 | Magyar Telekom Nyrt | 14,854,005 | |||||||||
655,730 | MOL Hungarian Oil and Gas Nyrt * | 60,705,202 | |||||||||
1,796,290 | OTP Bank Nyrt * | 38,007,698 | |||||||||
151,120 | Richter Gedeon Nyrt | 31,201,318 | |||||||||
Total Hungary | 149,728,959 | ||||||||||
India — 6.5% | |||||||||||
601,100 | Aurobindo Pharma Ltd | 13,253,683 | |||||||||
2,133,485 | Bank of Baroda (a) | 37,540,411 | |||||||||
468,059 | BGR Energy Systems Ltd | 7,884,773 | |||||||||
6,842,853 | Bharti Airtel Ltd | 47,757,166 | |||||||||
1,248,000 | Canara Bank Ltd | 13,552,682 | |||||||||
11,896,052 | CBAY Systems Holdings Ltd * (b) (c) | 21,163,480 | |||||||||
1,564,800 | Dabur India Ltd | 6,966,341 | |||||||||
684,340 | Emami Ltd | 6,554,648 | |||||||||
1,020,181 | Godrej Consumer Products Ltd | 8,105,479 | |||||||||
265,897 | Grasim Industries Ltd (a) | 11,833,289 | |||||||||
1,193,703 | Great Eastern Shipping Co Ltd (The) | 7,522,875 | |||||||||
624,500 | HDFC Bank Ltd | 28,426,945 | |||||||||
1,061,569 | Hindustan Petroleum Corp Ltd * | 11,947,492 | |||||||||
612,450 | Housing Development Finance Corp Ltd | 8,168,004 | |||||||||
9,319,110 | IFCI Ltd | 11,639,875 | |||||||||
819,600 | Indiabulls Real Estate Ltd * | 2,915,890 | |||||||||
1,409,000 | Indian Oil Corp Ltd | 12,281,652 | |||||||||
1,519,900 | Indraprastha Gas Ltd | 11,000,230 | |||||||||
329,150 | Infosys Technologies Ltd | 18,955,904 | |||||||||
487,350 | Infosys Technologies Ltd Sponsored ADR | 27,920,281 |
See accompanying notes to the financial statements.
6
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
India — continued | |||||||||||
1,480,490 | Ipca Laboratories Ltd | 9,059,119 | |||||||||
330,200 | Larsen & Toubro Ltd | 12,712,715 | |||||||||
523,700 | Maruti Suzuki India Ltd (a) | 14,149,547 | |||||||||
2,623,700 | Oil & Natural Gas Corp Ltd | 74,672,286 | |||||||||
606,350 | Punjab National Bank Ltd (a) | 16,664,372 | |||||||||
5,117,900 | Reliance Communications Ltd * | 16,993,415 | |||||||||
4,417,710 | Rural Electrification Corp Ltd 144A (a) | 31,813,288 | |||||||||
4,360,733 | Shree Renuka Sugars Ltd | 5,933,130 | |||||||||
1,522,040 | Shriram Transport Finance Co Ltd 144A | 23,206,937 | |||||||||
1,599,400 | Sintex Industries Ltd | 12,104,635 | |||||||||
973,400 | State Bank of India | 57,475,032 | |||||||||
1,555,641 | Tata Consultancy Services Ltd | 27,950,456 | |||||||||
318,200 | Tata Motors Ltd | 6,824,109 | |||||||||
777,300 | Torrent Pharmaceuticals Ltd | 9,022,740 | |||||||||
920,196 | Torrent Power Ltd | 6,678,638 | |||||||||
95,236 | Ultratech Cement Ltd | 1,840,263 | |||||||||
1,465,733 | Union Bank of India (a) | 10,624,044 | |||||||||
2,018,670 | Yes Bank Ltd | 13,417,239 | |||||||||
Total India | 666,533,065 | ||||||||||
Indonesia — 2.1% | |||||||||||
11,487,500 | Adaro Energy Tbk PT | 2,426,495 | |||||||||
5,037,500 | Astra International Tbk PT | 26,657,064 | |||||||||
12,755,500 | Bank Mandiri Tbk PT | 8,369,124 | |||||||||
120,647,000 | Bank Pembangunan Daerah Jawa Barat Dan Banten Tbk PT * | 17,092,215 | |||||||||
37,128,500 | Bank Rakyat Tbk PT | 38,362,058 | |||||||||
184,005,500 | Bumi Resources Tbk PT | 34,013,872 | |||||||||
1,453,500 | Gudang Garam Tbk PT | 6,352,189 | |||||||||
44,593,000 | Indah Kiat Pulp and Paper Corp Tbk PT * | 10,029,396 | |||||||||
29,837,500 | Kalbe Farma Tbk PT | 7,703,679 | |||||||||
11,412,100 | Matahari Putra Prima Tbk PT | 1,161,858 | |||||||||
14,343,500 | Semen Gresik Persero Tbk PT | 13,852,844 | |||||||||
3,420,500 | Tambang Batubara Bukit Asam Tbk PT | 6,641,889 | |||||||||
26,920,000 | Telekomunikasi Indonesia Tbk PT | 25,980,667 |
See accompanying notes to the financial statements.
7
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Indonesia — continued | |||||||||||
8,184,100 | United Tractors Tbk PT | 16,736,146 | |||||||||
Total Indonesia | 215,379,496 | ||||||||||
Macau — 0.1% | |||||||||||
6,770,000 | Wynn Macau Ltd * | 11,748,972 | |||||||||
Malaysia — 1.6% | |||||||||||
9,243,700 | AMMB Holdings Berhad * | 16,500,220 | |||||||||
8,454,500 | Axiata Group Berhad * | 11,951,330 | |||||||||
4,158,700 | CIMB Group Holdings Berhad | 10,283,263 | |||||||||
1,055,800 | Genting Berhad | 3,162,539 | |||||||||
16,786,400 | Genting Malaysia Berhad | 16,061,629 | |||||||||
22,346,800 | KNM Group Berhad * | 3,413,435 | |||||||||
1,696,600 | Kulim Malaysia Berhad | 4,538,067 | |||||||||
12,377,403 | Lion Industries Corp Berhad | 6,286,466 | |||||||||
6,294,900 | Malayan Banking Berhad | 16,735,207 | |||||||||
1,524,200 | PPB Group Berhad | 8,233,500 | |||||||||
3,844,776 | Public Bank Berhad | 14,714,315 | |||||||||
4,857,780 | RHB Capital Berhad | 10,218,089 | |||||||||
35,550,200 | Scomi Group Berhad * | 4,403,528 | |||||||||
4,081,100 | Shangri-La Hotels Berhad | 3,518,219 | |||||||||
2,170,538 | Sunway City Berhad | 2,673,464 | |||||||||
2,778,875 | Supermax Corp Berhad | 4,555,593 | |||||||||
5,369,400 | Telekom Malaysia Berhad | 6,028,331 | |||||||||
3,978,700 | Tenaga Nasional Berhad | 11,212,053 | |||||||||
19,743,500 | Zelan Berhad * | 3,765,103 | |||||||||
Total Malaysia | 158,254,351 | ||||||||||
Mexico — 1.8% | |||||||||||
1,141,800 | Alfa SA de CV Class A | 7,773,243 | |||||||||
1,585,340 | America Movil SAB de CV Class L ADR | 73,924,404 | |||||||||
3,101,530 | Cemex SAB de CV Sponsored ADR * | 24,036,858 | |||||||||
85,790 | Coca-Cola Femsa SAB de CV Sponsored ADR | 6,440,255 | |||||||||
1,551,500 | Corporacion GEO SA de CV Class B * | 3,996,470 |
See accompanying notes to the financial statements.
8
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Mexico — continued | |||||||||||
5,891,750 | Grupo Financiero Banorte SAB de CV Class O | 21,081,818 | |||||||||
2,147,520 | Grupo Mexico SA Class B | 5,517,100 | |||||||||
1,582,200 | Grupo Televisa SA-Series CPO | 5,855,605 | |||||||||
1,087,300 | Kimberly-Clark de Mexico SAB de CV (Series A) | 6,301,684 | |||||||||
965,360 | Telefonos de Mexico SAB de CV Class L Sponsored ADR | 13,486,079 | |||||||||
5,711,200 | Wal-Mart de Mexico SA de CV Class V | 12,945,975 | |||||||||
Total Mexico | 181,359,491 | ||||||||||
Morocco — 0.2% | |||||||||||
46,300 | Attijariwafa Bank | 1,642,759 | |||||||||
39,920 | Banque Centrale Populaire | 1,491,053 | |||||||||
9,190 | Ciments du Maroc | 1,211,428 | |||||||||
16,101 | Credit Immobilier et Hotelier | 579,905 | |||||||||
4,230 | Lafarge Ciments | 1,005,271 | |||||||||
18,228 | Managem * | 1,033,790 | |||||||||
666,355 | Maroc Telecom | 11,143,733 | |||||||||
1,780 | Societe Nationale De Siderurgie | 474,024 | |||||||||
1,317 | Wafa Assurance | 388,387 | |||||||||
Total Morocco | 18,970,350 | ||||||||||
Peru — 0.0% | |||||||||||
224,357 | Minsur SA | 537,430 | |||||||||
3,498,500 | Volcan Compania Minera SA Class B | 3,814,954 | |||||||||
Total Peru | 4,352,384 | ||||||||||
Philippines — 0.8% | |||||||||||
9,365,000 | Aboitiz Power Corp | 3,897,514 | |||||||||
12,532,000 | Alliance Global Group Inc | 1,755,944 | |||||||||
85,290,700 | Lopez Holding Corp. * | 9,748,550 | |||||||||
143,874,200 | Megaworld Corp | 5,893,659 | |||||||||
57,803,500 | Metro Pacific Investments Corp 144A | 4,286,577 | |||||||||
10,030,000 | Metropolitan Bank & Trust Co | 14,169,528 | |||||||||
273,200 | Philippine Long Distance Telephone Co | 14,693,854 | |||||||||
6,000 | PLDT Communications and Energy Ventures Inc | 992 |
See accompanying notes to the financial statements.
9
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Philippines — continued | |||||||||||
22,699,110 | Robinsons Land Corp | 7,087,530 | |||||||||
2,879,700 | Security Bank Corp | 4,756,881 | |||||||||
7,540,000 | Universal Robina Corp | 5,750,268 | |||||||||
71,812,100 | Vista Land & Lifescapes Inc | 4,284,480 | |||||||||
Total Philippines | 76,325,777 | ||||||||||
Poland — 0.9% | |||||||||||
474,612 | Asseco Poland SA | 8,249,158 | |||||||||
72,950 | Bank Zachodni WBK SA | 4,320,263 | |||||||||
1,064,030 | Getin Holding SA * | 3,225,372 | |||||||||
373,250 | Grupa Lotos SA * | 3,502,113 | |||||||||
657,380 | KGHM Polska Miedz SA | 22,123,532 | |||||||||
1,217,550 | Polski Koncern Naftowy Orlen SA * | 14,912,733 | |||||||||
1,567,690 | Powszechna Kasa Oszczednosci Bank Polski SA | 18,824,409 | |||||||||
2,704,580 | Telekomunikacja Polska SA | 14,605,232 | |||||||||
Total Poland | 89,762,812 | ||||||||||
Russia — 13.8% | |||||||||||
2,006,000 | Cherepovets MK Severstal GDR (Registered Shares) * | 24,038,004 | |||||||||
1,135,643,620 | Federal Hydrogenerating Co * | 58,135,868 | |||||||||
1,834,630 | Gazprom Neft Class S | 6,864,296 | |||||||||
19,856,500 | Gazprom OAO Sponsored ADR | 408,285,143 | |||||||||
3,703,090 | Lukoil OAO ADR | 196,413,560 | |||||||||
2,143,332 | Magnit OJSC Sponsored GDR (Registered Shares) | 45,654,506 | |||||||||
1,700,200 | Magnitogorsk Iron & Steel Works Sponsored GDR (Registered Shares) | 18,862,435 | |||||||||
1,350,940 | Mechel Sponsored ADR | 30,733,885 | |||||||||
4,368,500 | MMC Norilsk Nickel JSC ADR | 73,695,608 | |||||||||
4,691,240 | Mobile Telesystems Sponsored ADR | 97,859,266 | |||||||||
537,100 | NovaTek OAO Sponsored GDR (Registered Shares) | 39,222,378 | |||||||||
1,184,050 | Novolipetsk Steel Class S | 3,465,304 | |||||||||
476,457 | Novolipetsk Steel GDR (Registered Shares) | 13,778,267 | |||||||||
1,625,256 | OAO Tatneft Sponsored GDR (Registered Shares) | 48,446,312 | |||||||||
7,067,500 | Rosneft OJSC GDR (Registered Shares) * | 44,573,945 | |||||||||
135,000 | Russia Petroleum Class S * (a) | 14,850 |
See accompanying notes to the financial statements.
10
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Russia — continued | |||||||||||
40,093,360 | Sberbank Class S | 101,500,711 | |||||||||
1,944,611 | Sistema JSFC Sponsored GDR (Registered Shares) | 49,877,639 | |||||||||
9,026,862 | Surgutneftegas Sponsored ADR | 84,445,437 | |||||||||
380,770 | TNK-BP Holding | 772,963 | |||||||||
13,912,000 | United Co RUSAL Plc * | 14,059,700 | |||||||||
6,574,600 | VTB Bank OJSC GDR (Registered Shares) | 33,708,605 | |||||||||
437,347 | X5 Retail Group NV GDR (Registered Shares) * | 15,862,611 | |||||||||
Total Russia | 1,410,271,293 | ||||||||||
South Africa — 2.7% | |||||||||||
764,500 | Absa Group Ltd | 12,737,027 | |||||||||
2,889,232 | Aveng Ltd | 14,844,580 | |||||||||
1,381,000 | Discovery Holdings Ltd | 6,554,435 | |||||||||
15,248,896 | FirstRand Ltd | 39,823,876 | |||||||||
3,631,116 | Grindrod Ltd | 7,616,578 | |||||||||
3,038,800 | Growthpoint Properties Ltd | 6,940,989 | |||||||||
306,500 | Impala Platinum Holdings Ltd | 7,217,430 | |||||||||
842,300 | Imperial Holdings Ltd | 11,637,538 | |||||||||
238,600 | Kumba Iron Ore Ltd | 10,821,924 | |||||||||
499,000 | Massmart Holdings Ltd | 8,270,286 | |||||||||
707,900 | MTN Group Ltd | 11,539,305 | |||||||||
1,105,200 | Murray & Roberts Holdings Ltd | 6,212,076 | |||||||||
658,138 | Reunert Ltd | 5,135,635 | |||||||||
2,854,200 | Sanlam Ltd | 8,985,464 | |||||||||
1,709,254 | Shoprite Holdings Ltd | 20,932,908 | |||||||||
10,006,054 | Steinhoff International Holdings Ltd * | 25,498,257 | |||||||||
3,248,500 | Telkom South Africa Ltd | 14,796,369 | |||||||||
900,316 | Tiger Brands Ltd | 22,040,650 | |||||||||
1,518,000 | Vodacom Group (Pty) Ltd | 12,700,956 | |||||||||
627,465 | Wilson Bayly Holmes-Ovcon Ltd | 9,601,714 | |||||||||
4,131,100 | Woolworths Holdings Ltd. | 13,766,738 | |||||||||
Total South Africa | 277,674,735 |
See accompanying notes to the financial statements.
11
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
South Korea — 18.3% | |||||||||||
14,567 | Amorepacific Corp | 13,377,713 | |||||||||
212,870 | Boryung Pharmaceutical Co Ltd | 2,720,493 | |||||||||
1,643,695 | Busan Bank | 17,511,300 | |||||||||
291,387 | Cheil Industries Inc | 25,469,572 | |||||||||
21,489 | CJ O Shopping Co Ltd * (a) | 2,327,415 | |||||||||
1,032,058 | Daegu Bank | 12,016,416 | |||||||||
1,194,440 | Daehan Pulp Co Ltd * | 4,854,451 | |||||||||
374,633 | Daelim Industrial Co Ltd | 23,650,108 | |||||||||
13,337 | Daesun Shipbuilding & Engineering Co Ltd * | 313,004 | |||||||||
291,419 | Dongbu Insurance Co Ltd | 8,210,759 | |||||||||
289,126 | Edu Ark Co Ltd * (a) | — | |||||||||
829,731 | Finetex EnE Inc * | 1,831,912 | |||||||||
173,167 | GS Engineering & Construction Corp | 12,394,264 | |||||||||
504,541 | GS Holdings Corp | 20,751,339 | |||||||||
1,502,730 | Hana Financial Group Inc | 38,687,843 | |||||||||
1,264,077 | Hanwha Chemical Corp | 28,406,088 | |||||||||
668,345 | Hanwha Corp | 24,882,643 | |||||||||
211,643 | Honam Petrochemical Corp | 33,113,712 | |||||||||
3,399,083 | Hynix Semiconductor Inc * | 59,856,617 | |||||||||
147,916 | Hyosung Corp | 13,204,645 | |||||||||
260,865 | Hyundai Development Co | 5,990,157 | |||||||||
638,650 | Hyundai Heavy Industries Co Ltd | 140,922,964 | |||||||||
126,153 | Hyundai Mipo Dockyard | 16,905,259 | |||||||||
538,291 | Hyundai Mobis | 97,636,420 | |||||||||
863,683 | Hyundai Motor Co | 102,267,527 | |||||||||
3,354,357 | In the F Co Ltd * (b) | 3,242,163 | |||||||||
1,995,284 | Industrial Bank of Korea | 24,176,241 | |||||||||
1,699,138 | Kangwon Land Inc | 31,127,617 | |||||||||
2,071,030 | KB Financial Group Inc | 84,156,950 | |||||||||
1,241,886 | Kia Motors Corp | 32,022,522 | |||||||||
185,619 | Kolon Industries Inc * | 11,075,535 | |||||||||
1,921,226 | Korea Exchange Bank | 20,296,345 | |||||||||
331,734 | Korea Investment Holdings Co Ltd | 8,724,095 | |||||||||
73,271 | Korea Zinc Co Ltd | 16,370,497 |
See accompanying notes to the financial statements.
12
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
South Korea — continued | |||||||||||
226,340 | Korean Air Lines Co Ltd * | 13,784,981 | |||||||||
846,463 | KT Corp | 30,892,800 | |||||||||
1,115,981 | KT&G Corp | 56,830,983 | |||||||||
170,085 | LG Chem Ltd | 49,081,753 | |||||||||
596,009 | LG Corp | 42,749,389 | |||||||||
1,072,771 | LG Display Co Ltd | 30,048,396 | |||||||||
1,943,441 | LG Telecom Ltd | 12,150,837 | |||||||||
109,097 | Lotte Shopping Co Ltd | 35,399,986 | |||||||||
341,175 | Maeil Dairy Industry | 4,878,045 | |||||||||
38,495 | OCI Company Ltd. | 11,963,129 | |||||||||
227,567 | POSCO | 92,215,856 | |||||||||
702,893 | Pumyang Construction Co Ltd (b) | 2,701,637 | |||||||||
249,380 | Samsung C&T Corp | 11,750,162 | |||||||||
259,585 | Samsung Electro Mechanics Co Ltd | 24,740,733 | |||||||||
835,767 | Samsung Heavy Industries Co Ltd | 18,615,293 | |||||||||
449,191 | Samsung Electronics Co Ltd | 283,999,200 | |||||||||
1,955,921 | Shinhan Financial Group Co Ltd | 74,909,122 | |||||||||
320,092 | SK Telecom Co Ltd | 43,278,419 | |||||||||
197,725 | SK Telecom Co Ltd ADR | 3,167,555 | |||||||||
579,970 | SK Holdings Co Ltd | 44,593,630 | |||||||||
904,195 | STX Pan Ocean Co Ltd | 8,657,874 | |||||||||
2,747,792 | Woori Finance Holdings Co Ltd | 30,942,950 | |||||||||
610,782 | Youngone Corp | 4,906,783 | |||||||||
Total South Korea | 1,870,754,099 | ||||||||||
Sri Lanka — 0.1% | |||||||||||
2,302,500 | Hatton National Bank Plc | 5,911,467 | |||||||||
229,574 | Lanka Walltile Ltd | 184,910 | |||||||||
Total Sri Lanka | 6,096,377 | ||||||||||
Taiwan — 7.6% | |||||||||||
4,649,300 | Asustek Computer Inc | 30,963,385 | |||||||||
25,823,000 | China Petrochemical Development Corp. * | 15,222,966 | |||||||||
18,446,621 | China Steel Corp | 17,431,752 |
See accompanying notes to the financial statements.
13
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Taiwan — continued | |||||||||||
23,666,660 | Chinatrust Financial Holding Co Ltd | 13,251,602 | |||||||||
23,474,246 | Chunghwa Telecom Co Ltd | 48,211,776 | |||||||||
32,806,818 | Compal Electronics Inc | 36,835,569 | |||||||||
7,305,000 | Delta Electronics Inc | 27,696,554 | |||||||||
8,488,500 | Far Eastone Telecommunications Co Ltd | 11,016,968 | |||||||||
26,110,016 | First Financial Holding Co Ltd | 15,070,288 | |||||||||
7,328,439 | Fubon Financial Holding Co Ltd | 8,520,834 | |||||||||
19,226,455 | Hon Hai Precision Industry Co Ltd | 67,792,040 | |||||||||
4,034,751 | HTC Corp | 74,001,895 | |||||||||
984,000 | Largan Precision Co Ltd | 17,723,315 | |||||||||
8,660,223 | Lite-On Technology Corp | 9,992,513 | |||||||||
40,220,000 | Mega Financial Holding Co Ltd | 24,250,040 | |||||||||
35,112,697 | Nan Ya Plastics Corp | 67,640,206 | |||||||||
3,979,658 | Novatek Microelectronics Corp Ltd | 9,520,710 | |||||||||
9,800,438 | Pegatron Corp * | 12,268,139 | |||||||||
7,594,500 | Powertech Technology Inc | 22,546,922 | |||||||||
18,851,290 | Quanta Computer Inc | 28,645,815 | |||||||||
434,973 | Synnex Technology International Corp | 895,235 | |||||||||
30,678,355 | Taishin Financial Holding Co Ltd * | 12,519,291 | |||||||||
86,366,697 | Taiwan Semiconductor Manufacturing Co Ltd | 157,942,980 | |||||||||
14,799,866 | Wistron Corp | 23,184,277 | |||||||||
11,227,708 | WPG Holdings Co Ltd | 20,785,431 | |||||||||
Total Taiwan | 773,930,503 | ||||||||||
Thailand — 6.8% | |||||||||||
16,205,590 | Advanced Info Service Pcl (Foreign Registered) (a) | 47,838,863 | |||||||||
6,985,000 | Airports of Thailand Pcl (Foreign Registered) (a) | 8,872,144 | |||||||||
46,233,660 | Asian Property Development Pcl (Foreign Registered) (a) | 9,769,110 | |||||||||
866,000 | Bangkok Bank Pcl (Foreign Registered) (a) | 4,085,291 | |||||||||
7,322,010 | Bangkok Bank Pcl NVDR | 34,541,038 | |||||||||
13,454,386 | Bangkok Dusit Medical Service Pcl (Foreign Registered) (a) | 14,192,847 | |||||||||
17,341,650 | Bank of Ayudhya Pcl NVDR (Foreign Registered) (a) | 12,085,023 | |||||||||
1,561,180 | Banpu Pcl (Foreign Registered) (a) | 30,618,464 | |||||||||
84,060 | Banpu Pcl NVDR | 1,648,617 |
See accompanying notes to the financial statements.
14
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Thailand — continued | |||||||||||
50,111,000 | Charoen Pokphand Foods Pcl (Foreign Registered) (a) | 40,917,456 | |||||||||
27,777,000 | CP ALL Pcl (Foreign Registered) (a) | 35,285,381 | |||||||||
24,521,072 | Home Product Center Pcl (Foreign Registered) (a) | 8,343,005 | |||||||||
114,044,800 | IRPC Pcl (Foreign Registered) (a) | 14,688,529 | |||||||||
12,218,460 | Kasikornbank Pcl (Foreign Registered) (a) | 44,553,835 | |||||||||
7,315,490 | Kasikornbank Pcl NVDR | 25,388,493 | |||||||||
56,489,600 | Krung Thai Bank Pcl (Foreign Registered) (a) | 25,977,821 | |||||||||
20,264,000 | PTT Aromatics & Refining Pcl (Foreign Registered) (a) | 15,189,329 | |||||||||
7,360,000 | PTT Chemical Pcl (Foreign Registered) (a) | 24,981,279 | |||||||||
6,130,000 | PTT Exploration & Production Pcl (Foreign Registered) (a) | 28,176,461 | |||||||||
10,025,270 | PTT Pcl (Foreign Registered) (a) | 85,020,614 | |||||||||
17,601,870 | Robinson Department Store Pcl (Foreign Registered) (a) | 12,641,408 | |||||||||
12,644,400 | Saha Pathana International Holding Pcl (Foreign Registered) (a) | 7,919,615 | |||||||||
3,593,138 | Siam Cement Pcl (Foreign Registered) (a) | 35,681,497 | |||||||||
2,108,990 | Siam Cement Pcl NVDR | 19,997,408 | |||||||||
16,619,080 | Siam Commercial Bank Pcl (Foreign Registered) (a) | 50,612,619 | |||||||||
3,108,050 | Star Block Co Ltd (Foreign Registered) * (a) (b) (d) | — | |||||||||
14,186,200 | Thai Airways International Pcl (Foreign Registered) (a) | 17,062,981 | |||||||||
12,834,320 | Thai Oil Pcl (Foreign Registered) (a) | 18,081,124 | |||||||||
13,898,000 | Thanachart Capital Pcl (a) | 15,321,329 | |||||||||
12,497,000 | Thoresen Thai Agencies Pcl (Foreign Registered) (a) | 9,694,181 | |||||||||
Total Thailand | 699,185,762 | ||||||||||
Turkey — 6.8% | |||||||||||
13,231,906 | Akbank TAS | 69,543,503 | |||||||||
970,040 | Anadolu Efes Biracilik ve Malt Sanayii AS | 13,004,423 | |||||||||
3,322,150 | Arcelik AS | 15,625,437 | |||||||||
3,430,600 | Asya Katilim Bankasi AS | 7,539,834 | |||||||||
289,915 | Dogus Otomotiv Servis ve Ticaret AS * | 1,565,918 | |||||||||
2,453,782 | Enka Insaat ve Sanayi AS | 8,843,210 | |||||||||
2,051,262 | Ford Otomotiv Sanayi AS | 15,621,802 | |||||||||
4,371,431 | Haci Omer Sabanci Holding AS | 19,604,075 | |||||||||
13,656,119 | KOC Holding AS | 52,631,973 | |||||||||
42,150 | Medya Holding AS (a) (d) | — |
See accompanying notes to the financial statements.
15
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Turkey — continued | |||||||||||
1,751,120 | Tupras-Turkiye Petrol Rafineriler AS | 38,991,873 | |||||||||
6,768,199 | Turk Hava Yollari Anonim Ortakligi | 21,099,606 | |||||||||
7,158,381 | Turk Sise ve Cam Fabrikalari AS * | 10,604,853 | |||||||||
14,428,570 | Turk Telekomunikasyon AS | 59,244,471 | |||||||||
8,005,585 | Turkcell Iletisim Hizmet AS | 50,299,929 | |||||||||
29,749,540 | Turkiye Garanti Bankasi | 142,939,911 | |||||||||
16,197,715 | Turkiye IS Bankasi Class C | 58,941,788 | |||||||||
6,923,252 | Turkiye Sinai Kalkinma Bankasi AS | 9,810,707 | |||||||||
6,031,960 | Turkiye Vakiflar Bankasi TAO Class D | 16,167,359 | |||||||||
5,976,300 | Turkiye Halk Bankasi AS | 48,327,202 | |||||||||
13,036,633 | Yapi ve Kredi Bankasi AS * | 38,605,704 | |||||||||
Total Turkey | 699,013,578 | ||||||||||
TOTAL COMMON STOCKS (COST $8,107,923,116) | 9,000,266,412 | ||||||||||
PREFERRED STOCKS — 8.4% | |||||||||||
Brazil — 6.1% | |||||||||||
1,651,100 | AES Tiete SA 8.84% | 20,043,531 | |||||||||
3,759,996 | Banco Bradesco SA 0.57% | 65,212,514 | |||||||||
1,414,800 | Banco do Estado do Rio Grande do Sul SA Class B 0.81% | 12,470,379 | |||||||||
481,100 | Bradespar SA 0.62% | 10,026,056 | |||||||||
2,768,100 | Brasil Telecom SA * | 17,510,941 | |||||||||
1,267,800 | Centrais Eletricas Brasileiras SA Class B | 18,306,852 | |||||||||
1,436,980 | Cia Energetica de Minas Gerais 2.43% | 22,909,859 | |||||||||
62,106 | Companhia de Bebidas das Americas 3.74% | 6,842,357 | |||||||||
209,600 | Companhia de Transmissao de Energia Eletrica Paulista 0.83% | 5,943,391 | |||||||||
902,600 | Companhia Paranaense de Energia Class B 0.19% | 19,760,837 | |||||||||
474,300 | Eletropaulo Metropolitana SA 5.84% | 8,912,114 | |||||||||
6,919,641 | Itausa-Investimentos Itau SA 0.45% | 48,462,112 | |||||||||
2,402,104 | Petroleo Brasileiro SA (Petrobras) 0.51% | 35,643,462 | |||||||||
3,130,220 | Petroleo Brasileiro SA Sponsored ADR 0.50% | 92,529,303 | |||||||||
1,229,680 | Tele Norte Leste Participacoes ADR 12.00% | 16,674,461 | |||||||||
266,400 | Telecomunicacoes de Sao Paulo SA 4.53% | 6,114,496 |
See accompanying notes to the financial statements.
16
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Brazil — continued | |||||||||||
498,500 | Usinas Siderrurgicas de Minas Gerais SA Class A 1.81% | 12,497,626 | |||||||||
3,115,908 | Vale SA Preference A 2.00% | 73,504,381 | |||||||||
5,459,730 | Vale SA Sponsored ADR 1.98% | 128,958,823 | |||||||||
Total Brazil | 622,323,495 | ||||||||||
Chile — 0.0% | |||||||||||
493,740 | Embotelladora Andina SA A Shares 1.76% | 1,904,096 | |||||||||
514,629 | Embotelladora Andina SA B Shares 1.63% | 2,356,010 | |||||||||
Total Chile | 4,260,106 | ||||||||||
Russia — 1.0% | |||||||||||
122,622,320 | Surgutneftegaz Class S 8.20% | 51,170,662 | |||||||||
3,208,560 | TNK BP Holding 8.14% | 5,647,065 | |||||||||
39,445 | Transneft 0.75% | 42,174,491 | |||||||||
Total Russia | 98,992,218 | ||||||||||
South Korea — 1.3% | |||||||||||
239,589 | Hyundai Motor Co 2.46% | 10,111,021 | |||||||||
274,321 | Samsung Electronics Co Ltd (Non Voting) 2.32% | 122,028,955 | |||||||||
Total South Korea | 132,139,976 | ||||||||||
TOTAL PREFERRED STOCKS (COST $761,172,259) | 857,715,795 | ||||||||||
INVESTMENT FUNDS — 0.4% | |||||||||||
China — 0.1% | |||||||||||
199,464 | Martin Currie China A Share Fund Ltd Class B * (a) (c) | 8,229,102 | |||||||||
245,374 | Martin Currie China A Share Fund Ltd Class S * (a) (c) | 2,096,105 | |||||||||
25,045 | Martin Currie China A Share Fund Ltd Class S * (a) (c) | 1,722,829 | |||||||||
Total China | 12,048,036 | ||||||||||
India — 0.1% | |||||||||||
12,146 | Fire Capital Mauritius Private Fund * (a) (c) | 10,270,092 | |||||||||
1,371,900 | TDA India Technology Fund II LP * (a) (c) | 1,585,217 | |||||||||
Total India | 11,855,309 |
See accompanying notes to the financial statements.
17
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares / Par Value | Description | Value ($) | |||||||||
Poland — 0.0% | |||||||||||
1,749,150 | The Emerging European Fund II LP * (a) (c) | 380,846 | |||||||||
Russia — 0.1% | |||||||||||
9,500,000 | NCH Eagle Fund LP * (a) (c) | 8,627,796 | |||||||||
2,769 | Steep Rock Russia Fund LP * (a) (c) | 694,028 | |||||||||
Total Russia | 9,321,824 | ||||||||||
Ukraine — 0.0% | |||||||||||
16,667 | Societe Generale Thalmann Ukraine Fund * (a) (c) (e) | 4,000 | |||||||||
United States — 0.1% | |||||||||||
301,204 | iShares MSCI Emerging Markets Index Fund * (f) | 12,069,244 | |||||||||
TOTAL INVESTMENT FUNDS (COST $41,724,072) | 45,679,259 | ||||||||||
DEBT OBLIGATIONS — 0.5% | |||||||||||
Poland — 0.2% | |||||||||||
PLN | 100,677,888 | TRI Media Secured Term Note, 4.50% , due 02/07/13 (a) (c) | 24,595,758 | ||||||||
United States — 0.3% | |||||||||||
27,508,157 | U.S. Treasury Inflation Indexed Note, 2.38% , due 04/15/11 (g) | 27,852,008 | |||||||||
TOTAL DEBT OBLIGATIONS (COST $57,396,626) | 52,447,766 | ||||||||||
RIGHTS AND WARRANTS — 0.0% | |||||||||||
China — 0.0% | |||||||||||
315,050 | Kingboard Chemical Holdings Ltd Warrants, Expires 10/31/12 * | 138,515 | |||||||||
Malaysia — 0.0% | |||||||||||
4,395,496 | Sunway City Warrants, Expires 10/04/17 * | 700,332 | |||||||||
TOTAL RIGHTS AND WARRANTS (COST $203,756) | 838,847 |
See accompanying notes to the financial statements.
18
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares / Par Value | Description | Value ($) | |||||||||
MUTUAL FUNDS — 0.0% | |||||||||||
United States — 0.0% | |||||||||||
Affiliated Issuers | |||||||||||
8,064 | GMO Special Purpose Holding Fund (h) | 4,355 | |||||||||
TOTAL MUTUAL FUNDS (COST $0) | 4,355 | ||||||||||
SHORT-TERM INVESTMENTS — 1.8% | |||||||||||
Time Deposits — 1.8% | |||||||||||
ZAR | 1,755,197 | Citibank (New York) Time Deposit, 6.24%, due 09/01/10 | 237,997 | ||||||||
USD | 81,940 | DnB Nor Bank (Oslo) Time Deposit, 0.21%, due 09/01/10 | 81,940 | ||||||||
USD | 65,000,000 | HSBC Bank (USA) Time Deposit, 0.17%, due 09/01/10 | 65,000,000 | ||||||||
USD | 48,400,000 | Royal Bank of Canada (Grand Cayman) Time Deposit, 0.18%, due 09/01/10 | 48,400,000 | ||||||||
USD | 65,000,000 | Societe Generale (Grand Cayman) Time Deposit, 0.20%, due 09/01/10 | 65,000,000 | ||||||||
Total Time Deposits | 178,719,937 | ||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $178,719,937) | 178,719,937 | ||||||||||
TOTAL INVESTMENTS — 99.2% (Cost $9,147,139,766) | 10,135,672,371 | ||||||||||
Other Assets and Liabilities (net) — 0.8% | 80,716,969 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 10,216,389,340 |
See accompanying notes to the financial statements.
19
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Additional information on each restricted security is as follows:
Issuer Description | Acquisition Date | Acquisition Cost | Value as a Percentage of Fund's Net Assets | Value as of August 31, 2010 | |||||||||||||||
CBAY Systems Holdings Ltd | 5/14/2007 | $ | 17,013,437 | 0.21 | % | $ | 21,163,480 | ||||||||||||
Fire Capital Mauritius Private Fund ** | 9/06/06-3/30/09 | 12,180,554 | 0.10 | % | 10,270,092 | ||||||||||||||
Martin Currie China A Share Fund Ltd Class B | 1/20/06 | 2,453,738 | 0.08 | % | 8,229,102 | ||||||||||||||
Martin Currie China A Share Fund Ltd Class S | 10/14/08 | 2,159,084 | 0.04 | % | 3,818,934 | ||||||||||||||
NCH Eagle Fund LP | 1/08/03 | 9,500,000 | 0.08 | % | 8,627,796 | ||||||||||||||
Societe Generale Thalmann Ukraine Fund | 7/15/97 | 199,943 | 0.00 | % | 4,000 | ||||||||||||||
Steep Rock Russia Fund LP | 12/22/06-5/13/09 | 2,250,000 | 0.01 | % | 694,028 | ||||||||||||||
TDA India Technology Fund II LP | 2/23/00-3/23/04 | 787,800 | 0.02 | % | 1,585,217 | ||||||||||||||
TRI Media Secured Term Note | 8/7/09 | 29,505,475 | 0.24 | % | 24,595,758 | ||||||||||||||
The Emerging European Fund II LP | 12/05/97-6/24/02 | 471,720 | 0.00 | % | 380,846 | ||||||||||||||
$ | 79,369,253 |
** GMO Emerging Markets Fund has committed an additional $7,834,879 to this investment.
A summary of outstanding financial instruments at August 31, 2010 is as follows:
Swap Agreements
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Fund Pays | Fund Receives | Market Value | ||||||||||||||||||||||
20,691,805 | USD | 9/8/2010 | Morgan Stanley | Depreciation of | Appreciation of | $ | 775,813 | ||||||||||||||||||||
Total Return on | Total Return on | ||||||||||||||||||||||||||
OTP Bank PLC + | OTP Bank PLC | ||||||||||||||||||||||||||
(Daily Fed Funds | |||||||||||||||||||||||||||
Rate -0.60%) | |||||||||||||||||||||||||||
$ | 775,813 | ||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
As of August 31, 2010, for futures contracts, swap agreements and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
See accompanying notes to the financial statements.
20
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Notes to Schedule of Investments:
144A - Securities 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.
ADR - American Depositary Receipt
CPO - Ordinary Participation Certificate (Certificado de Participacion Ordinares), representing a bundle of shares of the multiple series of one issuer that trade together as a unit.
Foreign Registered - Shares issued to foreign investors in markets that have foreign ownership limits.
GDR - Global Depository Receipt
MSCI - Morgan Stanley Capital International
NVDR - Non-Voting Depository Receipt
* Non-income producing security.
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
(b) Affiliated company (Note 10).
(c) Private placement securities are restricted as to resale.
(d) Bankrupt issuer.
(e) The security is currently in full liquidation.
(f) Represents an investment to equitize cash in the iShares® MSCI Emerging Markets Index Fund, which is a separate investment portfolio of iShares, Inc., a registered investment company. The iShares® MSCI Emerging Markets Index Fund invests in global emerging markets and seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the MSCI Emerging Markets Index. iShares® is a registered trademark of BlackRock. Neither BlackRock nor the iShares® Funds make any representations regarding the advisability of investing in the iShares® MSCI Emerging Markets Index Fund.
(g) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic (Note 2).
(h) Underlying investment represents interests in defaulted claims.
Currency Abbreviations:
PLN - Polish Zloty USD - United States Dollar ZAR - South African Rand | |||
See accompanying notes to the financial statements.
21
GMO Emerging Markets Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Investments in unaffiliated issuers, at value (cost $9,116,744,680) (Note 2) | $ | 10,103,706,285 | |||||
Investments in affiliated issuers, at value (cost $30,395,086) (Notes 2 and 10) | 31,966,086 | ||||||
Foreign currency, at value (cost $15,630,271) (Note 2) | 15,607,773 | ||||||
Receivable for investments sold | 210,228,989 | ||||||
Receivable for Fund shares sold | 76,830,796 | ||||||
Dividends and interest receivable | 39,385,979 | ||||||
Receivable for foreign currency sold | 27,000 | ||||||
Receivable for open swap contracts (Note 4) | 775,813 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 289,802 | ||||||
Miscellaneous receivable | 960,481 | ||||||
Total assets | 10,479,779,004 | ||||||
Liabilities: | |||||||
Due to custodian | 53,862 | ||||||
Foreign taxes payable | 4,540,248 | ||||||
Payable for investments purchased | 3,376,742 | ||||||
Payable for Fund shares repurchased | 243,608,880 | ||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 6,750,445 | ||||||
Shareholder service fee | 987,857 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 17,651 | ||||||
Miscellaneous payable | 1,396,684 | ||||||
Accrued expenses | 2,657,295 | ||||||
Total liabilities | 263,389,664 | ||||||
Net assets | $ | 10,216,389,340 |
See accompanying notes to the financial statements.
22
GMO Emerging Markets Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited) — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 9,921,066,686 | |||||
Accumulated undistributed net investment income | 103,079,693 | ||||||
Accumulated net realized loss | (788,518,254 | ) | |||||
Net unrealized appreciation | 980,761,215 | ||||||
$ | 10,216,389,340 | ||||||
Net assets attributable to: | |||||||
Class II shares | $ | 2,267,184,174 | |||||
Class III shares | $ | 1,073,064,392 | |||||
Class IV shares | $ | 1,569,062,960 | |||||
Class V shares | $ | 553,448,001 | |||||
Class VI shares | $ | 4,753,629,813 | |||||
Shares outstanding: | |||||||
Class II | 183,493,816 | ||||||
Class III | 86,619,506 | ||||||
Class IV | 127,451,128 | ||||||
Class V | 44,996,393 | ||||||
Class VI | 385,767,107 | ||||||
Net asset value per share: | |||||||
Class II | $ | 12.36 | |||||
Class III | $ | 12.39 | |||||
Class IV | $ | 12.31 | |||||
Class V | $ | 12.30 | |||||
Class VI | $ | 12.32 |
See accompanying notes to the financial statements.
23
GMO Emerging Markets Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $21,478,370) | $ | 155,545,376 | |||||
Interest | 1,209,417 | ||||||
Dividends from affiliated issuers | 18,759 | ||||||
Total investment income | 156,773,552 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 37,705,662 | ||||||
Shareholder service fee – Class II (Note 5) | 2,577,711 | ||||||
Shareholder service fee – Class III (Note 5) | 813,207 | ||||||
Shareholder service fee – Class IV (Note 5) | 860,637 | ||||||
Shareholder service fee – Class V (Note 5) | 206,646 | ||||||
Shareholder service fee – Class VI (Note 5) | 1,237,956 | ||||||
Custodian and fund accounting agent fees | 5,486,328 | ||||||
Legal fees | 298,540 | ||||||
Trustees fees and related expenses (Note 5) | 107,411 | ||||||
Audit and tax fees | 91,356 | ||||||
Transfer agent fees | 41,124 | ||||||
Registration fees | 25,208 | ||||||
Miscellaneous | 94,577 | ||||||
Total expenses | 49,546,363 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (1,582,808 | ) | |||||
Expense reductions (Note 2) | (1,131 | ) | |||||
Net expenses | 47,962,424 | ||||||
Net investment income (loss) | 108,811,128 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers (net of foreign capital gains tax of $7,916,177) | 720,570,698 | ||||||
Investments in affiliated issuers | (2,864,666 | ) | |||||
Closed swap contracts | 6,564,357 | ||||||
Foreign currency, forward contracts and foreign currency related transactions (net of foreign capital gains tax of $3,663 and Brazilian IOF tax of $21,833) (Note 2) | (8,526,772 | ) | |||||
Net realized gain (loss) | 715,743,617 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers (net of change in foreign capital gains tax of $8,462,424) (Note 2) | (257,397,212 | ) | |||||
Investments in affiliated issuers | 15,787,991 | ||||||
Open swap contracts | 775,813 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (428,088 | ) | |||||
Net unrealized gain (loss) | (241,261,496 | ) | |||||
Net realized and unrealized gain (loss) | 474,482,121 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 583,293,249 |
See accompanying notes to the financial statements.
24
GMO Emerging Markets Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 108,811,128 | $ | 127,258,284 | |||||||
Net realized gain (loss) | 715,743,617 | 699,055,720 | |||||||||
Change in net unrealized appreciation (depreciation) | (241,261,496 | ) | 4,125,061,699 | ||||||||
Net increase (decrease) in net assets from operations | 583,293,249 | 4,951,375,703 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class II | — | (37,234,403 | ) | ||||||||
Class III | — | (21,375,610 | ) | ||||||||
Class IV | — | (31,476,321 | ) | ||||||||
Class V | — | (12,760,543 | ) | ||||||||
Class VI | — | (64,099,216 | ) | ||||||||
Total distributions from net investment income | — | (166,946,093 | ) | ||||||||
Net share transactions (Note 9): | |||||||||||
Class II | (142,200,312 | ) | 2,023,770,932 | ||||||||
Class III | (1,637,472 | ) | (2,964,843,372 | ) | |||||||
Class IV | (178,250,640 | ) | (767,368,513 | ) | |||||||
Class V | 168,879,268 | (1,016,877,255 | ) | ||||||||
Class VI | 652,964,532 | 1,371,471,389 | |||||||||
Increase (decrease) in net assets resulting from net share transactions | 499,755,376 | (1,353,846,819 | ) | ||||||||
Purchase premiums and redemption fees (Notes 2 and 9): | |||||||||||
Class II | 1,778,147 | 3,293,784 | |||||||||
Class III | 139,323 | 3,740,402 | |||||||||
Class IV | 726,181 | 2,859,788 | |||||||||
Class V | 208,389 | 679,896 | |||||||||
Class VI | 5,934,040 | 6,691,676 | |||||||||
Increase in net assets resulting from purchase premiums and redemption fees | 8,786,080 | 17,265,546 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees | 508,541,456 | (1,336,581,273 | ) | ||||||||
Total increase (decrease) in net assets | 1,091,834,705 | 3,447,848,337 | |||||||||
Net assets: | |||||||||||
Beginning of period | 9,124,554,635 | 5,676,706,298 | |||||||||
End of period (including accumulated undistributed net investment income of $103,079,693 and distributions in excess of net investment income of $5,731,435, respectively) | $ | 10,216,389,340 | $ | 9,124,554,635 |
See accompanying notes to the financial statements.
25
GMO Emerging Markets Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class II share outstanding throughout the period)
Six Months Ended August 31, 2010 (Unaudited) | Period from August 12, 2009 through February 28, 2010 | ||||||||||
Net asset value, beginning of period | $ | 11.63 | $ | 10.62 | |||||||
Income (loss) from investment operations: | |||||||||||
Net investment income (loss)† | 0.13 | 0.02 | |||||||||
Net realized and unrealized gain (loss) | 0.60 | 1.18 | |||||||||
Total from investment operations | 0.73 | 1.20 | |||||||||
Less distributions to shareholders: | |||||||||||
From net investment income | — | (0.19 | ) | ||||||||
Total distributions | — | (0.19 | ) | ||||||||
Net asset value, end of period | $ | 12.36 | $ | 11.63 | |||||||
Total Return(a) | 6.28 | %** | 11.21 | %** | |||||||
Ratios/Supplemental Data: | |||||||||||
Net assets, end of period (000's) | $ | 2,267,184 | $ | 2,265,637 | |||||||
Net expenses to average daily net assets | 1.06 | %(b)(c)* | 1.07 | %(b)* | |||||||
Net investment income (loss) to average daily net assets | 2.06 | %* | 0.30 | %* | |||||||
Portfolio turnover rate | 48 | %** | 126 | %**†† | |||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.03 | %* | 0.03 | %* | |||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.01 | $ | 0.02 |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the year ended February 28, 2010.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
26
GMO Emerging Markets Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 11.66 | $ | 6.30 | $ | 20.48 | $ | 20.67 | $ | 22.49 | $ | 19.05 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.13 | 0.21 | 0.23 | 0.25 | 0.41 | 0.37 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.60 | 5.34 | (10.65 | ) | 5.94 | 3.00 | 6.24 | ||||||||||||||||||||
Total from investment operations | 0.73 | 5.55 | (10.42 | ) | 6.19 | 3.41 | 6.61 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | — | (0.19 | ) | (0.13 | ) | (0.31 | ) | (0.54 | ) | (0.43 | ) | ||||||||||||||||
From net realized gains | — | — | (3.63 | ) | (6.07 | ) | (4.69 | ) | (2.74 | ) | |||||||||||||||||
Total distributions | — | (0.19 | ) | (3.76 | ) | (6.38 | ) | (5.23 | ) | (3.17 | ) | ||||||||||||||||
Net asset value, end of period | $ | 12.39 | $ | 11.66 | $ | 6.30 | $ | 20.48 | $ | 20.67 | $ | 22.49 | |||||||||||||||
Total Return(a) | 6.26 | %** | 88.05 | % | (58.62 | )% | 28.38 | % | 17.05 | % | 37.99 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,073,064 | $ | 1,014,490 | $ | 2,309,057 | $ | 3,402,343 | $ | 4,276,782 | $ | 4,788,395 | |||||||||||||||
Net expenses to average daily net assets | 1.01 | %(b)(d)* | 1.06 | %(b) | 1.10 | %(c) | 1.09 | %(c) | 1.07 | % | 1.10 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 2.11 | %* | 2.25 | % | 1.77 | % | 1.04 | % | 1.87 | % | 1.88 | % | |||||||||||||||
Portfolio turnover rate | 48 | %** | 126 | % | 99 | % | 60 | % | 44 | % | 41 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.01 | %* | 0.01 | % | 0.01 | % | 0.00 | %(e) | 0.01 | % | 0.01 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.00 | (f) | $ | 0.02 | $ | 0.04 | $ | 0.04 | $ | 0.02 | $ | 0.01 |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions. (Note 2)
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(e) Ratio is less than 0.01%.
(f) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
27
GMO Emerging Markets Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 11.58 | $ | 6.27 | $ | 20.40 | $ | 20.62 | $ | 22.45 | $ | 19.02 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.13 | 0.16 | 0.25 | 0.23 | 0.42 | 0.40 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.60 | 5.36 | (10.62 | ) | 5.95 | 2.99 | 6.20 | ||||||||||||||||||||
Total from investment operations | 0.73 | 5.52 | (10.37 | ) | 6.18 | 3.41 | 6.60 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | — | (0.21 | ) | (0.13 | ) | (0.33 | ) | (0.55 | ) | (0.43 | ) | ||||||||||||||||
From net realized gains | — | — | (3.63 | ) | (6.07 | ) | (4.69 | ) | (2.74 | ) | |||||||||||||||||
Total distributions | — | (0.21 | ) | (3.76 | ) | (6.40 | ) | (5.24 | ) | (3.17 | ) | ||||||||||||||||
Net asset value, end of period | $ | 12.31 | $ | 11.58 | $ | 6.27 | $ | 20.40 | $ | 20.62 | $ | 22.45 | |||||||||||||||
Total Return(a) | 6.30 | %** | 88.05 | % | (58.59 | )% | 28.38 | % | 17.10 | % | 38.05 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,569,063 | $ | 1,639,961 | $ | 1,345,811 | $ | 3,021,319 | $ | 2,599,002 | $ | 3,081,021 | |||||||||||||||
Net expenses to average daily net assets | 0.96 | %(b)(d)* | 0.99 | %(b) | 1.06 | %(c) | 1.05 | %(c) | 1.03 | % | 1.05 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 2.15 | %* | 1.54 | % | 1.86 | % | 0.98 | % | 1.94 | % | 2.03 | % | |||||||||||||||
Portfolio turnover rate | 48 | %** | 126 | % | 99 | % | 60 | % | 44 | % | 41 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.01 | %* | 0.01 | % | 0.01 | % | 0.00 | %(e) | 0.01 | % | 0.01 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.01 | $ | 0.02 | $ | 0.04 | $ | 0.02 | $ | 0.02 | $ | 0.01 |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions. (Note 2)
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(e) Ratio is less than 0.01%.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
28
GMO Emerging Markets Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class V share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 11.57 | $ | 6.26 | $ | 20.39 | $ | 20.61 | $ | 22.44 | $ | 19.02 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.14 | 0.20 | 0.22 | 0.23 | 0.43 | 0.22 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.59 | 5.32 | (10.58 | ) | 5.96 | 2.98 | 6.39 | ||||||||||||||||||||
Total from investment operations | 0.73 | 5.52 | (10.36 | ) | 6.19 | 3.41 | 6.61 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | — | (0.21 | ) | (0.14 | ) | (0.34 | ) | (0.55 | ) | (0.45 | ) | ||||||||||||||||
From net realized gains | — | — | (3.63 | ) | (6.07 | ) | (4.69 | ) | (2.74 | ) | |||||||||||||||||
Total distributions | — | (0.21 | ) | (3.77 | ) | (6.41 | ) | (5.24 | ) | (3.19 | ) | ||||||||||||||||
Net asset value, end of period | $ | 12.30 | $ | 11.57 | $ | 6.26 | $ | 20.39 | $ | 20.61 | $ | 22.44 | |||||||||||||||
Total Return(a) | 6.31 | %** | 88.21 | % | (58.59 | )% | 28.43 | % | 17.11 | % | 38.12 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 553,448 | $ | 367,836 | $ | 795,586 | $ | 1,190,887 | $ | 679,988 | $ | 1,447,059 | |||||||||||||||
Net expenses to average daily net assets | 0.91 | %(b)(d)* | 0.98 | %(b) | 1.03 | %(c) | 1.03 | %(c) | 1.01 | % | 1.04 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 2.23 | %* | 2.12 | % | 1.81 | % | 0.98 | % | 1.97 | % | 1.06 | % | |||||||||||||||
Portfolio turnover rate | 48 | %** | 126 | % | 99 | % | 60 | % | 44 | % | 41 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.04 | %* | 0.03 | % | 0.01 | % | 0.00 | (e) | 0.01 | % | 0.01 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.01 | $ | 0.01 | $ | 0.05 | $ | 0.05 | $ | 0.03 | $ | 0.02 |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions. (Note 2)
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(e) Ratio is less than 0.01%.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
29
GMO Emerging Markets Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class VI share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 11.59 | $ | 6.27 | $ | 20.42 | $ | 20.63 | $ | 22.45 | $ | 19.03 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.14 | 0.13 | 0.23 | 0.25 | 0.42 | 0.38 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.59 | 5.41 | (10.61 | ) | 5.95 | 3.01 | 6.23 | ||||||||||||||||||||
Total from investment operations | 0.73 | 5.54 | (10.38 | ) | 6.20 | 3.43 | 6.61 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | — | (0.22 | ) | (0.14 | ) | (0.34 | ) | (0.56 | ) | (0.45 | ) | ||||||||||||||||
From net realized gains | — | — | (3.63 | ) | (6.07 | ) | (4.69 | ) | (2.74 | ) | |||||||||||||||||
Total distributions | — | (0.22 | ) | (3.77 | ) | (6.41 | ) | (5.25 | ) | (3.19 | ) | ||||||||||||||||
Net asset value, end of period | $ | 12.32 | $ | 11.59 | $ | 6.27 | $ | 20.42 | $ | 20.63 | $ | 22.45 | |||||||||||||||
Total Return(a) | 6.30 | %** | 88.34 | % | (58.61 | )% | 28.49 | % | 17.20 | % | 38.07 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 4,753,630 | $ | 3,836,631 | $ | 1,226,252 | $ | 5,902,406 | $ | 5,116,565 | $ | 3,203,435 | |||||||||||||||
Net expenses to average daily net assets | 0.88 | %(b)(c)* | 0.91 | %(b) | 1.00 | %(d) | 1.00 | %(d) | 0.98 | % | 1.00 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 2.23 | %* | 1.18 | % | 1.83 | % | 1.05 | % | 1.93 | % | 1.94 | % | |||||||||||||||
Portfolio turnover rate | 48 | %** | 126 | % | 99 | % | 60 | % | 44 | % | 41 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.04 | %* | 0.04 | % | 0.01 | % | 0.00 | %(e) | 0.01 | % | 0.01 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.02 | $ | 0.02 | $ | 0.07 | $ | 0.03 | $ | 0.02 | $ | 0.02 |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(d) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions. (Note 2)
(e) Ratio is less than 0.01%.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
30
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO Emerging Markets Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks total return in excess of that of its benchmark, the S&P/IFCI Composite Index. The Fund typically makes equity investments directly and indirectly (e.g., through the GMO funds in which the Fund invests, collectively referred to as the "underlying funds" or derivatives) in companies tied economically to emerging markets. "Emerging markets" include all markets that are not considered to be "developed markets" by the MSCI World Index or MSCI EAFE Index. The term "equity investments" refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts. Under normal circumstances, the Fund invests directly and indirectly at least 80% of its assets in investments tied economically to emerging markets.
The Manager uses proprietary quantitative models and fundamental analysis to evaluate and select countries, sectors, and equity investments. The Manager evaluates and selects countries, sectors, and equity investments based on value, momentum, and quality models (that take into account various factors including, but not limited to, historical profitability, earnings stability and low debt to equity ratios), and also evaluates countries and sectors based on macroeconomic models (that take into account various factors including, but not limited to, currency valuations, inflation, and current account deficits). The models used by the Manager may change over time.
In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the-counter ("OTC") derivatives (including options, futures, warrants, swap contracts, and reverse repurchase agreements) and exchange-traded funds ("ETFs") (i) as a substitute for direct investment; (ii) in an attempt to reduce investment exposures (which may result in a reduction below zero); (iii) to effect transactions intended as substitutes for securities lending; and/or (iv) in an attempt to adjust elements of its investment and/or foreign currency exposure. The Fund's foreign currency exposure may differ from the currency exposure represented by its equity investments. In addition, the Fund may take active overweighted and underweighted positions in particular currencies relative to its benchmark. In addition, the Fund may lend its portfolio securities.
31
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
Throughout the period ended August 31, 2010, the Fund had five classes of shares outstanding: Class II, Class III, Class IV, Class V and Class VI. Each class of shares bears a different shareholder service fee.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the OTC market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or who se values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of August 31, 2010, the total value of securities held directly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 7.8% of net assets. The Fund classifies such securities (as defined below) as Level 3. Additionally, because many foreign equity securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the ev ents that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on local closing prices and adjustments supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2010, 74.0% of the net assets of the Fund
32
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
were valued using fair value prices based on those adjustments and are classified as using Level 2 inputs in the table below. See note 4 for a further discussion on valuation of derivative financial instruments.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include: fair value adjustments applied to closing prices of foreign securities due to market events that have occurred since the local market close but before the Fund's daily NAV calculation.
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund utilized the following fair value techniques on Level 3 investments: Certain of the Fund's securities in Thailand were valued at the local price as adjusted by applying a premium or discount when the holdings exceed foreign ownership limitations. The Fund valued various third-party investment funds based on valuations provided by fund sponsors and adjusted the values for liquidity considerations as well as the timing of the receipt of information. The Fund valued certain equity securities based on the values of underlying securities or underlying indices to which the securities are linked, and other equity securities based on the last traded exchange price adjusted for the movement in a securities index. The Fund deemed certain bankrupt and delisted securities to be near worthless.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | |||||||||||||||||||
Argentina | $ | 3,268,371 | $ | — | $ | — | $ | 3,268,371 | |||||||||||
Brazil | 536,764,393 | — | — | 536,764,393 | |||||||||||||||
Chile | 49,038,920 | — | — | 49,038,920 | |||||||||||||||
China | 76,749,818 | 642,885,488 | 0 | * | 719,635,306 | ||||||||||||||
Czech Republic | — | 218,396,880 | — | 218,396,880 | |||||||||||||||
Egypt | — | 163,820,538 | — | 163,820,538 |
33
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
ASSET VALUATION INPUTS — continued
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Hungary | $ | — | $ | 149,728,959 | $ | — | $ | 149,728,959 | |||||||||||
India | 49,083,761 | 526,637,641 | 90,811,663 | 666,533,065 | |||||||||||||||
Indonesia | 17,092,215 | 198,287,281 | — | 215,379,496 | |||||||||||||||
Macau | — | 11,748,972 | — | 11,748,972 | |||||||||||||||
Malaysia | — | 158,254,351 | — | 158,254,351 | |||||||||||||||
Mexico | 181,359,491 | — | — | 181,359,491 | |||||||||||||||
Morocco | — | 18,970,350 | — | 18,970,350 | |||||||||||||||
Peru | 4,352,384 | — | — | 4,352,384 | |||||||||||||||
Philippines | — | 76,325,777 | — | 76,325,777 | |||||||||||||||
Poland | — | 89,762,812 | — | 89,762,812 | |||||||||||||||
Russia | 128,593,151 | 1,281,663,292 | 14,850 | 1,410,271,293 | |||||||||||||||
South Africa | — | 277,674,735 | — | 277,674,735 | |||||||||||||||
South Korea | 3,167,555 | 1,865,259,129 | 2,327,415 | 1,870,754,099 | |||||||||||||||
Sri Lanka | — | 6,096,377 | — | 6,096,377 | |||||||||||||||
Taiwan | 12,268,139 | 761,662,364 | — | 773,930,503 | |||||||||||||||
Thailand | — | 81,575,556 | 617,610,206 | 699,185,762 | |||||||||||||||
Turkey | — | 699,013,578 | 0 | * | 699,013,578 | ||||||||||||||
TOTAL COMMON STOCKS | 1,061,738,198 | 7,227,764,080 | 710,764,134 | 9,000,266,412 | |||||||||||||||
Preferred Stocks | |||||||||||||||||||
Brazil | 622,323,495 | — | — | 622,323,495 | |||||||||||||||
Chile | 4,260,106 | — | — | 4,260,106 | |||||||||||||||
Russia | — | 98,992,218 | — | 98,992,218 | |||||||||||||||
South Korea | — | 132,139,976 | — | 132,139,976 | |||||||||||||||
TOTAL PREFERRED STOCKS | 626,583,601 | 231,132,194 | — | 857,715,795 | |||||||||||||||
Investment Funds | |||||||||||||||||||
China | — | — | 12,048,036 | 12,048,036 | |||||||||||||||
India | — | — | 11,855,309 | 11,855,309 | |||||||||||||||
Poland | — | — | 380,846 | 380,846 | |||||||||||||||
Russia | — | — | 9,321,824 | 9,321,824 | |||||||||||||||
Ukraine | — | — | 4,000 | 4,000 | |||||||||||||||
United States | 12,069,244 | — | — | 12,069,244 | |||||||||||||||
TOTAL INVESTMENT FUNDS | 12,069,244 | — | 33,610,015 | 45,679,259 |
34
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
ASSET VALUATION INPUTS — continued
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Debt Obligations | |||||||||||||||||||
Poland | $ | — | $ | — | $ | 24,595,758 | $ | 24,595,758 | |||||||||||
United States | — | 27,852,008 | — | 27,852,008 | |||||||||||||||
TOTAL DEBT OBLIGATIONS | — | 27,852,008 | 24,595,758 | 52,447,766 | |||||||||||||||
Rights and Warrants | |||||||||||||||||||
Malaysia | — | 700,332 | — | 700,332 | |||||||||||||||
China | — | 138,515 | — | 138,515 | |||||||||||||||
TOTAL RIGHTS AND WARRANTS | — | 838,847 | — | 838,847 | |||||||||||||||
Mutual Funds | |||||||||||||||||||
United States | — | 4,355 | — | 4,355 | |||||||||||||||
TOTAL MUTUAL FUNDS | — | 4,355 | — | 4,355 | |||||||||||||||
Short-Term Investments | 178,719,937 | — | — | 178,719,937 | |||||||||||||||
Total Investments | 1,879,110,980 | 7,487,591,484 | 768,969,907 | 10,135,672,371 | |||||||||||||||
Derivatives | |||||||||||||||||||
Swap Agreements | |||||||||||||||||||
Equity Risk | — | 775,813 | — | 775,813 | |||||||||||||||
Total Derivatives | — | 775,813 | — | 775,813 | |||||||||||||||
Total | $ | 1,879,110,980 | $ | 7,488,367,297 | $ | 768,969,907 | $ | 10,136,448,184 |
* Represents the investment in securities that have no value at August 31, 2010.
The underlying funds held at period end are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements. The aggregate net values of the Fund's investments (both direct and indirect) in securities using Level 3 inputs were 7.5% of total net assets.
35
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2010 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Transfer into Level 3* | Transfer out of Level 3* | Balances as of August 31, 2010 | ||||||||||||||||||||||||||||
Common Stocks | |||||||||||||||||||||||||||||||||||
China | $ | 8,189 | $ | — | $ | — | $ | — | $ | (8,189 | ) | $ | — | $ | — | $ | — | ||||||||||||||||||
India | — | 41,827,012 | — | 6,722,263 | 3,021,175 | 39,241,213 | ** | — | 90,811,663 | ||||||||||||||||||||||||||
Russia | — | — | — | — | (2,312,335 | ) | 2,327,185 | ** | — | 14,850 | |||||||||||||||||||||||||
South Korea | — | 1,234,325 | — | 894,371 | 198,719 | — | — | 2,327,415 | |||||||||||||||||||||||||||
Thailand | 493,561,819 | 38,155,350 | — | 31,271,861 | 136,196,732 | — | (81,575,556 | )** | 617,610,206 | ||||||||||||||||||||||||||
Turkey | 273 | — | — | — | (273 | ) | — | — | — | ||||||||||||||||||||||||||
Total Common Stock | 493,570,281 | 81,216,687 | — | 38,888,495 | 137,095,829 | 41,568,398 | (81,575,556 | ) | 710,764,134 | ||||||||||||||||||||||||||
Private Equity Securities | |||||||||||||||||||||||||||||||||||
Russia | 2,610 | — | — | (1,673,054 | ) | 1,670,444 | — | — | — | ||||||||||||||||||||||||||
Total Private Equity Securities | 2,610 | — | — | (1,673,054 | ) | 1,670,444 | — | — | — | ||||||||||||||||||||||||||
Investment Fund | |||||||||||||||||||||||||||||||||||
China | 11,891,906 | — | — | 1,901,894 | (1,745,764 | ) | — | — | 12,048,036 | ||||||||||||||||||||||||||
India | 10,728,924 | (94,191 | ) | — | 31,742 | 1,188,834 | — | — | 11,855,309 | ||||||||||||||||||||||||||
Poland | 393,802 | — | — | — | (12,956 | ) | — | — | 380,846 | ||||||||||||||||||||||||||
Russia | 9,266,776 | — | — | — | 55,048 | — | — | 9,321,824 | |||||||||||||||||||||||||||
Ukraine | 4,000 | — | — | — | — | — | — | 4,000 | |||||||||||||||||||||||||||
Total Investment Fund | 32,285,408 | (94,191 | ) | — | 1,933,636 | (514,838 | ) | — | — | 33,610,015 | |||||||||||||||||||||||||
Debt Obligations | |||||||||||||||||||||||||||||||||||
Poland | 26,303,383 | — | — | — | (1,707,625 | ) | — | — | 24,595,758 | ||||||||||||||||||||||||||
Total | $ | 552,161,682 | $ | 81,122,496 | $ | — | $ | 39,149,077 | $ | 136,543,810 | $ | 41,568,398 | $ | (81,575,556 | ) | $ | 768,969,907 |
* The Fund recognizes investments and derivatives transferred into Level 3 at the value at the beginning of the period and transferred out of Level 3 at the value at the end of the period.
** Financial assets transferred between Level 2 and Level 3 were due to a change in observable and/or unobservable inputs.
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and
36
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on 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 investment securities.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country's tax treaty with the United States. The foreign withholding rates applicable to a Fund's investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if paid by the shareholders of the Fund.
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Transaction-based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes. For the period ended August 31, 2010, the Fund incurred $7,916,177 in foreign capital gains tax, which is included in net realized gain (loss) in the Statement of Operations.
The Fund is subject to a Imposto sobre Operacoes Financeiras (IOF) transaction tax levied by the Brazilian government on certain foreign exchange transactions. The IOF tax has been included in net realized gain (loss) from foreign currency transactions in the Statement of Operations.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and
37
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2018 | $ | (1,148,006,327 | ) | ||||
Total | $ | (1,148,006,327 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 9,416,098,966 | $ | 1,027,659,928 | $ | (308,086,523 | ) | $ | 719,573,405 |
For the period ended August 31, 2010, the Fund had net realized gains attributed to redemption in-kind transactions of $20,517,990.
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
38
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which co llection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. Investment income, common expenses and realized and unrealized gains and losses are allocated among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class's operations. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds (See Note 5).
Brown Brothers Harriman & Co. ("BBH") serves as the Fund's custodian and fund accounting agent. State Street Bank and Trust Company ("State Street") serves as the Fund's transfer agent. BBH's and State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
For the period ended August 31, 2010, the premium on cash purchases and fee on cash redemptions of Fund shares were each 0.80% of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by a Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase oc curring on the same day, it ordinarily will waive or reduce the purchase
39
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redem ptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
Other matters
SPHF, an investment of the Fund, has litigation pending against various entities related to the 2002 fraud and related default of securities previously held by SPHF. The outcome of the lawsuits against the remaining defendants is not known and any potential recoveries are not reflected in the net asset value of SPHF. For the period ended August 31, 2010, the Fund received no distributions from SPHF in connection with settlement agreements related to litigation.
In addition, Indian regulators have alleged that the Fund violated certain conditions under which it was granted permission to operate in India and have restricted the Fund's locally held assets pending resolution of the dispute. Although these locally held assets remain the property of the Fund, a portion of the assets are not permitted to be withdrawn from the Fund's local custodial account located in India. The amount of restricted assets is small relative to the size of the Fund, representing approximately 0.1% of the Fund's total assets as of August 31, 2010. The effect of this claim on the value of the restricted assets, and all matters relating to the Fund's response to these allegations are subject to the supervision and control of the Trust's Board of Trustees. The Fund's costs in respect of this matter are being borne by the Fund.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
40
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund's investments.
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund's investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund's investments in companies tied economically to emerging markets, the economies of which tend to be more volatile than the economies of developed markets.
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind. These risks are particularly pronounced for the Fund because it typically makes equity investments in companies tied economically to emerging markets and may make investments in companies with smaller market capitalizations. In addition, the Fund may buy securities that are less liquid than those in its benchmark.
• Market Disruption and Geopolitical Risk — Geopolitical events may disrupt securities markets and adversely affect global economies and markets. Those events as well as other changes in foreign and domestic economic and political conditions could adversely affect the value of the Fund's investments.
• Smaller Company Risk — The securities of small- and mid-cap companies often are less widely held and trade less frequently and in lesser quantities, and their market prices often fluctuate more, than the securities of companies with larger market capitalizations. The Fund may buy securities that have smaller market capitalizations than those in its benchmark.
41
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Other principal risks of an investment in the Fund include Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund's securities); Focused Investment Risk (increased risk from the Fund's focus on investments in a limited number of countries and geographic regions); Market Risk — Value Securities (risk that the price of the Fund's investments will not increase to what the Manager believes to be their fundamental value or that the Manage r has overestimated their fundamental value); Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Fund of Funds Risk (risk that the underlying funds (including exchange-traded funds (ETFs)) in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments); Leveraging Risk (increased risk of loss from use of reverse repurchase agreements and other derivatives and securities lending); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
42
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index). The Funds also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedin gs. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be secured by collateral (e.g., foreign currency forwards; see "Currency Risk" above), that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
43
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. The Fund had no forward currency contracts outstanding at the end of the period.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash,
44
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount tha t the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because regular trading on many foreign exchanges closes prior to the close of the NYSE, closing prices for foreign futures contracts on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures contracts using fair value prices, which are based on adjustments to local closing prices, and supplied by a third party vendor based on that vendor's proprietary models. The Fund had no futures contracts outstanding at the end of the period.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an of fsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
45
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap
46
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the pe riod ended August 31, 2010, the Fund used total return swap agreements as a substitute for direct investment in securities. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of
47
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. During the period ended August 31, 2010, the Fund held rights and warrants received as a result of a corporate action. Rights and warrants held by the Fund at the end of the period are listed in the Fund's Schedule of Investments.
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (rights and warrants) | $ | — | $ | — | $ | — | $ | 838,847 | $ | — | $ | 838,847 | |||||||||||||||
Unrealized appreciation on swap agreements | — | — | — | 775,813 | — | 775,813 | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 1,614,660 | $ | — | $ | 1,614,660 |
The Effect of Derivative Instruments on the Statement of Operations for the Period Ended August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (rights and warrants) | $ | — | $ | — | $ | — | $ | (956,380 | ) | $ | — | $ | (956,380 | ) | |||||||||||||
Swap agreements | — | — | — | 6,564,357 | — | 6,564,357 | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 5,607,977 | $ | — | $ | 5,607,977 | |||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (rights and warrants) | $ | — | $ | — | $ | — | $ | 365,557 | $ | — | $ | 365,557 | |||||||||||||||
Swap agreements | — | — | — | 775,813 | — | 775,813 | |||||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 1,141,370 | $ | — | $ | 1,141,370 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
48
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The volume of derivative activity, based on absolute values (rights and warrants), or notional amounts (swap agreements) outstanding at each month-end, was as follows for the period ended August 31, 2010:
Swap agreements | Rights/ Warrants | ||||||||||
Average amount outstanding | $ | 8,264,248 | $ | 1,308,943 |
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. Effective August 12, 2009, that fee is paid monthly at the annual rate of 0.75% of average daily net assets. Before August 12, 2009, the management fee was paid monthly at the annual rate of 0.81% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets of each class at the annual rate of 0.22% for Class II shares, 0.15% for Class III shares, 0.105% for Class IV shares, 0.085% for Class V shares, and 0.055% for Class VI shares.
The Manager has contractually agreed to reimburse each class of the Fund to the extent the class's total annual operating expenses exceed the following amounts of the class's average daily net assets: 0.95% for Class II shares, 0.90% for Class III shares, 0.85% for Class IV shares, 0.80% for Class V shares, and 0.77% for Class VI shares (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (inc luding expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes) and custodial fees. In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund's Expense Reimbursement Amount. These contractual expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $107,411 and $36,432, respectively. The
49
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees) | Indirect Shareholder Service Fees | Total Indirect Expenses | |||||||||
< 0.001% | 0.000 | % | < 0.001% |
6. Purchases and sales of securities
For the period ended August 31, 2010, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | 47,458,855 | $ | 28,879,454 | |||||||
Investments (non-U.S. Government securities) | 5,211,862,932 | 4,657,885,794 |
Proceeds from sales of securities for in-kind transactions for the period ended August 31, 2010 were $107,244,197.
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, the Fund had no shareholders who individually held more than 10% of the Fund's outstanding shares.
As of August 31, 2010, 0.60% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 30.46% of the Fund's shares were held by accounts for which the Manager had investment discretion.
50
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Period from August 12, 2009 (commencement of operations) through February 28, 2010 | ||||||||||||||||||
Class II: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 18,514,862 | $ | 228,295,064 | 252,778,370 | $ | 2,699,405,042 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 2,489,345 | 29,548,519 | |||||||||||||||
Shares repurchased | (29,831,223 | ) | (370,495,376 | ) | (60,457,538 | ) | (705,182,629 | ) | |||||||||||
Purchase premiums | — | 804,016 | — | 289,458 | |||||||||||||||
Redemption fees | — | 974,131 | — | 3,004,326 | |||||||||||||||
Net increase (decrease) | (11,316,361 | ) | $ | (140,422,165 | ) | 194,810,177 | $ | 2,027,064,716 | |||||||||||
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 4,647,572 | $ | 60,681,433 | 60,688,925 | $ | 590,315,924 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 1,384,598 | 14,933,224 | |||||||||||||||
Shares repurchased | (5,052,064 | ) | (62,318,905 | ) | (341,523,485 | ) | (3,570,092,520 | ) | |||||||||||
Purchase premiums | — | 57,963 | — | 1,656,883 | |||||||||||||||
Redemption fees | — | 81,360 | — | 2,083,519 | |||||||||||||||
Net increase (decrease) | (404,492 | ) | $ | (1,498,149 | ) | (279,449,962 | ) | $ | (2,961,102,970 | ) | |||||||||
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 9,515,407 | $ | 118,373,086 | 83,789,833 | $ | 867,186,010 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 2,234,977 | 25,614,765 | |||||||||||||||
Shares repurchased | (23,651,029 | ) | (296,623,726 | ) | (159,036,163 | ) | (1,660,169,288 | ) | |||||||||||
Purchase premiums | — | 478,448 | — | 317,143 | |||||||||||||||
Redemption fees | — | 247,733 | — | 2,542,645 | |||||||||||||||
Net increase (decrease) | (14,135,622 | ) | $ | (177,524,459 | ) | (73,011,353 | ) | $ | (764,508,725 | ) |
51
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class V: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 14,017,279 | $ | 178,915,398 | 43,715,876 | $ | 473,416,600 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 631,224 | 6,813,766 | |||||||||||||||
Shares repurchased | (815,946 | ) | (10,036,130 | ) | (139,632,569 | ) | (1,497,107,621 | ) | |||||||||||
Purchase premiums | — | 172,259 | — | 150,000 | |||||||||||||||
Redemption fees | — | 36,130 | — | 529,896 | |||||||||||||||
Net increase (decrease) | 13,201,333 | $ | 169,087,657 | (95,285,469 | ) | $ | (1,016,197,359 | ) | |||||||||||
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class VI: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 79,955,304 | $ | 963,830,702 | 201,482,771 | $ | 2,104,241,700 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 5,401,782 | 62,732,344 | |||||||||||||||
Shares repurchased | (25,266,670 | ) | (310,866,170 | ) | (71,261,109 | ) | (795,502,655 | ) | |||||||||||
Purchase premium fees | — | 5,379,970 | — | 661,775 | |||||||||||||||
Redemption fees | — | 554,070 | — | 6,029,901 | |||||||||||||||
Net increase (decrease) | 54,688,634 | $ | 658,898,572 | 135,623,444 | $ | 1,378,163,065 |
* During the year ended February 28, 2010, the following transfers occurred from Class III to Class II:
Date of Transfer | Shares Transferred | Amount Transferred | |||||||||
8/12/2009 | 239,139,436 | $ | 2,539,820,792 | ||||||||
10/30/2009 | (14,087,438 | ) | $ | (161,582,914 | ) | ||||||
2/5/2010 | (3,803,675 | ) | $ | (42,905,458 | ) | ||||||
2/24/2010 | 3,378,830 | $ | 39,329,578 |
52
GMO Emerging Markets Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
10. Investments in affiliated companies and other funds of the Trust
An affiliated company is a company in which the Fund has or had ownership of at least 5% of the voting securities. A summary of the Fund's transactions involving companies that are or were affiliates during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Value, end of period | ||||||||||||||||||
Boryung Pharmaceutical Co Ltd* | $ | 4,294,391 | $ | — | $ | 1,313,497 | $ | — | $ | 2,720,493 | |||||||||||||
CBAY Systems Holdings Ltd | 12,969,456 | — | — | — | 21,163,480 | ||||||||||||||||||
Daehan Pulp Co Ltd* | 5,372,382 | — | 486,555 | — | 4,854,451 | ||||||||||||||||||
Dimerco Express Taiwan Corp* | 3,800,682 | — | 4,148,450 | — | — | ||||||||||||||||||
In The F Co Ltd | 2,849,143 | 454,734 | 65,740 | — | 3,242,163 | ||||||||||||||||||
Pumyang Construction Co Ltd | 4,299,731 | — | 852,981 | — | 2,701,637 | ||||||||||||||||||
Star Block Co Ltd (Foreign Registered) | 940 | — | — | — | — | ||||||||||||||||||
Totals | $ | 33,586,725 | $ | 454,734 | $ | 6,867,223 | $ | — | $ | 34,682,224 |
* No longer an affiliate as of August 31, 2010.
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO Special Purpose Holding Fund | $ | 4,435 | $ | — | $ | — | $ | — | $ | — | $ | 4,355 | |||||||||||||||
GMO U.S. Treasury Fund | 74,488,836 | 294,518,653 | 369,007,489 | 18,759 | — | — | |||||||||||||||||||||
Totals | $ | 74,493,271 | $ | 294,518,653 | $ | 369,007,489 | $ | 18,759 | $ | — | $ | 4,355 |
53
GMO Emerging Markets Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of a composite of accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three-, five-, seven- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications
54
GMO Emerging Markets Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparis on to the Manager's separate account clients and the expenses and risks borne by the Manager as a result of the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by , for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to
55
GMO Emerging Markets Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
56
GMO Emerging Markets Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
57
GMO Emerging Markets Fund
(A Series of GMO Trust)
Fund Expenses — (Continued)
August 31, 2010 (Unaudited)
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class II | |||||||||||||||||||
1) Actual | 1.06 | % | $ | 1,000.00 | $ | 1,062.80 | $ | 5.51 | |||||||||||
2) Hypothetical | 1.06 | % | $ | 1,000.00 | $ | 1,019.86 | $ | 5.40 | |||||||||||
Class III | |||||||||||||||||||
1) Actual | 1.01 | % | $ | 1,000.00 | $ | 1,062.60 | $ | 5.25 | |||||||||||
2) Hypothetical | 1.01 | % | $ | 1,000.00 | $ | 1,020.11 | $ | 5.14 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.96 | % | $ | 1,000.00 | $ | 1,063.00 | $ | 4.99 | |||||||||||
2) Hypothetical | 0.96 | % | $ | 1,000.00 | $ | 1,020.37 | $ | 4.89 | |||||||||||
Class V | |||||||||||||||||||
1) Actual | 0.91 | % | $ | 1,000.00 | $ | 1,063.10 | $ | 4.73 | |||||||||||
2) Hypothetical | 0.91 | % | $ | 1,000.00 | $ | 1,020.62 | $ | 4.63 | |||||||||||
Class VI | |||||||||||||||||||
1) Actual | 0.88 | % | $ | 1,000.00 | $ | 1,063.00 | $ | 4.58 | |||||||||||
2) Hypothetical | 0.88 | % | $ | 1,000.00 | $ | 1,020.77 | $ | 4.48 |
* Expenses are calculated using each Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
58
GMO Flexible Equities Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a private placement memorandum, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The private placement memorandum can be obtained by calling 1-617-346-7646 (collect).
GMO Flexible Equities Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 97.5 | % | |||||
Short-Term Investments | 5.8 | ||||||
Futures Contracts | 0.0 | ||||||
Forward Currency Contracts | (0.7 | ) | |||||
Swap Agreements | (5.0 | ) | |||||
Other | 2.4 | ||||||
100.0 | % | ||||||
Country Summary | % of Equity Investments* | ||||||
Japan | 100.0 | % | |||||
100.0 | % | ||||||
Industry Group Summary | % of Equity Investments* | ||||||
Telecommunication Services | 19.1 | % | |||||
Banks | 11.8 | ||||||
Real Estate | 10.9 | ||||||
Retailing | 10.7 | ||||||
Food & Staples Retailing | 9.3 | ||||||
Diversified Financials | 8.2 | ||||||
Capital Goods | 7.3 | ||||||
Health Care Equipment & Services | 3.3 | ||||||
Utilities | 3.2 | ||||||
Food, Beverage & Tobacco | 2.5 | ||||||
Commercial & Professional Services | 2.5 | ||||||
Materials | 2.4 | ||||||
Transportation | 2.3 | ||||||
Consumer Durables & Apparel | 1.8 | ||||||
Software & Services | 1.3 | ||||||
Consumer Services | 1.2 | ||||||
Household & Personal Products | 1.1 | ||||||
Insurance | 0.6 | ||||||
Media | 0.5 | ||||||
100.0 | % |
* Equity investments may consist of common stocks, preferred stocks and rights and warrants. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
1
GMO Flexible Equities Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
COMMON STOCKS — 97.5% | |||||||||||||||
Japan — 97.5% | |||||||||||||||
2,819 | Advance Residence Investment Corp (REIT) * | 4,405,640 | |||||||||||||
471,400 | Aeon Co Ltd | 5,025,457 | |||||||||||||
149,900 | Aeon Credit Service Co Ltd | 1,583,366 | |||||||||||||
356,900 | Aiful Corp * | 445,918 | |||||||||||||
84,000 | Alfresa Holdings Corp | 3,744,964 | |||||||||||||
31,800 | Alpen Co Ltd | 501,256 | |||||||||||||
25,100 | AOKI Holdings Inc | 310,122 | |||||||||||||
45,500 | Aoyama Trading Co Ltd | 627,187 | |||||||||||||
19,800 | Arcs Co Ltd | 259,683 | |||||||||||||
33,700 | Asahi Glass Co Ltd | 328,817 | |||||||||||||
27,800 | Asatsu–DK Inc | 586,766 | |||||||||||||
39,000 | Bank of Saga Ltd (The) | 110,876 | |||||||||||||
20,900 | Bank of the Ryukyus Ltd | 248,614 | |||||||||||||
520,000 | Bank of Yokohama Ltd (The) | 2,254,239 | |||||||||||||
131,650 | Belluna Co Ltd | 648,251 | |||||||||||||
237,000 | Best Denki Co Ltd * | 555,624 | |||||||||||||
2,483 | BIC Camera Inc | 950,110 | |||||||||||||
55,200 | Cawachi Ltd | 1,004,624 | |||||||||||||
231,000 | Cedyna Financial Corp * | 401,159 | |||||||||||||
120 | Central Japan Railway Co | 967,726 | |||||||||||||
146,300 | Century Tokyo Leasing Corp | 1,881,854 | |||||||||||||
26,900 | Chiba Kogyo Bank Ltd (The) * | 163,036 | |||||||||||||
28,500 | Chiyoda Integre Co Ltd | 305,416 | |||||||||||||
217,000 | Chuo Mitsui Trust Holdings Inc | 768,532 | |||||||||||||
41,100 | Circle K Sunkus Co Ltd | 561,372 | |||||||||||||
16,700 | Coca–Cola Central Japan Co Ltd | 215,739 | |||||||||||||
38,300 | Cocokara fine Holdings Inc | 794,432 | |||||||||||||
185,485 | Credit Saison Co Ltd | 2,358,186 | |||||||||||||
176,100 | CSK Holdings Corp * | 577,656 | |||||||||||||
24,300 | Daidoh Ltd | 203,338 | |||||||||||||
364,400 | Daiei Inc * | 1,479,892 | |||||||||||||
80,700 | Daiichikosho Co Ltd | 1,239,100 |
See accompanying notes to the financial statements.
2
GMO Flexible Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
495,000 | Daikyo Inc * | 696,074 | |||||||||||||
74,800 | Daimei Telecom Engineering Corp | 504,755 | |||||||||||||
147,000 | Daio Paper Corp | 1,048,495 | |||||||||||||
177,800 | Daito Trust Construction Co Ltd | 10,210,282 | |||||||||||||
38,000 | Dai Nippon Printing Co Ltd | 441,875 | |||||||||||||
340 | DA Office Investment Corp (REIT) | 926,561 | |||||||||||||
153,600 | DCM Japan Holdings Co Ltd | 722,801 | |||||||||||||
18,512 | Dena Co Ltd | 557,262 | |||||||||||||
33,200 | Don Quijote Co Ltd | 812,118 | |||||||||||||
22,000 | Doshisha Co Ltd | 521,533 | |||||||||||||
55,600 | DTS Corp | 564,974 | |||||||||||||
200,000 | Edion Corp | 1,379,648 | |||||||||||||
79,200 | Electric Power Development Co Ltd | 2,546,840 | |||||||||||||
24,500 | Fast Retailing Co Ltd | 3,383,966 | |||||||||||||
507,754 | Fuji Fire & Marine Insurance Co Ltd (The) * | 639,452 | |||||||||||||
555,000 | Fuji Electric Holdings Co Ltd | 1,374,923 | |||||||||||||
9,500 | Fuji Soft Inc | 144,078 | |||||||||||||
166,000 | Fukuoka Financial Group Inc | 663,104 | |||||||||||||
55 | Fukuoka REIT Co (REIT) | 351,355 | |||||||||||||
85,400 | Fuyo General Lease Co Ltd | 2,243,306 | |||||||||||||
1,045 | Geo Corp | 1,225,827 | |||||||||||||
147 | Global One Real Estate Investment Co Ltd (REIT) | 1,118,478 | |||||||||||||
7,640 | Gulliver International Co Ltd | 297,781 | |||||||||||||
20,900 | H.I.S. Co Ltd | 447,079 | |||||||||||||
77 | Hankyu Reit Inc (REIT) | 330,879 | |||||||||||||
605,500 | Haseko Corp * | 504,945 | |||||||||||||
46,200 | Heiwado Co Ltd | 548,632 | |||||||||||||
64,300 | Hikari Tsushin Inc | 1,133,301 | |||||||||||||
190,000 | Hitachi Cable Ltd | 463,332 | |||||||||||||
46,700 | Hitachi Capital Corp | 658,499 | |||||||||||||
10,300 | Hogy Medical Co Ltd | 515,163 | |||||||||||||
71,000 | Hokuetsu Bank Ltd (The) | 125,759 | |||||||||||||
77,320 | Honeys Co Ltd | 1,166,069 | |||||||||||||
37,400 | IBJ Leasing Co Ltd | 758,900 |
See accompanying notes to the financial statements.
3
GMO Flexible Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
102,000 | Isetan Mitsukoshi Holdings Ltd | 1,073,503 | |||||||||||||
85,700 | IT Holdings Corp | 965,959 | |||||||||||||
20,100 | Itoki Corp | 56,143 | |||||||||||||
81,500 | Ito En Ltd | 1,333,560 | |||||||||||||
129,675 | Izumiya Co Ltd | 528,638 | |||||||||||||
140,700 | Izumi Co Ltd | 1,737,228 | |||||||||||||
384,000 | JACCS Co Ltd | 704,639 | |||||||||||||
499 | Japan Prime Realty Investment Corp (REIT) | 1,113,656 | |||||||||||||
78 | Japan Real Estate Investment Corp (REIT) | 692,579 | |||||||||||||
176 | Japan Excellent Inc (REIT) | 841,633 | |||||||||||||
4,052 | Japan Retail Fund Investment Corp (REIT) | 5,422,606 | |||||||||||||
117,489 | Joshin Denki Co Ltd | 1,099,147 | |||||||||||||
32,000 | JS Group Corp | 610,632 | |||||||||||||
122,000 | J–Oil Mills Inc | 338,011 | |||||||||||||
108,740 | K's Holdings Corp | 2,349,053 | |||||||||||||
1,131,000 | Kajima Corp | 2,647,734 | |||||||||||||
158,700 | Kao Corp | 3,694,395 | |||||||||||||
56,600 | Kasumi Co Ltd | 301,942 | |||||||||||||
30,100 | Kato Sangyo Co Ltd | 454,420 | |||||||||||||
4,101 | KDDI Corp | 19,777,735 | |||||||||||||
69,300 | Keiyo Co Ltd | 370,418 | |||||||||||||
256 | Kenedix Realty Investment Corp (REIT) | 896,097 | |||||||||||||
108,600 | Kohnan Shoji Co Ltd | 1,155,888 | |||||||||||||
139,400 | Kojima Co Ltd | 683,951 | |||||||||||||
182,000 | Krosaki Harima Corp | 578,654 | |||||||||||||
321,000 | Kurabo Industries Ltd | 504,556 | |||||||||||||
75,000 | Kyodo Printing Co Ltd | 177,168 | |||||||||||||
27,000 | Kyoritsu Maintenance Co Ltd | 380,273 | |||||||||||||
61,000 | Kyudenko Corp | 312,166 | |||||||||||||
13,400 | Lawson Inc | 609,614 | |||||||||||||
834,000 | Leopalace21 Corp * | 1,783,597 | |||||||||||||
247,000 | Maeda Corp | 596,440 | |||||||||||||
28,000 | Maeda Road Construction Co Ltd | 201,996 | |||||||||||||
192,300 | Marudai Food Co Ltd | 587,960 |
See accompanying notes to the financial statements.
4
GMO Flexible Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
82,074 | Maruetsu Inc (The) | 334,848 | |||||||||||||
867,000 | Maruha Nichiro Holdings Inc | 1,406,706 | |||||||||||||
22,000 | Maruzen Showa Unyu Co Ltd | 71,113 | |||||||||||||
24,800 | Matsuda Sangyo Co Ltd | 356,453 | |||||||||||||
16,500 | Matsumotokiyoshi Holdings Co Ltd | 312,881 | |||||||||||||
282,100 | Medipal Holdings Corp | 3,502,161 | |||||||||||||
53,000 | Mercian Corp | 100,865 | |||||||||||||
582 | MID REIT Inc (REIT) | 1,251,665 | |||||||||||||
27,800 | Mikuni Coca–Cola Bottling Co Ltd | 235,581 | |||||||||||||
65,000 | Mitsubishi Electric Corp | 518,715 | |||||||||||||
562,392 | Mitsubishi Paper Mills Ltd * | 603,007 | |||||||||||||
968,600 | Mitsubishi UFJ Financial Group Inc | 4,592,626 | |||||||||||||
95,470 | Mitsubishi UFJ Lease & Finance Co Ltd | 3,393,796 | |||||||||||||
25,000 | Mitsui Home Co Ltd | 113,010 | |||||||||||||
9,522,400 | Mizuho Financial Group Inc | 14,604,668 | |||||||||||||
169 | Mori Hills REIT Investment Corp (REIT) | 341,814 | |||||||||||||
336,000 | Morinaga Milk Industry Co Ltd | 1,450,691 | |||||||||||||
13,900 | NEC Fielding Ltd | 148,643 | |||||||||||||
31,700 | NEC Networks & System Integration Corp | 394,762 | |||||||||||||
384,000 | Nichias Corp | 1,587,737 | |||||||||||||
19,200 | Nichiha Corp | 126,308 | |||||||||||||
309,200 | Nichirei Corp | 1,315,932 | |||||||||||||
21,800 | Nihon Kohden Corp | 441,601 | |||||||||||||
173,000 | Nihon Yamamura Glass Co Ltd | 417,711 | |||||||||||||
91,000 | Nippon Corp | 596,001 | |||||||||||||
76 | Nippon Building Fund Inc (REIT) | 645,168 | |||||||||||||
1,060 | Nippon Commercial Investment Corp (REIT) | 1,093,324 | |||||||||||||
61,000 | Nippon Densetsu Kogyo Co Ltd | 560,228 | |||||||||||||
563,000 | Nippon Express Co Ltd | 1,965,263 | |||||||||||||
73,000 | Nippon Flour Mills Co Ltd | 377,178 | |||||||||||||
62,000 | Nippon Konpo Unyu Soko Co Ltd | 727,358 | |||||||||||||
113,300 | Nippon Paper Group Inc | 2,940,664 | |||||||||||||
360,400 | Nippon Suisan Kaisha Ltd | 1,137,826 | |||||||||||||
526,200 | Nippon Telegraph & Telephone Corp | 22,625,426 |
See accompanying notes to the financial statements.
5
GMO Flexible Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
83,300 | Nishimatsuya Chain Co Ltd | 723,301 | |||||||||||||
1,260,984 | Nishimatsu Construction Co Ltd | 1,466,774 | |||||||||||||
56,800 | Nissen Holdings Co Ltd | 243,733 | |||||||||||||
120,000 | Nissin Corp | 259,498 | |||||||||||||
11,550 | Nitori Co Ltd | 1,006,489 | |||||||||||||
18,700 | Nitto Kogyo Corp | 153,523 | |||||||||||||
226,000 | NKSJ Holdings Inc * | 1,261,765 | |||||||||||||
170 | Nomura Real Estate Office Fund (REIT) | 842,577 | |||||||||||||
13,964 | NTT Docomo Inc | 23,662,340 | |||||||||||||
505,000 | Obayashi Corp | 1,921,002 | |||||||||||||
86,000 | OJI Paper Co Ltd | 407,353 | |||||||||||||
34,000 | Okamura Corp | 179,685 | |||||||||||||
117 | Okinawa Cellular Telephone Co | 237,531 | |||||||||||||
12,700 | Okinawa Electric Power Co | 671,697 | |||||||||||||
22,000 | Okuwa Co Ltd | 206,539 | |||||||||||||
1,373,558 | Orient Corp * | 931,238 | |||||||||||||
139,040 | ORIX Corp | 10,454,975 | |||||||||||||
201 | ORIX JREIT Inc (REIT) | 948,086 | |||||||||||||
1,113,132 | Osaka Gas Co Ltd | 4,197,376 | |||||||||||||
1,419 | Pacific Golf Group International Holdings KK | 910,634 | |||||||||||||
30,400 | Parco Co Ltd | 233,502 | |||||||||||||
329 | Pasona Group Inc | 224,498 | |||||||||||||
1,058,000 | Penta Ocean Construction Co Ltd | 1,399,106 | |||||||||||||
64 | PILOT Corp | 116,549 | |||||||||||||
15,530 | Point Inc | 725,914 | |||||||||||||
331 | Premier Investment Corp (REIT) | 1,434,301 | |||||||||||||
70,000 | Rengo Co Ltd | 466,821 | |||||||||||||
602,500 | Resona Holdings Inc | 5,951,448 | |||||||||||||
69,900 | Ricoh Leasing Co Ltd | 1,648,322 | |||||||||||||
32,700 | Right On Co Ltd | 189,531 | |||||||||||||
379,800 | Round One Corp | 1,644,694 | |||||||||||||
23,800 | Ryoshoku Ltd | 524,502 | |||||||||||||
20,900 | Saint Marc Holdings Co Ltd | 806,074 | |||||||||||||
20,300 | Sanei–International Co Ltd | 227,609 |
See accompanying notes to the financial statements.
6
GMO Flexible Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
54,000 | Sanki Engineering | 398,143 | |||||||||||||
680,000 | Sankyo–Tateyama Holdings Inc * | 737,628 | |||||||||||||
515,418 | Sankyu Inc | 1,963,511 | |||||||||||||
285,159 | Sanwa Shutter Corp | 834,246 | |||||||||||||
132,000 | Sanyo Shokai Ltd | 531,008 | |||||||||||||
6,400 | San–A Co Ltd | 235,902 | |||||||||||||
235,300 | Sapporo Hokuyo Holdings Inc | 1,108,921 | |||||||||||||
146,500 | Secom Co Ltd | 6,389,128 | |||||||||||||
199,000 | Seiko Holdings Corp * | 570,715 | |||||||||||||
152,000 | Seino Holdings Co Ltd | 944,879 | |||||||||||||
60,700 | Seiren Co Ltd | 356,534 | |||||||||||||
72,000 | Sekisui House Ltd | 623,707 | |||||||||||||
176,516 | Senko Co Ltd | 515,987 | |||||||||||||
19,900 | Senshukai Co Ltd | 116,940 | |||||||||||||
717,500 | Seven & I Holdings Co Ltd | 16,369,315 | |||||||||||||
166,000 | Shimizu Corp | 587,984 | |||||||||||||
918 | SHIP HEALTHCARE HOLDINGS Inc | 746,290 | |||||||||||||
58,500 | Shizuoka Gas Co Ltd | 368,706 | |||||||||||||
76,700 | Shoei Co Ltd | 544,461 | |||||||||||||
35,000 | Showa Sangyo Co Ltd | 106,266 | |||||||||||||
137,600 | Sumitomo Forestry Co Ltd | 983,614 | |||||||||||||
88,100 | Sumitomo Mitsui Financial Group Inc | 2,614,536 | |||||||||||||
1,420,311 | Sumitomo Trust & Banking Co Ltd | 7,532,564 | |||||||||||||
23,600 | Sundrug Co Ltd | 636,412 | |||||||||||||
36,500 | Suzuken Co Ltd | 1,267,558 | |||||||||||||
716,000 | SWCC Showa Holdings Co Ltd * | 621,574 | |||||||||||||
1,507,000 | Taiheiyo Cement Co Ltd * | 1,686,851 | |||||||||||||
348,400 | Taihei Kogyo Co Ltd | 1,226,442 | |||||||||||||
1,913,836 | Taisei Corp | 3,775,537 | |||||||||||||
54,000 | Takashimaya Co Ltd | 408,562 | |||||||||||||
259,710 | Takefuji Corp | 622,104 | |||||||||||||
11,300 | Terumo Corp | 560,123 | |||||||||||||
574,098 | TOA Corp | 567,508 | |||||||||||||
47,300 | Toho Holdings Co Ltd | 681,731 |
See accompanying notes to the financial statements.
7
GMO Flexible Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
91,000 | Tokai Tokyo Financial Holdings | 300,979 | |||||||||||||
38,940 | Token Corp | 1,067,825 | |||||||||||||
723,000 | Tokyo Gas Co Ltd | 3,369,585 | |||||||||||||
190,000 | Tokyo Tatemono Co Ltd | 664,725 | |||||||||||||
28,700 | Tokyo Tomin Bank Ltd (The) | 311,580 | |||||||||||||
47 | Tokyu REIT Inc (REIT) | 255,696 | |||||||||||||
57,760 | Tokyu Construction Co Ltd | 152,779 | |||||||||||||
79,000 | Tokyu Land Corp | 312,229 | |||||||||||||
160 | Top REIT Inc (REIT) | 858,512 | |||||||||||||
1,000,000 | Toyo Construction Co Ltd | 475,679 | |||||||||||||
86,000 | Toyo Securities Co Ltd | 133,035 | |||||||||||||
17,000 | Tsuruha Holdings Inc | 698,722 | |||||||||||||
684 | T–Gaia Corp | 1,071,318 | |||||||||||||
215,000 | Uchida Yoko Co Ltd | 586,519 | |||||||||||||
46,400 | United Arrows Ltd | 640,956 | |||||||||||||
882,000 | Unitika Ltd * | 703,502 | |||||||||||||
326,100 | UNY Co Ltd | 2,394,581 | |||||||||||||
34,370 | USS Co Ltd | 2,535,803 | |||||||||||||
80,100 | Valor Co Ltd | 588,684 | |||||||||||||
32,300 | Xebio Co Ltd | 585,646 | |||||||||||||
5,814 | Yahoo Japan Corp | 2,089,006 | |||||||||||||
57,290 | Yamada Denki Co Ltd | 3,564,298 | |||||||||||||
27,000 | Yokohama Reito Co Ltd | 194,463 | |||||||||||||
23,000 | Yonekyu Corp | 182,744 | |||||||||||||
17,000 | Yurtec Corp | 62,091 | |||||||||||||
41,000 | Yusen Air & Sea Service Co Ltd | 571,161 | |||||||||||||
Total Japan | 347,297,211 | ||||||||||||||
TOTAL COMMON STOCKS (COST $348,124,492) | 347,297,211 |
See accompanying notes to the financial statements.
8
GMO Flexible Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
SHORT-TERM INVESTMENTS — 5.8% | |||||||||||||||
Time Deposits — 5.8% | |||||||||||||||
USD | 5,000,000 | Bank of Tokyo-Mitsubishi (Tokyo) Time Deposit, 0.21%, due 09/01/10 | 5,000,000 | ||||||||||||
JPY | 6,423,041 | BNP Paribas (Paris) Time Deposit, 0.04%, due 09/01/10 | 76,455 | ||||||||||||
USD | 5,000,000 | Commerzbank (Frankfurt) Time Deposit, 0.21%, due 09/01/10 | 5,000,000 | ||||||||||||
USD | 5,000,000 | DnB Nor Bank (Oslo) Time Deposit, 0.21%, due 09/01/10 | 5,000,000 | ||||||||||||
USD | 5,000,000 | Nordea Bank Norge ASA (Oslo) Time Deposit, 0.21%, due 09/01/10 | 5,000,000 | ||||||||||||
USD | 493,785 | Skandinaviska Enskilda Banken, AB (Stockholm) Time Deposit, 0.21%, due 09/01/10 | 493,785 | ||||||||||||
Total Time Deposits | 20,570,240 | ||||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $20,570,240) | 20,570,240 | ||||||||||||||
TOTAL INVESTMENTS — 103.3% (Cost $368,694,732) | 367,867,451 | ||||||||||||||
Other Assets and Liabilities (net) — (3.3%) | (11,735,465 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 356,131,986 |
See accompanying notes to the financial statements.
9
GMO Flexible Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
A summary of outstanding financial instruments at August 31, 2010 is as follows:
Forward Currency Contracts
Settlement Date | Counterparty | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||
Buys † | |||||||||||||||||||||||
9/08/10 | Bank of New York Mellon | JPY | 4,213,905,571 | $ | 50,162,360 | $ | 471,311 | ||||||||||||||||
9/08/10 | Barclays Bank Plc | JPY | 4,829,815,806 | 57,494,160 | 466,674 | ||||||||||||||||||
10/22/10 | Barclays Bank Plc | JPY | 422,925,000 | 5,037,021 | 29,977 | ||||||||||||||||||
$ | 112,693,541 | $ | 967,962 | ||||||||||||||||||||
Sales # | |||||||||||||||||||||||
9/08/10 | Bank of New York Mellon | JPY | 4,213,905,571 | $ | 50,162,360 | $ | (1,566,581 | ) | |||||||||||||||
9/08/10 | Barclays Bank Plc | JPY | 4,829,815,806 | 57,494,160 | (1,617,755 | ) | |||||||||||||||||
10/08/10 | Bank of New York Mellon | JPY | 2,753,140,571 | 32,784,573 | (86,980 | ) | |||||||||||||||||
10/08/10 | Barclays Bank Plc | JPY | 3,428,866,806 | 40,831,164 | (117,951 | ) | |||||||||||||||||
$ | 181,272,257 | $ | (3,389,267 | ) |
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
25 | TOPIX | September 2010 | $ | 2,380,639 | $ | (130,967 | ) |
See accompanying notes to the financial statements.
10
GMO Flexible Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Swap Agreements
Forward Cross Currency Swaps
Deliver | Receive | Expiation Date | Counterparty | Receive/ (Pay)# | Fixed Rate | Variable Rate | Market Value | ||||||||||||||||||||||||||||||||
11,331,250,000 | JPY | 125,000,000 | USD | 6/27/2011 | Morgan Stanley | (Pay) | 0.00 | % | 3 Month | ||||||||||||||||||||||||||||||
USD LIBOR – 0.20% | $ | (9,199,802 | ) | ||||||||||||||||||||||||||||||||||||
10,878,000,000 | JPY | 120,000,000 | USD | 6/27/2011 | Deutsche Bank | (Pay) | 0.00 | % | 3 Month USD LIBOR – 0.12% | (8,740,332 | ) | ||||||||||||||||||||||||||||
$ | (17,940,134 | ) | |||||||||||||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
# Receive - Fund receives fixed rate and sells variable rate.
(Pay) - Fund pays fixed rate and receives variable rate.
As of August 31, 2010, for futures contracts, swap agreements and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
Notes to Schedule of Investments:
REIT - Real Estate Investment Trust
USD LIBOR - London Interbank Offered Rate denominated in United States Dollars.
* Non-income producing security.
Currency Abbreviations:
JPY - Japanese Yen
USD - United States Dollar
See accompanying notes to the financial statements.
11
GMO Flexible Equities Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments, at value (cost $368,694,732) (Note 2) | $ | 367,867,451 | |||||
Dividends receivable | 971,788 | ||||||
Unrealized appreciation on open forward currency contracts (Note 4) | 967,962 | ||||||
Receivable for collateral on open futures contracts (Note 4) | 101,000 | ||||||
Receivable for collateral on open swap contracts (Note 4) | 7,940,000 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 33,170 | ||||||
Total assets | 377,881,371 | ||||||
Liabilities: | |||||||
Foreign currency due to custodian (proceeds $1,455) | 1,455 | ||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 171,906 | ||||||
Shareholder service fee | 19,907 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 792 | ||||||
Payable for variation margin on open futures contracts (Note 4) | 83,755 | ||||||
Unrealized depreciation on open forward currency contracts (Note 4) | 3,389,267 | ||||||
Payable for open swap contracts (Note 4) | 17,940,134 | ||||||
Accrued expenses | 142,169 | ||||||
Total liabilities | 21,749,385 | ||||||
Net assets | $ | 356,131,986 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 398,981,303 | |||||
Accumulated undistributed net investment income | 2,951,791 | ||||||
Accumulated net realized loss | (24,505,443 | ) | |||||
Net unrealized depreciation | (21,295,665 | ) | |||||
$ | 356,131,986 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 32,224,989 | |||||
Class VI shares | $ | 323,906,997 | |||||
Shares outstanding: | |||||||
Class III | 1,887,893 | ||||||
Class VI | 18,959,841 | ||||||
Net asset value per share: | |||||||
Class III | $ | 17.07 | |||||
Class VI | $ | 17.08 |
See accompanying notes to the financial statements.
12
GMO Flexible Equities Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $333,910) | $ | 4,437,566 | |||||
Interest | 2,259 | ||||||
Total investment income | 4,439,825 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 1,099,124 | ||||||
Shareholder service fee – Class III (Note 5) | 30,532 | ||||||
Shareholder service fee – Class VI (Note 5) | 98,718 | ||||||
Custodian and fund accounting agent fees | 115,000 | ||||||
Audit and tax fees | 39,284 | ||||||
Transfer agent fees | 21,160 | ||||||
Registration fees | 18,400 | ||||||
Legal fees | 10,212 | ||||||
Trustees fees and related expenses (Note 5) | 4,465 | ||||||
Miscellaneous | 16,652 | ||||||
Total expenses | 1,453,547 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (219,144 | ) | |||||
Expense reductions (Note 2) | (4 | ) | |||||
Net expenses | 1,234,399 | ||||||
Net investment income (loss) | 3,205,426 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 10,542,699 | ||||||
Closed futures contracts | 138,464 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (10,053,334 | ) | |||||
Net realized gain (loss) | 627,829 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | (25,097,215 | ) | |||||
Open futures contracts | (99,844 | ) | |||||
Open swap contracts | (17,940,134 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 8,337,596 | ||||||
Net unrealized gain (loss) | (34,799,597 | ) | |||||
Net realized and unrealized gain (loss) | (34,171,768 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (30,966,342 | ) |
See accompanying notes to the financial statements.
13
GMO Flexible Equities Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 3,205,426 | $ | 5,680,813 | |||||||
Net realized gain (loss) | 627,829 | (20,119,555 | ) | ||||||||
Change in net unrealized appreciation (depreciation) | (34,799,597 | ) | 104,950,270 | ||||||||
Net increase (decrease) in net assets from operations | (30,966,342 | ) | 90,511,528 | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | — | (1,059,417 | ) | ||||||||
Class VI | — | (8,942,217 | ) | ||||||||
Total distributions from net investment income | — | (10,001,634 | ) | ||||||||
Net share transactions (Note 9): | |||||||||||
Class III | (6,521,924 | ) | (12,149,564 | ) | |||||||
Class VI | 1,732,492 | (30,326,228 | ) | ||||||||
Increase (decrease) in net assets resulting from net share transactions | (4,789,432 | ) | (42,475,792 | ) | |||||||
Total increase (decrease) in net assets | (35,755,774 | ) | 38,034,102 | ||||||||
Net assets: | |||||||||||
Beginning of period | 391,887,760 | 353,853,658 | |||||||||
End of period (including accumulated undistributed net investment income of $2,951,791 and distributions in excess of net investment income of $253,635, respectively) | $ | 356,131,986 | $ | 391,887,760 |
See accompanying notes to the financial statements.
14
GMO Flexible Equities Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | Period from December 12, 2008 (commencement of operations) through February 28, 2009 | |||||||||||||
Net asset value, beginning of period | $ | 18.55 | $ | 15.39 | $ | 20.00 | |||||||||
Income (loss) from investment operations: | |||||||||||||||
Net investment income (loss)† | 0.15 | 0.23 | 0.02 | ||||||||||||
Net realized and unrealized gain (loss) | (1.63 | ) | 3.40 | (4.63 | ) | ||||||||||
Total from investment operations | (1.48 | ) | 3.63 | (4.61 | ) | ||||||||||
Less distributions to shareholders: | |||||||||||||||
From net investment income | — | (0.47 | ) | (0.00 | )(a) | ||||||||||
Total distributions | — | (0.47 | ) | (0.00 | ) | ||||||||||
Net asset value, end of period | $ | 17.07 | $ | 18.55 | $ | 15.39 | |||||||||
Total Return(b) | (7.98 | )%** | 23.62 | % | (23.04 | )%** | |||||||||
Ratios/Supplemental Data: | |||||||||||||||
Net assets, end of period (000's) | $ | 32,225 | $ | 41,753 | $ | 43,788 | |||||||||
Net expenses to average daily net assets | 0.70 | %(c)* | 0.70 | %(c) | 0.70 | %* | |||||||||
Net investment income (loss) to average daily net assets | 1.55 | %* | 1.26 | % | 0.56 | %* | |||||||||
Portfolio turnover rate | 46 | %** | 58 | % | 7 | %** | |||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.11 | %* | 0.11 | % | 0.26 | %* |
(a) Distributions from net investment income were less than $0.01 per share.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(c) The net expense ratio does not include the effect of expense reductions (Note 2).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
15
GMO Flexible Equities Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class VI share outstanding throughout each period)
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | Period from December 12, 2008 (commencement of operations) through February 28, 2009 | |||||||||||||
Net asset value, beginning of period | $ | 18.56 | $ | 15.39 | $ | 20.00 | |||||||||
Income (loss) from investment operations: | |||||||||||||||
Net investment income (loss)† | 0.15 | 0.25 | 0.03 | ||||||||||||
Net realized and unrealized gain (loss) | (1.63 | ) | 3.41 | (4.64 | ) | ||||||||||
Total from investment operations | (1.48 | ) | 3.66 | (4.61 | ) | ||||||||||
Less distributions to shareholders: | |||||||||||||||
From net investment income | — | (0.49 | ) | (0.00 | )(a) | ||||||||||
Total distributions | — | (0.49 | ) | (0.00 | ) | ||||||||||
Net asset value, end of period | $ | 17.08 | $ | 18.56 | $ | 15.39 | |||||||||
Total Return(b) | (7.97 | )%** | 23.81 | % | (23.04 | )%** | |||||||||
Ratios/Supplemental Data: | |||||||||||||||
Net assets, end of period (000's) | $ | 323,907 | $ | 350,135 | $ | 310,066 | |||||||||
Net expenses to average daily net assets | 0.61 | %(c)* | 0.61 | %(c) | 0.61 | %* | |||||||||
Net investment income (loss) to average daily net assets | 1.61 | %* | 1.36 | % | 0.69 | %* | |||||||||
Portfolio turnover rate | 46 | %** | 58 | % | 7 | %** | |||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.11 | %* | 0.11 | % | 0.26 | %* |
(a) Distributions from net investment income were less than $0.01 per share.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(c) The net expense ratio does not include the effect of expense reductions (Note 2).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
16
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO Flexible Equities Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks total return in excess of that of its benchmark, the MSCI World Index. The Fund may invest directly and indirectly (e.g., through the GMO Funds in which the Fund invests, collectively referred to as the "underlying funds" or derivatives) in equity investments traded in any of the world's securities markets. Under normal circumstances, the Fund invests directly and indirectly at least 80% of its assets in equity investments. The term "equity investments" refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts. The Fund is permitted to make equity investments of all types, including equity investments issued by foreign and/or U.S. companies, growth and/or value style equities, and equity investments of companies of any market capitalization. In addition, the Fund is not limited to how much it may invest i n any market or type of equity investment, and may invest all its assets in a limited number of equity investments of companies in a single country and/or capitalization range. The Fund could experience material losses from a single investment. As of August 31, 2010, substantially all of the Fund's assets were invested in equity investments tied economically to Japan.
The Manager uses proprietary quantitative models and fundamental investment techniques to select the countries and equity investments in which the Fund invests, to decide how much to invest in each, and to determine the Fund's currency exposures.
In pursuing its investment objective, the Fund is permitted to (but is not obligated to) use a wide variety of exchange-traded and over-the-counter ("OTC") derivatives, including options, futures, swap contracts, and reverse repurchase agreements, (i) as a substitute for direct investment; (ii) in an attempt to reduce investment exposures (which may result in a reduction below zero); (iii) to effect transactions intended as substitutes for securities lending; and/or (iv) in an attempt to adjust elements of its investment and/or foreign currency exposure. The Fund's foreign currency exposure may differ significantly from the currency exposure represented by its equity investments. For investment and hedging purposes, the Fund also may make short sales of securities, including short sales of securities the Fund does not own. In addition, the Fund may take active overweighted and underweighted positions in particular currencies rel ative to its benchmark. In addition, the Fund may lend its portfolio securities. The Fund may identify and measure its performance against one or more secondary benchmarks from time to time. The Fund does not seek to control risk relative to the MSCI World Index or any other benchmark.
17
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund may, from time to time, take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
The Fund is not intended to serve as a standalone investment product and is available for investment only by other GMO Funds and other GMO asset allocation clients.
Throughout the period ended August 31, 2010, the Fund had two classes of shares outstanding: Class III and Class VI. Each class of shares bears a different shareholder service fee.
The Fund currently limits subscriptions.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the OTC market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or who se values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. Additionally, because many foreign equity securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the
18
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on local closing prices and adjustments supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2010, 97.5% of the net assets of the Fund were valued using fair value prices based on those adjustments and are classified as using Level 2 inputs in the table below. See note 4 for a further discussion on valuation of derivative financial instruments.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include: fair value adjustments applied to closing prices of foreign securities due to market events that have occurred since the local market close but before the Fund's daily NAV calculation.
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | |||||||||||||||||||
Japan | $ | — | $ | 347,297,211 | $ | — | $ | 347,297,211 | |||||||||||
TOTAL COMMON STOCKS | — | 347,297,211 | — | 347,297,211 | |||||||||||||||
Short-Term Investments | 20,570,240 | — | — | 20,570,240 | |||||||||||||||
Total Investments | 20,570,240 | 347,297,211 | — | 367,867,451 | |||||||||||||||
Forward Currency Contracts | |||||||||||||||||||
Foreign Exchange risk | — | 967,962 | — | 967,962 | |||||||||||||||
Total | $ | 20,570,240 | $ | 348,265,173 | $ | — | $ | 368,835,413 |
19
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Forward Currency Contracts | |||||||||||||||||||
Foreign Exchange risk | $ | — | $ | (3,389,267 | ) | $ | — | $ | (3,389,267 | ) | |||||||||
Futures Contracts | |||||||||||||||||||
Equity risk | — | (130,967 | ) | — | (130,967 | ) | |||||||||||||
Swap Agreements | |||||||||||||||||||
Foreign Exchange risk | — | (17,940,134 | ) | — | (17,940,134 | ) | |||||||||||||
Total | $ | — | $ | (21,460,368 | ) | $ | — | $ | (21,460,368 | ) |
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2010 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Transfers into Level 3* | Transfers out of Level 3* | Balances as of August 31, 2010 | ||||||||||||||||||||||||||||
Common Stocks | |||||||||||||||||||||||||||||||||||
Japan | $ | 2,146,388 | $ | (1,956,344 | )** | $ | — | $ | — | $ | (190,044 | ) | $ | — | $ | — | $ | — | |||||||||||||||||
Total | $ | 2,146,388 | $ | (1,956,344 | ) | $ | — | $ | — | $ | (190,044 | ) | $ | — | $ | — | $ | — |
* The Fund recognizes investments and derivatives transferred into Level 3 at the value at the beginning of the period and transferred out of Level 3 at the value at the end of the period.
** Sale transaction occurred as a result of a corporate action.
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on
20
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
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 investment securities.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country's tax treaty with the United States. The foreign withholding rates applicable to a Fund's investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if paid by the shareholders of the Fund.
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Transaction based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
21
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
As of February 28, 2010, the Fund elected to defer to March 1, 2010 post-October currency losses of $2,800,425.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2018 | $ | (23,957,755 | ) | ||||
Total | $ | (23,957,755 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 378,039,794 | $ | 26,046,325 | $ | (36,218,668 | ) | $ | (10,172,343 | ) |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the periods ended February 28, 2009 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts.
22
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. Investment income, common expenses and realized and unrealized gains and losses are allocated among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class's operations.
Brown Brothers Harriman & Co. ("BBH") serves as the Fund's custodian and fund accounting agent. State Street Bank and Trust Company ("State Street") serves as the Fund's transfer agent. BBH's and State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Management and Operational Risk — The Fund runs the risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations. In addition, while each GMO Fund is exposed to some level of management and operational risk, this risk may be particularly pronounced for this Fund because it does not seek to control risk relative to a particular securities market index or benchmark. This risk is also pronounced for this Fund because the risks created by its derivative positions and other investments may cause it to incur significant losses.
23
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Declines in stock market prices generally are likely to reduce the market value of the Fund's equity investments.
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to rec eipt) may expose the Fund to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund's investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund's investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Focused Investment Risk — Focusing investments in countries, regions, sectors, or companies with high positive correlations to one another creates additional risk. As of the date of this Prospectus, this risk was particularly pronounced for the Fund because it had invested substantially all of its assets in equity investments tied economically to Japan. This risk may be particularly pronounced for the Fund because it may invest a significant portion of its assets in a particular geographic region or foreign country or in the securities of a limited number of issuers. A decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund invested in the securities of a larger number of issuers.
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
• Smaller Company Risk — The securities of small- and mid-cap companies often are less widely held and trade less frequently and in lesser quantities, and their market prices often fluctuate more, than the securities of companies with larger market capitalizations.
24
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
• Large Shareholder Risk — To the extent that shares of the Fund are held by large shareholders (e.g., institutional investors, asset allocation funds, or other GMO Funds), the Fund is subject to the risk that these shareholders will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis.
Other principal risks of an investment in the Fund include Market Disruption and Geopolitical Risk (the risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Leveraging Risk (increased risk of loss from use of reverse repurchase agreements and other derivatives and securities lending); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund's securities); Short Sales Risk (risk that the Fund's loss on a short sale of securities that the Fund does not own is unlimited); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such inves tments).
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
25
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index). The Funds also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedin gs. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be secured by collateral (e.g., foreign currency forwards; see "Currency Risk" above), that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
26
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. During the period ended August 31, 2010, the Fund used forward currency contracts to manage against anticipated currency exchange rate changes and adjust exposure to foreign currencies. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
27
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because regular trading on many foreign exchanges closes prior to the close of the NYSE, closing prices for foreign futures contracts on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures contracts using fair value prices, which are based on adjustments to local closing prices, and supplied by a third party vendor based on that vendor's proprietary models. As of August 31, 2010, futures contracts representing (0.1)% of the net assets of the Fund were valued using fair value prices based on those adjustments and are classified using Level 2 inputs in the table above. During the period ended August 31, 2010, the Fund used futures contracts to maintain the diversity and liquidity of the portfolio. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash,
28
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
29
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type
30
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the period ended August 31, 2010, the Fund used swap agreements to adjust currency exposure. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Unrealized appreciation on forward currency contracts | $ | — | $ | 967,962 | $ | — | $ | — | $ | — | $ | 967,962 | |||||||||||||||
Total | $ | — | $ | 967,962 | $ | — | $ | — | $ | — | $ | 967,962 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Unrealized depreciation on forward currency contracts | $ | — | $ | (3,389,267 | ) | $ | — | $ | — | $ | — | $ | (3,389,267 | ) | |||||||||||||
Unrealized depreciation on futures contracts* | — | — | — | (130,967 | ) | — | (130,967 | ) | |||||||||||||||||||
Unrealized depreciation on swap agreements | — | (17,940,134 | ) | — | — | — | (17,940,134 | ) | |||||||||||||||||||
Total | $ | — | $ | (21,329,401 | ) | $ | — | $ | (130,967 | ) | $ | — | $ | (21,460,368 | ) |
31
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Period Ended August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Forward currency contracts | $ | — | $ | (9,212,169 | ) | $ | — | $ | — | $ | — | $ | (9,212,169 | ) | |||||||||||||
Futures contracts | — | — | — | 138,464 | — | 138,464 | |||||||||||||||||||||
Total | $ | — | $ | (9,212,169 | ) | $ | — | $ | 138,464 | $ | — | $ | (9,073,705 | ) | |||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Forward currency contracts | $ | — | $ | 8,333,725 | $ | — | $ | — | $ | — | $ | 8,333,725 | |||||||||||||||
Futures contracts | — | — | — | (99,844 | ) | — | (99,844 | ) | |||||||||||||||||||
Swap contracts | — | (17,940,134 | ) | — | — | — | (17,940,134 | ) | |||||||||||||||||||
Total | $ | — | $ | (9,606,409 | ) | $ | — | $ | (99,844 | ) | $ | — | $ | (9,706,253 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments.
The volume of derivative activity, based on absolute values (forward currency contracts and futures contracts), or notional amounts (swap agreements) outstanding at each month-end, was as follows for the period ended August 31, 2010:
Forward Currency Contracts | Futures Contracts | Swap Agreements | |||||||||||||
Average amount outstanding | $ | 558,393,071 | $ | 3,935,129 | $ | 110,374,854 |
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.55% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets of each class at the annual rate of 0.15% for Class III shares and 0.055% for Class VI shares.
32
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.55% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investme nt company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund's Expense Reimbursement Amount. These contractual expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ending August 31, 2010 was $4,465 and $1,564, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended August 31, 2010 aggregated $396,971,097 and $175,002,074, respectively.
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
33
GMO Flexible Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
8. Principal shareholders and related parties
As of August 31, 2010, 71.88% of the outstanding shares of the Fund were held by four shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholders owned more than 10% of the outstanding shares of the Fund. Three of the shareholders are other funds of the Trust.
As of August 31, 2010, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and all of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 7,750 | $ | 142,996 | 254,146 | $ | 4,481,202 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 37,554 | 691,738 | |||||||||||||||
Shares repurchased | (370,335 | ) | (6,664,920 | ) | (886,624 | ) | (17,322,504 | ) | |||||||||||
Net increase (decrease) | (362,585 | ) | $ | (6,521,924 | ) | (594,924 | ) | $ | (12,149,564 | ) | |||||||||
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class VI: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 207,118 | $ | 3,806,201 | 2,572,598 | $ | 44,263,613 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 485,176 | 8,941,790 | |||||||||||||||
Shares repurchased | (112,276 | ) | (2,073,709 | ) | (4,335,164 | ) | (83,531,631 | ) | |||||||||||
Net increase (decrease) | 94,842 | $ | 1,732,492 | (1,277,390 | ) | $ | (30,326,228 | ) |
34
GMO Flexible Equities Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including a one-year period and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered that the Fund's performance is intended to complement other strategies offered by the Manager and noted that the Fund does not seek to control risk relative to its benchmark or any other benchmark. The Trustees considered information provided by the Manager addressing the Fund's performance, including a
35
GMO Flexible Equities Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
performance attribution analysis. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparison to the Manager's separate account clients and the expenses and risks borne by the Manager as a result of the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client rela tionships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating
36
GMO Flexible Equities Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
37
GMO Flexible Equities Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.70 | % | $ | 1,000.00 | $ | 920.20 | $ | 3.39 | |||||||||||
2) Hypothetical | 0.70 | % | $ | 1,000.00 | $ | 1,021.68 | $ | 3.57 | |||||||||||
Class VI | |||||||||||||||||||
1) Actual | 0.61 | % | $ | 1,000.00 | $ | 920.30 | $ | 2.95 | |||||||||||
2) Hypothetical | 0.61 | % | $ | 1,000.00 | $ | 1,022.13 | $ | 3.11 |
* Expenses are calculated using each Class's annualized net expense ratio for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
38
GMO Foreign Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Foreign Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 96.4 | % | |||||
Short-Term Investments | 2.6 | ||||||
Preferred Stocks | 0.3 | ||||||
Rights and Warrants | 0.0 | ||||||
Other | 0.7 | ||||||
100.0 | % | ||||||
Country Summary | % of Equity Investments* | ||||||
United Kingdom | 24.0 | % | |||||
Japan | 20.1 | ||||||
France | 11.3 | ||||||
Germany | 8.7 | ||||||
Italy | 8.1 | ||||||
Switzerland | 4.1 | ||||||
Netherlands | 3.1 | ||||||
Finland | 3.1 | ||||||
Norway | 2.7 | ||||||
Spain | 2.7 | ||||||
Australia | 2.3 | ||||||
South Korea | 1.5 | ||||||
Brazil | 1.4 | ||||||
Hong Kong | 0.8 | ||||||
Belgium | 0.7 | ||||||
Russia | 0.7 | ||||||
Taiwan | 0.7 | ||||||
India | 0.5 | ||||||
Singapore | 0.5 | ||||||
Austria | 0.4 | ||||||
Ireland | 0.4 | ||||||
Mexico | 0.4 | ||||||
Greece | 0.3 | ||||||
Israel | 0.3 | ||||||
Sweden | 0.3 | ||||||
Turkey | 0.3 | ||||||
Hungary | 0.2 | ||||||
Philippines | 0.2 | ||||||
New Zealand | 0.1 | ||||||
Poland | 0.1 | ||||||
Canada | 0.0 | ||||||
100.0 | % |
* Equity investments may consist of common stocks, preferred stocks and rights and warrants. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
1
GMO Foreign Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2010 (Unaudited)
Industry Group Summary | % of Equity Investments* | ||||||
Banks | 11.8 | % | |||||
Energy | 11.6 | ||||||
Capital Goods | 9.1 | ||||||
Telecommunication Services | 7.4 | ||||||
Materials | 7.2 | ||||||
Pharmaceuticals, Biotechnology & Life Sciences | 6.9 | ||||||
Utilities | 6.6 | ||||||
Automobiles & Components | 6.5 | ||||||
Food, Beverage & Tobacco | 5.9 | ||||||
Technology Hardware & Equipment | 4.8 | ||||||
Insurance | 4.5 | ||||||
Food & Staples Retailing | 2.7 | ||||||
Diversified Financials | 2.0 | ||||||
Transportation | 1.9 | ||||||
Media | 1.8 | ||||||
Consumer Services | 1.6 | ||||||
Real Estate | 1.5 | ||||||
Household & Personal Products | 1.4 | ||||||
Software & Services | 1.3 | ||||||
Commercial & Professional Services | 1.1 | ||||||
Retailing | 0.9 | ||||||
Consumer Durables & Apparel | 0.8 | ||||||
Semiconductors & Semiconductor Equipment | 0.4 | ||||||
Health Care Equipment & Services | 0.3 | ||||||
100.0 | % |
* Equity investments may consist of common stocks, preferred stocks and rights and warrants. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
2
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
COMMON STOCKS — 96.4% | |||||||||||||||
Australia — 2.2% | |||||||||||||||
683,582 | Amcor Ltd | 4,106,940 | |||||||||||||
702,243 | Aristocrat Leisure Ltd | 2,333,568 | |||||||||||||
1,651,594 | Asciano Group * | 2,472,041 | |||||||||||||
408,040 | Australia and New Zealand Banking Group Ltd | 8,240,265 | |||||||||||||
845,820 | BlueScope Steel Ltd * | 1,624,160 | |||||||||||||
455,727 | Crown Ltd | 3,370,309 | |||||||||||||
3,456,018 | Dexus Property Group (REIT) | 2,562,819 | |||||||||||||
1,711,610 | Fairfax Media Ltd | 2,195,878 | |||||||||||||
514,540 | Foster's Group Ltd | 2,779,992 | |||||||||||||
80,310 | Macquarie Group Ltd | 2,696,764 | |||||||||||||
1,651,995 | Myer Holdings Ltd | 5,423,341 | |||||||||||||
224,127 | National Australia Bank Ltd | 4,647,539 | |||||||||||||
788,160 | Qantas Airways Ltd * | 1,769,615 | |||||||||||||
69,205 | Rio Tinto Ltd | 4,346,415 | |||||||||||||
131,251 | Suncorp-Metway Ltd | 977,900 | |||||||||||||
1,617,932 | Telstra Corp Ltd | 3,973,828 | |||||||||||||
539,837 | Ten Network Holdings Ltd * | 659,930 | |||||||||||||
209,916 | Westfield Group (REIT) | 2,346,448 | |||||||||||||
144,047 | Westpac Banking Corp | 2,791,584 | |||||||||||||
Total Australia | 59,319,336 | ||||||||||||||
Austria — 0.4% | |||||||||||||||
87,434 | OMV AG | 2,810,925 | |||||||||||||
159,780 | Telekom Austria AG | 2,037,232 | |||||||||||||
353,190 | Wienerberger AG * | 4,567,384 | |||||||||||||
Total Austria | 9,415,541 | ||||||||||||||
Belgium — 0.7% | |||||||||||||||
3,143,900 | Ageas | 7,911,688 | |||||||||||||
100,260 | Anheuser-Busch InBev NV | 5,192,996 | |||||||||||||
146,360 | Belgacom SA | 5,203,406 | |||||||||||||
Total Belgium | 18,308,090 |
See accompanying notes to the financial statements.
3
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Brazil — 1.3% | |||||||||||||||
375,200 | Banco do Brasil SA | 6,084,382 | |||||||||||||
641,600 | Hypermarcas SA * | 8,449,941 | |||||||||||||
527,500 | Julio Simoes Logistica SA 144A * | 2,553,025 | |||||||||||||
255,800 | Localiza Rent A Car SA | 3,568,456 | |||||||||||||
346,800 | Multiplus SA | 4,591,089 | |||||||||||||
444,600 | Sul America SA | 4,341,574 | |||||||||||||
68,200 | Totvs SA | 5,048,256 | |||||||||||||
Total Brazil | 34,636,723 | ||||||||||||||
Canada — 0.0% | |||||||||||||||
220,100 | KAP Resources Ltd * (a) | — | |||||||||||||
Finland — 3.0% | |||||||||||||||
123,900 | Elisa Oyj * | 2,452,013 | |||||||||||||
211,933 | Fortum Oyj | 4,866,483 | |||||||||||||
189,600 | KCI Konecranes Oyj | 5,764,463 | |||||||||||||
105,620 | Kone Oyj Class B | 4,844,146 | |||||||||||||
199,070 | Metso Oyj | 7,244,527 | |||||||||||||
421,345 | Nokian Renkaat Oyj | 12,030,661 | |||||||||||||
1,343,166 | Nokia Oyj | 11,445,171 | |||||||||||||
116,565 | Orion Oyj Class B | 2,125,435 | |||||||||||||
288,680 | Outokumpu Oyj | 4,703,262 | |||||||||||||
876,300 | Sampo Oyj Class A | 21,052,539 | |||||||||||||
407,735 | UPM–Kymmene Oyj | 5,579,596 | |||||||||||||
Total Finland | 82,108,296 | ||||||||||||||
France — 10.9% | |||||||||||||||
66,760 | Accor SA | 2,042,203 | |||||||||||||
137,426 | Air France–KLM * | 1,803,326 | |||||||||||||
1,871,631 | Alcatel-Lucent * | 4,797,553 | |||||||||||||
254,630 | ArcelorMittal | 7,380,123 | |||||||||||||
740,831 | AXA | 11,412,288 | |||||||||||||
375,136 | BNP Paribas | 23,240,190 | |||||||||||||
205,263 | Bouygues SA | 8,286,846 |
See accompanying notes to the financial statements.
4
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
France — continued | |||||||||||||||
162,933 | Cap Gemini SA | 6,869,191 | |||||||||||||
288,820 | Carrefour SA | 13,048,422 | |||||||||||||
123,350 | Compagnie de Saint-Gobain | 4,505,483 | |||||||||||||
84,420 | Compagnie Generale des Etablissements Michelin-Class B | 6,236,282 | |||||||||||||
402,760 | Credit Agricole SA | 5,031,206 | |||||||||||||
186,089 | Danone SA | 9,961,703 | |||||||||||||
66,760 | Edenred * | 1,150,582 | |||||||||||||
228,579 | Electricite de France | 9,081,499 | |||||||||||||
208,130 | European Aeronautic Defense and Space Co NV * | 4,565,696 | |||||||||||||
660,685 | France Telecom SA | 13,429,539 | |||||||||||||
233,357 | GDF Suez | 7,196,045 | |||||||||||||
118,585 | GDF Suez VVPR Strip * | 150 | |||||||||||||
84,497 | L'Oreal SA | 8,366,577 | |||||||||||||
43,755 | Lafarge SA | 2,007,340 | |||||||||||||
86,544 | LVMH Moet Hennessy Louis Vuitton SA | 10,026,817 | |||||||||||||
104,873 | Pernod-Ricard SA | 8,165,920 | |||||||||||||
135,593 | Publicis Groupe SA | 5,660,745 | |||||||||||||
178,788 | Renault SA * | 7,222,447 | |||||||||||||
419,628 | Sanofi-Aventis | 24,022,150 | |||||||||||||
117,074 | Schneider Electric SA | 12,372,753 | |||||||||||||
95,503 | Societe BIC SA | 7,007,685 | |||||||||||||
174,499 | Societe Generale | 8,799,624 | |||||||||||||
67,244 | Sodexo | 3,848,212 | |||||||||||||
97,742 | Technip SA | 6,372,367 | |||||||||||||
790,367 | Total SA | 36,763,458 | |||||||||||||
8,777 | Unibail-Rodamco SE (REIT) | 1,648,335 | |||||||||||||
613,456 | Vivendi SA | 14,233,051 | |||||||||||||
Total France | 296,555,808 | ||||||||||||||
Germany — 8.4% | |||||||||||||||
219,289 | Allianz SE (Registered) | 22,386,391 | |||||||||||||
38,771 | Axel Springer AG | 4,520,390 | |||||||||||||
151,699 | BASF AG | 7,978,726 | |||||||||||||
13,181 | Bayerische Motoren Werke AG | 692,568 |
See accompanying notes to the financial statements.
5
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Germany — continued | |||||||||||||||
280,068 | Bayer AG | 17,082,975 | |||||||||||||
55,852 | Beiersdorf AG | 2,985,931 | |||||||||||||
206,340 | Continental AG * | 12,436,378 | |||||||||||||
584,921 | Daimler AG (Registered) * | 28,298,488 | |||||||||||||
285,540 | Deutsche Lufthansa AG (Registered) * | 4,501,611 | |||||||||||||
131,332 | Deutsche Bank AG (Registered) | 8,166,680 | |||||||||||||
120,260 | Deutsche Boerse AG | 7,321,972 | |||||||||||||
557,044 | Deutsche Telekom AG (Registered) | 7,317,980 | |||||||||||||
840,605 | E.ON AG | 23,593,463 | |||||||||||||
84,670 | Gerresheimer AG * | 2,929,894 | |||||||||||||
129,810 | HeidelbergCement AG | 5,185,568 | |||||||||||||
180,760 | Heidelberger Druckmaschinen AG * | 1,399,088 | |||||||||||||
136,700 | K+S AG | 7,127,422 | |||||||||||||
52,891 | MAN SE | 4,548,453 | |||||||||||||
113,430 | Merck KGaA | 9,835,802 | |||||||||||||
54,152 | Muenchener Rueckversicherungs-Gesellschaft AG (Registered) | 6,900,744 | |||||||||||||
130,699 | RWE AG | 8,554,614 | |||||||||||||
344,404 | SAP AG | 14,997,266 | |||||||||||||
188,943 | Siemens AG (Registered) | 17,127,282 | |||||||||||||
51,580 | ThyssenKrupp AG | 1,408,798 | |||||||||||||
Total Germany | 227,298,484 | ||||||||||||||
Greece — 0.3% | |||||||||||||||
543,014 | Alapis Holding Industrial and Commercial SA | 1,404,086 | |||||||||||||
372,164 | National Bank of Greece SA * | 4,620,717 | |||||||||||||
174,872 | OPAP SA | 2,654,460 | |||||||||||||
Total Greece | 8,679,263 | ||||||||||||||
Hong Kong — 0.7% | |||||||||||||||
410,500 | Cheung Kong Holdings Ltd | 5,219,051 | |||||||||||||
611,500 | CLP Holdings Ltd | 4,668,698 | |||||||||||||
1,606,622 | Great Eagle Holdings Ltd | 4,391,644 | |||||||||||||
725,000 | Hutchison Whampoa Ltd | 5,377,757 | |||||||||||||
Total Hong Kong | 19,657,150 |
See accompanying notes to the financial statements.
6
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Hungary — 0.2% | |||||||||||||||
2,068,740 | Magyar Telekom Nyrt | 6,267,709 | |||||||||||||
India — 0.5% | |||||||||||||||
1,254,100 | Hindalco Industries Ltd | 4,451,134 | |||||||||||||
177,126 | ICICI Bank Ltd | 3,712,740 | |||||||||||||
1,602,740 | Indiabulls Real Estate Ltd * | 5,702,067 | |||||||||||||
Total India | 13,865,941 | ||||||||||||||
Ireland — 0.4% | |||||||||||||||
472,250 | Bank of Ireland * | 450,494 | |||||||||||||
781,339 | C&C Group Plc | 3,042,968 | |||||||||||||
277,341 | CRH Plc | 4,270,165 | |||||||||||||
14,019 | DCC Plc | 350,798 | |||||||||||||
994,600 | Greencore Group Plc | 1,481,327 | |||||||||||||
Total Ireland | 9,595,752 | ||||||||||||||
Israel — 0.2% | |||||||||||||||
127,700 | Teva Pharmaceutical Industries Ltd Sponsored ADR | 6,459,066 | |||||||||||||
Italy — 7.8% | |||||||||||||||
540,835 | Assicurazioni Generali SPA | 9,722,842 | |||||||||||||
128,769 | Atlantia SPA | 2,420,168 | |||||||||||||
834,353 | Autogrill SPA * | 9,592,980 | |||||||||||||
4,577,309 | Banca Monte dei Paschi di Siena SPA * | 5,447,019 | |||||||||||||
281,833 | Banca Popolare di Milano Scarl | 1,219,677 | |||||||||||||
255,747 | Buzzi Unicem SPA | 2,311,061 | |||||||||||||
5,547,167 | Enel SPA | 26,323,955 | |||||||||||||
2,262,736 | ENI SPA | 44,707,353 | |||||||||||||
260,943 | Finmeccanica SPA | 2,613,141 | |||||||||||||
387,730 | Fondiaria–Sai SPA | 3,664,758 | |||||||||||||
101,553 | Fondiaria–Sai SPA-Di RISP | 607,609 | |||||||||||||
5,467,643 | Intesa San Paolo | 15,235,235 | |||||||||||||
2,163,604 | Intesa Sanpaolo SPA-Di RISP | 4,877,826 | |||||||||||||
540,527 | Italcementi SPA-Di RISP | 2,190,612 |
See accompanying notes to the financial statements.
7
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Italy — continued | |||||||||||||||
468,486 | Lottomatica SPA | 6,354,707 | |||||||||||||
905,787 | Mediaset SPA | 5,594,597 | |||||||||||||
484,190 | Mediobanca SPA * | 3,789,475 | |||||||||||||
161,495 | Pirelli & C SPA | 1,066,611 | |||||||||||||
355,551 | Prysmian SPA | 5,554,695 | |||||||||||||
2,873,076 | Saras SPA * | 4,864,545 | |||||||||||||
648,566 | Snam Rete Gas SPA | 2,998,257 | |||||||||||||
460,689 | Telecom Italia SPA | 620,773 | |||||||||||||
10,140,628 | Telecom Italia SPA-Di RISP | 11,124,115 | |||||||||||||
13,837,253 | UniCredit SPA | 32,255,582 | |||||||||||||
668,744 | Unione di Banche Italiane ScpA | 5,844,636 | |||||||||||||
Total Italy | 211,002,229 | ||||||||||||||
Japan — 19.4% | |||||||||||||||
494,800 | Aisin Seiki Co Ltd | 12,782,235 | |||||||||||||
1,370,000 | Asahi Glass Co Ltd | 13,367,346 | |||||||||||||
1,283,000 | Asahi Kasei Corp | 6,340,368 | |||||||||||||
438,200 | Canon Inc | 17,940,114 | |||||||||||||
261,300 | East Japan Railway Co | 16,898,832 | |||||||||||||
1,381,000 | Ebara Corp * | 5,471,003 | |||||||||||||
120,100 | Electric Power Development Co Ltd | 3,862,065 | |||||||||||||
89,300 | Fanuc Ltd | 9,610,644 | |||||||||||||
595,500 | FujiFilm Holdings Corp | 18,072,432 | |||||||||||||
1,797,000 | Fujitsu Ltd | 12,442,833 | |||||||||||||
6,576,000 | Hitachi Ltd * | 26,723,081 | |||||||||||||
1,304,600 | Honda Motor Co Ltd | 43,211,265 | |||||||||||||
286,200 | Hoya Corp | 6,305,700 | |||||||||||||
1,826 | INPEX Corp | 8,268,304 | |||||||||||||
1,175,300 | Itochu Corp | 9,581,419 | |||||||||||||
521,800 | JSR Corp | 7,672,521 | |||||||||||||
2,907,600 | JX Holdings Inc * | 14,720,974 | |||||||||||||
338,100 | Kansai Electric Power Co Inc (The) | 8,662,464 | |||||||||||||
221,800 | Kao Corp | 5,163,307 | |||||||||||||
750,000 | Kirin Holdings Co Ltd | 10,363,245 |
See accompanying notes to the financial statements.
8
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
294,000 | Lawson Inc | 13,375,110 | |||||||||||||
1,055,000 | Minebea Co Ltd | 4,862,808 | |||||||||||||
179,300 | Miraca Holdings Inc | 5,994,605 | |||||||||||||
518,700 | Mitsubishi Corp | 11,114,404 | |||||||||||||
2,080,000 | Mitsubishi Electric Corp | 16,598,881 | |||||||||||||
3,101,400 | Mitsubishi UFJ Financial Group Inc | 14,705,318 | |||||||||||||
3,928,500 | Mizuho Financial Group Inc | 6,025,208 | |||||||||||||
199,700 | Nidec Corp | 17,588,719 | |||||||||||||
23,500 | Nintendo Co Ltd | 6,514,908 | |||||||||||||
385,000 | Nissan Chemical Industries Ltd | 3,915,167 | |||||||||||||
3,125,100 | Nissan Motor Co Ltd * | 23,819,494 | |||||||||||||
16,515 | NTT Docomo Inc | 27,985,072 | |||||||||||||
125,180 | ORIX Corp | 9,412,786 | |||||||||||||
369 | ORIX JREIT Inc (REIT) | 1,740,515 | |||||||||||||
129,700 | Rohm Co Ltd | 7,829,044 | |||||||||||||
967,000 | Sekisui Chemical Co Ltd | 5,667,909 | |||||||||||||
79,100 | Shimamura Co Ltd | 7,202,605 | |||||||||||||
539,100 | Shionogi & Co Ltd | 9,430,114 | |||||||||||||
377,700 | Stanley Electric Co Ltd | 5,826,670 | |||||||||||||
754,800 | Sumitomo Electric Industries Ltd | 8,090,232 | |||||||||||||
521,500 | Sumitomo Mitsui Financial Group Inc | 15,476,509 | |||||||||||||
427,000 | Sumitomo Realty & Development Co Ltd | 8,148,816 | |||||||||||||
135,000 | TDK Corp | 7,082,849 | |||||||||||||
1,520,000 | Teijin Ltd | 4,670,593 | |||||||||||||
704,300 | Tokyo Electric Power Co Inc (The) | 20,475,940 | |||||||||||||
224,000 | Toyo Suisan Kaisha Ltd | 4,719,742 | |||||||||||||
Total Japan | 525,734,170 | ||||||||||||||
Mexico — 0.4% | |||||||||||||||
75,900 | Grupo Aeroportuario del Sureste SAB de CV ADR | 3,152,127 | |||||||||||||
3,181,500 | Grupo Mexico SA Class B | 8,173,452 | |||||||||||||
Total Mexico | 11,325,579 |
See accompanying notes to the financial statements.
9
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Netherlands — 3.0% | |||||||||||||||
533,800 | Aegon NV * | 2,719,454 | |||||||||||||
82,300 | Akzo Nobel NV | 4,326,108 | |||||||||||||
142,380 | ASML Holding NV | 3,523,025 | |||||||||||||
226,296 | Dockwise Ltd * | 4,927,143 | |||||||||||||
82,085 | Fugro NV | 4,599,581 | |||||||||||||
177,369 | Imtech NV | 4,979,450 | |||||||||||||
676,223 | ING Groep NV * | 5,971,436 | |||||||||||||
762,245 | Koninklijke Ahold NV | 9,357,201 | |||||||||||||
811,872 | Koninklijke KPN NV | 11,737,991 | |||||||||||||
365,171 | Koninklijke Philips Electronics NV | 10,176,137 | |||||||||||||
403,860 | Reed Elsevier NV | 4,816,468 | |||||||||||||
1,367,840 | SNS REAAL NV * | 5,750,606 | |||||||||||||
356,132 | Unilever NV | 9,503,578 | |||||||||||||
Total Netherlands | 82,388,178 | ||||||||||||||
New Zealand — 0.1% | |||||||||||||||
66,009 | Air New Zealand Ltd | 58,950 | |||||||||||||
409,466 | Sky Network Television Ltd | 1,449,932 | |||||||||||||
207,293 | Telecom Corp of New Zealand | 297,763 | |||||||||||||
Total New Zealand | 1,806,645 | ||||||||||||||
Norway — 2.6% | |||||||||||||||
683,190 | Aker Solutions ASA | 7,496,433 | |||||||||||||
767,322 | DnB NOR ASA | 8,425,607 | |||||||||||||
1,024,220 | Orkla ASA | 8,535,985 | |||||||||||||
1,041,509 | ProSafe ASA | 4,973,986 | |||||||||||||
1,838,814 | Prosafe Production Public Ltd * | 3,741,876 | |||||||||||||
452,220 | Statoil ASA | 8,462,921 | |||||||||||||
1,493,200 | Telenor ASA | 21,778,744 | |||||||||||||
182,600 | Yara International ASA | 7,289,396 | |||||||||||||
Total Norway | 70,704,948 | ||||||||||||||
Philippines — 0.2% | |||||||||||||||
29,694,000 | Alliance Global Group Inc | 4,160,629 |
See accompanying notes to the financial statements.
10
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Poland — 0.1% | |||||||||||||||
650,450 | Telekomunikacja Polska SA | 3,512,550 | |||||||||||||
Russia — 0.7% | |||||||||||||||
294,370 | Gazprom OAO Sponsored ADR | 6,052,773 | |||||||||||||
244,100 | Lukoil OAO ADR | 12,947,174 | |||||||||||||
Total Russia | 18,999,947 | ||||||||||||||
Singapore — 0.5% | |||||||||||||||
2,895,000 | Ascendas Real Estate Investment Trust (REIT) | 4,436,872 | |||||||||||||
309,444 | DBS Group Holdings Ltd | 3,178,542 | |||||||||||||
437,300 | Singapore Airlines Ltd | 4,880,306 | |||||||||||||
Total Singapore | 12,495,720 | ||||||||||||||
South Korea — 1.2% | |||||||||||||||
24,100 | Hyundai Mobis | 4,371,312 | |||||||||||||
247,480 | LG Display Co Ltd | 6,931,933 | |||||||||||||
34,000 | LG Electronics Inc | 2,734,682 | |||||||||||||
169,780 | Shinhan Financial Group Co Ltd | 6,502,344 | |||||||||||||
7,840 | Shinsegae Co Ltd | 3,765,081 | |||||||||||||
343,400 | SK Telecom Co Ltd ADR | 5,501,268 | |||||||||||||
50,550 | SK Holdings Co Ltd | 3,886,766 | |||||||||||||
Total South Korea | 33,693,386 | ||||||||||||||
Spain — 2.6% | |||||||||||||||
2,331,955 | Banco Santander SA | 27,153,939 | |||||||||||||
615,600 | Enagas | 10,847,110 | |||||||||||||
257,561 | Red Electrica de Espana | 10,573,604 | |||||||||||||
582,768 | Repsol YPF SA | 13,265,237 | |||||||||||||
424,045 | Telefonica SA | 9,372,181 | |||||||||||||
Total Spain | 71,212,071 | ||||||||||||||
Sweden — 0.3% | |||||||||||||||
133,500 | Autoliv Inc SDR | 7,204,847 |
See accompanying notes to the financial statements.
11
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Switzerland — 4.0% | |||||||||||||||
116,250 | Adecco SA | 5,403,754 | |||||||||||||
147,950 | Credit Suisse Group AG (Registered) | 6,470,408 | |||||||||||||
52,853 | Energiedienst Holding AG (Registered) | 2,699,895 | |||||||||||||
300,037 | Nestle SA (Registered) | 15,510,649 | |||||||||||||
786,690 | Novartis AG (Registered) | 41,239,641 | |||||||||||||
63,640 | Sulzer AG | 6,292,835 | |||||||||||||
23,551 | Swisscom AG (Registered) | 9,141,420 | |||||||||||||
61,730 | Syngenta AG (Registered) | 14,216,583 | |||||||||||||
31,343 | Zurich Financial Services AG | 6,964,836 | |||||||||||||
Total Switzerland | 107,940,021 | ||||||||||||||
Taiwan — 0.7% | |||||||||||||||
498,800 | Asustek Computer Inc | 3,321,906 | |||||||||||||
134,423 | Chunghwa Telecom Co Ltd | 2,765,081 | |||||||||||||
764,960 | Hon Hai Precision Industry Co Ltd | 2,697,231 | |||||||||||||
396,490 | HTC Corp | 7,272,075 | |||||||||||||
1,128,574 | Pegatron Corp * | 1,412,743 | |||||||||||||
2,383,000 | Yuanta Financial Holding Co Ltd | 1,350,310 | |||||||||||||
Total Taiwan | 18,819,346 | ||||||||||||||
Turkey — 0.3% | |||||||||||||||
489,270 | Koza Altin Isletmeleri AS | 4,621,343 | |||||||||||||
449,650 | Turkiye Halk Bankasi AS | 3,636,084 | |||||||||||||
Total Turkey | 8,257,427 | ||||||||||||||
United Kingdom — 23.2% | |||||||||||||||
131,655 | AMEC Plc | 1,843,907 | |||||||||||||
349,204 | Anglo American Plc | 12,454,779 | |||||||||||||
57,833 | Associated British Foods Plc | 935,455 | |||||||||||||
580,304 | AstraZeneca Plc | 28,525,070 | |||||||||||||
1,074,535 | Aviva Plc | 6,207,080 | |||||||||||||
233,500 | Babcock International Group Plc | 1,806,315 | |||||||||||||
2,649,507 | BAE Systems Plc | 11,928,337 | |||||||||||||
3,218,786 | Barclays Plc | 14,777,514 |
See accompanying notes to the financial statements.
12
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
United Kingdom — continued | |||||||||||||||
61,097 | Berkeley Group Holdings Plc (Unit Shares) * | 764,243 | |||||||||||||
1,088,822 | BG Group Plc | 17,439,376 | |||||||||||||
432,577 | BHP Billiton Plc | 12,062,682 | |||||||||||||
6,929,622 | BP Plc | 39,992,532 | |||||||||||||
930,458 | British American Tobacco Plc | 31,526,815 | |||||||||||||
161,927 | Bunzl Plc | 1,762,118 | |||||||||||||
56,000 | Carnival Plc | 1,810,925 | |||||||||||||
1,448,317 | Centrica Plc | 7,205,079 | |||||||||||||
568,894 | Cobham Plc | 1,818,310 | |||||||||||||
637,948 | Compass Group Plc | 5,201,125 | |||||||||||||
701,266 | Diageo Plc | 11,398,631 | |||||||||||||
361,487 | Experian Plc | 3,436,027 | |||||||||||||
1,859,303 | GlaxoSmithKline Plc | 34,697,212 | |||||||||||||
157,400 | Go–Ahead Group Plc | 2,645,517 | |||||||||||||
386,171 | Group 4 Securicor Plc | 1,490,074 | |||||||||||||
176,051 | Hiscox Ltd | 988,771 | |||||||||||||
404,110 | Home Retail Group Plc | 1,346,835 | |||||||||||||
5,242,818 | HSBC Holdings Plc | 51,351,660 | |||||||||||||
56,975 | ICAP Plc | 356,492 | |||||||||||||
703,407 | Imperial Tobacco Group Plc | 19,358,414 | |||||||||||||
909,851 | Inchcape Plc * | 3,560,733 | |||||||||||||
901,701 | International Power Plc | 5,117,741 | |||||||||||||
71,997 | Johnson Matthey Plc | 1,749,031 | |||||||||||||
407,336 | John Wood Group Plc | 2,261,095 | |||||||||||||
450,565 | Lamprell Plc | 1,798,947 | |||||||||||||
71,240 | Lancashire Holdings Ltd | 581,232 | |||||||||||||
413,658 | Land Securities Group Plc (REIT) | 3,861,862 | |||||||||||||
2,774,731 | Legal & General Group Plc | 3,925,204 | |||||||||||||
11,734,097 | Lloyds Banking Group Plc * | 12,351,229 | |||||||||||||
50,040 | Lonmin Plc * | 1,165,272 | |||||||||||||
512,535 | Marks & Spencer Group Plc | 2,708,010 | |||||||||||||
1,071,640 | National Express Group Plc * | 3,668,182 | |||||||||||||
652,272 | National Grid Plc | 5,492,218 | |||||||||||||
144,168 | Next Plc | 4,359,490 |
See accompanying notes to the financial statements.
13
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
United Kingdom — continued | |||||||||||||||
194,933 | Pearson Plc | 2,890,635 | |||||||||||||
37,173 | Premier Oil Plc * | 860,584 | |||||||||||||
572,257 | Prudential Plc | 4,963,942 | |||||||||||||
210,130 | Reckitt Benckiser Group Plc | 10,473,346 | |||||||||||||
276,992 | Reed Elsevier Plc | 2,216,609 | |||||||||||||
455,555 | Rio Tinto Plc | 22,913,528 | |||||||||||||
233,905 | Rolls–Royce Group Plc * | 1,979,065 | |||||||||||||
2,154,781 | Royal Bank of Scotland Group Plc * | 1,459,340 | |||||||||||||
1,122,297 | Royal Dutch Shell Plc A Shares (London) | 29,722,745 | |||||||||||||
1,008,384 | Royal Dutch Shell Plc B Shares (London) | 25,700,883 | |||||||||||||
767,668 | RSA Insurance Group Plc | 1,443,536 | |||||||||||||
270,593 | SABMiller Plc | 7,683,794 | |||||||||||||
170,137 | Sage Group Plc (The) | 637,108 | |||||||||||||
59,372 | Schroders Plc | 1,244,139 | |||||||||||||
361,630 | Scottish & Southern Energy Plc | 6,344,893 | |||||||||||||
287,760 | Serco Group Plc | 2,562,085 | |||||||||||||
163,443 | Severn Trent Plc | 3,240,459 | |||||||||||||
119,438 | Shire Plc | 2,569,501 | |||||||||||||
89,037 | Smiths Group Plc | 1,557,027 | |||||||||||||
271,104 | Smith & Nephew Plc | 2,243,612 | |||||||||||||
458,820 | Standard Chartered Plc | 12,252,830 | |||||||||||||
88,694 | Tate & Lyle Plc | 554,843 | |||||||||||||
2,705,985 | Tesco Plc | 16,839,538 | |||||||||||||
1,248,980 | Thomas Cook Group Plc | 3,465,203 | |||||||||||||
113,697 | Travis Perkins Plc * | 1,325,159 | |||||||||||||
476,706 | Unilever Plc | 12,558,752 | |||||||||||||
19,791,601 | Vodafone Group Plc | 47,520,779 | |||||||||||||
2,243,382 | WM Morrison Supermarkets Plc | 9,947,183 | |||||||||||||
198,598 | WPP Plc | 1,963,381 | |||||||||||||
758,768 | Xstrata Plc | 11,840,857 | |||||||||||||
Total United Kingdom | 628,706,897 | ||||||||||||||
TOTAL COMMON STOCKS (COST $2,753,947,741) | 2,610,131,749 |
See accompanying notes to the financial statements.
14
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares/ Par Value | Description | Value ($) | |||||||||||||
PREFERRED STOCKS — 0.3% | |||||||||||||||
Brazil — 0.1% | |||||||||||||||
19,800 | Cia Brasileira de Distribuicao Grupo Pao de Acucar Sponsored ADR 0.05% | 1,394,316 | |||||||||||||
74,900 | Vivo Participacoes SA 2.18% | 1,799,732 | |||||||||||||
Total Brazil | 3,194,048 | ||||||||||||||
Italy — 0.1% | |||||||||||||||
68,671 | Exor SPA 2.66% | 1,032,020 | |||||||||||||
141,680 | Fiat SPA 5.40% | 1,010,099 | |||||||||||||
Total Italy | 2,042,119 | ||||||||||||||
South Korea — 0.1% | |||||||||||||||
82,900 | Hyundai Motor Co 2.46% | 3,498,506 | |||||||||||||
55,580 | LG Electronics Inc | 1,932,101 | |||||||||||||
Total South Korea | 5,430,607 | ||||||||||||||
TOTAL PREFERRED STOCKS (COST $9,628,668) | 10,666,774 | ||||||||||||||
RIGHTS AND WARRANTS — 0.0% | |||||||||||||||
Italy — 0.0% | |||||||||||||||
528,734 | Mediobanca SPA Warrants, Expires 03/18/11 * | 14,138 | |||||||||||||
497,700 | Unione di Banche Italiane SCPA Warrants, Expires 06/30/11 * | 6,559 | |||||||||||||
Total Italy | 20,697 | ||||||||||||||
TOTAL RIGHTS AND WARRANTS (COST $23,255) | 20,697 | ||||||||||||||
SHORT-TERM INVESTMENTS — 2.6% | |||||||||||||||
Time Deposits — 2.6% | |||||||||||||||
AUD | 79,167 | Bank of America (Charlotte) Time Deposit, 4.44%, due 09/01/10 | 70,435 | ||||||||||||
JPY | 290,148,612 | BNP Paribas (Paris) Time Deposit, 0.04%, due 09/01/10 | 3,453,743 | ||||||||||||
USD | 24,000,000 | Commerzbank (Grand Cayman) Time Deposit, 0.20%, due 09/01/10 | 24,000,000 | ||||||||||||
CHF | 44,281 | Credit Suisse AG (Zurich) Time Deposit, 0.02%, due 09/01/10 | 43,616 |
See accompanying notes to the financial statements.
15
GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
Time Deposits — continued | |||||||||||||||
USD | 46,093 | DnB Nor Bank (Oslo) Time Deposit, 0.21%, due 09/01/10 | 46,093 | ||||||||||||
USD | 22,800,000 | HSBC Bank (USA) Time Deposit, 0.17%, due 09/01/10 | 22,800,000 | ||||||||||||
NOK | 5,077,128 | Nordea Bank Norge ASA, 1.89%, due 09/01/10 | 804,954 | ||||||||||||
EUR | 14,935,428 | Royal Bank of Scotland (London) Time Deposit, 0.28%, due 09/01/10 | 18,926,921 | ||||||||||||
GBP | 17,073 | Royal Bank of Scotland (London) Time Deposit, 0.46%, due 09/01/10 | 26,184 | ||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $70,171,946) | 70,171,946 | ||||||||||||||
TOTAL INVESTMENTS — 99.3% (Cost $2,833,771,610) | 2,690,991,166 | ||||||||||||||
Other Assets and Liabilities (net) — 0.7% | 18,812,771 | ||||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 2,709,803,937 |
Notes to Schedule of Investments:
144A - Securities 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.
ADR - American Depositary Receipt
REIT - Real Estate Investment Trust
SDR - Swedish Depository Receipt
* Non-income producing security.
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
Currency Abbreviations:
AUD - Australian Dollar
CHF - Swiss Franc
EUR - Euro
GBP - British Pound
JPY - Japanese Yen
NOK - Norwegian Krone
USD - United States Dollar
See accompanying notes to the financial statements.
16
GMO Foreign Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments, at value (cost $2,833,771,610) (Note 2) | $ | 2,690,991,166 | |||||
Foreign currency, at value (cost $5,900,091) (Note 2) | 5,736,676 | ||||||
Receivable for investments sold | 14,880,112 | ||||||
Receivable for Fund shares sold | 252,605 | ||||||
Dividends and interest receivable | 6,039,007 | ||||||
Foreign taxes receivable | 1,756,847 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 144,274 | ||||||
Miscellaneous receivable | 132,117 | ||||||
Total assets | 2,719,932,804 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 7,743,575 | ||||||
Payable for Fund shares repurchased | 5,349 | ||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 1,433,807 | ||||||
Shareholder service fee | 337,120 | ||||||
Administration fee – Class M | 807 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 5,745 | ||||||
Payable for 12b-1 fee – Class M | 1,983 | ||||||
Payable for foreign currency purchased | 33,133 | ||||||
Accrued expenses | 567,348 | ||||||
Total liabilities | 10,128,867 | ||||||
Net assets | $ | 2,709,803,937 |
See accompanying notes to the financial statements.
17
GMO Foreign Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited) — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 3,603,308,577 | |||||
Accumulated undistributed net investment income | 36,989,934 | ||||||
Accumulated net realized loss | (787,348,255 | ) | |||||
Net unrealized depreciation | (143,146,319 | ) | |||||
$ | 2,709,803,937 | ||||||
Net assets attributable to: | |||||||
Class II shares | $ | 398,028,199 | |||||
Class III shares | $ | 1,448,384,803 | |||||
Class IV shares | $ | 858,788,129 | |||||
Class M shares | $ | 4,602,806 | |||||
Shares outstanding: | |||||||
Class II | 37,980,911 | ||||||
Class III | 137,470,871 | ||||||
Class IV | 79,612,110 | ||||||
Class M | 437,487 | ||||||
Net asset value per share: | |||||||
Class II | $ | 10.48 | |||||
Class III | $ | 10.54 | |||||
Class IV | $ | 10.79 | |||||
Class M | $ | 10.52 |
See accompanying notes to the financial statements.
18
GMO Foreign Fund
(A Series of GMO Trust)
Statement of Operations �� Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $6,664,803) | $ | 56,368,304 | |||||
Interest | 59,861 | ||||||
Total investment income | 56,428,165 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 8,798,097 | ||||||
Shareholder service fee – Class II (Note 5) | 557,554 | ||||||
Shareholder service fee – Class III (Note 5) | 1,139,087 | ||||||
Shareholder service fee – Class IV (Note 5) | 406,022 | ||||||
12b-1 fee – Class M (Note 5) | 5,975 | ||||||
Administration fee – Class M (Note 5) | 4,780 | ||||||
Custodian and fund accounting agent fees | 709,872 | ||||||
Legal fees | 73,140 | ||||||
Audit and tax fees | 49,220 | ||||||
Trustees fees and related expenses (Note 5) | 39,901 | ||||||
Transfer agent fees | 35,144 | ||||||
Registration fees | 17,112 | ||||||
Miscellaneous | 39,467 | ||||||
Total expenses | 11,875,371 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (908,868 | ) | |||||
Expense reductions (Note 2) | (355 | ) | |||||
Net expenses | 10,966,148 | ||||||
Net investment income (loss) | 45,462,017 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 3,874,771 | ||||||
Foreign currency, forward contracts and foreign currency related transactions (net of Brazilian IOF tax of $240,266) (Note 2) | (13,180,139 | ) | |||||
Net realized gain (loss) | (9,305,368 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments (net of change in foreign capital gains tax of $181,337) (Note 2) | (160,329,754 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 78,436 | ||||||
Net unrealized gain (loss) | (160,251,318 | ) | |||||
Net realized and unrealized gain (loss) | (169,556,686 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (124,094,669 | ) |
See accompanying notes to the financial statements.
19
GMO Foreign Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 45,462,017 | $ | 84,982,160 | |||||||
Net realized gain (loss) | (9,305,368 | ) | (429,351,370 | ) | |||||||
Change in net unrealized appreciation (depreciation) | (160,251,318 | ) | 1,596,286,890 | ||||||||
Net increase (decrease) in net assets from operations | (124,094,669 | ) | 1,251,917,680 | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class II | (5,858,000 | ) | (30,762,111 | ) | |||||||
Class III | (16,410,007 | ) | (94,821,520 | ) | |||||||
Class IV | (10,151,637 | ) | (18,767,306 | ) | |||||||
Class M | (51,638 | ) | (201,387 | ) | |||||||
Total distributions from net investment income | (32,471,282 | ) | (144,552,324 | ) | |||||||
Net realized gains | |||||||||||
(32,471,282 | ) | (144,552,324 | ) | ||||||||
Net share transactions (Note 9): | |||||||||||
Class II | (126,101,066 | ) | (438,363,474 | ) | |||||||
Class III | (59,648,090 | ) | (1,239,331,675 | ) | |||||||
Class IV | 53,650,967 | 411,299,489 | |||||||||
Class M | 79,244 | (456,251 | ) | ||||||||
Increase (decrease) in net assets resulting from net share transactions | (132,018,945 | ) | (1,266,851,911 | ) | |||||||
Total increase (decrease) in net assets | (288,584,896 | ) | (159,486,555 | ) | |||||||
Net assets: | |||||||||||
Beginning of period | 2,998,388,833 | 3,157,875,388 | |||||||||
End of period (including accumulated undistributed net investment income of $36,989,934 and $23,999,199, respectively) | $ | 2,709,803,937 | $ | 2,998,388,833 |
See accompanying notes to the financial statements.
20
GMO Foreign Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class II share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 11.07 | $ | 8.03 | $ | 16.52 | $ | 18.56 | $ | 16.70 | $ | 15.13 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.17 | 0.26 | 0.45 | 0.40 | 0.38 | 0.28 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.64 | ) | 3.24 | (7.95 | ) | (0.36 | ) | 3.06 | 2.46 | ||||||||||||||||||
Total from investment operations | (0.47 | ) | 3.50 | (7.50 | ) | 0.04 | 3.44 | 2.74 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.12 | ) | (0.46 | ) | (0.33 | ) | (0.44 | ) | (0.43 | ) | (0.33 | ) | |||||||||||||||
From net realized gains | — | — | (0.66 | ) | (1.64 | ) | (1.15 | ) | (0.84 | ) | |||||||||||||||||
Total distributions | (0.12 | ) | (0.46 | ) | (0.99 | ) | (2.08 | ) | (1.58 | ) | (1.17 | ) | |||||||||||||||
Net asset value, end of period | $ | 10.48 | $ | 11.07 | $ | 8.03 | $ | 16.52 | $ | 18.56 | $ | 16.70 | |||||||||||||||
Total Return(a) | (4.21 | )%** | 43.95 | % | (47.49 | )% | (0.78 | )% | 21.21 | % | 19.01 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 398,028 | $ | 545,336 | $ | 765,201 | $ | 848,359 | $ | 1,018,021 | $ | 1,213,447 | |||||||||||||||
Net expenses to average daily net assets | 0.82 | %(b)* | 0.82 | %(b) | 0.82 | %(c) | 0.82 | %(c) | 0.82 | % | 0.82 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 3.04 | %* | 2.53 | % | 3.42 | % | 2.10 | % | 2.17 | % | 1.82 | % | |||||||||||||||
Portfolio turnover rate | 24 | %** | 59 | % | 39 | % | 29 | % | 23 | % | 25 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.06 | %* | 0.05 | % | 0.05 | % | 0.05 | % | 0.05 | % | 0.05 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions. (Note 2)
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
21
GMO Foreign Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 11.13 | $ | 8.07 | $ | 16.59 | $ | 18.64 | $ | 16.76 | $ | 15.18 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.17 | 0.28 | 0.47 | 0.41 | 0.38 | 0.30 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.63 | ) | 3.25 | (7.99 | ) | (0.36 | ) | 3.09 | 2.45 | ||||||||||||||||||
Total from investment operations | (0.46 | ) | 3.53 | (7.52 | ) | 0.05 | 3.47 | 2.75 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.13 | ) | (0.47 | ) | (0.34 | ) | (0.46 | ) | (0.44 | ) | (0.33 | ) | |||||||||||||||
From net realized gains | — | — | (0.66 | ) | (1.64 | ) | (1.15 | ) | (0.84 | ) | |||||||||||||||||
Total distributions | (0.13 | ) | (0.47 | ) | (1.00 | ) | (2.10 | ) | (1.59 | ) | (1.17 | ) | |||||||||||||||
Net asset value, end of period | $ | 10.54 | $ | 11.13 | $ | 8.07 | $ | 16.59 | $ | 18.64 | $ | 16.76 | |||||||||||||||
Total Return(a) | (4.18 | )%** | 44.10 | % | (47.42 | )% | (0.75 | )% | 21.36 | % | 19.07 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,448,385 | $ | 1,591,717 | $ | 2,054,885 | $ | 4,078,545 | $ | 4,556,742 | $ | 3,800,326 | |||||||||||||||
Net expenses to average daily net assets | 0.75 | %(b)* | 0.75 | %(b) | 0.75 | %(c) | 0.75 | %(c) | 0.75 | % | 0.75 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 3.10 | %* | 2.65 | % | 3.51 | % | 2.16 | % | 2.11 | % | 1.97 | % | |||||||||||||||
Portfolio turnover rate | 24 | %** | 59 | % | 39 | % | 29 | % | 23 | % | 25 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.06 | %* | 0.05 | % | 0.05 | % | 0.05 | % | 0.05 | % | 0.05 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions. (Note 2)
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
22
GMO Foreign Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 11.39 | $ | 8.07 | $ | 16.59 | $ | 18.64 | $ | 16.77 | $ | 15.18 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.19 | 0.22 | 0.51 | 0.40 | 0.36 | 0.31 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.66 | ) | 3.35 | (8.02 | ) | (0.34 | ) | 3.11 | 2.47 | ||||||||||||||||||
Total from investment operations | (0.47 | ) | 3.57 | (7.51 | ) | 0.06 | 3.47 | 2.78 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.13 | ) | (0.25 | ) | (0.35 | ) | (0.47 | ) | (0.45 | ) | (0.35 | ) | |||||||||||||||
From net realized gains | — | — | (0.66 | ) | (1.64 | ) | (1.15 | ) | (0.84 | ) | |||||||||||||||||
Total distributions | (0.13 | ) | (0.25 | ) | (1.01 | ) | (2.11 | ) | (1.60 | ) | (1.19 | ) | |||||||||||||||
Net asset value, end of period | $ | 10.79 | $ | 11.39 | $ | 8.07 | $ | 16.59 | $ | 18.64 | $ | 16.77 | |||||||||||||||
Total Return(a) | (4.16 | )%** | 44.05 | % | (47.39 | )% | (0.68 | )% | 21.36 | % | 19.22 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 858,788 | $ | 856,553 | $ | 334,003 | $ | 3,571,516 | $ | 3,424,024 | $ | 2,007,037 | |||||||||||||||
Net expenses to average daily net assets | 0.69 | %(b)* | 0.69 | %(b) | 0.69 | %(c) | 0.69 | %(c) | 0.69 | % | 0.69 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 3.13 | %* | 1.92 | % | 3.70 | % | 2.08 | % | 2.04 | % | 1.98 | % | |||||||||||||||
Portfolio turnover rate | 24 | %** | 59 | % | 39 | % | 29 | % | 23 | % | 25 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.06 | %* | 0.05 | % | 0.05 | % | 0.05 | % | 0.05 | % | 0.05 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions. (Note 2)
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
23
GMO Foreign Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class M share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 11.12 | $ | 8.07 | $ | 16.58 | $ | 18.63 | $ | 16.75 | $ | 15.19 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.15 | 0.22 | 0.41 | 0.35 | 0.30 | 0.24 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.63 | ) | 3.27 | (7.96 | ) | (0.36 | ) | 3.12 | 2.46 | ||||||||||||||||||
Total from investment operations | (0.48 | ) | 3.49 | (7.55 | ) | (0.01 | ) | 3.42 | 2.70 | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.12 | ) | (0.44 | ) | (0.30 | ) | (0.40 | ) | (0.39 | ) | (0.30 | ) | |||||||||||||||
From net realized gains | — | — | (0.66 | ) | (1.64 | ) | (1.15 | ) | (0.84 | ) | |||||||||||||||||
Total distributions | (0.12 | ) | (0.44 | ) | (0.96 | ) | (2.04 | ) | (1.54 | ) | (1.14 | ) | |||||||||||||||
Net asset value, end of period | $ | 10.52 | $ | 11.12 | $ | 8.07 | $ | 16.58 | $ | 18.63 | $ | 16.75 | |||||||||||||||
Total Return(a) | (4.32 | )%** | 43.60 | % | (47.58 | )% | (1.05 | )% | 21.04 | % | 18.66 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 4,603 | $ | 4,783 | $ | 3,786 | $ | 7,375 | $ | 8,258 | $ | 5,673 | |||||||||||||||
Net expenses to average daily net assets | 1.05 | %*(b) | 1.05 | %(b) | 1.05 | %(c) | 1.05 | %(c) | 1.05 | % | 1.05 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 2.77 | %* | 2.05 | % | 3.11 | % | 1.81 | % | 1.69 | % | 1.56 | % | |||||||||||||||
Portfolio turnover rate | 24 | %** | 59 | % | 39 | % | 29 | % | 23 | % | 25 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.06 | %* | 0.05 | % | 0.05 | % | 0.05 | % | 0.05 | % | 0.05 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions. (Note 2)
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
24
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO Foreign Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks total return in excess of that of its benchmark, the MSCI EAFE Index (Europe, Australasia, and Far East). The Fund typically makes equity investments directly and indirectly (e.g., through the GMO funds in which the Fund invests, collectively referred to as the "underlying funds" or derivatives) in companies tied economically to non-U.S. countries, including companies that issue equity investments included in the MSCI international developed country universe (the universe of securities from which the MSCI EAFE Index, a developed markets index, is constructed) and companies whose equity investments are traded in the securities markets of the world's non-developed countries ("emerging countries"). The term "equity investments" refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts. Under normal circumsta nces, the Fund invests directly and indirectly at least 80% of its assets in investments tied economically to countries outside the U.S.
The Fund's country selections relative to its benchmark are determined by a cumulative quantitative value score for each country together with the Manager's evaluation of the country's fundamentals. The Fund typically overweights or underweights (sometimes to a significant extent) its investment exposures in particular countries relative to the Fund's benchmark. The Manager selects stocks using fundamental analysis that is informed by a disciplined quantitative screening process. The Manager separates companies with valuations it believes are deservedly low from those it believes represent investment opportunities. The Manager analyzes companies for financial, operational and managerial strength and compares them to their global, regional and local industry peers. As part of the investment process, the Manager frequently meets with management and/or visits companies.
The Fund normally does not take temporary defensive positions but may hold up to 10% of its total assets in cash and cash equivalents to manage cash inflows and outflows as a result of shareholder purchases and redemptions. To the extent the Fund takes temporary defensive positions or holds cash or cash equivalents to manage shareholder purchases or redemptions, it may not achieve its investment objective. The Fund typically makes investments tied economically to emerging countries, but these investments generally represent 10% or less of the Fund's total assets.
In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the-counter ("OTC") derivatives, including, without limitation, futures and
25
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
options. In addition, the Fund may lend its portfolio securities. The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund.
Throughout the period ended August 31, 2010, the Fund had four classes of shares outstanding: Class II, Class III, Class IV, and Class M. Class M shares bear an administration fee and a 12b-1 fee while classes II, III, and IV bear a shareholder service fee (See Note 5). The principal economic difference among the classes of shares is the type and level of fees they bear.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the OTC market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or who se values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of August 31, 2010, the total value of securities held directly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 0.0% of net assets. The Fund classifies such securities (as defined below) as Level 3. Additionally, because many foreign equity securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the ev ents that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on local closing prices and adjustments supplied by a third party
26
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
vendor using that vendor's proprietary models. As of August 31, 2010, 93.8% of the net assets of the Fund were valued using fair value prices based on those adjustments and are classified as using Level 2 inputs in the table below. See note 4 for a further discussion on valuation of derivative financial instruments.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include: (i) fair value adjustments applied to closing prices of foreign securities due to market events that have occurred since the local market close but before the Fund's daily NAV calculation.
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund used the following fair value techniques on Level 3 investments: The Fund deemed certain bankrupt securities to be worthless.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | |||||||||||||||||||
Australia | $ | — | $ | 59,319,336 | $ | — | $ | 59,319,336 | |||||||||||
Austria | — | 9,415,541 | — | 9,415,541 | |||||||||||||||
Belgium | — | 18,308,090 | — | 18,308,090 | |||||||||||||||
Brazil | 34,636,723 | — | — | 34,636,723 | |||||||||||||||
Canada | — | — | 0 | * | 0 | ||||||||||||||
Finland | — | 82,108,296 | — | 82,108,296 | |||||||||||||||
France | 14,580,271 | 281,975,537 | — | 296,555,808 | |||||||||||||||
Germany | — | 227,298,484 | — | 227,298,484 | |||||||||||||||
Greece | — | 8,679,263 | — | 8,679,263 |
27
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
ASSET VALUATION INPUTS — continued
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Hong Kong | $ | — | $ | 19,657,150 | $ | — | $ | 19,657,150 | |||||||||||
Hungary | — | 6,267,709 | — | 6,267,709 | |||||||||||||||
India | — | 13,865,941 | — | 13,865,941 | |||||||||||||||
Ireland | — | 9,595,752 | — | 9,595,752 | |||||||||||||||
Israel | 6,459,066 | — | — | 6,459,066 | |||||||||||||||
Italy | — | 211,002,229 | — | 211,002,229 | |||||||||||||||
Japan | — | 525,734,170 | — | 525,734,170 | |||||||||||||||
Mexico | 11,325,579 | — | — | 11,325,579 | |||||||||||||||
Netherlands | — | 82,388,178 | — | 82,388,178 | |||||||||||||||
New Zealand | 297,763 | 1,508,882 | — | 1,806,645 | |||||||||||||||
Norway | — | 70,704,948 | — | 70,704,948 | |||||||||||||||
Philippines | — | 4,160,629 | — | 4,160,629 | |||||||||||||||
Poland | — | 3,512,550 | — | 3,512,550 | |||||||||||||||
Russia | — | 18,999,947 | — | 18,999,947 | |||||||||||||||
Singapore | — | 12,495,720 | — | 12,495,720 | |||||||||||||||
South Korea | 5,501,268 | 28,192,118 | — | 33,693,386 | |||||||||||||||
Spain | — | 71,212,071 | — | 71,212,071 | |||||||||||||||
Sweden | — | 7,204,847 | — | 7,204,847 | |||||||||||||||
Switzerland | — | 107,940,021 | — | 107,940,021 | |||||||||||||||
Taiwan | 4,177,824 | 14,641,522 | — | 18,819,346 | |||||||||||||||
Turkey | — | 8,257,427 | — | 8,257,427 | |||||||||||||||
United Kingdom | — | 628,706,897 | — | 628,706,897 | |||||||||||||||
TOTAL COMMON STOCKS | 76,978,494 | 2,533,153,255 | — | 2,610,131,749 | |||||||||||||||
Preferred Stocks | |||||||||||||||||||
Brazil | 3,194,048 | — | — | 3,194,048 | |||||||||||||||
Italy | — | 2,042,119 | — | 2,042,119 | |||||||||||||||
South Korea | — | 5,430,607 | — | 5,430,607 | |||||||||||||||
TOTAL PREFERRED STOCKS | 3,194,048 | 7,472,726 | — | 10,666,774 |
28
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
ASSET VALUATION INPUTS — continued
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Rights and Warrants | |||||||||||||||||||
Italy | $ | — | $ | 20,697 | $ | — | $ | 20,697 | |||||||||||
TOTAL RIGHTS AND WARRANTS | — | 20,697 | — | 20,697 | |||||||||||||||
Short-Term Investments | 70,171,946 | — | — | 70,171,946 | |||||||||||||||
Total Investments | 150,344,488 | 2,540,646,678 | — | 2,690,991,166 | |||||||||||||||
Total | $ | 150,344,488 | $ | 2,540,646,678 | $ | — | $ | 2,690,991,166 |
* Represents the interest in securities that are defaulted and have no value at August 31, 2010.
The aggregate net value of the Fund's direct investments in securities using Level 3 inputs was 0.0% of the total net assets.
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2010 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Transfer into level 3* | Transfer out of level 3* | Balances as of August 31, 2010 | ||||||||||||||||||||||||||||
Common Stocks | |||||||||||||||||||||||||||||||||||
Canada | $ | 2,092 | $ | — | $ | — | $ | — | $ | (2,092 | ) | $ | — | $ | — | $ | — | ||||||||||||||||||
Thailand | 6,963,258 | (8,160,155 | ) | — | 573,375 | 623,522 | — | — | — | ||||||||||||||||||||||||||
Total | $ | 6,965,350 | $ | (8,160,155 | ) | $ | — | $ | 573,375 | $ | 621,430 | $ | — | $ | — | $ | — |
* The fund recognizes investments and derivatives transferred into Level 3 at the value at the beginning of the period and transferred out of Level 3 at the end of the period.
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and
29
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on 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 investment securities.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country's tax treaty with the United States. The foreign withholding rates applicable to a Fund's investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if paid by the shareholders of the Fund.
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Transaction based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
The Fund is subject to a Imposto sobre Operacoes Financeiras (IOF) transaction tax levied by the Brazilian government on certain foreign exchange transactions. The IOF tax has been included in net realized gain (loss) from foreign currency transactions in the Statement of Operations.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or
30
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund elected to defer to March 1, 2010 post-October capital losses of $48,855,088.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (72,173,104 | ) | ||||
2/28/2018 | (596,400,512 | ) | |||||
Total | $ | (668,573,616 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 2,897,090,899 | $ | 218,653,573 | $ | (424,753,306 | ) | $ | (206,099,733 | ) |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
31
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Security transactions and related investment income
Security transactions are accounted for in the financial statements on the trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for whic h collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. Investment income, common expenses and realized and unrealized gains and losses are allocated among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service, 12b-1, and administration fees, which are directly attributable to a class of shares, are charged to that class's operations.
Brown Brothers Harriman & Co. ("BBH") serves as the Fund's custodian and fund accounting agent. State Street Bank and Trust Company ("State Street") serves as the Fund's transfer agent. BBH's and State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because
32
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund's investments.
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to rec eipt) may expose the Fund to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund's investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund's investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
• Market Risk — Value Securities — The Fund purchases some equity investments at prices below what the Manager believes to be their fundamental value. The Fund runs the risk that the prices of these investments will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value.
• Credit and Counterparty Risk — The Fund runs the risk that the counterparty to an over-the-counter derivatives contract or a borrower of the Fund's securities will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise honor its obligations.
Other principal risks of an investment in the Fund include Liquidity Risk (difficulty in selling Fund investments at desirable prices and/or increased likelihood of honoring redemption requests in-kind); Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other
33
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments); and Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk).
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index). The Funds also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
34
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedin gs. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be secured by collateral (e.g., foreign currency forwards; see "Currency Risk" above), that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value.
35
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. During the period ended August 31, 2010, the Fund used forward currency contracts to manage against anticipated currency exchange rate changes. The fund had no forward currency contracts outstanding at the end of the period.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and
36
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because many foreign exchanges close prior to the close of the NYSE, closing prices for foreign futures contracts on those exchanges do not reflect events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures contracts using fair value prices, which are based on adjustments to closing prices supplied by a third party vendor based on that vendor's proprietary models. The Fund had no futures contracts outstanding at the end of the period.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an of fsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
37
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level
38
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. During the period ended August 31, 2010, the Fund held rights and warrants received as a result of corporate actions. Rights and warrants held by the Fund at the end of the period are listed in the Fund's Schedule of Investments.
39
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (rights and warrants) | $ | — | $ | — | $ | — | $ | 20,697 | $ | — | $ | 20,697 | |||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 20,697 | $ | — | $ | 20,697 |
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments, at value (rights and warrants) | $ | — | $ | — | $ | — | $ | (374,423 | ) | $ | — | $ | (374,423 | ) | |||||||||||||
Forward currency contracts | — | — | — | (11,417,041 | ) | — | (11,417,041 | ) | |||||||||||||||||||
Total | $ | — | $ | — | $ | — | $ | (11,791,464 | ) | $ | — | $ | (11,791,464 | ) | |||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments, at value (rights and warrants) | $ | — | $ | — | $ | — | $ | 65,946 | $ | — | $ | 65,946 | |||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 65,946 | $ | — | $ | 65,946 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
The volume of derivative activity, based on absolute values (forward currency contracts and rights and warrants), outstanding at each month-end, was as follows for the period ended August 31, 2010:
Forward Currency Contracts | Rights/ Warrants | ||||||||||
Average amount outstanding | $ | 90,952,171 | $ | 145,612 |
40
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.60% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets of each class at the annual rate of 0.22% for Class II shares, 0.15% for Class III shares, and 0.09% for Class IV shares.
Holders of Class M shares of the Fund pay GMO an administration fee for support services provided to Class M shareholders. That fee is paid monthly at the annual rate of 0.20% of the average daily net assets of Class M shares. Pursuant to a Rule 12b-1 distribution and service plan adopted by the Fund, holders of Class M shares of the Fund may pay a fee, at the annual rate of up to 1.00% of average daily net assets of Class M shares for any activities or expenses primarily intended to result in the sale of Class M shares of the Fund and/or for the provision of services to Class M shareholders. The Trustees currently limit payments on Class M shares to 0.25% of the Fund's average daily net assets of Class M shares.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.60% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means administration fees and distribution (12b-1) fees (Class M Shares only), shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an inves tment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund's Expense Reimbursement Amount. These contractual expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ending August 31, 2010 was $39,901 and $11,315, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
41
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended August 31, 2010 aggregated $669,694,465 and $833,508,599, respectively.
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, the Fund had no shareholders who individually held more than 10% of the Fund's outstanding shares.
As of August 31, 2010, 0.02% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 1.49% of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class II: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 1,042,317 | $ | 11,546,568 | 5,284,392 | $ | 58,775,053 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 442,860 | 4,658,892 | 2,299,833 | 23,931,435 | |||||||||||||||
Shares repurchased | (12,769,949 | ) | (142,306,526 | ) | (53,617,185 | ) | (521,069,962 | ) | |||||||||||
Net increase (decrease) | (11,284,772 | ) | $ | (126,101,066 | ) | (46,032,960 | ) | $ | (438,363,474 | ) |
42
GMO Foreign Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 13,360,168 | $ | 145,310,880 | 32,110,911 | $ | 364,181,334 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 1,226,515 | 12,976,532 | 6,905,503 | 72,795,801 | |||||||||||||||
Shares repurchased | (20,189,003 | ) | (217,935,502 | ) | (150,666,345 | ) | (1,676,308,810 | ) | |||||||||||
Net increase (decrease) | (5,602,320 | ) | $ | (59,648,090 | ) | (111,649,931 | ) | $ | (1,239,331,675 | ) | |||||||||
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 6,164,194 | $ | 74,397,359 | 89,288,679 | $ | 1,007,203,382 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 591,263 | 6,403,377 | 939,270 | 11,365,163 | |||||||||||||||
Shares repurchased | (2,373,948 | ) | (27,149,769 | ) | (56,397,183 | ) | (607,269,056 | ) | |||||||||||
Net increase (decrease) | 4,381,509 | $ | 53,650,967 | 33,830,766 | $ | 411,299,489 | |||||||||||||
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class M: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 23,896 | $ | 264,428 | 47,202 | $ | 490,290 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 4,885 | 51,638 | 18,984 | 201,387 | |||||||||||||||
Shares repurchased | (21,380 | ) | (236,822 | ) | (105,440 | ) | (1,147,928 | ) | |||||||||||
Net increase (decrease) | 7,401 | $ | 79,244 | (39,254 | ) | $ | (456,251 | ) |
43
GMO Foreign Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of a composite of accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three-, five-, seven- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications
44
GMO Foreign Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparis on to the Manager's separate account clients and the expenses and risks borne by the Manager as a result of the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by , for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to
45
GMO Foreign Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
46
GMO Foreign Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, distribution (12b-1) and/or administration fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $35,000,000 account value divided by $1,000 = 35,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
47
GMO Foreign Fund
(A Series of GMO Trust)
Fund Expenses — (Continued)
August 31, 2010 (Unaudited)
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class II | |||||||||||||||||||
1) Actual | 0.82 | % | $ | 1,000.00 | $ | 957.90 | $ | 4.05 | |||||||||||
2) Hypothetical | 0.82 | % | $ | 1,000.00 | $ | 1,021.07 | $ | 4.18 | |||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.75 | % | $ | 1,000.00 | $ | 958.20 | $ | 3.70 | |||||||||||
2) Hypothetical | 0.75 | % | $ | 1,000.00 | $ | 1,021.42 | $ | 3.82 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.69 | % | $ | 1,000.00 | $ | 958.40 | $ | 3.41 | |||||||||||
2) Hypothetical | 0.69 | % | $ | 1,000.00 | $ | 1,021.73 | $ | 3.52 | |||||||||||
Class M | |||||||||||||||||||
1) Actual | 1.05 | % | $ | 1,000.00 | $ | 956.80 | $ | 5.18 | |||||||||||
2) Hypothetical | 1.05 | % | $ | 1,000.00 | $ | 1,019.91 | $ | 5.35 |
* Expenses are calculated using each Class's annualized net expense ratio for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
48
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 95.8 | % | |||||
Short-Term Investments | 3.1 | ||||||
Preferred Stocks | 1.0 | ||||||
Rights and Warrants | 0.1 | ||||||
Other | 0.0 | ||||||
100.0 | % | ||||||
Country Summary | % of Equity Investments* | ||||||
United Kingdom | 20.1 | % | |||||
Japan | 19.0 | ||||||
Italy | 7.7 | ||||||
Germany | 7.3 | ||||||
Brazil | 5.6 | ||||||
South Korea | 5.0 | ||||||
Netherlands | 4.4 | ||||||
France | 3.5 | ||||||
Switzerland | 3.4 | ||||||
Australia | 3.2 | ||||||
Canada | 3.2 | ||||||
Finland | 2.3 | ||||||
Hong Kong | 1.7 | ||||||
Belgium | 1.6 | ||||||
Mexico | 1.5 | ||||||
Singapore | 1.2 | ||||||
Spain | 1.2 | ||||||
Sweden | 1.0 | ||||||
China | 0.9 | ||||||
Greece | 0.8 | ||||||
Ireland | 0.8 | ||||||
Norway | 0.8 | ||||||
Philippines | 0.8 | ||||||
Denmark | 0.7 | ||||||
New Zealand | 0.6 | ||||||
India | 0.5 | ||||||
Austria | 0.4 | ||||||
Taiwan | 0.4 | ||||||
Chile | 0.3 | ||||||
Turkey | 0.1 | ||||||
100.0 | % |
1
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2010 (Unaudited)
Industry Group Summary | % of Equity Investments* | ||||||
Capital Goods | 19.7 | % | |||||
Materials | 8.9 | ||||||
Consumer Durables & Apparel | 7.1 | ||||||
Energy | 6.5 | ||||||
Automobiles & Components | 5.5 | ||||||
Diversified Financials | 4.6 | ||||||
Food, Beverage & Tobacco | 4.5 | ||||||
Retailing | 4.4 | ||||||
Commercial & Professional Services | 4.4 | ||||||
Banks | 3.9 | ||||||
Media | 3.9 | ||||||
Software & Services | 3.8 | ||||||
Pharmaceuticals, Biotechnology & Life Sciences | 3.6 | ||||||
Health Care Equipment & Services | 3.0 | ||||||
Consumer Services | 2.9 | ||||||
Transportation | 2.9 | ||||||
Technology Hardware & Equipment | 2.7 | ||||||
Real Estate | 2.6 | ||||||
Insurance | 1.8 | ||||||
Food & Staples Retailing | 1.5 | ||||||
Utilities | 0.7 | ||||||
Telecommunication Services | 0.6 | ||||||
Household & Personal Products | 0.4 | ||||||
Semiconductors & Semiconductor Equipment | 0.1 | ||||||
100.0 | % |
* Equity investments may consist of common stocks, preferred stocks and rights and warrants. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
2
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
COMMON STOCKS — 95.8% | |||||||||||||||
Australia — 3.0% | |||||||||||||||
141,856 | Aquarius Platinum Ltd | 598,827 | |||||||||||||
107,203 | Aristocrat Leisure Ltd | 356,238 | |||||||||||||
371,953 | Asciano Group * | 556,725 | |||||||||||||
132,693 | Australian Vintage Ltd * | 42,182 | |||||||||||||
2,219,240 | Dexus Property Group (REIT) | 1,645,683 | |||||||||||||
740,208 | Fairfax Media Ltd | 949,636 | |||||||||||||
330,685 | Iress Market Technology Ltd | 2,279,390 | |||||||||||||
1,203,800 | Pacific Brands Ltd * | 1,122,325 | |||||||||||||
2,044,900 | PanAust Ltd * | 1,081,735 | |||||||||||||
240,600 | Primary Health Care Ltd | 692,151 | |||||||||||||
46,900 | Sonic Healthcare Ltd | 461,397 | |||||||||||||
2,169,320 | Ten Network Holdings Ltd * | 2,651,909 | |||||||||||||
166,269 | West Australian Newspapers Holdings Ltd | 1,000,539 | |||||||||||||
Total Australia | 13,438,737 | ||||||||||||||
Austria — 0.4% | |||||||||||||||
16,047 | Flughafen Wien AG | 936,886 | |||||||||||||
58,311 | Wienerberger AG * | 754,066 | |||||||||||||
Total Austria | 1,690,952 | ||||||||||||||
Belgium — 1.5% | |||||||||||||||
10,420 | Bekaert NV | 2,106,443 | |||||||||||||
33,648 | CMB Cie Maritime Belge SA | 909,308 | |||||||||||||
31,280 | Compagnie d'Entreprises CFE | 1,529,779 | |||||||||||||
4,808 | SA D'Ieteren NV | 2,249,916 | |||||||||||||
Total Belgium | 6,795,446 | ||||||||||||||
Brazil — 4.9% | |||||||||||||||
176,900 | Aliansce Shopping Centers SA | 1,203,676 | |||||||||||||
370,000 | Cia Hering | 14,199,573 | |||||||||||||
464,100 | Even Construtora e Incorporadora SA | 2,177,471 | |||||||||||||
245,500 | Iochpe-Maxion SA | 2,739,815 |
See accompanying notes to the financial statements.
3
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Brazil — continued | |||||||||||||||
148,600 | Profarma Distribuidora de Produtos Farmaceuticos SA | 1,184,569 | |||||||||||||
Total Brazil | 21,505,104 | ||||||||||||||
Canada — 3.0% | |||||||||||||||
72,200 | Corus Entertainment Inc Class B | 1,318,267 | |||||||||||||
169,100 | Flint Energy Services Ltd * | 2,096,406 | |||||||||||||
145,300 | Gammon Gold Inc * | 1,041,020 | |||||||||||||
2,500,000 | Gran Colombia Gold Corp * | 773,667 | |||||||||||||
390,900 | Gran Tierra Energy, Inc. * | 2,456,070 | |||||||||||||
42,700 | Intact Financial Corp | 1,777,114 | |||||||||||||
90,600 | KAP Resources Ltd * (a) | — | |||||||||||||
186,500 | Precision Drilling Corp * | 1,168,303 | |||||||||||||
270,000 | Trilogy Energy Corp | 2,797,862 | |||||||||||||
Total Canada | 13,428,709 | ||||||||||||||
Chile — 0.3% | |||||||||||||||
1,358,500 | Administradora de Fondos de Pensiones Provida SA | 1,282,750 | |||||||||||||
China — 0.8% | |||||||||||||||
4,310,000 | 361 Degrees International Ltd | 3,671,370 | |||||||||||||
Denmark — 0.7% | |||||||||||||||
71,900 | H Lundbeck A/S | 1,090,519 | |||||||||||||
1,138,510 | Ossur hf * | 1,845,418 | |||||||||||||
Total Denmark | 2,935,937 | ||||||||||||||
Finland — 2.2% | |||||||||||||||
96,904 | KCI Konecranes Oyj | 2,946,200 | |||||||||||||
116,042 | Nokian Renkaat Oyj | 3,313,346 | |||||||||||||
260,879 | Oriola-KD Oyj Class B | 1,269,918 | |||||||||||||
14,850 | Orion Oyj Class B | 270,774 | |||||||||||||
100,764 | YIT Oyj | 2,082,994 | |||||||||||||
Total Finland | 9,883,232 |
See accompanying notes to the financial statements.
4
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
France — 3.4% | |||||||||||||||
26,060 | Arkema | 1,085,286 | |||||||||||||
104,991 | Boursorama * | 1,093,772 | |||||||||||||
43,145 | Cap Gemini SA | 1,818,976 | |||||||||||||
3,629 | Damartex SA | 91,857 | |||||||||||||
62,938 | Faurecia * | 1,087,281 | |||||||||||||
59,369 | Renault SA * | 2,398,312 | |||||||||||||
39,969 | Societe BIC SA | 2,932,789 | |||||||||||||
37,370 | Technip SA | 2,436,367 | |||||||||||||
16,043 | Virbac SA | 1,900,127 | |||||||||||||
Total France | 14,844,767 | ||||||||||||||
Germany — 7.0% | |||||||||||||||
4,404 | Axel Springer AG | 513,471 | |||||||||||||
8,880 | Beiersdorf AG | 474,738 | |||||||||||||
67,386 | Cat Oil AG | 584,316 | |||||||||||||
32,050 | Continental AG * | 1,931,695 | |||||||||||||
112,400 | Deutsche Lufthansa AG (Registered) * | 1,772,015 | |||||||||||||
93,333 | Deutsche Wohnen AG * | 907,024 | |||||||||||||
19,800 | Deutsche Boerse AG | 1,205,514 | |||||||||||||
53,400 | Deutz AG * | 318,988 | |||||||||||||
95,828 | Francotyp-Postalia Holdings AG * | 308,303 | |||||||||||||
146,601 | GEA Group AG | 3,040,442 | |||||||||||||
141,161 | Gerresheimer AG * | 4,884,690 | |||||||||||||
31,000 | HeidelbergCement AG | 1,238,368 | |||||||||||||
39,289 | Heidelberger Druckmaschinen AG * | 304,098 | |||||||||||||
42,743 | MAN SE | 3,675,758 | |||||||||||||
31,199 | Nemetschek AG | 971,950 | |||||||||||||
188,471 | Patrizia Immobilien AG * | 746,292 | |||||||||||||
283,889 | Praktiker Bau-Und Heimwerkermaerkte Holding AG | 2,187,348 | |||||||||||||
116,755 | Symrise AG | 2,879,224 | |||||||||||||
158,889 | Tognum AG | 2,920,289 | |||||||||||||
Total Germany | 30,864,523 |
See accompanying notes to the financial statements.
5
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Greece — 0.8% | |||||||||||||||
444,290 | Alapis Holding Industrial and Commercial SA | 1,148,813 | |||||||||||||
273,350 | Ellaktor SA | 988,160 | |||||||||||||
95,075 | Intralot SA | 373,319 | |||||||||||||
68,421 | Metka SA | 699,281 | |||||||||||||
58,921 | Mytilineos Holdings SA * | 312,404 | |||||||||||||
Total Greece | 3,521,977 | ||||||||||||||
Hong Kong — 1.7% | |||||||||||||||
450,200 | Dah Sing Financial Group * | 2,830,794 | |||||||||||||
5,990,000 | Xingda International Holdings Ltd | 4,541,077 | |||||||||||||
Total Hong Kong | 7,371,871 | ||||||||||||||
India — 0.5% | |||||||||||||||
70,000 | Corporation Bank | 844,859 | |||||||||||||
110,000 | Everonn Education Ltd | 1,331,803 | |||||||||||||
Total India | 2,176,662 | ||||||||||||||
Ireland — 0.8% | |||||||||||||||
239,826 | C&C Group Plc | 934,016 | |||||||||||||
60,839 | DCC Plc | 1,522,378 | |||||||||||||
100,920 | Smurfit Kappa Group Plc * | 862,026 | |||||||||||||
Total Ireland | 3,318,420 | ||||||||||||||
Italy — 7.4% | |||||||||||||||
155,637 | Arnoldo Mondadori Editore SPA * | 439,140 | |||||||||||||
214,650 | Astaldi SPA | 1,328,169 | |||||||||||||
412,973 | Autogrill SPA * | 4,748,160 | |||||||||||||
1,085,000 | Banca Monte dei Paschi di Siena SPA * | 1,291,155 | |||||||||||||
46,938 | �� | Banco Popolare Scarl | 262,052 | ||||||||||||
107,256 | Benetton Group SPA | 723,387 | |||||||||||||
84,754 | Brembo SPA | 611,149 | |||||||||||||
101,309 | Buzzi Unicem SPA | 915,480 | |||||||||||||
366,726 | Credito Emiliano SPA | 2,150,863 | |||||||||||||
68,836 | ERG SPA | 846,504 |
See accompanying notes to the financial statements.
6
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Italy — continued | |||||||||||||||
181,393 | Exor SPA | 3,324,515 | |||||||||||||
68,132 | Finmeccanica SPA | 682,289 | |||||||||||||
314,125 | Fondiaria–Sai SPA-Di RISP | 1,879,463 | |||||||||||||
488,588 | Grouppo Editoriale L'Espresso * | 938,981 | |||||||||||||
311,788 | Italcementi SPA-Di RISP | 1,263,594 | |||||||||||||
114,881 | Lottomatica SPA | 1,558,286 | |||||||||||||
255,289 | Mediaset SPA | 1,576,794 | |||||||||||||
246,268 | Mediolanum SPA | 907,788 | |||||||||||||
137,073 | Piaggio & C SPA | 356,641 | |||||||||||||
103,945 | Pirelli & C SPA | 686,516 | |||||||||||||
165,581 | Prysmian SPA | 2,586,836 | |||||||||||||
633,790 | Saras SPA * | 1,073,101 | |||||||||||||
289,978 | Unione di Banche Italiane ScpA | 2,534,327 | |||||||||||||
Total Italy | 32,685,190 | ||||||||||||||
Japan — 18.4% | |||||||||||||||
344,000 | Air Water Inc | 3,827,500 | |||||||||||||
132,200 | Capcom | 1,926,522 | |||||||||||||
129,900 | Cosmos Pharmaceutical Corp | 3,683,978 | |||||||||||||
589,000 | Denki Kagaku Kogyo K K | 2,371,452 | |||||||||||||
890 | EPS Co Ltd | 2,236,714 | |||||||||||||
319,000 | Fuji Oil Co Ltd | 4,914,404 | |||||||||||||
83,600 | Funai Electric Co Ltd | 2,538,507 | |||||||||||||
132,100 | Hitachi Chemical Co Ltd | 2,289,122 | |||||||||||||
271,000 | Hitachi Transport System Ltd | 3,944,991 | |||||||||||||
114,800 | IRISO ELECTRONICS Co Ltd | 1,501,112 | |||||||||||||
202,000 | Izumi Co Ltd | 2,494,101 | |||||||||||||
444,000 | Japan Aviation Electronics Industry Ltd | 2,439,508 | |||||||||||||
94,440 | K's Holdings Corp | 2,040,137 | |||||||||||||
710 | Kenedix Realty Investment Corp (REIT) | 2,485,268 | |||||||||||||
154,600 | Kyowa Exeo Corp | 1,347,302 | |||||||||||||
43,400 | Micronics Japan Co Ltd | 456,785 | |||||||||||||
80,680 | Mitsubishi UFJ Lease & Finance Co Ltd | 2,868,037 | |||||||||||||
340,000 | Nabtesco Corp | 5,120,724 |
See accompanying notes to the financial statements.
7
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
514,000 | NHK Spring Co Ltd | 4,262,350 | |||||||||||||
259,500 | Nihon Kohden Corp | 5,256,670 | |||||||||||||
438,000 | Nissin Electric Co Ltd | 1,787,381 | |||||||||||||
24,600 | Obic Co Ltd | 4,629,943 | |||||||||||||
705,000 | Sumitomo Bakelite Co Ltd | 3,417,854 | |||||||||||||
170,300 | Sumitomo Rubber Industries | 1,543,438 | |||||||||||||
136,000 | Takata Corp | 2,910,590 | |||||||||||||
186,000 | Toei Co Ltd | 816,315 | |||||||||||||
138,000 | Toyo Suisan Kaisha Ltd | 2,907,698 | |||||||||||||
652,000 | Tsubakimoto Chain Co | 2,373,456 | |||||||||||||
1,310,000 | Ube Industries Ltd | 2,781,673 | |||||||||||||
Total Japan | 81,173,532 | ||||||||||||||
Mexico — 1.5% | |||||||||||||||
2,030,000 | Genomma Lab Internacional SA Class B * | 3,614,180 | |||||||||||||
305,400 | Grupo Continental SAB de CV | 852,614 | |||||||||||||
817,600 | Mexichem SAB de CV | 2,107,893 | |||||||||||||
Total Mexico | 6,574,687 | ||||||||||||||
Netherlands — 4.3% | |||||||||||||||
103,729 | Aalberts Industries NV | 1,462,995 | |||||||||||||
108,500 | AerCap Holdings NV * | 1,165,290 | |||||||||||||
36,461 | CSM | 946,667 | |||||||||||||
85,355 | Dockwise Ltd * | 1,858,435 | |||||||||||||
35,468 | Fugro NV | 1,987,427 | |||||||||||||
104,222 | Imtech NV | 2,925,924 | |||||||||||||
78,677 | Koninklijke Ten Cate NV | 1,985,813 | |||||||||||||
38,272 | Nutreco Holding NV | 2,214,795 | |||||||||||||
508,054 | SNS REAAL NV * | 2,135,936 | |||||||||||||
202,963 | Spyker Cars NV * | 552,297 | |||||||||||||
36,301 | Unit 4 Agresso NV | 802,707 | |||||||||||||
71,967 | USG People NV * | 912,256 | |||||||||||||
Total Netherlands | 18,950,542 |
See accompanying notes to the financial statements.
8
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
New Zealand — 0.6% | |||||||||||||||
232,564 | Air New Zealand Ltd | 207,693 | |||||||||||||
889,740 | Fisher & Paykel Appliances Holdings Ltd * | 316,788 | |||||||||||||
143,175 | Pumpkin Patch Ltd | 173,641 | |||||||||||||
878,299 | Sky City Entertainment Group Ltd | 1,761,092 | |||||||||||||
Total New Zealand | 2,459,214 | ||||||||||||||
Norway — 0.8% | |||||||||||||||
46,730 | Kongsberg Gruppen ASA | 922,673 | |||||||||||||
46,730 | Norwegian Air Shuttle ASA * | 660,010 | |||||||||||||
181,850 | ProSafe ASA | 868,470 | |||||||||||||
494,235 | Prosafe Production Public Ltd * | 1,005,739 | |||||||||||||
Total Norway | 3,456,892 | ||||||||||||||
Philippines — 0.8% | |||||||||||||||
18,475,000 | Alliance Global Group Inc | 2,588,658 | |||||||||||||
14,482,000 | Pepsi-Cola Products Philippines Inc | 856,328 | |||||||||||||
Total Philippines | 3,444,986 | ||||||||||||||
Singapore — 1.1% | |||||||||||||||
1,710,000 | Chemoil Energy Ltd * | 565,839 | |||||||||||||
3,658,000 | First Ship Lease Trust | 1,106,767 | |||||||||||||
1,898,000 | Mapletree Logistics Trust (REIT) | 1,177,647 | |||||||||||||
639,000 | MobileOne Ltd | 1,024,952 | |||||||||||||
958,000 | Petra Foods Ltd | 1,016,040 | |||||||||||||
Total Singapore | 4,891,245 | ||||||||||||||
South Korea — 4.5% | |||||||||||||||
94,000 | Busan Bank | 1,001,440 | |||||||||||||
132,720 | Daegu Bank | 1,545,280 | |||||||||||||
9,880 | Daelim Industrial Co Ltd | 623,712 | |||||||||||||
34,380 | Daishin Securities Co Ltd | 414,030 | |||||||||||||
36,780 | Doosan Corp | 3,691,132 | |||||||||||||
406,382 | Kortek Corp | 2,459,136 | |||||||||||||
15,000 | Mando Corp 144A * | 1,682,793 |
See accompanying notes to the financial statements.
9
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
South Korea — continued | |||||||||||||||
10,467 | Nong Shim Co Ltd | 1,855,190 | |||||||||||||
32,300 | S1 Corp | 1,563,420 | |||||||||||||
16,300 | Sindoh Co Ltd | 680,966 | |||||||||||||
22,430 | SK Holdings Co Ltd | 1,724,633 | |||||||||||||
75,000 | Tong Yang Life Insurance Co Ltd | 735,168 | |||||||||||||
73,090 | Youngone Holding Co Ltd | 1,761,818 | |||||||||||||
Total South Korea | 19,738,718 | ||||||||||||||
Spain — 1.1% | |||||||||||||||
140,000 | Banco Espanol de Credito SA | 1,193,032 | |||||||||||||
1,651 | Construcciones y Auxiliar de Ferrocarriles SA | 699,237 | |||||||||||||
120,560 | Enagas | 2,124,314 | |||||||||||||
24,134 | Red Electrica de Espana | 990,768 | |||||||||||||
Total Spain | 5,007,351 | ||||||||||||||
Sweden — 1.0% | |||||||||||||||
102,286 | B&B Tools AB | 1,311,161 | |||||||||||||
35,746 | Elekta AB Class B | 1,029,832 | |||||||||||||
60,700 | Getinge AB Class B | 1,216,776 | |||||||||||||
942,104 | Trigon Agri A/S * | 756,855 | |||||||||||||
Total Sweden | 4,314,624 | ||||||||||||||
Switzerland — 3.3% | |||||||||||||||
6,556 | Banque Cantonale Vaudoise | 3,125,465 | |||||||||||||
127,320 | Clariant AG (Registered) * | 1,632,410 | |||||||||||||
50,809 | Kardex AG (Registered) * | 1,213,162 | |||||||||||||
7,240 | Rieter Holding AG (Registered) * | 2,116,495 | |||||||||||||
34,404 | Sulzer AG | 3,401,928 | |||||||||||||
10,735 | Valora Holding AG | 2,881,952 | |||||||||||||
Total Switzerland | 14,371,412 | ||||||||||||||
Taiwan — 0.4% | |||||||||||||||
622,000 | Altek Corp * | 917,754 | |||||||||||||
2,808,918 | Gold Circuit Electronics Ltd | 919,810 | |||||||||||||
Total Taiwan | 1,837,564 |
See accompanying notes to the financial statements.
10
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Turkey — 0.1% | |||||||||||||||
59,729 | Koza Altin Isletmeleri AS | 564,163 | |||||||||||||
United Kingdom — 19.5% | |||||||||||||||
290,774 | Aquarius Platinum Ltd | 1,234,720 | |||||||||||||
302,480 | Babcock International Group Plc | 2,339,932 | |||||||||||||
99,070 | Berkeley Group Holdings Plc (Unit Shares) * | 1,239,235 | |||||||||||||
531,415 | Bodycote Plc | 1,830,345 | |||||||||||||
168,528 | Bovis Homes Group Plc * | 910,216 | |||||||||||||
821,975 | Brewin Dolphin Holdings Plc | 1,509,669 | |||||||||||||
227,260 | Catlin Group Ltd | 1,142,033 | |||||||||||||
797,890 | Centaur Media Plc | 561,770 | |||||||||||||
288,590 | Charles Taylor Consulting Plc | 728,959 | |||||||||||||
869,110 | Chaucer Holdings Plc | 598,613 | |||||||||||||
48,760 | Chemring Group Plc | 1,940,164 | |||||||||||||
209,604 | Cobham Plc | 669,940 | |||||||||||||
646,090 | Collins Stewart Plc | 797,277 | |||||||||||||
275,922 | Cookson Group Plc * | 1,765,669 | |||||||||||||
58,193 | De La Rue Plc | 624,197 | |||||||||||||
1,647,747 | Debenhams Plc * | 1,451,995 | |||||||||||||
1,149,390 | Dimension Data Holdings Plc | 2,118,880 | |||||||||||||
853,330 | Diploma Plc | 3,385,676 | |||||||||||||
313,600 | Euromoney Institutional Investor Plc | 2,831,964 | |||||||||||||
936,600 | F&C Asset Management Plc | 904,743 | |||||||||||||
706,693 | Fenner Plc | 2,203,738 | |||||||||||||
307,800 | Filtrona Plc | 1,106,570 | |||||||||||||
146,896 | Galliford Try Plc | 684,934 | |||||||||||||
83,716 | Go–Ahead Group Plc | 1,407,066 | |||||||||||||
376,080 | Great Portland Estates Plc (REIT) | 1,817,104 | |||||||||||||
264,460 | Homeserve Plc | 1,839,873 | |||||||||||||
243,800 | IMI Plc | 2,538,765 | |||||||||||||
435,467 | Inchcape Plc * | 1,704,215 | |||||||||||||
1,265,040 | ITE Group Plc | 2,950,518 | |||||||||||||
264,036 | James Fisher & Sons Plc | 1,931,886 | |||||||||||||
120,840 | JD Wetherspoon Plc | 773,966 |
See accompanying notes to the financial statements.
11
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
United Kingdom — continued | |||||||||||||||
314,467 | John Wood Group Plc | 1,745,585 | |||||||||||||
648,750 | Jupiter Fund Management Plc 144A * | 2,002,348 | |||||||||||||
1,850,500 | KCOM Group Plc | 1,316,730 | |||||||||||||
90,902 | Kier Group Plc | 1,379,543 | |||||||||||||
823,700 | Metric Property Investments Plc 144A * | 1,234,836 | |||||||||||||
254,430 | Micro Focus International Plc | 1,175,204 | |||||||||||||
386,559 | N Brown Group | 1,323,375 | |||||||||||||
510,690 | National Express Group Plc * | 1,748,072 | |||||||||||||
232,420 | New Britain Palm Oil Ltd | 2,055,639 | |||||||||||||
36,363 | Next Plc | 1,099,579 | |||||||||||||
97,922 | Petrofac Ltd | 2,095,203 | |||||||||||||
87,770 | Premier Oil Plc * | 2,031,944 | |||||||||||||
285,426 | PZ Cussons Plc | 1,431,148 | |||||||||||||
422,652 | Restaurant Group Plc | 1,563,542 | |||||||||||||
144,284 | RM Plc | 290,278 | |||||||||||||
535,893 | RPS Group Plc | 1,396,903 | |||||||||||||
1,083,720 | Senior Plc | 1,890,195 | |||||||||||||
157,015 | Serco Group Plc | 1,397,991 | |||||||||||||
494,220 | Severfield-Rowen Plc | 1,595,595 | |||||||||||||
69,968 | Travis Perkins Plc * | 815,490 | |||||||||||||
138,425 | Ultra Electronics Holdings Plc | 3,536,237 | |||||||||||||
151,743 | United Business Media Ltd | 1,279,473 | |||||||||||||
761,692 | Wilmington Group Plc | 1,586,136 | |||||||||||||
416,889 | WSP Group Plc | 2,347,597 | |||||||||||||
Total United Kingdom | 85,883,275 | ||||||||||||||
TOTAL COMMON STOCKS (COST $401,204,287) | 422,083,852 | ||||||||||||||
PREFERRED STOCKS — 1.0% | |||||||||||||||
Brazil — 0.6% | |||||||||||||||
404,600 | Marcopolo SA 1.24% | 2,534,150 | |||||||||||||
Germany — 0.0% | |||||||||||||||
2,590 | Biotest AG 1.33% | 98,536 |
See accompanying notes to the financial statements.
12
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares / Par Value | Description | Value ($) | |||||||||||||
Italy — 0.0% | |||||||||||||||
4,783 | Exor SPA 2.66% | 71,881 | |||||||||||||
South Korea — 0.4% | |||||||||||||||
35,270 | Daelim Industrial Co Ltd 0.62% | 692,046 | |||||||||||||
114,670 | Daishin Securities Co Ltd 11.21% | 901,116 | |||||||||||||
Total South Korea | 1,593,162 | ||||||||||||||
TOTAL PREFERRED STOCKS (COST $4,130,923) | 4,297,729 | ||||||||||||||
RIGHTS AND WARRANTS — 0.1% | |||||||||||||||
Canada — 0.1% | |||||||||||||||
1,250,000 | Gran Colombia Gold Corp Warrants, Expires 08/24/15 * | 158,250 | |||||||||||||
Italy — 0.0% | |||||||||||||||
100,428 | Unione di Banche Italiane SCPA Warrants, Expires 06/30/11 * | 1,324 | |||||||||||||
TOTAL RIGHTS AND WARRANTS (COST $114,574) | 159,574 | ||||||||||||||
SHORT-TERM INVESTMENTS — 3.1% | |||||||||||||||
Time Deposits — 3.1% | |||||||||||||||
USD | 2,000,000 | BNP Paribas (Grand Cayman) Time Deposit, 0.22%, due 09/01/10 | 2,000,000 | ||||||||||||
AUD | 13 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 4.44%, due 09/01/10 | 11 | ||||||||||||
CAD | 3,069 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.70%, due 09/01/10 | 2,878 | ||||||||||||
EUR | 1,573,750 | Citibank (New York) Time Deposit, 0.28%, due 09/01/10 | 1,994,335 | ||||||||||||
USD | 2,000,000 | Commerzbank (Grand Cayman) Time Deposit, 0.20%, due 09/01/10 | 2,000,000 | ||||||||||||
CHF | 49,940 | Credit Suisse AG (Zurich) Time Deposit, 0.02%, due 09/01/10 | 49,189 | ||||||||||||
USD | 36,664 | DnB Nor Bank (Oslo) Time Deposit, 0.21%, due 09/01/10 | 36,664 | ||||||||||||
GBP | 25,809 | HSBC Bank (London) Time Deposit, 0.46%, due 09/01/10 | 39,581 | ||||||||||||
JPY | 13,776,853 | HSBC Bank (Hong Kong) Time Deposit, 0.04%, due 09/01/10 | 163,992 | ||||||||||||
USD | 1,300,000 | HSBC Bank (USA) Time Deposit, 0.17%, due 09/01/10 | 1,300,000 | ||||||||||||
EUR | 137,748 | JPMorgan Chase (New York) Time Deposit, 0.28%, due 09/01/10 | 174,561 | ||||||||||||
EUR | 1,573,750 | Royal Bank of Scotland (London) Time Deposit, 0.28%, due 09/01/10 | 1,994,335 | ||||||||||||
USD | 2,000,000 | Royal Bank of Canada (Grand Cayman) Time Deposit, 0.18%, due 09/01/10 | 2,000,000 |
See accompanying notes to the financial statements.
13
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
Time Deposits — continued | |||||||||||||||
USD | 2,000,000 | Societe Generale (Grand Cayman) Time Deposit, 0.20%, due 09/01/10 | 2,000,000 | ||||||||||||
Total Time Deposits | 13,755,546 | ||||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $13,755,546) | 13,755,546 | ||||||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $419,205,330) | 440,296,701 | ||||||||||||||
Other Assets and Liabilities (net) — 0.0% | 179,525 | ||||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 440,476,226 |
Notes to Schedule of Investments:
144A - Securities 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.
REIT - Real Estate Investment Trust
* Non-income producing security.
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
Currency Abbreviations:
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
EUR - Euro
GBP - British Pound
JPY - Japanese Yen
USD - United States Dollar
See accompanying notes to the financial statements.
14
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments, at value (cost $419,205,330) (Note 2) | $ | 440,296,701 | |||||
Foreign currency, at value (cost $732,130) (Note 2) | 695,199 | ||||||
Receivable for investments sold | 45,333 | ||||||
Dividends and interest receivable | 247,506 | ||||||
Foreign taxes receivable | 46,878 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 49,600 | ||||||
Miscellaneous receivable | 104,042 | ||||||
Total assets | 441,485,259 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 580,259 | ||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 268,555 | ||||||
Shareholder service fee | 52,070 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 767 | ||||||
Payable for foreign currency purchased | 3,041 | ||||||
Accrued expenses | 104,341 | ||||||
Total liabilities | 1,009,033 | ||||||
Net assets | $ | 440,476,226 |
See accompanying notes to the financial statements.
15
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited) — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 496,186,568 | |||||
Accumulated undistributed net investment income | 2,361,913 | ||||||
Accumulated net realized loss | (79,053,023 | ) | |||||
Net unrealized appreciation | 20,980,768 | ||||||
$ | 440,476,226 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 314,704,197 | |||||
Class IV shares | $ | 125,772,029 | |||||
Shares outstanding: | |||||||
Class III | 28,412,378 | ||||||
Class IV | 11,363,573 | ||||||
Net asset value per share: | |||||||
Class III | $ | 11.08 | |||||
Class IV | $ | 11.07 |
See accompanying notes to the financial statements.
16
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $530,079) | $ | 5,720,050 | |||||
Interest | 11,512 | ||||||
Total investment income | 5,731,562 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 1,497,540 | ||||||
Shareholder service fee – Class III (Note 5) | 229,755 | ||||||
Shareholder service fee – Class IV (Note 5) | 60,764 | ||||||
Custodian and fund accounting agent fees | 165,968 | ||||||
Audit and tax fees | 43,148 | ||||||
Transfer agent fees | 21,160 | ||||||
Legal fees | 18,124 | ||||||
Trustees fees and related expenses (Note 5) | 5,593 | ||||||
Registration fees | 460 | ||||||
Miscellaneous | 13,984 | ||||||
Total expenses | 2,056,496 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (257,416 | ) | |||||
Expense reductions (Note 2) | (282 | ) | |||||
Net expenses | 1,798,798 | ||||||
Net investment income (loss) | 3,932,764 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments (net of foreign capital gains tax of $9,660) | 7,957,768 | ||||||
Foreign currency, forward contracts and foreign currency related transactions (net of Brazilian IOF tax of $94,861) (Note 2) | (1,632,131 | ) | |||||
Net realized gain (loss) | 6,325,637 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments (net of change in foreign capital gains tax of $76,885) (Note 2) | (1,844,178 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | (143,069 | ) | |||||
Net unrealized gain (loss) | (1,987,247 | ) | |||||
Net realized and unrealized gain (loss) | 4,338,390 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 8,271,154 |
See accompanying notes to the financial statements.
17
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 3,932,764 | $ | 3,838,781 | |||||||
Net realized gain (loss) | 6,325,637 | (80,252,411 | ) | ||||||||
Change in net unrealized appreciation (depreciation) | (1,987,247 | ) | 203,852,124 | ||||||||
Net increase (decrease) in net assets from operations | 8,271,154 | 127,438,494 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | — | (3,377,934 | ) | ||||||||
Class IV | — | (1,023,334 | ) | ||||||||
Total distributions from net investment income | — | (4,401,268 | ) | ||||||||
Net share transactions (Note 9): | |||||||||||
Class III | 14,261,951 | (8,194,206 | ) | ||||||||
Class IV | 40,488,747 | (67,114,119 | ) | ||||||||
Increase (decrease) in net assets resulting from net share transactions | 54,750,698 | (75,308,325 | ) | ||||||||
Purchase premiums and redemption fees (Notes 2 and 9): | |||||||||||
Class III | 178,183 | 452,668 | |||||||||
Class IV | 200,000 | 32,431 | |||||||||
Increase in net assets resulting from purchase premiums and redemption fees | 378,183 | 485,099 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees | 55,128,881 | (74,823,226 | ) | ||||||||
Total increase (decrease) in net assets | 63,400,035 | 48,214,000 | |||||||||
Net assets: | |||||||||||
Beginning of period | 377,076,191 | 328,862,191 | |||||||||
End of period (including accumulated undistributed net investment income of $2,361,913 and distributions in excess of net investment income of $1,570,851, respectively) | $ | 440,476,226 | $ | 377,076,191 |
See accompanying notes to the financial statements.
18
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 10.74 | $ | 6.41 | $ | 14.63 | $ | 18.38 | $ | 17.98 | $ | 17.19 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.11 | 0.13 | 0.30 | 0.31 | 0.28 | 0.26 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.23 | 4.32 | (7.43 | ) | (0.36 | ) | 4.51 | 3.19 | |||||||||||||||||||
Total from investment operations | 0.34 | 4.45 | (7.13 | ) | (0.05 | ) | 4.79 | 3.45 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | — | (0.12 | ) | (0.27 | ) | (0.41 | ) | (0.44 | ) | (0.32 | ) | ||||||||||||||||
From net realized gains | — | — | (0.81 | ) | (3.29 | ) | (3.95 | ) | (2.34 | ) | |||||||||||||||||
Return of capital | — | — | (0.01 | ) | — | — | — | ||||||||||||||||||||
Total distributions | — | (0.12 | ) | (1.09 | ) | (3.70 | ) | (4.39 | ) | (2.66 | ) | ||||||||||||||||
Net asset value, end of period | $ | 11.08 | $ | 10.74 | $ | 6.41 | $ | 14.63 | $ | 18.38 | $ | 17.98 | |||||||||||||||
Total Return(a) | 3.17 | %** | 69.44 | % | (51.33 | )% | (1.96 | )% | 29.94 | % | 22.32 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 314,704 | $ | 292,852 | $ | 185,298 | $ | 338,804 | $ | 375,565 | $ | 364,551 | |||||||||||||||
Net expenses to average daily net assets | 0.86 | %*(b) | 0.86 | %(b) | 0.85 | %(c) | 0.86 | %(c) | 0.86 | % | 0.85 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 1.86 | %* | 1.40 | % | 2.59 | % | 1.69 | % | 1.53 | % | 1.52 | % | |||||||||||||||
Portfolio turnover rate | 27 | %** | 78 | % | 42 | % | 42 | % | 37 | % | 40 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.12 | %* | 0.14 | % | 0.11 | % | 0.09 | % | 0.09 | % | 0.09 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.00 | (d) | $ | 0.02 | $ | 0.00 | (d) | — | — | — |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions. (Note 2)
(d) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
19
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
Six months ended August 31, 2010 | Period from August 12, 2009 through | Period from March 1, 2009 through | |||||||||||||
(Unaudited) | February 28, 2010(a) | March 16, 2009(a) | |||||||||||||
Net asset value, beginning of period | $ | 10.73 | $ | 9.84 | $ | 6.42 | |||||||||
Income (loss) from investment operations: | |||||||||||||||
Net investment income (loss)† | 0.10 | 0.02 | 0.01 | ||||||||||||
Net realized and unrealized gain (loss) | 0.24 | 1.00 | 0.01 | ||||||||||||
Total from investment operations | 0.34 | 1.02 | 0.02 | ||||||||||||
Less distributions to shareholders: | |||||||||||||||
From net investment income | — | (0.13 | ) | — | |||||||||||
From net realized gains | — | — | — | ||||||||||||
Return of capital | — | — | — | ||||||||||||
Total distributions | — | (0.13 | ) | — | |||||||||||
Net asset value, end of period | $ | 11.07 | $ | 10.73 | $ | 6.44 | |||||||||
Total Return(b) | 3.17 | %** | 10.33 | %** | 0.31 | %** | |||||||||
Ratios/Supplemental Data: | |||||||||||||||
Net assets, end of period (000's) | $ | 125,772 | $ | 84,225 | $ | 144,101 | |||||||||
Net expenses to average daily net assets | 0.81 | %(c)* | 0.81 | %(c)* | 0.81 | %(c)* | |||||||||
Net investment income to average daily net assets | 1.78 | %* | 0.35 | %* | 3.28 | %* | |||||||||
Portfolio turnover rate | 27 | %** | 78 | %†† | 40 | %††† | |||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.12 | %* | 0.08 | %* | 0.22 | %* | |||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.02 | $ | 0.00 | (e) | $ | 0.00 | (e) |
(a) The class was inactive from March 16, 2009 to August 12, 2009.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the
effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(c) The net expense ratio does not include the effect of expense reductions.(Note 2)
(d) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities
lending transactions. (Note 2)
(e) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the year ended February 28, 2010.
††† Calculation represents portfolio turnover of the Fund for the period ended August 31, 2009.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
20
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Financial Highlights — (Continued)
(For a Class IV share outstanding throughout each period)
Year Ended February 28/29, | |||||||||||||||||||
2009 | 2008 | 2007 | 2006 | ||||||||||||||||
Net asset value, beginning of period | $ | 14.64 | $ | 18.39 | $ | 17.99 | $ | 17.20 | |||||||||||
Income (loss) from investment operations: | |||||||||||||||||||
Net investment income (loss)† | 0.33 | 0.31 | 0.28 | 0.26 | |||||||||||||||
Net realized and unrealized gain (loss) | (7.46 | ) | (0.35 | ) | 4.52 | 3.20 | |||||||||||||
Total from investment operations | (7.13 | ) | (0.04 | ) | 4.80 | 3.46 | |||||||||||||
Less distributions to shareholders: | |||||||||||||||||||
From net investment income | (0.27 | ) | (0.42 | ) | (0.45 | ) | (0.33 | ) | |||||||||||
From net realized gains | (0.81 | ) | (3.29 | ) | (3.95 | ) | (2.34 | ) | |||||||||||
Return of capital | (0.01 | ) | — | — | — | ||||||||||||||
Total distributions | (1.09 | ) | (3.71 | ) | (4.40 | ) | (2.67 | ) | |||||||||||
Net asset value, end of period | $ | 6.42 | $ | 14.64 | $ | 18.39 | $ | 17.99 | |||||||||||
Total Return(b) | (51.29 | )% | (1.91 | )% | 30.00 | % | 22.37 | % | |||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||
Net assets, end of period (000's) | $ | 143,564 | $ | 666,991 | $ | 740,872 | $ | 638,634 | |||||||||||
Net expenses to average daily net assets | 0.80 | %(d) | 0.81 | %(d) | 0.81 | % | 0.80 | % | |||||||||||
Net investment income to average daily net assets | 2.74 | % | 1.70 | % | 1.54 | % | 1.55 | % | |||||||||||
Portfolio turnover rate | 42 | % | 42 | % | 37 | % | 40 | % | |||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.11 | % | 0.09 | % | 0.09 | % | 0.09 | % | |||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | 0.00 | (e) | — | — | — |
See accompanying notes to the financial statements.
21
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO Foreign Small Companies Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks total return in excess of that of its benchmark, the S&P Developed ex-U.S. Small Cap Index. The Fund typically makes equity investments directly and indirectly (e.g., through the GMO Funds in which the Fund invests, collectively referred to as the "underlying funds" or derivatives) in companies tied economically to non-U.S. countries whose outstanding publicly traded equity investments are in the smallest 25% of companies in a particular country as measured by total float-adjusted market capitalization ("small companies"). The term "equity investments" refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts. Under normal circumstances, the Fund invests directly and indirectly at least 80% of its assets in securities of small companies that are tied economically to countries outside the U.S. The mark et capitalization range of companies whose equity investments are held by the Fund is generally within the market capitalization range of companies in the Fund's benchmark, which represents the bottom 15% of available market capitalization (float) of the S&P Broad Market Index in each country.
The Fund's country selections relative to its benchmark are determined by a cumulative quantitative value score for each country together with the Manager's evaluation of the country's fundamentals. The Fund typically overweights or underweights (sometimes to a significant extent) its investment exposures in particular countries relative to the Fund's benchmark. The Manager selects stocks using fundamental analysis that is informed by a disciplined quantitative screening process. The Manager separates companies with valuations it believes are deservedly low from those it believes represent investment opportunities. The Manager analyzes companies for financial, operational and managerial strength and compares them to their global, regional and local industry peers. As part of the investment process, the Manager frequently meets with management and/or visits companies.
The Fund normally does not take temporary defensive positions but may hold up to 10% of its total assets in cash and cash equivalents to manage cash inflows and outflows as a result of shareholder purchases and redemptions. To the extent the Fund takes temporary defensive positions or holds cash or cash equivalents to manage shareholder purchases or redemptions, it may not achieve its investment objective. The Fund typically makes investments tied economically to emerging countries, but these investments (excluding
22
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
investments in companies tied economically to emerging countries included in the Fund's benchmark) generally represent 10% or less of the Fund's total assets.
In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the-counter ("OTC") derivatives, including, without limitation, futures and options. In addition, the Fund may lend its portfolio securities. The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund.
As of August 31, 2010, the Fund had two classes of shares outstanding: Class III and Class IV. Each class of shares bears a different shareholder servicing fee.
The Fund currently limits subscriptions due to capacity considerations.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the OTC market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or who se values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of August 31, 2010, the total value of securities held directly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 0.0% of net assets. The Fund
23
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
classifies such securities (as defined below) as Level 3. Additionally, because many foreign equity securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on local closing prices and adjustments supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2010, 85.4% of the net assets of the Fund were valued using fair value prices based on those adjustments and are classified as using Level 2 inputs in the table below. See note 4 for a further discussion on valuation of derivative financial instruments.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include: fair value adjustments applied to closing prices of foreign securities due to market events that have occurred since the local market close but before the Fund's daily NAV calculation.
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund used the following fair value techniques on Level 3 investments: The Fund deemed certain securities to be worthless.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | |||||||||||||||||||
Australia | $ | — | $ | 13,438,737 | $ | — | $ | 13,438,737 | |||||||||||
Austria | — | 1,690,952 | — | 1,690,952 | |||||||||||||||
Belgium | — | 6,795,446 | — | 6,795,446 | |||||||||||||||
Brazil | 21,505,104 | — | — | 21,505,104 | |||||||||||||||
Canada | 13,428,709 | — | 0 | * | 13,428,709 |
24
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
ASSET VALUATION INPUTS — continued
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Chile | $ | 1,282,750 | $ | — | $ | — | $ | 1,282,750 | |||||||||||
China | — | 3,671,370 | — | 3,671,370 | |||||||||||||||
Denmark | — | 2,935,937 | — | 2,935,937 | |||||||||||||||
Finland | — | 9,883,232 | — | 9,883,232 | |||||||||||||||
France | — | 14,844,767 | — | 14,844,767 | |||||||||||||||
Germany | — | 30,864,523 | — | 30,864,523 | |||||||||||||||
Greece | — | 3,521,977 | — | 3,521,977 | |||||||||||||||
Hong Kong | — | 7,371,871 | — | 7,371,871 | |||||||||||||||
India | — | 2,176,662 | — | 2,176,662 | |||||||||||||||
Ireland | — | 3,318,420 | — | 3,318,420 | |||||||||||||||
Italy | — | 32,685,190 | — | 32,685,190 | |||||||||||||||
Japan | — | 81,173,532 | — | 81,173,532 | |||||||||||||||
Mexico | 6,574,687 | — | — | 6,574,687 | |||||||||||||||
Netherlands | 1,165,290 | 17,785,252 | — | 18,950,542 | |||||||||||||||
New Zealand | — | 2,459,214 | — | 2,459,214 | |||||||||||||||
Norway | — | 3,456,892 | — | 3,456,892 | |||||||||||||||
Philippines | — | 3,444,986 | — | 3,444,986 | |||||||||||||||
Singapore | — | 4,891,245 | — | 4,891,245 | |||||||||||||||
South Korea | 1,682,793 | 18,055,925 | — | 19,738,718 | |||||||||||||||
Spain | — | 5,007,351 | — | 5,007,351 | |||||||||||||||
Sweden | — | 4,314,624 | — | 4,314,624 | |||||||||||||||
Switzerland | — | 14,371,412 | — | 14,371,412 | |||||||||||||||
Taiwan | — | 1,837,564 | — | 1,837,564 | |||||||||||||||
Turkey | — | 564,163 | — | 564,163 | |||||||||||||||
United Kingdom | 2,002,348 | 83,880,927 | — | 85,883,275 | |||||||||||||||
TOTAL COMMON STOCKS | 47,641,681 | 374,442,171 | 0 | 422,083,852 | |||||||||||||||
Preferred Stocks | |||||||||||||||||||
Brazil | 2,534,150 | — | — | 2,534,150 | |||||||||||||||
Germany | — | 98,536 | — | 98,536 | |||||||||||||||
Italy | — | 71,881 | — | 71,881 | |||||||||||||||
South Korea | — | 1,593,162 | — | 1,593,162 | |||||||||||||||
TOTAL PREFERRED STOCKS | 2,534,150 | 1,763,579 | — | 4,297,729 |
25
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
ASSET VALUATION INPUTS — continued
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Rights and Warrants | |||||||||||||||||||
Canada | $ | — | $ | 158,250 | $ | — | $ | 158,250 | |||||||||||
Italy | — | 1,324 | — | 1,324 | |||||||||||||||
TOTAL RIGHTS AND WARRANTS | — | 159,574 | — | 159,574 | |||||||||||||||
Short-Term Investments | 13,755,546 | — | — | 13,755,546 | |||||||||||||||
Total Investments | 63,931,377 | 376,365,324 | 0 | 440,296,701 | |||||||||||||||
Total | $ | 63,931,377 | $ | 376,365,324 | $ | 0 | $ | 440,296,701 |
* Represents the interest in securities that are delisted and have no value at August 31, 2010.
The aggregate net value of the Fund's direct investments in securities using Level 3 inputs was 0.0% of total net assets.
Balances as of February 28, 2010 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Transfers into Level 3* | Transfers out of Level 3* | Balances as of August 31, 2010 | ||||||||||||||||||||||||||||
Common Stocks | |||||||||||||||||||||||||||||||||||
Canada | $ | 861 | $ | — | $ | — | $ | — | $ | (861 | ) | $ | — | $ | — | $ | — | ||||||||||||||||||
Thailand | 2,337,225 | (2,820,580 | ) | — | 1,333,477 | (850,122 | ) | — | — | — | |||||||||||||||||||||||||
Total | $ | 2,338,086 | $ | (2,820,580 | ) | $ | — | $ | 1,333,477 | $ | (850,983 | ) | $ | — | $ | — | $ | — |
* The Fund recognizes investments and derivatives transferred into Level 3 at the value at the beginning of the period and transfers out of Level 3 at the value at the end of the period.
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on
26
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
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 investment securities.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country's tax treaty with the United States. The foreign withholding rates applicable to a Fund's investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if paid by the shareholders of the Fund.
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Transaction based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
The Fund is subject to a Imposto sobre Operacoes Financeiras (IOF) transaction tax levied by the Brazilian government on certain foreign exchange transactions. The IOF tax has been included in net realized gain (loss) from foreign currency transactions in the Statement of Operations.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
27
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund elected to defer to March 1, 2010 post-October currency losses of $1,100,754.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2018 | $ | (84,486,074 | ) | ||||
Total | $ | (84,486,074 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 420,543,548 | $ | 61,987,547 | $ | (42,234,394 | ) | $ | 19,753,153 |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio
28
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. Investment income, common expenses and realized and unrealized gains and losses are allocated among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class's operations.
Brown Brothers Harriman & Co. ("BBH") serves as the Fund's custodian and fund accounting agent. State Street Bank and Trust Company ("State Street") serves as the Fund's transfer agent. BBH's and State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
For the period ended August 31, 2010, the premium on cash purchases and fee on cash redemptions of Fund shares were each 0.50% of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by a Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase oc curring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component.
29
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Smaller Company Risk — The securities of small companies often are less widely held and trade less frequently and in lesser quantities, and their market prices often fluctuate more, than the securities of companies with larger market capitalizations.
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund's investments.
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to rec eipt) may expose the Fund to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund's investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund's investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
30
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
• Market Risk — Value Securities — The Fund purchases some equity investments at prices below what the Manager believes to be their fundamental value. The Fund runs the risk that the prices of these investments will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value.
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind. These risks are particularly pronounced for the Fund because it makes equity investments in small companies and may make investments in companies tied economically to emerging countries.
• Credit and Counterparty Risk — The Fund runs the risk that the counterparty to an over-the-counter derivatives contract or a borrower of the Fund's securities will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise honor its obligations.
Other principal risks of an investment in the Fund include Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in th e Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments); and Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk).
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
31
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index). The Funds also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedin gs. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be secured by collateral (e.g., foreign currency forwards; see "Currency Risk" above), that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund
32
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied
33
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. During the period ended August 31, 2010, the Fund used forward currency contracts to hedge against anticipated currency exchange rate changes. The Fund had no forward currency contracts outstanding at the end of the period.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because regular trading on many foreign exchanges closes prior to the close of the NYSE, closing prices for foreign futures contracts on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures contracts using fair value prices, which are based on adjustments to local closing prices, and supplied by a third party vendor based on that vendor's proprietary models. The Fund had no futures contracts outstanding at the end of the period.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of
34
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an of fsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
35
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be
36
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. During the period ended August 31, 2010, the Fund held rights and warrants received as a result of a corporate action. Rights and warrants held by the Fun d at the end of the period are listed in the Fund's Schedule of Investments.
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (rights and warrants) | $ | — | $ | — | $ | — | $ | 159,574 | $ | — | $ | 159,574 | |||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 159,574 | $ | — | $ | 159,574 |
37
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the period ended August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (rights and warrants) | $ | — | $ | — | $ | — | $ | (25,775 | ) | $ | — | $ | (25,775 | ) | |||||||||||||
Forward currency contracts | — | (722,241 | ) | — | — | — | (722,241 | ) | |||||||||||||||||||
Total | $ | — | $ | (722,241 | ) | $ | — | $ | (25,775 | ) | $ | — | $ | (748,016 | ) | ||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (rights and warrants) | $ | — | $ | — | $ | — | $ | 40,446 | $ | — | $ | 40,446 | |||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 40,446 | $ | — | $ | 40,446 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
The volume of derivative activity, based on absolute values (foreign currency contracts and rights/warrants), outstanding at each month-end, was as follows for the period ended August 31, 2010:
Right/ Warrants | Forward Currency Contracts | ||||||||||
Average amount outstanding | $ | 25,141 | $ | 5,469,573 |
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.70% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets of each class at the annual rate of 0.15% for Class III shares and 0.10% for Class IV shares.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.70% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for
38
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund's Expense Reimbursement Amount. These contractual expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $5,593 and $1,564, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended August 31, 2010 aggregated $167,398,928 and $107,358,620, respectively.
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, 52.89% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
39
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
As of August 31, 2010, 0.03% of the Fund's shares were held by senior management of the Manager and GMO Trust officers, and none of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 2,190,910 | $ | 25,230,273 | 9,025,272 | $ | 99,118,049 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 264,894 | 2,935,030 | |||||||||||||||
Shares repurchased | (1,054,713 | ) | (10,968,322 | ) | (10,915,361 | ) | (110,247,285 | ) | |||||||||||
Purchase premiums | — | 126,785 | — | 393,056 | |||||||||||||||
Redemption fees | — | 51,398 | — | 59,612 | |||||||||||||||
Net increase (decrease) | 1,136,197 | $ | 14,440,134 | (1,625,195 | ) | $ | (7,741,538 | ) | |||||||||||
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 3,511,913 | $ | 40,488,747 | 8,073,696 | $ | 79,445,170 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 28,005 | 310,014 | |||||||||||||||
Shares repurchased | — | — | (22,611,732 | ) | (146,869,303 | ) | |||||||||||||
Purchase premiums | — | 200,000 | — | — | |||||||||||||||
Redemption fees | — | — | — | 32,431 | |||||||||||||||
Net increase (decrease) | 3,544,344 | $ | 40,688,747 | (14,510,031 | ) | $ | (67,081,688 | ) |
40
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three-, five-, seven- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received
41
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparis on to the Manager's separate account clients and the expenses and risks borne by the Manager as a result of the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by , for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating
42
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
43
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including management fees, shareholder service fees and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.86 | % | $ | 1,000.00 | $ | 1,031.70 | $ | 4.40 | |||||||||||
2) Hypothetical | 0.86 | % | $ | 1,000.00 | $ | 1,020.87 | $ | 4.38 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.81 | % | $ | 1,000.00 | $ | 1,031.70 | $ | 4.15 | |||||||||||
2) Hypothetical | 0.81 | % | $ | 1,000.00 | $ | 1,021.12 | $ | 4.13 |
* Expenses are calculated using each Class's annualized net expense ratio for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
44
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 68.3 | % | |||||
Debt Obligations | 20.6 | ||||||
Cash and Cash Equivalents | 12.0 | ||||||
Short-Term Investments | 9.2 | ||||||
Preferred Stocks | 1.1 | ||||||
Options Purchased | 0.9 | ||||||
Investment Funds | 0.3 | ||||||
Loan Participations | 0.0 | ||||||
Loan Assignments | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Promissory Notes | 0.0 | ||||||
Forward Currency Contracts | (0.1 | ) | |||||
Written Options | (0.8 | ) | |||||
Reverse Repurchase Agreements | (1.1 | ) | |||||
Swap Agreements | (2.6 | ) | |||||
Futures Contracts | (9.2 | ) | |||||
Other | 1.4 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
1
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2010 (Unaudited)
Country / Region Summary** | % of Investments | ||||||
United States | 48.0 | % | |||||
Euro Region*** | 9.6 | ||||||
Japan | 8.4 | ||||||
United Kingdom | 6.9 | ||||||
Australia | 5.3 | ||||||
Switzerland | 3.5 | ||||||
South Korea | 2.7 | ||||||
Russia | 2.1 | ||||||
Brazil | 1.6 | ||||||
Sweden | 1.1 | ||||||
Taiwan | 1.1 | ||||||
China | 1.0 | ||||||
Singapore | 1.0 | ||||||
Thailand | 1.0 | ||||||
Turkey | 1.0 | ||||||
India | 0.9 | ||||||
New Zealand | 0.8 | ||||||
Denmark | 0.4 | ||||||
Hong Kong | 0.4 | ||||||
South Africa | 0.4 | ||||||
Czech Republic | 0.3 | ||||||
Indonesia | 0.3 | ||||||
Mexico | 0.3 | ||||||
Canada | 0.2 | ||||||
Egypt | 0.2 | ||||||
Emerging**** | 0.2 | ||||||
Hungary | 0.2 | ||||||
Malaysia | 0.2 | ||||||
Norway | 0.2 | ||||||
Philippines | 0.2 | ||||||
Poland | 0.2 | ||||||
Argentina | 0.1 | ||||||
Chile | 0.1 | ||||||
Israel | 0.1 | ||||||
100.0 | % |
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds except for GMO Alpha Only Fund. The table excludes short-term investments. The table includes exposure through the use of derivative contracts.
*** The "Euro Region" is comprised of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
**** The "Emerging" exposure is associated only with investments in the GMO Emerging Country Debt Fund, which is exposed to emerging countries primarily comprised of Russia, Argentina, Brazil, Philippines, Mexico, Venezuela, Colombia, Ukraine, Turkey, and Indonesia. Additional information about the fund's emerging country exposure is available in the financial statements of the GMO Emerging Country Debt Fund.
2
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||||||
MUTUAL FUNDS — 97.9% | |||||||||||||||
Affiliated Issuers — 97.9% | |||||||||||||||
86,791,433 | GMO Alpha Only Fund, Class IV | 422,674,277 | |||||||||||||
5,581,543 | GMO Asset Allocation Bond Fund, Class VI | 149,473,714 | |||||||||||||
25,631,051 | GMO Domestic Bond Fund, Class VI | 123,541,666 | |||||||||||||
1,611,277 | GMO Emerging Country Debt Fund, Class IV | 15,291,023 | |||||||||||||
30,331,570 | GMO Emerging Markets Fund, Class VI | 373,684,947 | |||||||||||||
2,619,149 | GMO Flexible Equities Fund, Class VI | 44,735,060 | |||||||||||||
1,849,684 | GMO Inflation Indexed Plus Bond Fund, Class VI | 37,178,651 | |||||||||||||
19,487,866 | GMO International Core Equity Fund, Class VI | 482,519,574 | |||||||||||||
6,695,934 | GMO International Growth Equity Fund, Class IV | 129,901,114 | |||||||||||||
6,808,623 | GMO International Intrinsic Value Fund, Class IV | 128,478,710 | |||||||||||||
44,486,172 | GMO Quality Fund, Class VI | 782,066,899 | |||||||||||||
360,507 | GMO Short-Duration Investment Fund, Class III | 2,963,372 | |||||||||||||
5,829,323 | GMO Special Situations Fund, Class VI | 155,468,033 | |||||||||||||
15,878,747 | GMO Strategic Fixed Income Fund, Class VI | 250,566,622 | |||||||||||||
1,032,718 | GMO World Opportunity Overlay Fund | 22,895,354 | |||||||||||||
TOTAL MUTUAL FUNDS (COST $3,194,554,136) | 3,121,439,016 | ||||||||||||||
DEBT OBLIGATIONS — 2.1% | |||||||||||||||
Asset-Backed Securities — 2.0% | |||||||||||||||
ABS Collateralized Debt Obligations — 0.0% | |||||||||||||||
500,000 | Paragon CDO Ltd., Series 04-1A, Class A, 144A, 3 mo. LIBOR + .65%, 1.17%, due 10/20/44 | 5,000 | |||||||||||||
Airlines — 0.0% | |||||||||||||||
565,621 | Aircraft Finance Trust, Series 99-1A, Class A1, 144A, 1 mo. LIBOR + .48%, 0.76%, due 05/15/24 | 254,529 | |||||||||||||
Auto Financing — 0.2% | |||||||||||||||
200,000 | Capital Auto Receivable Asset Trust, Series 08-1, Class A4B, 1 mo. LIBOR + 1.35%, 1.63%, due 07/15/14 | 202,438 |
See accompanying notes to the financial statements.
3
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Auto Financing — continued | |||||||||||||||
800,000 | Carmax Auto Owner Trust, Series 08-2, Class A4B, 1 mo. LIBOR + 1.65%, 1.93%, due 08/15/13 | 816,624 | |||||||||||||
700,000 | Daimler Chrysler Auto Trust, Series 08-B, Class A4A, 5.32%, due 11/10/14 | 735,210 | |||||||||||||
600,000 | Daimler Chrysler Auto Trust, Series 08-B, Class A4B, 1 mo. LIBOR + 1.85%, 2.14%, due 11/10/14 | 611,670 | |||||||||||||
1,100,000 | Ford Credit Auto Owner Trust, Series 08-B, Class A4B, 1 mo. LIBOR + 2.00%, 2.28%, due 03/15/13 | 1,122,616 | |||||||||||||
2,200,000 | Ford Credit Floorplan Master Owner Trust, Series 06-4, Class A, 1 mo. LIBOR + .25%, 0.53%, due 06/15/13 | 2,178,000 | |||||||||||||
300,000 | Franklin Auto Trust, Series 08-A, Class A4B, 1 mo. LIBOR + 1.95%, 2.22%, due 05/20/16 | 303,000 | |||||||||||||
500,000 | Swift Master Auto Receivables Trust, Series 07-2, Class A, 1 mo. LIBOR + .65%, 0.93%, due 10/15/12 | 500,055 | |||||||||||||
400,000 | Wachovia Auto Owner Trust, Series 08-A, Class A4B, 1 mo. LIBOR + 1.15%, 1.42%, due 03/20/14 | 404,704 | |||||||||||||
Total Auto Financing | 6,874,317 | ||||||||||||||
Bank Loan Collateralized Debt Obligations — 0.0% | |||||||||||||||
102,079 | Arran Corp. Loans No. 1 B.V., Series 06-1A, Class A3, 144A, 3 mo. LIBOR + .17%, 0.71%, due 06/20/25 | 101,760 | |||||||||||||
Business Loans — 0.1% | |||||||||||||||
339,652 | ACAS Business Loan Trust, Series 07-1A, Class A, 144A, 3 mo. LIBOR + .14%, 0.52%, due 08/16/19 | 298,894 | |||||||||||||
91,403 | Bayview Commercial Asset Trust, Series 04-1, Class A, 144A, 1 mo. LIBOR + .36%, 0.62%, due 04/25/34 | 72,208 | |||||||||||||
64,222 | Bayview Commercial Asset Trust, Series 04-3, Class A1, 144A, 1 mo. LIBOR + .37%, 0.63%, due 01/25/35 | 50,094 | |||||||||||||
320,088 | Bayview Commercial Asset Trust, Series 05-4A, Class A2, 144A, 1 mo. LIBOR + .39%, 0.65%, due 01/25/36 | 204,856 | |||||||||||||
270,447 | Bayview Commercial Asset Trust, Series 07-3, Class A1, 144A, 1 mo. LIBOR + .24%, 0.50%, due 07/25/37 | 199,454 | |||||||||||||
1,000,000 | Bayview Commercial Asset Trust, Series 07-6A, Class A2, 144A, 1 mo. LIBOR + 1.30%, 1.56%, due 12/25/37 | 820,000 | |||||||||||||
87,346 | Capitalsource Commercial Loan Trust, Series 07-1A, Class A, 144A, 1 mo. LIBOR + .13%, 0.40%, due 03/20/17 | 80,795 |
See accompanying notes to the financial statements.
4
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Business Loans — continued | |||||||||||||||
85,493 | GE Business Loan Trust, Series 04-1, Class A, 144A, 1 mo. LIBOR + .29%, 0.57%, due 05/15/32 | 75,234 | |||||||||||||
132,156 | GE Business Loan Trust, Series 05-2A, Class A, 144A, 1 mo. LIBOR + .24%, 0.52%, due 11/15/33 | 109,690 | |||||||||||||
657,220 | Lehman Brothers Small Balance Commercial, Series 07-3A, Class 1A2, 144A, 1 mo. LIBOR + .85%, 1.11%, due 10/25/37 | 525,776 | |||||||||||||
232,846 | Lehman Brothers Small Balance Commercial, Series 05-1A, Class A, 144A, 1 mo. LIBOR + .25%, 0.51%, due 02/25/30 | 172,306 | |||||||||||||
189,644 | Lehman Brothers Small Balance Commercial, Series 05-2A, Class 1A, 144A, 1 mo. LIBOR + .25%, 0.51%, due 09/25/30 | 136,544 | |||||||||||||
3,958 | The Money Store Business Loan Backed Trust, Series 99-1, Class AN, 1 mo. LIBOR + .50%, 0.78%, due 09/15/17 | 3,463 | |||||||||||||
Total Business Loans | 2,749,314 | ||||||||||||||
CMBS — 0.3% | |||||||||||||||
687,946 | Citigroup/Deutsche Bank Commercial Mortgage, Series 05-CD1, Class A2FL, 1 mo. LIBOR + .12%, 0.39%, due 07/15/44 | 679,622 | |||||||||||||
1,100,000 | Commercial Mortgage Pass-Through Certificates, Series 06-FL12, Class AJ, 144A, 1 mo. LIBOR + .13%, 0.41%, due 12/15/20 | 792,000 | |||||||||||||
832,979 | GE Capital Commercial Mortgage Corp., Series 05-C4, Class A2, 5.31%, due 11/10/45 | 835,311 | |||||||||||||
500,000 | GE Capital Commercial Mortgage Corp., Series 06-C1, Class A2, 5.51%, due 03/10/44 | 502,500 | |||||||||||||
57,202 | Greenwich Capital Commercial Funding Corp., Series 06-FL4A, Class A1, 144A, 1 mo. LIBOR + .09%, 0.39%, due 11/05/21 | 54,056 | |||||||||||||
807,072 | GS Mortgage Securities Corp., Series 06-GG6, Class A2, 5.51%, due 04/10/38 | 818,296 | |||||||||||||
211,759 | GS Mortgage Securities Corp., Series 07-EOP, Class A1, 144A, 1 mo. LIBOR + .09%, 0.39%, due 03/06/20 | 205,596 | |||||||||||||
300,000 | GS Mortgage Securities Corp., Series 07-EOP, Class A2, 144A, 1 mo. LIBOR + .13%, 0.43%, due 03/06/20 | 285,000 | |||||||||||||
260,065 | J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 06-FL1A, Class A1B, 144A, 1 mo. LIBOR + .12%, 0.40%, due 02/15/20 | 248,362 | |||||||||||||
1,377,781 | J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 06-LDP7, Class A2, 6.05%, due 04/15/45 | 1,407,403 | |||||||||||||
900,000 | Merrill Lynch Mortgage Trust, Series 06-C1, Class A2, 5.79%, due 05/12/39 | 937,620 | |||||||||||||
298,852 | Morgan Stanley Capital I, Series 06-IQ11, Class A2, 5.69%, due 10/15/42 | 303,897 | |||||||||||||
400,000 | Morgan Stanley Capital I, Series 06-IQ11, Class A3, 5.90%, due 10/15/42 | 421,876 |
See accompanying notes to the financial statements.
5
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
CMBS — continued | |||||||||||||||
30,600 | Morgan Stanley Dean Witter Capital I, Series 03-TOP9, Class A1, 3.98%, due 11/13/36 | 30,820 | |||||||||||||
664,667 | Wachovia Bank Commercial Mortgage Trust, Series 06-WL7A, Class A1, 144A, 1 mo. LIBOR + .09%, 0.36%, due 09/15/21 | 591,554 | |||||||||||||
Total CMBS | 8,113,913 | ||||||||||||||
CMBS Collateralized Debt Obligations — 0.0% | |||||||||||||||
499,812 | American Capital Strategies Ltd. Commercial Real Estate CDO Trust, Series 07-1A, Class A, 144A, 3 mo. LIBOR + .80%, 1.14%, due 11/23/52 | 22,491 | |||||||||||||
389,181 | G-Force LLC, Series 05-RR2, Class A2, 144A, 5.16%, due 12/25/39 | 264,643 | |||||||||||||
463,139 | Guggenheim Structured Real Estate Funding, Series 05-2A, Class A, 144A, 1 mo. LIBOR + .32%, 0.58%, due 08/26/30 | 338,092 | |||||||||||||
800,000 | Marathon Real Estate CDO, Series 06-1A, Class A1, 144A, 1 mo. LIBOR + .33%, 0.59%, due 05/25/46 | 536,000 | |||||||||||||
Total CMBS Collateralized Debt Obligations | 1,161,226 | ||||||||||||||
Collateralized Loan Obligations — 0.0% | |||||||||||||||
58,166 | Archimedes Funding IV (Cayman) Ltd., Series 4A, Class A1, 144A, 3 mo. LIBOR + .48%, 0.80%, due 02/25/13 | 56,275 | |||||||||||||
Corporate Collateralized Debt Obligations — 0.1% | |||||||||||||||
1,000,000 | Morgan Stanley ACES SPC, Series 06-13A, Class A, 144A, 3 mo. LIBOR + .29%, 0.83%, due 06/20/13 | 815,400 | |||||||||||||
1,000,000 | Morgan Stanley ACES SPC, Series 05-15, Class A, 144A, 3 mo. LIBOR + .40%, 0.94%, due 12/20/10 | 989,800 | |||||||||||||
1,000,000 | Prism Orso Trust, Series 04-MAPL, Class CERT, 144A, 3 mo. LIBOR + .70%, 1.24%, due 08/01/11 | 890,900 | |||||||||||||
Total Corporate Collateralized Debt Obligations | 2,696,100 | ||||||||||||||
Credit Cards — 0.3% | |||||||||||||||
1,100,000 | Cabela's Master Credit Card Trust, Series 08-4A, Class A2, 144A, 1 mo. LIBOR + 3.00%, 3.28%, due 09/15/14 | 1,128,248 | |||||||||||||
700,000 | Capital One Multi-Asset Execution Trust, Series 04-A7, Class A7, 3 mo. LIBOR + .15%, 0.53%, due 06/16/14 | 699,244 | |||||||||||||
800,000 | Capital One Multi-Asset Execution Trust, Series 06-A14, Class A, 1 mo. LIBOR + .01%, 0.29%, due 08/15/13 | 799,712 |
See accompanying notes to the financial statements.
6
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Credit Cards — continued | |||||||||||||||
600,000 | Capital One Multi-Asset Execution Trust, Series 08-A6, Class A6, 1 mo. LIBOR + 1.10%, 1.38%, due 03/17/14 | 603,750 | |||||||||||||
1,300,000 | Charming Shoppes Master Trust, Series 07-1A, Class A1, 144A, 1 mo. LIBOR + 1.25%, 1.53%, due 09/15/17 | 1,269,398 | |||||||||||||
EUR | 1,100,000 | Citibank Credit Card Issuance Trust, Series 04-A2, Class A, 3 mo. EUR LIBOR + .10%, 0.99%, due 05/24/13 | 1,388,121 | ||||||||||||
600,000 | Household Credit Card Master Note Trust I, Series 07-2, Class A, 1 mo. LIBOR + .55%, 0.83%, due 07/15/13 | 600,281 | |||||||||||||
400,000 | MBNA Credit Card Master Note Trust, Series 04-A8, Class A8, 1 mo. LIBOR + .15%, 0.43%, due 01/15/14 | 399,808 | |||||||||||||
1,300,000 | National City Credit Card Master Trust, Series 08-3, Class A, 1 mo. LIBOR + 1.80%, 2.08%, due 05/15/13 | 1,311,778 | |||||||||||||
400,000 | World Financial Network Credit Card Master Trust, Series 06-A, Class A, 144A, 1 mo. LIBOR + .13%, 0.41%, due 02/15/17 | 386,824 | |||||||||||||
Total Credit Cards | 8,587,164 | ||||||||||||||
Equipment Leases — 0.0% | |||||||||||||||
400,000 | CNH Equipment Trust, Series 08-A, Class A4B, 1 mo. LIBOR + 1.95%, 2.23%, due 08/15/14 | 406,320 | |||||||||||||
Insured Auto Financing — 0.2% | |||||||||||||||
521,962 | AmeriCredit Automobile Receivables Trust, Series 07-AX, Class A4, XL, 1 mo. LIBOR + .04%, 0.34%, due 10/06/13 | 516,743 | |||||||||||||
418,299 | AmeriCredit Automobile Receivables Trust, Series 07-BF, Class A4, FSA, 1 mo. LIBOR + .05%, 0.35%, due 12/06/13 | 413,225 | |||||||||||||
21,900 | AmeriCredit Automobile Receivables Trust, Series 07-CM, Class A3B, MBIA, 1 mo. LIBOR + .03%, 0.33%, due 05/07/12 | 21,851 | |||||||||||||
486,384 | AmeriCredit Automobile Receivables Trust, Series 07-DF, Class A4B, FSA, 1 mo. LIBOR + .80%, 1.10%, due 06/06/14 | 484,222 | |||||||||||||
800,000 | AmeriCredit Prime Automobile Receivable Trust, Series 07-2M, Class A4B, MBIA, 1 mo. LIBOR + .50%, 0.79%, due 03/08/16 | 797,200 | |||||||||||||
398,937 | Capital One Auto Finance Trust, Series 06-B, Class A4, MBIA, 1 mo. LIBOR + .02%, 0.29%, due 07/15/13 | 396,646 | |||||||||||||
134,877 | Capital One Auto Finance Trust, Series 07-A, Class A4, AMBAC, 1 mo. LIBOR + .02%, 0.30%, due 11/15/13 | 134,229 | |||||||||||||
157,062 | Capital One Auto Finance Trust, Series 07-C, Class A3B, FGIC, 1 mo. LIBOR + .51%, 0.79%, due 04/16/12 | 157,065 |
See accompanying notes to the financial statements.
7
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Insured Auto Financing — continued | |||||||||||||||
150,000 | Hertz Vehicle Financing LLC, Series 05-2A, Class A5, 144A, AMBAC, 1 mo. LIBOR + .25%, 0.51%, due 11/25/11 | 149,824 | |||||||||||||
576,398 | Santander Drive Auto Receivables Trust, Series 07-1, Class A4, FGIC, 1 mo. LIBOR + .05%, 0.33%, due 09/15/14 | 568,623 | |||||||||||||
625,873 | Santander Drive Auto Receivables Trust, Series 07-3, Class A4B, FGIC, 1 mo. LIBOR + .65%, 0.93%, due 10/15/14 | 623,119 | |||||||||||||
1,700,000 | Triad Auto Receivables Owner Trust, Series 07-B, Class A4B, FSA, 1 mo. LIBOR + 1.20%, 1.49%, due 07/14/14 | 1,702,822 | |||||||||||||
Total Insured Auto Financing | 5,965,569 | ||||||||||||||
Insured Business Loans — 0.0% | |||||||||||||||
288,396 | CNL Commercial Mortgage Loan Trust, Series 03-2A, Class A1, 144A, AMBAC, 1 mo. LIBOR + .44%, 0.70%, due 10/25/30 | 173,038 | |||||||||||||
Insured High Yield Collateralized Debt Obligations — 0.0% | |||||||||||||||
81,272 | GSC Partners CDO Fund Ltd., Series 2A, Class A, 144A, FSA, 6 mo. LIBOR + .52%, 1.20%, due 05/22/13 | 69,894 | |||||||||||||
249,980 | GSC Partners CDO Fund Ltd., Series 03-4A, Class A3, 144A, AMBAC, 3 mo. LIBOR + .46%, 0.98%, due 12/16/15 | 226,231 | |||||||||||||
Total Insured High Yield Collateralized Debt Obligations | 296,125 | ||||||||||||||
Insured Other — 0.1% | |||||||||||||||
800,000 | DB Master Finance LLC, Series 06-1, Class A2, 144A, AMBAC, 5.78%, due 06/20/31 | 793,000 | |||||||||||||
1,500,000 | Dominos Pizza Master Issuer LLC, Series 07-1, Class A2, 144A, MBIA, 5.26%, due 04/25/37 | 1,466,250 | |||||||||||||
712,671 | Henderson Receivables LLC, Series 06-3A, Class A1, 144A, MBIA, 1 mo. LIBOR + .20%, 0.48%, due 09/15/41 | 627,512 | |||||||||||||
715,400 | Henderson Receivables LLC, Series 06-4A, Class A1, 144A, MBIA, 1 mo. LIBOR + .20%, 0.48%, due 12/15/41 | 632,710 | |||||||||||||
489,528 | TIB Card Receivables Fund, 144A, FGIC, 3 mo. LIBOR + .25%, 0.78%, due 01/05/14 | 401,413 | |||||||||||||
100,000 | Toll Road Investment Part II, Series B, 144A, MBIA, Zero Coupon, due 02/15/30 | 15,141 | |||||||||||||
900,000 | Toll Road Investment Part II, Series C, 144A, MBIA, Zero Coupon, due 02/15/37 | 66,519 | |||||||||||||
Total Insured Other | 4,002,545 |
See accompanying notes to the financial statements.
8
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Insured Residential Asset-Backed Securities (United States) — 0.0% | |||||||||||||||
84,880 | Ameriquest Mortgage Securities, Inc., Series 04-R6, Class A1, XL, 1 mo. LIBOR + .21%, 0.47%, due 07/25/34 | 62,271 | |||||||||||||
103,419 | Citigroup Mortgage Loan Trust, Inc., Series 03-HE3, Class A, AMBAC, 1 mo. LIBOR + .38%, 0.64%, due 12/25/33 | 79,632 | |||||||||||||
27,709 | Quest Trust, Series 04-X1, Class A, 144A, AMBAC, 1 mo. LIBOR + .33%, 0.59%, due 03/25/34 | 21,613 | |||||||||||||
565,305 | Residential Asset Mortgage Products, Inc., Series 05-RS9, Class AI3, FGIC, 1 mo. LIBOR + .22%, 0.48%, due 11/25/35 | 378,845 | |||||||||||||
Total Insured Residential Asset-Backed Securities (United States) | 542,361 | ||||||||||||||
Insured Residential Mortgage-Backed Securities (United States) — 0.0% | |||||||||||||||
15,743 | Chevy Chase Mortgage Funding Corp., Series 03-4A, Class A1, 144A, AMBAC, 1 mo. LIBOR + .34%, 0.60%, due 10/25/34 | 9,446 | |||||||||||||
37,966 | Chevy Chase Mortgage Funding Corp., Series 04-1A, Class A2, 144A, AMBAC, 1 mo. LIBOR + .33%, 0.59%, due 01/25/35 | 23,159 | |||||||||||||
354,245 | Countrywide Home Equity Loan Trust, Series 07-E, Class A, MBIA, 1 mo. LIBOR + .15%, 0.43%, due 06/15/37 | 155,513 | |||||||||||||
223,698 | GMAC Mortgage Corp. Loan Trust, Series 04-HE3, Class A3, FSA, 1 mo. LIBOR + .23%, 0.49%, due 10/25/34 | 113,773 | |||||||||||||
12,225 | GreenPoint Home Equity Loan Trust, Series 04-1, Class A, AMBAC, 1 mo. LIBOR + .23%, 0.72%, due 07/25/29 | 6,095 | |||||||||||||
16,114 | GreenPoint Home Equity Loan Trust, Series 04-4, Class A, AMBAC, 1 mo. LIBOR + .28%, 0.84%, due 08/15/30 | 8,023 | |||||||||||||
28,192 | Lehman ABS Corp., Series 04-2, Class A, AMBAC, 1 mo. LIBOR + .22%, 0.70%, due 06/25/34 | 16,070 | |||||||||||||
7,222 | Residential Funding Mortgage Securities II, Series 03-HS1, Class AII, FGIC, 1 mo. LIBOR + .29%, 0.55%, due 12/25/32 | 3,067 | |||||||||||||
180,821 | SBI Heloc Trust, Series 05-HE1, Class 1A, 144A, FSA, 1 mo. LIBOR + .19%, 0.45%, due 11/25/35 | 109,379 | |||||||||||||
52,538 | Wachovia Asset Securitization, Inc., Series 04-HE1, Class A, MBIA, 1 mo. LIBOR + .22%, 0.48%, due 06/25/34 | 44,994 | |||||||||||||
Total Insured Residential Mortgage-Backed Securities (United States) | 489,519 | ||||||||||||||
Insured Time Share — 0.0% | |||||||||||||||
48,648 | Cendant Timeshare Receivables Funding LLC, Series 05-1A, Class A2, 144A, FGIC, 1 mo. LIBOR + .18%, 0.45%, due 05/20/17 | 46,550 |
See accompanying notes to the financial statements.
9
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Insured Time Share — continued | |||||||||||||||
101,442 | Sierra Receivables Funding Co., Series 06-1A, Class A2, 144A, MBIA, 1 mo. LIBOR + .15%, 0.42%, due 05/20/18 | 95,241 | |||||||||||||
125,794 | Sierra Receivables Funding Co., Series 07-1A, Class A2, 144A, FGIC, 1 mo. LIBOR + .15%, 0.42%, due 03/20/19 | 116,989 | |||||||||||||
354,110 | Sierra Receivables Funding Co., Series 07-2A, Class A2, 144A, MBIA, 1 mo. LIBOR + 1.00%, 1.27%, due 09/20/19 | 334,017 | |||||||||||||
Total Insured Time Share | 592,797 | ||||||||||||||
Insured Transportation — 0.0% | |||||||||||||||
146,667 | GE Seaco Finance SRL, Series 04-1A, Class A, 144A, AMBAC, 1 mo. LIBOR + .30%, 0.57%, due 04/17/19 | 138,967 | |||||||||||||
Residential Asset-Backed Securities (United States) — 0.4% | |||||||||||||||
37,311 | Accredited Mortgage Loan Trust, Series 04-4, Class A1B, 1 mo. LIBOR + .39%, 0.65%, due 01/25/35 | 26,724 | |||||||||||||
11,545 | Accredited Mortgage Loan Trust, Series 07-1, Class A1, 1 mo. LIBOR + .05%, 0.31%, due 02/25/37 | 11,446 | |||||||||||||
178,406 | ACE Securities Corp., Series 07-HE1, Class A2A, 1 mo. LIBOR + .09%, 0.35%, due 01/25/37 | 90,541 | |||||||||||||
418,828 | ACE Securities Corp., Series 06-CW1, Class A2B, 1 mo. LIBOR + .10%, 0.36%, due 07/25/36 | 359,145 | |||||||||||||
157,877 | ACE Securities Corp., Series 06-HE3, Class A2B, 1 mo. LIBOR + .09%, 0.35%, due 06/25/36 | 148,405 | |||||||||||||
169,568 | ACE Securities Corp., Series 06-ASP4, Class A2B, 1 mo. LIBOR + .10%, 0.36%, due 08/25/36 | 127,600 | |||||||||||||
128,911 | ACE Securities Corp., Series 06-SL1, Class A, 1 mo. LIBOR + .16%, 0.42%, due 09/25/35 | 31,777 | |||||||||||||
8,236 | ACE Securities Corp., Series 06-ASP2, Class A2B, 1 mo. LIBOR + .14%, 0.40%, due 03/25/36 | 8,123 | |||||||||||||
300,000 | ACE Securities Corp., Series 06-ASP2, Class A2C, 1 mo. LIBOR + .18%, 0.44%, due 03/25/36 | 210,300 | |||||||||||||
200,000 | ACE Securities Corp., Series 06-HE2, Class A2C, 1 mo. LIBOR + .16%, 0.42%, due 05/25/36 | 105,460 | |||||||||||||
700,000 | ACE Securities Corp., Series 06-ASP5, Class A2C, 1 mo. LIBOR + .18%, 0.44%, due 10/25/36 | 264,250 | |||||||||||||
277,346 | ACE Securities Corp., Series 06-SL3, Class A1, 1 mo. LIBOR + .10%, 0.36%, due 06/25/36 | 33,697 |
See accompanying notes to the financial statements.
10
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||||||
354,943 | ACE Securities Corp., Series 06-SL3, Class A2, 1 mo. LIBOR + .17%, 0.43%, due 06/25/36 | 34,536 | |||||||||||||
186,111 | ACE Securities Corp., Series 07-WM1, Class A2A, 1 mo. LIBOR + .07%, 0.33%, due 11/25/36 | 100,965 | |||||||||||||
96,929 | ACE Securities Corp., Series 06-ASL1, Class A, 1 mo. LIBOR + .14%, 0.40%, due 02/25/36 | 12,378 | |||||||||||||
400,000 | ACE Securities Corp., Series 06-OP1, Class A2C, 1 mo. LIBOR + .15%, 0.41%, due 04/25/36 | 199,000 | |||||||||||||
373,941 | Alliance Bancorp Trust, Series 07-S1, Class A1, 144A, 1 mo. LIBOR + .20%, 0.46%, due 05/25/37 | 38,815 | |||||||||||||
1,474,730 | Argent Securities, Inc., Series 06-M1, Class A2C, 1 mo. LIBOR + .15%, 0.41%, due 07/25/36 | 605,561 | |||||||||||||
275,107 | Argent Securities, Inc., Series 06-W5, Class A2C, 1 mo. LIBOR + .15%, 0.41%, due 06/25/36 | 104,541 | |||||||||||||
273,983 | Argent Securities, Inc., Series 06-M2, Class A2B, 1 mo. LIBOR + .11%, 0.37%, due 09/25/36 | 106,169 | |||||||||||||
130,475 | Argent Securities, Inc., Series 04-W8, Class A5, 1 mo. LIBOR + .52%, 0.78%, due 05/25/34 | 109,599 | |||||||||||||
366,692 | Argent Securities, Inc., Series 06-W2, Class A2B, 1 mo. LIBOR + .19%, 0.45%, due 03/25/36 | 146,677 | |||||||||||||
202,970 | Asset Backed Funding Certificates, Series 06-OPT2, Class A3B, 1 mo. LIBOR + .11%, 0.37%, due 10/25/36 | 201,042 | |||||||||||||
300,000 | Asset Backed Funding Certificates, Series 06-OPT2, Class A3C, 1 mo. LIBOR + .15%, 0.41%, due 10/25/36 | 198,750 | |||||||||||||
663,940 | Asset Backed Funding Certificates, Series 07-NC1, Class A1, 144A, 1 mo. LIBOR + .22%, 0.48%, due 05/25/37 | 551,070 | |||||||||||||
237,614 | Bayview Financial Acquisition Trust, Series 04-B, Class A1, 144A, 1 mo. LIBOR + .50%, 1.26%, due 05/28/39 | 119,995 | |||||||||||||
237,614 | Bayview Financial Acquisition Trust, Series 04-B, Class A2, 144A, 1 mo. LIBOR + .65%, 1.56%, due 05/28/39 | 88,511 | |||||||||||||
330,630 | Bayview Financial Acquisition Trust, Series 05-A, Class A1, 144A, 1 mo. LIBOR + .50%, 1.26%, due 02/28/40 | 209,785 | |||||||||||||
142,749 | Bear Stearns Asset Backed Securities, Inc., Series 07-AQ1, Class A1, 1 mo. LIBOR + .11%, 0.37%, due 11/25/36 | 102,223 | |||||||||||||
300,000 | Bear Stearns Asset Backed Securities, Inc., Series 07-AQ1, Class A2, 1 mo. LIBOR + .20%, 0.46%, due 11/25/36 | 61,950 |
See accompanying notes to the financial statements.
11
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||||||
125,881 | Bear Stearns Mortgage Funding Trust, Series 07-SL2, Class 1A, 1 mo. LIBOR + .16%, 0.42%, due 02/25/37 | 13,205 | |||||||||||||
80,582 | Carrington Mortgage Loan Trust, Series 07-FRE1, Class A1, 1 mo. LIBOR + .12%, 0.38%, due 02/25/37 | 73,789 | |||||||||||||
1,300,000 | Carrington Mortgage Loan Trust, Series 07-FRE1, Class A2, 1 mo. LIBOR + .20%, 0.46%, due 02/25/37 | 707,070 | |||||||||||||
437,506 | Centex Home Equity, Series 06-A, Class AV3, 1 mo. LIBOR + .16%, 0.42%, due 06/25/36 | 352,590 | |||||||||||||
7,387 | Chase Funding Mortgage Loan Trust, Series 03-3, Class 2A2, 1 mo. LIBOR + .27%, 0.80%, due 04/25/33 | 5,910 | |||||||||||||
4,984 | Citigroup Mortgage Loan Trust, Inc., Series 04-OPT1, Class A1B, 1 mo. LIBOR + .41%, 0.67%, due 10/25/34 | 4,821 | |||||||||||||
400,000 | Citigroup Mortgage Loan Trust, Inc., Series 06-HE3, Class A2C, 1 mo. LIBOR + .16%, 0.42%, due 12/25/36 | 146,000 | |||||||||||||
123,629 | Countrywide Asset-Backed Certificates, Series 06-BC5, Class 2A1, 1 mo. LIBOR + .08%, 0.34%, due 03/25/37 | 122,331 | |||||||||||||
1,000,000 | Countrywide Asset-Backed Certificates, Series 06-BC3, Class 2A2, 1 mo. LIBOR + .14%, 0.40%, due 02/25/37 | 753,200 | |||||||||||||
18,059 | Equity One ABS, Inc., Series 04-1, Class AV2, 1 mo. LIBOR + .30%, 0.56%, due 04/25/34 | 11,739 | |||||||||||||
454,108 | First Franklin Mortgage Loan Asset Backed Certificates, Series 06-FF5, Class 2A3, 1 mo. LIBOR + .16%, 0.42%, due 04/25/36 | 275,019 | |||||||||||||
61,166 | Fremont Home Loan Trust, Series 06-B, Class 2A2, 1 mo. LIBOR + .10%, 0.36%, due 08/25/36 | 35,476 | |||||||||||||
600,000 | Fremont Home Loan Trust, Series 06-B, Class 2A3, 1 mo. LIBOR + .16%, 0.42%, due 08/25/36 | 213,000 | |||||||||||||
138,604 | Fremont Home Loan Trust, Series 06-A, Class 1A2, 1 mo. LIBOR + .20%, 0.46%, due 05/25/36 | 85,935 | |||||||||||||
133,063 | Household Home Equity Loan Trust, Series 05-2, Class A2, 1 mo. LIBOR + .31%, 0.58%, due 01/20/35 | 112,771 | |||||||||||||
121,089 | Household Home Equity Loan Trust, Series 05-3, Class A2, 1 mo. LIBOR + .29%, 0.56%, due 01/20/35 | 105,082 | |||||||||||||
354,098 | Household Home Equity Loan Trust, Series 06-1, Class A1, 1 mo. LIBOR + .16%, 0.43%, due 01/20/36 | 309,172 | |||||||||||||
993,319 | J.P. Morgan Mortgage Acquisition Corp., Series 06-WMC4, Class A3, 1 mo. LIBOR + .12%, 0.38%, due 12/25/36 | 376,468 | |||||||||||||
500,000 | Master Asset-Backed Securities Trust, Series 06-NC3, Class A4, 1 mo. LIBOR + .16%, 0.42%, due 10/25/36 | 180,000 |
See accompanying notes to the financial statements.
12
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||||||
684,274 | Master Asset-Backed Securities Trust, Series 06-FRE2, Class A4, 1 mo. LIBOR + .15%, 0.41%, due 03/25/36 | 342,137 | |||||||||||||
93,521 | Master Asset-Backed Securities Trust, Series 05-FRE1, Class A4, 1 mo. LIBOR + .25%, 0.51%, due 10/25/35 | 88,728 | |||||||||||||
400,000 | Master Asset-Backed Securities Trust, Series 06-HE2, Class A3, 1 mo. LIBOR + .15%, 0.41%, due 06/25/36 | 141,000 | |||||||||||||
136,400 | Master Asset-Backed Securities Trust, Series 06-AM3, Class A2, 1 mo. LIBOR + .13%, 0.39%, due 10/25/36 | 131,285 | |||||||||||||
754,315 | Master Asset-Backed Securities Trust, Series 06-HE3, Class A3, 1 mo. LIBOR + .15%, 0.41%, due 08/25/36 | 264,010 | |||||||||||||
212,508 | Master Second Lien Trust, Series 06-1, Class A, 1 mo. LIBOR + .16%, 0.42%, due 03/25/36 | 27,360 | |||||||||||||
202,989 | Merrill Lynch Mortgage Investors, Series 07-HE2, Class A2A, 1 mo. LIBOR + .12%, 0.38%, due 02/25/37 | 133,019 | |||||||||||||
104,710 | Morgan Stanley Capital, Inc., Series 04-SD1, Class A, 1 mo. LIBOR + .40%, 0.66%, due 08/25/34 | 81,151 | |||||||||||||
1,000,000 | Morgan Stanley Capital, Inc., Series 07-HE4, Class A2C, 1 mo. LIBOR + .23%, 0.49%, due 02/25/37 | 397,500 | |||||||||||||
248,022 | Morgan Stanley Home Equity Loans, Series 07-2, Class A1, 1 mo. LIBOR + .10%, 0.36%, due 04/25/37 | 228,800 | |||||||||||||
300,000 | Morgan Stanley IXIS Real Estate Capital Trust, Series 06-2, Class A3, 1 mo. LIBOR + .15%, 0.41%, due 11/25/36 | 126,750 | |||||||||||||
218,000 | People's Choice Home Loan Securities Trust, Series 05-4, Class 1A2, 1 mo. LIBOR + .26%, 0.52%, due 12/25/35 | 127,508 | |||||||||||||
261,031 | RAAC Series Trust, Series 06-SP1, Class A2, 1 mo. LIBOR + .19%, 0.45%, due 09/25/45 | 226,522 | |||||||||||||
85,354 | Residential Asset Mortgage Products, Inc., Series 05-RS8, Class A2, 1 mo. LIBOR + .29%, 0.55%, due 10/25/33 | 74,915 | |||||||||||||
101,063 | Residential Asset Securities Corp., Series 07-KS3, Class AI1, 1 mo. LIBOR + .11%, 0.37%, due 04/25/37 | 98,456 | |||||||||||||
233,233 | Residential Asset Securities Corp., Series 05-KS12, Class A2, 1 mo. LIBOR + .25%, 0.51%, due 01/25/36 | 223,270 | |||||||||||||
9,319 | Saxon Asset Securities Trust, Series 04-1, Class A, 1 mo. LIBOR + .27%, 0.80%, due 03/25/35 | 5,125 | |||||||||||||
72,972 | Securitized Asset Backed Receivables LLC, Series 06-NC1, Class A2, 1 mo. LIBOR + .16%, 0.42%, due 03/25/36 | 62,391 |
See accompanying notes to the financial statements.
13
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||||||
56,614 | Security National Mortgage Loan Trust, Series 06-2A, Class A1, 144A, 1 mo. LIBOR + .29%, 0.55%, due 10/25/36 | 55,482 | |||||||||||||
53,658 | SG Mortgage Securities Trust, Series 05-OPT1, Class A2, 1 mo. LIBOR + .26%, 0.52%, due 10/25/35 | 48,808 | |||||||||||||
56,961 | Soundview Home Equity Loan Trust, Series 07-NS1, Class A1, 1 mo. LIBOR + .12%, 0.38%, due 01/25/37 | 54,327 | |||||||||||||
500,000 | Specialty Underwriting & Residential Finance, Series 06-BC3, Class A2C, 1 mo. LIBOR + .15%, 0.41%, due 06/25/37 | 225,600 | |||||||||||||
202,280 | Structured Asset Investment Loan Trust, Series 06-1, Class A3, 1 mo. LIBOR + .20%, 0.46%, due 01/25/36 | 151,205 | |||||||||||||
140,980 | Structured Asset Securities Corp., Series 05-S6, Class A2, 1 mo. LIBOR + .29%, 0.55%, due 11/25/35 | 64,146 | |||||||||||||
543,060 | Yale Mortgage Loan Trust, Series 07-1, Class A, 144A, 1 mo. LIBOR + .40%, 0.66%, due 06/25/37 | 65,167 | |||||||||||||
Total Residential Asset-Backed Securities (United States) | 11,737,275 | ||||||||||||||
Residential Mortgage-Backed Securities (Australian) — 0.1% | |||||||||||||||
230,668 | Crusade Global Trust, Series 06-1, Class A1, 144A, 3 mo. LIBOR + .06%, 0.58%, due 07/20/38 | 221,984 | |||||||||||||
364,290 | Crusade Global Trust, Series 07-1, Class A1, 3 mo. LIBOR + .06%, 0.58%, due 04/19/38 | 350,586 | |||||||||||||
52,906 | Interstar Millennium Trust, Series 05-1G, Class A, 3 mo. LIBOR + .12%, 0.94%, due 12/08/36 | 51,009 | |||||||||||||
74,374 | Interstar Millennium Trust, Series 06-2GA, Class A2, 144A, 3 mo. LIBOR + .08%, 0.38%, due 05/27/38 | 67,495 | |||||||||||||
78,865 | Interstar Millennium Trust, Series 03-3G, Class A2, 3 mo. LIBOR + .25%, 1.04%, due 09/27/35 | 74,291 | |||||||||||||
592,411 | Interstar Millennium Trust, Series 04-2G, Class A, 3 mo. LIBOR + .20%, 0.94%, due 03/14/36 | 541,642 | |||||||||||||
41,644 | Medallion Trust, Series 05-1G, Class A1, 3 mo. LIBOR + .08%, 0.49%, due 05/10/36 | 40,344 | |||||||||||||
268,153 | Medallion Trust, Series 06-1G, Class A1, 3 mo. LIBOR + .05%, 0.59%, due 06/14/37 | 255,519 | |||||||||||||
297,488 | National RMBS Trust, Series 06-3, Class A1, 144A, 3 mo. LIBOR + .07%, 0.59%, due 10/20/37 | 288,970 | |||||||||||||
360,510 | Puma Finance Ltd., Series G5, Class A1, 144A, 3 mo. LIBOR + .07%, 0.41%, due 02/21/38 | 343,494 |
See accompanying notes to the financial statements.
14
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Mortgage-Backed Securities (Australian) — continued | |||||||||||||||
18,109 | Superannuation Members Home Loans Global Fund, Series 6, Class A, 3 mo. LIBOR + .16%, 0.74%, due 11/09/35 | 17,928 | |||||||||||||
47,549 | Superannuation Members Home Loans Global Fund, Series 7, Class A1, 3 mo. LIBOR + .14%, 0.68%, due 03/09/36 | 46,542 | |||||||||||||
43,753 | Superannuation Members Home Loans Global Fund, Series 8, Class A1, 3 mo. LIBOR + .07%, 0.60%, due 01/12/37 | 42,112 | |||||||||||||
401,808 | Superannuation Members Home Loans Global Fund, Series 07-1, Class A1, 3 mo. LIBOR + .06%, 0.60%, due 06/12/40 | 384,676 | |||||||||||||
292,632 | Westpac Securitization Trust, Series 07-1G, Class A2A, 3 mo. LIBOR + .05%, 0.39%, due 05/21/38 | 280,927 | |||||||||||||
Total Residential Mortgage-Backed Securities (Australian) | 3,007,519 | ||||||||||||||
Residential Mortgage-Backed Securities (European) — 0.1% | |||||||||||||||
142,805 | Aire Valley Mortgages, Series 07-1A, Class 1A2, 144A, 3 mo. LIBOR + .09%, 0.63%, due 03/20/30 | 141,877 | |||||||||||||
430,556 | Aire Valley Mortgages, Series 06-1A, Class 1A, 144A, 3 mo. LIBOR + .11%, 0.65%, due 09/20/66 | 356,457 | |||||||||||||
1,074,494 | Brunel Residential Mortgages, Series 07-1A, Class A4C, 144A, 3 mo. LIBOR + .10%, 0.63%, due 01/13/39 | 961,672 | |||||||||||||
65,908 | Gracechurch Mortgage Funding Plc, Series 1A, Class A2B, 144A, 3 mo. LIBOR + .07%, 0.60%, due 10/11/41 | 65,578 | |||||||||||||
160,421 | Granite Master Issuer Plc, Series 06-2, Class A4, 1 mo. LIBOR + .04%, 0.31%, due 12/20/54 | 149,032 | |||||||||||||
85,432 | Granite Mortgages Plc, Series 04-3, Class 2A1, 3 mo. LIBOR + .14%, 0.68%, due 09/20/44 | 79,964 | |||||||||||||
395,194 | Kildare Securities Ltd., Series 07-1A, Class A2, 144A, 3 mo. LIBOR + .06%, 0.60%, due 12/10/43 | 377,885 | |||||||||||||
91,130 | Leek Finance Plc, Series 17A, Class A2B, 144A, 3 mo. LIBOR + .14%, 0.68%, due 12/21/37 | 87,599 | |||||||||||||
201,130 | Paragon Mortgages Plc, Series 7A, Class A1A, 144A, 3 mo. LIBOR + .42%, 0.80%, due 05/15/34 | 172,087 | |||||||||||||
319,577 | Paragon Mortgages Plc, Series 12A, Class A2C, 144A, 3 mo. LIBOR + .11%, 0.49%, due 11/15/38 | 258,858 | |||||||||||||
224,419 | Paragon Mortgages Plc, Series 14A, Class A2C, 144A, 3 mo. LIBOR + .10%, 0.64%, due 09/15/39 | 185,100 | |||||||||||||
1,000,000 | Permanent Master Issuer Plc, Series 06-1, Class 5A, 3 mo. LIBOR + .11%, 0.64%, due 07/15/33 | 970,400 |
See accompanying notes to the financial statements.
15
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Mortgage-Backed Securities (European) — continued | |||||||||||||||
200,000 | Permanent Master Issuer Plc, Series 07-1, Class 4A, 3 mo. LIBOR + .08%, 0.61%, due 10/15/33 | 195,520 | |||||||||||||
Total Residential Mortgage-Backed Securities (European) | 4,002,029 | ||||||||||||||
Residential Mortgage-Backed Securities (United States) — 0.0% | |||||||||||||||
24,103 | Chevy Chase Mortgage Funding Corp., Series 04-3A, Class A2, 144A, 1 mo. LIBOR + .30%, 0.56%, due 08/25/35 | 14,703 | |||||||||||||
18,353 | GreenPoint Mortgage Funding Trust, Series 05-HE4, Class 2A3C, 1 mo. LIBOR + .25%, 0.51%, due 07/25/30 | 17,834 | |||||||||||||
89,329 | Mellon Residential Funding Corp., Series 04-TBC1, Class A, 144A, 1 mo. LIBOR + .25%, 0.51%, due 02/26/34 | 64,079 | |||||||||||||
Total Residential Mortgage-Backed Securities (United States) | 96,616 | ||||||||||||||
Student Loans — 0.1% | |||||||||||||||
700,000 | College Loan Corp. Trust, Series 07-2, Class A1, 3 mo. LIBOR + .25%, 0.75%, due 01/25/24 | 700,084 | |||||||||||||
78,340 | College Loan Corp. Trust, Series 07-1, Class A1, 3 mo. LIBOR + .01%, 0.51%, due 01/25/23 | 77,557 | |||||||||||||
27,201 | Goal Capital Funding Trust, Series 06-1, Class A1, 3 mo. LIBOR, 0.32%, due 08/25/20 | 27,133 | |||||||||||||
80,972 | Goal Capital Funding Trust, Series 07-1, Class A1, 3 mo. LIBOR + .02%, 0.56%, due 06/25/21 | 80,850 | |||||||||||||
40,753 | Montana Higher Education Student Assistance Corp., Series 05-1, Class A, 3 mo. LIBOR + .04%, 0.58%, due 06/20/15 | 40,720 | |||||||||||||
221,947 | National Collegiate Student Loan Trust, Series 06-1, Class A2, 1 mo. LIBOR + .14%, 0.40%, due 08/25/23 | 216,398 | |||||||||||||
400,000 | Nelnet Student Loan Trust, Series 05-2, Class A4, 3 mo. LIBOR + .08%, 0.62%, due 12/23/19 | 392,216 | |||||||||||||
302,542 | SLM Student Loan Trust, Series 07-A, Class A1, 3 mo. LIBOR + .03%, 0.57%, due 09/15/22 | 290,062 | |||||||||||||
Total Student Loans | 1,825,020 | ||||||||||||||
Time Share — 0.0% | |||||||||||||||
160,613 | Sierra Receivables Funding Co., Series 08-1A, Class A2, 144A, 1 mo. LIBOR + 4.00%, 4.27%, due 02/20/20 | 167,439 | |||||||||||||
Total Asset-Backed Securities | 64,042,737 |
See accompanying notes to the financial statements.
16
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) / Shares | Description | Value ($) | |||||||||||||
Corporate Debt — 0.0% | |||||||||||||||
598,000 | Health Care Property Investors, Inc., Series G, MTN, 5.63%, due 02/28/13 | 635,375 | |||||||||||||
U.S. Government Agency — 0.1% | |||||||||||||||
167,500 | Agency for International Development Floater (Support of C.A.B.E.I), 6 mo. U.S. Treasury Bill + .40%, 0.59%, due 10/01/12 (a) | 165,758 | |||||||||||||
101,782 | Agency for International Development Floater (Support of Honduras), 3 mo. U.S. Treasury Bill x 117%, 0.17%, due 10/01/11 (a) | 100,932 | |||||||||||||
565,981 | Agency for International Development Floater (Support of Jamaica), 6 mo. U.S. Treasury Bill + 0.75%, 0.94%, due 03/30/19 (a) | 551,446 | |||||||||||||
59,903 | Agency for International Development Floater (Support of Peru), Series B, 6 mo. U.S. Treasury Bill +.35%, 0.54%, due 05/01/14 (a) | 58,758 | |||||||||||||
300,001 | Agency for International Development Floater (Support of Zimbabwe), 3 mo. U.S. Treasury Bill x 115%, 0.17%, due 01/01/12 (a) | 296,467 | |||||||||||||
Total U.S. Government Agency | 1,173,361 | ||||||||||||||
TOTAL DEBT OBLIGATIONS (COST $60,645,582) | 65,851,473 | ||||||||||||||
SHORT-TERM INVESTMENTS — 0.0% | |||||||||||||||
Money Market Funds — 0.0% | |||||||||||||||
45,168 | State Street Institutional U.S. Government Money Market Fund-Institutional Class | 45,168 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $45,168) | 45,168 | ||||||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $3,255,244,886) | 3,187,335,657 | ||||||||||||||
Other Assets and Liabilities (net) — (0.0%) | (60,303 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 3,187,275,354 |
See accompanying notes to the financial statements.
17
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Notes to Schedule of Investments:
144A - Securities 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.
AMBAC - Insured as to the payment of principal and interest by AMBAC Assurance Corporation.
C.A.B.E.I. - Central American Bank for Economic Integration
CDO - Collateralized Debt Obligation
CMBS - Commercial Mortgage Backed Security
EUR LIBOR - London Interbank Offered Rate denominated in Euros.
FGIC - Insured as to the payment of principal and interest by Financial Guaranty Insurance Corporation.
FSA - Insured as to the payment of principal and interest by Financial Security Assurance.
LIBOR - London Interbank Offered Rate
MBIA - Insured as to the payment of principal and interest by MBIA Insurance Corp.
MTN - Medium Term Note
RMBS - Residential Mortgage Backed Security
XL - Insured as to the payment of principal and interest by XL Capital Assurance.
The rates shown on variable rate notes are the current interest rates at August 31, 2010, which are subject to change based on the terms of the security.
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
Currency Abbreviations:
EUR - Euro
See accompanying notes to the financial statements.
18
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $60,690,750) (Note 2) | $ | 65,896,641 | |||||
Investments in affiliated issuers, at value (cost $3,194,554,136) (Notes 2 and 10) | 3,121,439,016 | ||||||
Receivable for investments sold | 24,884,850 | ||||||
Receivable for Fund shares sold | 10,002 | ||||||
Interest receivable | 73,762 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 27,218 | ||||||
Miscellaneous receivable | 22,426 | ||||||
Total assets | 3,212,353,915 | ||||||
Liabilities: | |||||||
Payable for Fund shares repurchased | 24,917,268 | ||||||
Payable to affiliate for (Note 5): | |||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 5,535 | ||||||
Accrued expenses | 155,758 | ||||||
Total liabilities | 25,078,561 | ||||||
Net assets | $ | 3,187,275,354 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 3,822,602,393 | |||||
Distributions in excess of net investment income | (9,983,031 | ) | |||||
Accumulated net realized loss | (557,434,778 | ) | |||||
Net unrealized depreciation | (67,909,230 | ) | |||||
$ | 3,187,275,354 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 3,187,275,354 | |||||
Shares outstanding: | |||||||
Class III | 345,451,061 | ||||||
Net asset value per share: | |||||||
Class III | $ | 9.23 |
See accompanying notes to the financial statements.
19
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 10) | $ | 24,945,349 | |||||
Interest | 3,024,194 | ||||||
Dividends | 2,605 | ||||||
Total investment income | 27,972,148 | ||||||
Expenses: | |||||||
Legal fees | 77,004 | ||||||
Trustees fees and related expenses (Note 5) | 32,973 | ||||||
Custodian, fund accounting agent and transfer agent fees | 28,888 | ||||||
Audit and tax fees | 27,324 | ||||||
Chief Compliance Officer (Note 5) | 11,868 | ||||||
Registration fees | 2,116 | ||||||
Miscellaneous | 15,180 | ||||||
Total expenses | 195,353 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (150,512 | ) | |||||
Expense reductions (Note 2) | (683 | ) | |||||
Net expenses | 44,158 | ||||||
Net investment income (loss) | 27,927,990 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | 1,938,275 | ||||||
Investments in affiliated issuers | (54,055,881 | ) | |||||
Realized gains distributions from affiliated issuers (Note 10) | 639,094 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (76 | ) | |||||
Net realized gain (loss) | (51,478,588 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | (990,772 | ) | |||||
Investments in affiliated issuers | 304,327 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (1 | ) | |||||
Net unrealized gain (loss) | (686,446 | ) | |||||
Net realized and unrealized gain (loss) | (52,165,034 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (24,237,044 | ) |
See accompanying notes to the financial statements.
20
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 27,927,990 | $ | 89,279,309 | |||||||
Net realized gain (loss) | (51,478,588 | ) | (342,664,709 | ) | |||||||
Change in net unrealized appreciation (depreciation) | (686,446 | ) | 1,044,631,683 | ||||||||
Net increase (decrease) in net assets from operations | (24,237,044 | ) | 791,246,283 | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (1,171,383 | ) | (115,922,229 | ) | |||||||
(1,171,383 | ) | (115,922,229 | ) | ||||||||
Net share transactions (Note 9): | |||||||||||
Class III | 108,151,649 | (5,463,035 | ) | ||||||||
Purchase premiums and redemption fees (Notes 2 and 9): | |||||||||||
Class III | 239,396 | 1,444,675 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees | 108,391,045 | (4,018,360 | ) | ||||||||
Total increase (decrease) in net assets | 82,982,618 | 671,305,694 | |||||||||
Net assets: | |||||||||||
Beginning of period | 3,104,292,736 | 2,432,987,042 | |||||||||
End of period (including distributions in excess of net investment income of $9,983,031 and $36,739,638, respectively) | $ | 3,187,275,354 | $ | 3,104,292,736 |
See accompanying notes to the financial statements.
21
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 9.30 | $ | 7.28 | $ | 11.37 | $ | 12.01 | $ | 11.76 | $ | 11.33 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.08 | 0.27 | 0.87 | 0.48 | 0.39 | 0.36 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.15 | ) | 2.10 | (3.43 | ) | 0.05 | 0.66 | 0.86 | |||||||||||||||||||
Total from investment operations | (0.07 | ) | 2.37 | (2.56 | ) | 0.53 | 1.05 | 1.22 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.00 | )(b) | (0.35 | ) | (1.04 | ) | (0.53 | ) | (0.43 | ) | (0.37 | ) | |||||||||||||||
From net realized gains | — | — | (0.49 | ) | (0.64 | ) | (0.37 | ) | (0.42 | ) | |||||||||||||||||
Total distributions | (0.00 | ) | (0.35 | ) | (1.53 | ) | (1.17 | ) | (0.80 | ) | (0.79 | ) | |||||||||||||||
Net asset value, end of period | $ | 9.23 | $ | 9.30 | $ | 7.28 | $ | 11.37 | $ | 12.01 | $ | 11.76 | |||||||||||||||
Total Return(c) | (0.72 | )%** | 32.60 | % | (24.30 | )% | 4.10 | % | 9.22 | % | 11.05 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 3,187,275 | $ | 3,104,293 | $ | 2,432,987 | $ | 3,364,855 | $ | 3,079,164 | $ | 1,812,191 | |||||||||||||||
Net expenses to average daily net assets(d)(e) | 0.00 | %(f)* | 0.00 | %(f) | 0.00 | %(f) | 0.00 | %(f) | 0.00 | % | 0.00 | % | |||||||||||||||
Net investment income (loss) to average daily net assets(a) | 1.75 | %* | 3.00 | % | 8.81 | % | 3.89 | % | 3.28 | % | 3.17 | % | |||||||||||||||
Portfolio turnover rate | 13 | %** | 29 | % | 44 | % | 76 | % | 23 | % | 16 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.01 | %* | 0.01 | % | 0.01 | % | 0.01 | % | 0.01 | % | 0.01 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.00 | (g) | $ | 0.00 | (g) | $ | 0.00 | (g) | $ | 0.00 | (g) | $ | 0.01 | $ | 0.01 |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(b) Distributions from net investment income were less than $0.01 per share.
(c) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(e) Net expenses to average daily net assets were less than 0.01%.
(f) The net expense ratio does not include the effect of expense reductions (Note 2).
(g) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
22
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO Global Balanced Asset Allocation Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks total return greater than that of its benchmark, the GMO Global Balanced Index. The GMO Global Balanced Index is a composite benchmark computed by the Manager, consisting of (i) the MSCI ACWI (All Country World Index) Index and (ii) the Barclays Capital U.S. Aggregate Index in the following proportions: 65% MSCI ACWI Index and 35% Barclays Capital U.S. Aggregate Index. The Fund is a fund of funds and invests primarily in shares of other GMO Funds, which may include the GMO International Equity Funds, the GMO U.S. Equity Funds, the GMO Fixed Income Funds, GMO Alpha Only Fund, GMO Alternative Asset Opportunity Fund, GMO Debt Opportunities Fund, GMO High Quality Short-Duration Bond Fund, GMO Special Situations Fund, and GMO World Opportunity Overlay Fund (GMO Funds in which the Fund invests are collectively referred to as "underlying funds"). In addition, the Fund may hold securities (particularly asset-backed securi ties) directly or through one or more subsidiaries or other entities. The Fund may be exposed to foreign and U.S. equity investments (including emerging country equities, both growth and value style equities, and equities of any market capitalization), U.S. and foreign fixed income securities (including fixed income securities of any credit quality and having any maturity or duration), the investment returns of commodities and, from time to time, other alternative asset classes.
The Manager uses proprietary quantitative models and fundamental investment techniques to select the underlying funds in which the Fund invests and to decide how much to invest in each. The models use multi-year forecasts of relative value and risk among asset classes (e.g., foreign equity, U.S. equity, emerging country equity, emerging country debt, U.S. fixed income, foreign fixed income, and commodities). The Manager changes the Fund's holdings of underlying funds in response to changes in its investment outlook and market valuations and may use redemption/purchase activity to rebalance the Fund's investments. The Manager, however, intends to invest at least 25% of the Fund's assets in fixed income investments and at least 25% in equity investments.
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
23
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The financial statements of the underlying funds should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect). As of August 31, 2010, shares of GMO Alternative Asset Opportunity Fund, GMO Special Situations Fund, and GMO World Opportunity Overlay Fund were not publicly available for direct purchase.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Shares of the underlying funds and other investment funds are generally valued at their net asset value. Investments held by the Fund and the underlying funds are valued as follows. Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the over-the-counter ("OTC") market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, whi ch approximates market value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of August 31, 2010, the total value of securities held directly and indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 1.2% of net assets. The Fund and the underlying funds classify such securities (as defined below) as Level 3. Additionally, because many foreign equity securities mark ets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund and the underlying funds generally value foreign equity securities as of the NYSE close using fair value prices, which are based on local closing prices and adjustments supplied by a third party vendor using that
24
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
vendor's proprietary models. As of August 31, 2010, equity securities and futures contracts representing 40.9% and 0.1%, respectively, of the net assets of the Fund, through investments in the underlying funds, were valued using fair value prices based on those adjustments. Those underlying funds classify such securities (as defined below) as Level 2.
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. Although alternative prices are available for securities held by the Fund and the underlying funds, those alternative sources are not typically part of the valuation process and would not necessarily confirm the security price used by the Fund and the underlying funds. Therefore, the existence of those alternative sou rces does not necessarily provide greater certainty about the prices used by the Fund and the underlying funds. As of August 31, 2010, the total value of securities held directly and indirectly for which no alternative pricing source was available represented 1.4% of the net assets of the Fund.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data.
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund used the following fair value techniques on Level 3 investments: The Fund valued certain debt securities using indicative bids received from primary pricing sources. The Fund valued certain debt securities and preferred stocks using a specified spread above the LIBOR Rate or U.S. Treasury yield.
25
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Mutual Funds | $ | 3,121,439,016 | $ | — | $ | — | $ | 3,121,439,016 | |||||||||||
Debt Obligations | |||||||||||||||||||
Asset-Backed Securities | — | 14,524,464 | 49,518,273 | 64,042,737 | |||||||||||||||
Corporate Debt | — | 635,375 | — | 635,375 | |||||||||||||||
U.S. Government Agency | — | — | 1,173,361 | 1,173,361 | |||||||||||||||
TOTAL DEBT OBLIGATIONS | — | 15,159,839 | 50,691,634 | 65,851,473 | |||||||||||||||
Short-Term Investments | 45,168 | — | — | 45,168 | |||||||||||||||
Total Investments | 3,121,484,184 | 15,159,839 | 50,691,634 | 3,187,335,657 | |||||||||||||||
Total | $ | 3,121,484,184 | $ | 15,159,839 | $ | 50,691,634 | $ | 3,187,335,657 |
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements. The aggregate net values of the Fund's investments (both direct and indirect) in securities and other financial instruments using Level 3 inputs were 9.4% and (0.1)% of total net assets, respectively.
26
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2010 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Transfers into Level 3* | Transfers out of Level 3* | Balances as of August 31, 2010 | ||||||||||||||||||||||||||||
Debt Obligations | |||||||||||||||||||||||||||||||||||
Asset-Backed Securities | $ | 64,106,588 | $ | (17,156,124 | ) | $ | 871,726 | $ | 1,878,659 | $ | 288,236 | $ | — | $ | (470,812 | )** | $ | 49,518,273 | |||||||||||||||||
U.S. Government Agency | 1,373,924 | (205,499 | ) | 6,125 | 5,770 | (6,959 | ) | — | — | 1,173,361 | |||||||||||||||||||||||||
Total Debt Obligations | 65,480,512 | (17,361,623 | ) | 877,851 | 1,884,429 | 281,277 | — | (470,812 | )** | 50,691,634 | |||||||||||||||||||||||||
Preferred Stocks | 90,000 | (156,410 | ) | — | (2,398 | ) | 68,808 | — | — | — | |||||||||||||||||||||||||
Total | $ | 65,570,512 | $ | (17,518,033 | ) | $ | 877,851 | $ | 1,882,031 | $ | 350,085 | $ | — | $ | (470,812 | ) | $ | 50,691,634 |
* The Fund recognizes investments and derivatives transferred into Level 3 at the value at the beginning of the period and transferred out of Level 3 at the value at the end of the period.
** Financial assets transferred between Level 2 and Level 3 were due to a change in observable and/or unobservable inputs.
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are inclu ded with the net realized and unrealized gain or loss on investment securities.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
27
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund elected to defer to March 1, 2010 post-October capital losses of $16,675,356.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2018 | $ | (292,518,509 | ) | ||||
Total | $ | (292,518,509 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 3,506,260,115 | $ | 121,998,345 | $ | (440,922,803 | ) | $ | (318,924,458 | ) |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts
28
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact its operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Income dividends and capital gain distributions from the underlying funds are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for the purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 5).
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
Prior to June 30, 2010, the premium on cash purchases and the fee on cash redemptions were each 0.07% of the amount invested or redeemed. Effective June 30, 2010, the premium on cash purchases and the fee on cash redemptions were each 0.09% of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by a Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. The Fund charges purchase premiums and redemption fees based on the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase
29
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
premiums and/or redemption fees, if any, imposed by the underlying Funds in which it invests, provided that, if that weighted average is less than 0.05%, the Fund generally will not charge a purchase premium or redemption fee. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager may consider known cash flows out of or into other series of the Trust when placing orders for the cash purchase or redemption of shares by the Fund shareholders or other prospective or existing shareholders of the Funds for whom GMO provides asset allocation advice. Consequently, the Fund and those other shareholders for whom GMO provides asset allocation advice will tend to benefit from waivers of the Funds' purchase premiums and redemption fees to a greater extent than other prospective and existing shareholders of the other series of the Trust. All or a portion of the Fund's purchase premiums and/or redemption fees may be waived at the Manager's discretion when they are de minimis and/or the Manager deems it equitable to do so, including without limitation when the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premiums and/or redemption fees, if any, imposed by the underlying funds are less than the purchase premiums and/or redemption fees imposed by the Fund. The Manager also may waive or reduce the purchase p remium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of a Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. References to investments include those held directly by the Fund and indirectly through the Fund's investments in the underlying funds. Some of the underlying funds are non-diversified investment companies under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by those funds may affect their performance more than if they were diversified. The principal risks of investing in the Fund are
30
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
summarized below, including those risks to which the Fund is exposed as a result of its investments in the underlying funds. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Declines in stock market prices generally are likely to reduce the market value of the Fund's investments.
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund or the underlying funds may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund or the underlying funds need to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund or the underlying funds to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund's investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund's investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Market Risk — Fixed Income Securities — Typically, the value of fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund or an underlying fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
• Derivatives Risk — The use of derivatives involves the risk that their value may not correlate with the value of the relevant underlying assets, rates or indices. Derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk.
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in the underlying funds, including the risk that the underlying funds in which it invests do not perform as expected. Because the Fund bears the fees and expenses of the underlying funds in which it invests, new
31
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
investments in underlying funds with higher fees or expenses than those of the underlying funds in which the Fund is currently invested will increase the Fund's total expenses. The fees and expenses associated with an investment in the Fund are less predictable and may be higher than fees and expenses associated with an investment in funds that charge a fixed management fee.
Other principal risks of an investment in the Fund include Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Market Risk — Value Securities (risk that the price of investments held by the Fund will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Market Risk — Growth Securities (greater price fl uctuations resulting from dependence on future earnings expectations); Commodities Risk (value of an underlying fund's shares may be affected by factors particular to the commodities markets and may fluctuate more than the share value of a fund with a broader range of investments); Currency Risk (risk that fluctuations in exchange rates may adversely affect the value of investments denominated in foreign currencies or that the U.S. dollar will decline in value relative to a foreign currency being hedged); Leveraging Risk (increased risk of loss from use of reverse repurchase agreements and other derivatives and securities lending); Credit and Counterparty Risk (risk of default of an issuer of a portfolio security, a derivatives counterparty, or a borrower of the Fund's securities); Real Estate Risk (risk to an underlying fund that concentrates its assets in real estate-related investments that factors affecting the real estate industry may cause the value of the Fund's investments to fluctuate more than if it invested in securities of companies in a broader range of industries); Short Sales Risk (risk that an underlying fu nd's loss on the short sale of securities that it does not own is unlimited); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
The most significant market risk for Funds investing in fixed income securities is that the securities in which they invest experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. These risks apply to the Fund because it invests in asset-backed securities. Asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as "collateralized debt obligations" or "collateralized loan obligations") and by the fees earned by service providers. Payment of interest on asset-backed securities and repayment of principal largely depend on t he cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of
32
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. Many asset-backed securities owned (directly or indirectly) by the Fund that were once rated investment grade are now rated below investment grade as of the date of this Report.
With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e .g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and a Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.
The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution's business may have a material impact on multiple investments.
4. Derivative financial instruments
At August 31, 2010, the Fund held no derivative contracts.
33
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
5. Fees and other transactions with affiliates
The Manager decides how to allocate the assets of the Fund among underlying funds. The Manager does not charge the Fund a management fee or shareholder service fee, but it receives management and shareholder service fees from the underlying funds in which the Fund invests. Because those fees vary from fund to fund, the levels of indirect net expenses set forth below are affected by the Manager's asset allocation decisions.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.00% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investme nt company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). This contractual expense limitation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $32,973 and $11,868, respectively. The compensation and expenses of the CCO are included in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Indirect Interest Expense | Total Indirect Expenses | ||||||||||||
0.400 | % | 0.063 | % | 0.005 | % | 0.468 | % |
34
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments and class exchanges, for the period ended August 31, 2010 aggregated $580,514,754 and $407,840,632, respectively.
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, 14.78% of the outstanding shares of the Fund were held by one shareholder. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2010, 0.11% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and none of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 24,171,638 | $ | 224,553,821 | 42,511,488 | $ | 381,059,284 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 110,643 | 1,014,601 | 10,743,096 | 99,072,970 | |||||||||||||||
Shares repurchased | (12,447,640 | ) | (117,416,773 | ) | (53,683,925 | ) | (485,595,289 | ) | |||||||||||
Purchase premiums | — | 162,558 | — | 242,434 | |||||||||||||||
Redemption fees | — | 76,838 | — | 1,202,241 | |||||||||||||||
Net increase (decrease) | 11,834,641 | $ | 108,391,045 | (429,341 | ) | $ | (4,018,360 | ) |
35
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
10. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income* | Distributions of Realized Gains* | Return of Capital* | Value, end of period | ||||||||||||||||||||||||
GMO Alpha Only Fund, Class IV | $ | 414,351,557 | $ | 71,245,401 | $ | 59,626,539 | $ | — | $ | — | $ | — | $ | 422,674,277 | |||||||||||||||||
GMO Asset Allocation Bond Fund, Class VI | 130,221,749 | 80,165,798 | 64,560,522 | 1,167,167 | 639,094 | — | 149,473,714 | ||||||||||||||||||||||||
GMO Domestic Bond Fund, Class VI | 153,529,995 | — | — | 1,008,581 | — | 34,756,701 | 123,541,666 | ||||||||||||||||||||||||
GMO Emerging Country Debt Fund, Class IV | 13,084,375 | 588,411 | — | 588,411 | — | — | 15,291,023 | ||||||||||||||||||||||||
GMO Emerging Markets Fund, Class VI | 245,086,938 | 116,986,302 | 5,711,782 | — | — | — | 373,684,947 | ||||||||||||||||||||||||
GMO Flexible Equities Fund, Class VI | 48,307,295 | 938,285 | 680,617 | — | — | — | 44,735,060 | ||||||||||||||||||||||||
GMO Inflation Indexed Plus Bond Fund, Class VI | 33,878,670 | 222,934 | 75,000 | — | — | — | 37,178,651 | ||||||||||||||||||||||||
GMO International Core Equity Fund, Class VI | 316,191,644 | 193,341,269 | 13,100,871 | 2,460,515 | — | — | 482,519,574 | ||||||||||||||||||||||||
GMO International Growth Equity Fund, Class IV | 137,124,023 | 5,034,989 | 10,142,975 | 451,942 | — | — | 129,901,114 | ||||||||||||||||||||||||
GMO International Intrinsic Value Fund, Class IV | 134,818,303 | 6,389,828 | 7,883,472 | 546,069 | — | — | 128,478,710 | ||||||||||||||||||||||||
GMO International Small Companies Fund, Class III | 55,989,577 | 862,429 | 58,345,568 | 562,894 | — | — | — | ||||||||||||||||||||||||
GMO Quality Fund, Class VI | 963,211,867 | 37,897,504 | 155,409,554 | 9,359,067 | — | — | 782,066,899 | ||||||||||||||||||||||||
GMO Short-Duration Investment Fund, Class III | 2,903,113 | 6,260 | — | 8,022 | — | — | 2,963,372 | ||||||||||||||||||||||||
GMO Special Situations Fund, Class VI | 93,869,260 | 66,835,344 | 1,228,858 | — | — | — | 155,468,033 | ||||||||||||||||||||||||
GMO Strategic Fixed Income Fund, Class VI | 245,961,786 | — | — | 8,792,681 | — | 4,328,765 | 250,566,622 | ||||||||||||||||||||||||
GMO World Opportunity Overlay Fund | 21,996,890 | — | — | — | — | — | 22,895,354 | ||||||||||||||||||||||||
Totals | $ | 3,010,527,042 | $ | 580,514,754 | $ | 376,765,758 | $ | 24,945,349 | $ | 639,094 | $ | 39,085,466 | $ | 3,121,439,016 |
* The table above includes estimated sources of all distributions paid by the underlying funds during the period March 1, 2010 through August 31, 2010. The actual tax characterization of distributions paid by the underlying funds will be determined through fiscal year ending February 28, 2011 and in the case of GMO Inflation Indexed Plus Bond Fund, Class VI, through its tax year ending December 31, 2010.
36
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of other accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three-, five-, seven- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees observed that the comparative data provided by the third-party data services was based on peer groups that included funds with investment approaches that were substantially different from that of the
37
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
Fund. As a result, the Trustees gave more weight to the Fund's performance relative to its benchmark than to the peer group data. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fact that the Fund does not pay a management fee to the Manager under the Fund's investment management agreement, but that the Fund indirectly bears management and shareholder servicing fees paid to the Manager by other funds of the Trust in which it invests. The Trustees also considered so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees noted that they had approved renewal of the Manager's investment management agreements with the other funds of the Trust in which the Fund may invest and had concluded that the advisory fees charged to those funds were reasonable, after considering, among other things: possible economies of scale to the Manager in connection with its management of the other funds of the Trust; the Manager's profitability with respect to the other funds of the Trust and the Trust as a whole (including the effect of recent changes in assets under management); and information prepared by a third-party data service concerning fee s paid to managers of funds deemed by that service to have similar objectives to those of the other funds of the Trust.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
38
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
39
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including indirect management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.47 | % | $ | 1,000.00 | $ | 992.80 | $ | 2.36 | |||||||||||
2) Hypothetical | 0.47 | % | $ | 1,000.00 | $ | 1,022.84 | $ | 2.40 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
40
GMO Global Bond Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Global Bond Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 92.4 | % | |||||
Short-Term Investments | 10.7 | ||||||
Options Purchased | 1.9 | ||||||
Forward Currency Contracts | 1.8 | ||||||
Futures Contracts | 0.8 | ||||||
Loan Participations | 0.2 | ||||||
Loan Assignments | 0.1 | ||||||
Rights and Warrants | 0.0 | ||||||
Promissory Notes | 0.0 | ||||||
Swap Agreements | (1.1 | ) | |||||
Reverse Repurchase Agreements | (1.3 | ) | |||||
Written Options | (1.5 | ) | |||||
Other | (4.0 | ) | |||||
100.0 | % | ||||||
Country / Region Summary** | % of Investments | ||||||
Euro Region*** | 30.0 | % | |||||
United States | 29.5 | ||||||
Japan | 28.6 | ||||||
Canada | 5.4 | ||||||
United Kingdom | 3.4 | ||||||
Emerging**** | 3.3 | ||||||
Sweden | 1.1 | ||||||
Norway | 0.0 | ||||||
New Zealand | 0.0 | ||||||
Switzerland | (0.1 | ) | |||||
Australia | (1.2 | ) | |||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds. The table excludes short-term investments. The table includes exposure through the use of derivative contracts. The table is based on duration adjusted exposures, taking into account the market value of securities and the notional amounts of swaps and other derivative contracts. Duration is based on the Manager's models. The greater the duration of a bond, the greater its contribution to the concentration percentage. Credit default swap exposures (both positive and negative) are factored into the duration-adjusted exposure using the reference security and applying the same methodology to that security.
*** The "Euro Region" is comprised of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
**** The "Emerging" exposure is associated only with investments in the GMO Emerging Country Debt Fund, which is exposed to emerging countries primarily comprised of Russia, Argentina, Brazil, Philippines, Mexico, Venezuela, Colombia, Ukraine, Turkey, and Indonesia. Additional information about the fund's emerging country exposure is available in the financial statements of the GMO Emerging Country Debt Fund.
1
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value | Description | Value ($) | |||||||||
DEBT OBLIGATIONS — 28.3% | |||||||||||
Canada — 1.9% | |||||||||||
Foreign Government Obligations | |||||||||||
CAD | 2,000,000 | Government of Canada, 3.50%, due 06/01/20 | 1,990,529 | ||||||||
CAD | 1,500,000 | Government of Canada, 8.00%, due 06/01/23 | 2,136,798 | ||||||||
Total Canada | 4,127,327 | ||||||||||
France — 3.5% | |||||||||||
Foreign Government Obligations | |||||||||||
EUR | 5,000,000 | Government of France, 4.00%, due 10/25/38 | 7,530,002 | ||||||||
Germany — 0.8% | |||||||||||
Foreign Government Obligations | |||||||||||
EUR | 1,000,000 | Republic of Deutschland, 4.75%, due 07/04/34 | 1,720,546 | ||||||||
Italy — 0.8% | |||||||||||
Foreign Government Obligations | |||||||||||
EUR | 1,500,000 | Republic of Italy, 4.00%, due 02/01/37 | 1,762,207 | ||||||||
Japan — 10.8% | |||||||||||
Foreign Government Obligations | |||||||||||
JPY | 1,800,000,000 | Japan Government Twenty Year Bond, 2.20%, due 06/20/26 | 23,597,119 | ||||||||
Spain — 0.6% | |||||||||||
Foreign Government Obligations | |||||||||||
EUR | 1,000,000 | Government of Spain, 4.70%, due 07/30/41 | 1,239,346 | ||||||||
United Kingdom — 3.5% | |||||||||||
Foreign Government Obligations | |||||||||||
GBP | 4,500,000 | U.K. Treasury Gilt, 4.25%, due 12/07/27 | 7,507,373 | ||||||||
United States — 6.4% | |||||||||||
U.S. Government | |||||||||||
USD | 3,184,693 | U.S. Treasury Inflation Indexed Note, 2.38%, due 04/15/11 (a)(b) | 3,224,253 | ||||||||
USD | 15,000,000 | U.S. Treasury Principal Strip Bond, due 11/15/21 | 10,787,145 | ||||||||
Total United States | 14,011,398 | ||||||||||
TOTAL DEBT OBLIGATIONS (COST $56,760,764) | 61,495,318 |
See accompanying notes to the financial statements.
2
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
MUTUAL FUNDS — 71.0% | |||||||||||
United States — 71.0% | |||||||||||
Affiliated Issuers | |||||||||||
707,579 | GMO Emerging Country Debt Fund, Class III | 6,721,998 | |||||||||
7,873,225 | GMO Short-Duration Collateral Fund | 91,959,273 | |||||||||
45,838 | GMO Special Purpose Holding Fund (c) | 24,753 | |||||||||
503,212 | GMO U.S. Treasury Fund | 12,580,306 | |||||||||
1,948,199 | GMO World Opportunity Overlay Fund | 43,191,579 | |||||||||
Total United States | 154,477,909 | ||||||||||
TOTAL MUTUAL FUNDS (COST $169,666,810) | 154,477,909 | ||||||||||
SHORT-TERM INVESTMENTS — 2.0% | |||||||||||
Money Market Funds — 0.5% | |||||||||||
978,126 | State Street Institutional Treasury Plus Money Market Fund-Institutional Class | 978,126 | |||||||||
U.S. Government — 1.5% | |||||||||||
3,375,000 | U.S. Treasury Bill, 0.21%, due 06/30/11 (a)(d) | 3,369,053 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $4,344,870) | 4,347,179 | ||||||||||
TOTAL INVESTMENTS — 101.3% (Cost $230,772,444) | 220,320,406 | ||||||||||
Other Assets and Liabilities (net) — (1.3%) | (2,814,111 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 217,506,295 |
See accompanying notes to the financial statements.
3
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
A summary of outstanding financial instruments at August 31, 2010 is as follows:
Reverse Repurchase Agreements
Average balance outstanding | $ | (9,154,625 | ) | ||||
Average interest rate | 0.32 | % | |||||
Maximum balance outstanding | $ | (9,525,000 | ) |
Average balance outstanding was calculated based on daily face value balances outstanding during the period that the Fund has entered into reverse repurchase agreements.
Forward Currency Contracts
Settlement Date | Counterparty | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||
Buys † | |||||||||||||||||||||||
10/26/10 | Royal Bank of Scotland PLC | AUD | 2,400,000 | $ | 2,121,662 | $ | (15,870 | ) | |||||||||||||||
10/26/10 | Deutsche Bank AG | AUD | 10,800,000 | 9,547,480 | 103,159 | ||||||||||||||||||
10/26/10 | Citigroup | AUD | 500,000 | 442,013 | (9,517 | ) | |||||||||||||||||
11/02/10 | Deutsche Bank AG | CAD | 6,100,000 | 5,714,748 | (186,449 | ) | |||||||||||||||||
11/02/10 | Royal Bank of Scotland PLC | CAD | 800,000 | 749,475 | (22,372 | ) | |||||||||||||||||
10/05/10 | Deutsche Bank AG | CHF | 14,000,000 | 13,793,769 | 598,720 | ||||||||||||||||||
10/05/10 | Royal Bank of Scotland PLC | CHF | 700,000 | 689,689 | 15,669 | ||||||||||||||||||
10/05/10 | Citigroup | CHF | 1,200,000 | 1,182,323 | 27,000 | ||||||||||||||||||
10/12/10 | Royal Bank of Scotland PLC | EUR | 1,300,000 | 1,647,343 | (4,705 | ) | |||||||||||||||||
10/12/10 | Deutsche Bank AG | EUR | 44,500,000 | 56,389,806 | 1,399,538 | ||||||||||||||||||
9/07/10 | Barclays | GBP | 1,100,000 | 1,686,957 | 105,080 | ||||||||||||||||||
9/07/10 | Citigroup | GBP | 1,200,000 | 1,840,317 | (68,829 | ) | |||||||||||||||||
9/07/10 | Deutsche Bank AG | GBP | 1,000,000 | 1,533,598 | (38,163 | ) | |||||||||||||||||
10/19/10 | Royal Bank of Scotland PLC | JPY | 170,000,000 | 2,024,590 | 20,508 | ||||||||||||||||||
9/07/10 | Deutsche Bank AG | JPY | 552,665,821 | 6,591,125 | — | ||||||||||||||||||
10/19/10 | Deutsche Bank AG | JPY | 4,162,600,000 | 49,573,880 | 2,390,120 | ||||||||||||||||||
9/21/10 | Deutsche Bank AG | NZD | 8,300,000 | 5,779,006 | 201,043 | ||||||||||||||||||
$ | 161,307,781 | $ | 4,514,932 |
See accompanying notes to the financial statements.
4
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Settlement Date | Counterparty | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||
Sales # | |||||||||||||||||||||||
11/02/10 | Royal Bank of Scotland PLC | CAD | 4,300,000 | $ | 4,028,429 | $ | 52,121 | ||||||||||||||||
11/02/10 | Deutsche Bank AG | CAD | 13,000,000 | 12,178,971 | 263,288 | ||||||||||||||||||
10/05/10 | Deutsche Bank AG | CHF | 16,400,000 | 16,158,415 | (1,259,009 | ) | |||||||||||||||||
10/12/10 | Deutsche Bank AG | EUR | 7,500,000 | 9,503,900 | 176,594 | ||||||||||||||||||
10/12/10 | Royal Bank of Scotland PLC | EUR | 1,100,000 | 1,393,905 | 9,497 | ||||||||||||||||||
9/07/10 | Royal Bank of Scotland PLC | GBP | 1,300,000 | 1,993,677 | 41,350 | ||||||||||||||||||
9/07/10 | Deutsche Bank AG | GBP | 600,000 | 920,159 | 10,537 | ||||||||||||||||||
10/19/10 | Deutsche Bank AG | JPY | 650,000,000 | 7,741,081 | (17,053 | ) | |||||||||||||||||
9/21/10 | Royal Bank of Scotland PLC | NZD | 4,500,000 | 3,133,196 | 108,979 | ||||||||||||||||||
9/21/10 | Citigroup | NZD | 1,100,000 | 765,892 | 33,808 | ||||||||||||||||||
9/21/10 | Deutsche Bank AG | NZD | 1,200,000 | 835,519 | 11,705 | ||||||||||||||||||
$ | 58,653,144 | $ | (568,183 | ) |
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.
Forward Cross Currency Contracts
Settlement Date | Counterparty | Deliver/Units of Currency | Receive/In Exchange For | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
9/14/10 | Deutsche Bank AG | NOK | 27,949,551 | EUR | 3,500,000 | $ | 6,843 | ||||||||||||
9/28/10 | Deutsche Bank AG | SEK | 12,350,974 | EUR | 1,300,000 | (22,934 | ) | ||||||||||||
9/14/10 | Deutsche Bank AG | EUR | 6,400,000 | NOK | 50,637,554 | (87,013 | ) | ||||||||||||
9/14/10 | Royal Bank of Scotland PLC | EUR | 700,000 | NOK | 5,601,218 | 423 | |||||||||||||
$ | (102,681 | ) |
See accompanying notes to the financial statements.
5
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
52 | Canadian Government Bond 10 Yr. | December 2010 | $ | 6,158,466 | $ | 29,404 | |||||||||||||
128 | Euro BOBL | September 2010 | 19,946,391 | 295,253 | |||||||||||||||
107 | Euro Bund | September 2010 | 18,281,358 | 677,147 | |||||||||||||||
22 | Japanese Government Bond 10 Yr. (TSE) | September 2010 | 37,463,125 | 458,082 | |||||||||||||||
35 | U.S. Treasury Bond 30 Yr. (CBT) | September 2010 | 4,775,313 | 369,051 | |||||||||||||||
5 | U.S. Treasury Bond 30 Yr. (CBT) | December 2010 | 675,156 | 9,672 | |||||||||||||||
115 | U.S. Treasury Note 2 Yr. (CBT) | December 2010 | 25,201,172 | 1,452 | |||||||||||||||
164 | U.S. Treasury Note 5 Yr. (CBT) | December 2010 | 19,732,531 | 45,173 | |||||||||||||||
116 | U.S. Treasury Note 10 Yr. (CBT) | September 2010 | 14,674,000 | 554,147 | |||||||||||||||
$ | 146,907,512 | $ | 2,439,381 | ||||||||||||||||
Sales | |||||||||||||||||||
20 | Australian Government Bond 3 Yr. | September 2010 | $ | 1,864,937 | $ | (18,150 | ) | ||||||||||||
10 | Australian Government Bond 10 Yr. | September 2010 | 977,059 | (29,411 | ) | ||||||||||||||
8 | Japanese Government Bond 10 Yr. (LIFFE) | September 2010 | 13,610,572 | (495 | ) | ||||||||||||||
11 | UK Gilt Long Bond | December 2010 | 2,117,633 | (2,224 | ) | ||||||||||||||
$ | 18,570,201 | $ | (50,280 | ) |
See accompanying notes to the financial statements.
6
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Swap Agreements
Credit Default Swaps
Notional Amount | Expiration Date | Counterparty | Receive^ (Pay) | Annual Premium | Implied Credit Spread (1) | Deliverable on Default | Maximum Potential Amount of Future Payments by the Fund Under the Contract (2) | Market Value | |||||||||||||||||||||||||||||||||||
21,000,000 | USD | 3/20/2014 | Deutsche Bank AG | (Pay) | 1.70 | % | 2.20 | % | Republic of Italy | N/A | $ | 280,804 | |||||||||||||||||||||||||||||||
15,000,000 | USD | 3/20/2019 | Deutsche Bank AG | Receive | 1.66 | % | 2.33 | % | Republic of Italy | 15,000,000 | USD | (638,987 | ) | ||||||||||||||||||||||||||||||
$(358,183) | |||||||||||||||||||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
^ Receive - Fund receives premium and sells credit protection.
(Pay) - Fund pays premium and buys credit protection.
(1) Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on the reference security, as of August 31, 2010, serve as an indicator of the current status of the payment/performance risk and reflect the likelihood or risk of default for the reference entity. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection. Wider (i.e.. higher) credit spreads represent a deterioration of the referenced entity's credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.
(2) The maximum potential amount the Fund could be required to pay as a seller of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.
Interest Rate Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay)# | Fixed Rate | Variable Rate | Market Value | |||||||||||||||||||||||||
25,000,000 | SEK | 9/15/2015 | Barclays | Receive | 2.50 | % | 3 Month SEK STIBOR | $ | 67,815 | ||||||||||||||||||||||
3,800,000 | CHF | 3/16/2016 | JPMorgan Chase Bank | Receive | 1.30 | % | 6 Month CHF LIBOR | 13,659 | |||||||||||||||||||||||
7,600,000 | CHF | 3/16/2016 | Barclays | Receive | 1.30 | % | 6 Month CHF LIBOR | 27,319 | |||||||||||||||||||||||
$ | 108,793 | ||||||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | (22,670 | ) |
# Receive - Fund receives fixed rate and pays variable rate.
(Pay) - Fund pays fixed rate and receives variable rate.
As of August 31, 2010, for forward currency contracts, futures contracts, swap agreements and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
See accompanying notes to the financial statements.
7
GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Notes to Schedule of Investments:
BOBL - Bundesobligationen
CBT - Chicago Board of Trade
CHF LIBOR - London Interbank Offered Rate denominated in Swiss Franc.
SEK STIBOR - Stockholm Interbank Offered Rate denominated in Swedish Krona.
TSE - Tokyo Stock Exchange
(a) All or a portion of this security has been pledged to cover margin requirements on open financial futures contracts and/or collateral on open swap contracts (Note 4).
(b) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic (Note 2).
(c) Underlying investment represents interests in defaulted claims.
(d) Rate shown represents yield-to-maturity.
Currency Abbreviations:
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
EUR - Euro
GBP - British Pound
JPY - Japanese Yen
NOK - Norwegian Krone
NZD - New Zealand Dollar
SEK - Swedish Krona
USD - United States Dollar
See accompanying notes to the financial statements.
8
GMO Global Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $61,105,634) (Note 2) | $ | 65,842,497 | |||||
Investments in affiliated issuers, at value (cost $169,666,810) (Notes 2 and 10) | 154,477,909 | ||||||
Foreign currency, at value (cost $251) (Note 2) | 251 | ||||||
Dividends and interest receivable | 476,810 | ||||||
Unrealized appreciation on open forward currency contracts (Note 4) | 5,575,982 | ||||||
Receivable for variation margin on open futures contracts (Note 4) | 310,820 | ||||||
Receivable for open swap contracts (Note 4) | 389,597 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 10,163 | ||||||
Total assets | 227,084,029 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 7,078,912 | ||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 33,317 | ||||||
Shareholder service fee | 26,303 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 353 | ||||||
Payable to broker for closed futures contracts | 283 | ||||||
Unrealized depreciation on open forward currency contracts (Note 4) | 1,731,914 | ||||||
Payable for open swap contracts (Note 4) | 638,987 | ||||||
Accrued expenses | 67,665 | ||||||
Total liabilities | 9,577,734 | ||||||
Net assets | $ | 217,506,295 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 260,503,319 | |||||
Distributions in excess of net investment income | (10,587,820 | ) | |||||
Accumulated net realized loss | (27,904,903 | ) | |||||
Net unrealized depreciation | (4,504,301 | ) | |||||
$ | 217,506,295 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 217,506,295 | |||||
Shares outstanding: | |||||||
Class III | 27,149,282 | ||||||
Net asset value per share: | |||||||
Class III | $ | 8.01 |
See accompanying notes to the financial statements.
9
GMO Global Bond Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 10) | $ | 1,126,464 | |||||
Interest | 734,265 | ||||||
Dividends | 124 | ||||||
Total investment income | 1,860,853 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 196,561 | ||||||
Shareholder service fee – Class III (Note 5) | 155,180 | ||||||
Custodian, fund accounting agent and transfer agent fees | 58,236 | ||||||
Audit and tax fees | 34,316 | ||||||
Interest expense (Note 2) | 12,100 | ||||||
Legal fees | 5,980 | ||||||
Trustees fees and related expenses (Note 5) | 2,149 | ||||||
Registration fees | 1,840 | ||||||
Miscellaneous | 1,931 | ||||||
Total expenses | 468,293 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (38,668 | ) | |||||
Expense reductions (Note 2) | (24 | ) | |||||
Indirectly incurred fees waived or borne by Manager (Note 3) | (16,248 | ) | |||||
Shareholder service fee waived (Note 5) | (5,744 | ) | |||||
Net expenses | 407,609 | ||||||
Net investment income (loss) | 1,453,244 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | 5,258 | ||||||
Investments in affiliated issuers | (1,474,790 | ) | |||||
Realized gains distributions from affiliated issuers (Note 10) | 523 | ||||||
Closed futures contracts | 5,750,324 | ||||||
Closed swap contracts | (487,196 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | (6,753,140 | ) | |||||
Net realized gain (loss) | (2,959,021 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | 5,253,173 | ||||||
Investments in affiliated issuers | 8,161,535 | ||||||
Open futures contracts | 1,337,619 | ||||||
Open swap contracts | (324,324 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 4,195,123 | ||||||
Net unrealized gain (loss) | 18,623,126 | ||||||
Net realized and unrealized gain (loss) | 15,664,105 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 17,117,349 |
See accompanying notes to the financial statements.
10
GMO Global Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 1,453,244 | $ | 3,653,268 | |||||||
Net realized gain (loss) | (2,959,021 | ) | (2,147,889 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 18,623,126 | 66,752,334 | |||||||||
Net increase (decrease) in net assets from operations | 17,117,349 | 68,257,713 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (5,806,968 | ) | (20,301,309 | ) | |||||||
(5,806,968 | ) | (20,301,309 | ) | ||||||||
Net share transactions (Note 9): | |||||||||||
Class III | (7,679,128 | ) | (96,209,181 | ) | |||||||
Redemption fees (Notes 2 and 9): | |||||||||||
Class III | — | 421,557 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and redemption fees | (7,679,128 | ) | (95,787,624 | ) | |||||||
Total increase (decrease) in net assets | 3,631,253 | (47,831,220 | ) | ||||||||
Net assets: | |||||||||||
Beginning of period | 213,875,042 | 261,706,262 | |||||||||
End of period (including distributions in excess of net investment income of $10,587,820 and $6,234,096, respectively) | $ | 217,506,295 | $ | 213,875,042 |
See accompanying notes to the financial statements.
11
GMO Global Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 7.58 | $ | 6.33 | $ | 8.70 | $ | 8.92 | $ | 8.53 | $ | 9.11 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.05 | 0.10 | 0.25 | 0.42 | 0.38 | 0.18 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.61 | 1.66 | (2.11 | ) | 0.11 | 0.38 | (0.57 | ) | |||||||||||||||||||
Total from investment operations | 0.66 | 1.76 | (1.86 | ) | 0.53 | 0.76 | (0.39 | ) | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.23 | ) | (0.51 | ) | (0.51 | ) | (0.75 | ) | (0.37 | ) | (0.19 | ) | |||||||||||||||
Total distributions | (0.23 | ) | (0.51 | ) | (0.51 | ) | (0.75 | ) | (0.37 | ) | (0.19 | ) | |||||||||||||||
Net asset value, end of period | $ | 8.01 | $ | 7.58 | $ | 6.33 | $ | 8.70 | $ | 8.92 | $ | 8.53 | |||||||||||||||
Total Return(b) | 8.81 | %** | 28.99 | % | (22.77 | )% | 6.50 | % | 8.99 | % | (4.33 | )% | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 217,506 | $ | 213,875 | $ | 261,706 | $ | 338,614 | $ | 185,321 | $ | 168,324 | |||||||||||||||
Net operating expenses to average daily net assets(c) | 0.38 | %(d)* | 0.38 | %(d) | 0.39 | %(d) | 0.38 | %(d) | 0.39 | % | 0.37 | % | |||||||||||||||
Interest expense to average daily net assets(e) | 0.01 | %* | 0.00 | %(f) | — | — | — | — | |||||||||||||||||||
Total net expenses to average daily net assets(c) | 0.39 | %(d)* | 0.38 | %(d) | 0.39 | %(d) | 0.38 | %(d) | 0.39 | % | 0.37 | % | |||||||||||||||
Net investment income (loss) to average daily net assets(a) | 1.40 | %* | 1.37 | % | 3.24 | % | 4.86 | % | 4.33 | % | 2.12 | % | |||||||||||||||
Portfolio turnover rate | 24 | %** | 31 | % | 35 | % | 20 | % | 22 | % | 20 | % | |||||||||||||||
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets: | 0.06 | %* | 0.04 | % | 0.03 | % | 0.03 | % | 0.06 | % | 0.07 | % | |||||||||||||||
Redemption fees consisted of the following per share amounts:† | — | $ | 0.01 | $ | 0.00 | (g) | — | — | — |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(d) The net expense ratio does not include the effect of expense reductions (Note 2).
(e) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income.
(f) Interest expense was less than 0.01% to average daily net assets.
(g) Redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
12
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO Global Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks total return in excess of that of its benchmark, the J.P. Morgan Global Government Bond Index. The Fund seeks to add value relative to its benchmark by exploiting misvaluations in global interest rates, sectors, currencies, credit and emerging country debt markets. As a result, the Fund's interest rate, sector, credit and currency exposures will differ from those of its benchmark.
The Manager uses fundamental investment techniques and quantitative models to determine the relative values of the interest rate and currency markets, to determine currency and interest rate exposures, and to identify investments the Manager believes are undervalued or are likely to provide downside protection. The Manager selects investments based on an evaluation of various factors including, but not limited to, fundamental factors such as inflation and current account positions, as well as price-based factors such as interest and exchange rates.
Under normal circumstances, the Fund invests directly and indirectly (e.g., through the GMO Funds in which the Fund invests, collectively referred to as the "underlying funds" or derivatives) at least 80% of its assets in bonds. The term "bond" refers to any fixed income security, which includes (i) obligations of an issuer to make payments of principal and/or interest on future dates, (ii) synthetic debt instruments created by the Manager by using derivatives (e.g., a futures contract, swap contract, currency forward or option), and (iii) instruments with variable interest payments.
The Fund implements its investment program by investing in or holding: exchange-traded and over-the-counter ("OTC") derivatives, including without limitation, futures contracts, currency options, interest rate options, currency forwards, reverse repurchase agreements, credit default swaps, and other swap contracts (to gain exposure to the global interest rate, credit, and currency markets); foreign government securities and other investment-grade bonds denominated in various currencies, including U.S. government securities, asset-backed securities issued by foreign governments and U.S. government agencies (including securities neither guaranteed nor insured by the U.S. government), corporate bonds, and mortgage-backed and other asset-backed securities issued by private issuers; shares of GMO Short-Duration Collateral Fund ("SDCF") (a fund that invests primarily in asset-backed securities); shares of GMO World Opportunity Overlay Fund ("Overlay Fund") (to attempt to exploit misvaluations in world interest rates, currencies and
13
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
credit markets); shares of GMO Emerging Country Debt Fund ("ECDF") (to gain exposure to emerging country debt markets); shares of GMO High Quality Short-Duration Bond Fund (to seek to generate a return in excess of that of the J.P. Morgan U.S. 3 Month Cash Index by investing in a wide variety of high quality U.S. and foreign debt investments); shares of GMO Debt Opportunities Fund (to seek to generate a positive return by investing in a wide variety of U.S. and foreign debt investments without regard to the credit quality of the investment); and shares of GMO U.S. Treasury Fund (for liquidity management purposes). In addition, the Fund may invest in unaffiliated money market funds.
Historically, the Fund has used derivatives and investments in other GMO Funds as the principal means to gain investment exposure. As a result, the Fund has substantial holdings of SDCF (a fund that invests primarily in asset-backed securities) and Overlay Fund (a fund that invests in asset-backed securities and uses derivatives to attempt to exploit misvaluations in world interest rates, currencies and credit markets). Because of the deterioration in credit markets that became acute in 2008, the Fund, including through its investment in SDCF and Overlay Fund, currently has and may continue to have material exposure to below investment grade securities. This is in addition to the Fund's below investment grade emerging country debt investments. The Fund is not limited in its use of derivatives or in the absolute face value of its derivatives positions, and, as a result, the Fund may be leveraged in relation to its assets.
The Manager normally seeks to maintain the Fund's estimated interest rate duration within +/- 2 years of the benchmark's duration. The Fund, if deemed prudent by the Manager, will take temporary defensive measures until the Manager has determined that normal conditions have returned or that it is otherwise prudent to resume investing in accordance with the Fund's normal investment strategies. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
The financial statements of the underlying funds should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request by calling (617) 346-7646 (collect). As of August 31, 2010, shares of SDCF, GMO Special Purpose Holding Fund ("SPHF") and Overlay Fund were not publicly available for direct purchase.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
14
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the OTC market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or who se values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of August 31, 2010, the total value of securities held indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 0.9% of net assets. The underlying funds classify such securities (as defined below) as Level 3. During the period ended August 31, 2010, the Manager has evaluated the Fund's OTC derivatives contracts and determined that no reduction in value was warranted on account of the creditworthiness of a counterparty. See note 4 for a further discussion on valuation of derivative financial instruments.
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. Although alternative prices are available for securities held by the Fund and the underlying funds, those alternative sources are not typically part of the valuation process and would not necessarily confirm the security price used by the Fund and the underlying funds. Therefore, the existence of those alternative sou rces does not necessarily provide greater certainty about the prices used by the Fund and the underlying funds. As of August 31, 2010, the total value of securities held directly and indirectly for which no alternative pricing source was available represented 5.7% of the net assets of the Fund.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The
15
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data. The Fund also used third party valuation services (which use industry models and inputs from pricing vendors) to value credit default swaps.
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Debt Obligations | |||||||||||||||||||
U.S. Government | $ | — | $ | 14,011,398 | $ | — | $ | 14,011,398 | |||||||||||
Foreign Government Obligations | — | 47,483,920 | — | 47,483,920 | |||||||||||||||
TOTAL DEBT OBLIGATIONS | — | 61,495,318 | — | 61,495,318 | |||||||||||||||
Mutual Funds | 154,453,156 | 24,753 | — | 154,477,909 | |||||||||||||||
Short-Term Investments | 4,347,179 | — | — | 4,347,179 | |||||||||||||||
Total Investments | 158,800,335 | 61,520,071 | — | 220,320,406 | |||||||||||||||
Derivatives Swap Agreements | |||||||||||||||||||
Interest Rate Risk | — | 108,793 | — | 108,793 | |||||||||||||||
Credit Risk | — | 280,804 | — | 280,804 | |||||||||||||||
Futures Contracts | |||||||||||||||||||
Interest Rate Risk | 2,439,381 | — | — | 2,439,381 | |||||||||||||||
Forward Currency Contracts | |||||||||||||||||||
Foreign Exchange Rate Risk | — | 5,575,982 | — | 5,575,982 | |||||||||||||||
Total | $ | 161,239,716 | $ | 67,485,650 | $ | — | $ | 228,725,366 |
16
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Swap Agreements Credit Risk | $ | — | $ | (638,987 | ) | $ | — | $ | (638,987 | ) | |||||||||
Futures Contracts | |||||||||||||||||||
Interest Rate Risk | (50,280 | ) | — | — | (50,280 | ) | |||||||||||||
Forward Currency Contracts | |||||||||||||||||||
Foreign Exchange Rate Risk | — | (1,731,914 | ) | — | (1,731,914 | ) | |||||||||||||
Total | $ | (50,280 | ) | $ | (2,370,901 | ) | $ | — | $ | (2,421,181 | ) |
The underlying funds held at period end are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements. The aggregate net values of the Fund's investments (both direct and indirect) in securities and other financial instruments using Level 3 inputs were 36.8% and (0.1)% of total net assets, respectively.
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2010 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Transfer into Level 3* | Transfers out of Level 3* | Balances as of August 31, 2010 | ||||||||||||||||||||||||||||
Swap Agreements | $ | 17,943 | $ | 54,600 | $ | — | $ | (54,600 | ) | $ | (376,126 | ) | $ | — | $ | 358,183 | ** | $ | — | ||||||||||||||||
Total | $ | 17,943 | $ | 54,600 | $ | — | $ | (54,600 | ) | $ | (376,126 | ) | $ | — | $ | 358,183 | $ | — |
* The Fund recognizes investments and derivatives transferred into Level 3 at the value at the beginning of the period and transferred out of Level 3 at the value at the end of the period.
** Financial assets transferred between Level 2 and Level 3 were due to a change in observable and/or unobservable inputs.
17
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are inclu ded with the net realized and unrealized gain or loss on investment securities.
Repurchase agreements
The Fund may enter into repurchase agreements. Under a repurchase agreement the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities it acquired under the repurchase agreement. The value of the securities acquired is required by contract to be marked to market daily so that their market value is at least equal to the amount owed to the Fund by the seller. If the seller of a repurchase agreement defaults or enters into insolvency proceedings and/or the value of the securities subject to the repurchase agreement is insufficient, the Fund's recovery of cash from the seller may be delayed and the Fund may incur a loss equal to the difference between the cash it paid and the value of the securities. The Fund had no repurchase agreements outstanding at the end of the period.
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at an agreed upon price and date. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which generally causes the Fund's portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the even t of a buyer's bankruptcy or insolvency, the Fund's use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund's right to repurchase the securities. The Fund had no reverse repurchase agreements outstanding at the end of the period.
18
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Inflation-indexed bonds
The Fund may invest in inflation indexed bonds. Inflation indexed bonds are fixed income securities whose principal value is adjusted periodically according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that reflects inflation in the principal value of the bond. Most other issuers pay out any inflation related accruals as part of a semiannual coupon.
The value of inflation indexed bonds is expected to change in response to changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal interest rates (i.e., stated interest rates) and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate than nominal interest rates, real interest rates (i.e. nominal interest rate minus inflation) might decline, leading to an increase in value of inflation indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation indexed bonds. There can be no assurance, however, that the value of inflation indexed bonds will be directly correlated to changes in nominal interest rates, and short term increases in inflation may lead to a decline in their value. Coupon payments received by the Fund from inflation indexed bonds are included in the Fund's gross income for the period in which they accrue. In addition, any increase or decrease in the principal amount of an inflation indexed bond will increase or decrease taxable ordinary income to the Fund, even though principal is not paid until maturity. Inflation-indexed bonds outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country's tax treaty with the United States. The foreign withholding rates applicable to a Fund's investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Transaction based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
19
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund elected to defer to March 1, 2010 post-October capital losses of $3,596,491.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/29/2012 | $ | (7,601,799 | ) | ||||
2/28/2014 | (7,575,780 | ) | |||||
2/28/2015 | (269,796 | ) | |||||
2/28/2017 | (4,412,277 | ) | |||||
2/28/2018 | (6,769,760 | ) | |||||
Total | $ | (26,629,412 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 237,651,870 | $ | 5,594,707 | $ | (22,926,171 | ) | $ | (17,331,464 | ) |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts
20
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact its operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which co llection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 5).
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
For the period ended August 31, 2010, the Fund did not charge a premium on cash purchases or fee on cash redemptions of the amount invested or redeemed. Purchase premiums and redemption fees are paid
21
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
to and retained by a Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relat ing to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
Other matters
SPHF, an investment of the Fund, has litigation pending against various entities related to the 2002 fraud and related default of securities previously held by SPHF. The outcome of the lawsuits against the remaining defendants is not known and any potential recoveries are not reflected in the net asset value of SPHF. For the period ended August 31, 2010, the Fund received no distributions from SPHF in connection with settlement agreements related to litigation.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
22
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
• Market Risk — Fixed Income Securities — Typically, the value of the Fund's fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
• Credit and Counterparty Risk — The Fund runs the risk that the issuer or guarantor of a fixed income security, the counterparty to an over-the-counter derivatives contract, a borrower of the Fund's securities or the obligor of an obligation underlying an asset-backed security will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise honor its obligations. This risk is particularly pronounced for the Fund because it typically uses over-the-counter derivatives, including swap contracts with longer-term maturities, and may have significant exposure to a single counterparty. The risk of counterparty default is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent mark et disruptions.
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in underlying funds, including the risk that the underlying funds in which it invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments.
Other principal risks of an investment in the Fund include Foreign Investment Risk (risk that the market prices of foreign securities will fluctuate more rapidly and to a greater extent than those of U.S. securities); Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Leveraging Risk (increased risk of loss from use of reverse repurchase agreements and other derivatives and securities lending); Focused Investment Risk (increased risk from the Fund's to focus on investments in countries, regions, sectors or companies with high positive correlations to one another); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset
23
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
The most significant market risk for Funds investing in fixed income securities is that the securities in which they invest experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. These risks apply to the Fund because it invests in asset-backed securities. Asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as "collateralized debt obligations" or "collateralized loan obligations") and by the fees earned by service providers. Payment of interest on asset-backed securities and repayment of principal largely depend on t he cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. Many asset-backed securities owned (directly or indirectly) by the Fund that were once rated investment grade are now rated below investment grade as of the date of this Report.
With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e .g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets
24
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and a Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.
The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution's business may have a material impact on multiple investments.
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps or other derivatives on an index, a single security or a basket of securities to gain investment exposures (e.g., by selling protection under a credit default swap). The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). For example, the Fund may use credit default swaps to take a short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund's exposure to the credit of an issuer through the debt instrument, but adjust the Fund's interest rate
25
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed versus variable rates and shorter duration versus longer duration exposure. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedin gs. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be secured by collateral (e.g., foreign currency forwards; see "Currency Risk" above), that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed
26
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. During the period ended August 31, 2010, the Fund used forward currency contracts to adjust exposure to foreign currencies and otherwise adjust currency exchange rate risk. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in
27
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effec tively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. During the period ended August 31, 2010, the Fund used futures contracts to adjust interest-rate exposure and enhance the diversity and liquidity of the portfolio. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an of fsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
28
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level
29
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the pe riod ended August 31, 2010, the Fund used swap agreements to adjust interest rate exposure, achieve exposure to a reference entity's credit, and/or provide a measure of protection against default loss. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
30
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Unrealized appreciation on futures contracts* | $ | 2,439,381 | $ | — | $ | — | $ | — | $ | — | $ | 2,439,381 | |||||||||||||||
Unrealized appreciation on forward currency contracts | — | 5,575,982 | — | — | — | 5,575,982 | |||||||||||||||||||||
Unrealized appreciation on swap agreements | 108,793 | — | 280,804 | — | — | 389,597 | |||||||||||||||||||||
Total | $ | 2,548,174 | $ | 5,575,982 | $ | 280,804 | $ | — | $ | — | $ | 8,404,960 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Unrealized depreciation on futures contracts* | $ | (50,280 | ) | $ | — | $ | — | $ | — | $ | (50,280 | ) | |||||||||||||||
Unrealized depreciation on forward currency contracts | — | (1,731,914 | ) | — | — | (1,731,914 | ) | ||||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | (638,987 | ) | — | (638,987 | ) | ||||||||||||||||||||
Total | $ | (50,280 | ) | $ | (1,731,914 | ) | $ | (638,987 | ) | $ | — | $ | — | $ | (2,421,181 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair values of derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments.
31
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Period Ended August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Futures contracts | $ | 5,750,324 | $ | — | $ | — | $ | — | $ | — | $ | 5,750,324 | |||||||||||||||
Forward currency contracts | — | (6,781,126 | ) | — | — | — | (6,781,126 | ) | |||||||||||||||||||
Swap contracts | (432,596 | ) | — | (54,600 | ) | — | — | (487,196 | ) | ||||||||||||||||||
Total | $ | 5,317,728 | $ | (6,781,126 | ) | $ | (54,600 | ) | $ | — | $ | — | $ | (1,517,998 | ) | ||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Futures contracts | $ | 1,337,619 | $ | — | $ | — | $ | — | $ | — | $ | 1,337,619 | |||||||||||||||
Forward currency contracts | — | 4,201,580 | — | — | — | 4,201,580 | |||||||||||||||||||||
Swap contracts | 51,802 | — | (376,126 | ) | — | — | (324,324 | ) | |||||||||||||||||||
Total | $ | 1,389,421 | $ | 4,201,580 | $ | (376,126 | ) | $ | — | $ | — | $ | 5,214,875 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
The volume of derivative activity, based on absolute values (forward currency contracts and futures contracts), or notional amounts (swap agreements) outstanding at each month-end, was as follows for the period ended August 31, 2010:
Forward Currency Contracts | Futures Contracts | Swap Agreements | |||||||||||||
Average amount outstanding | $ | 164,169,951 | $ | 133,406,570 | $ | 62,490,477 |
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.19% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares. The Manager has contractually agreed through at least June 30, 2011 to waive the Fund's shareholder service fee to the extent that the
32
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
aggregate of any direct and indirect shareholder service fees borne by the Fund exceeds 0.15%; provided, however, that the amount of this waiver will not exceed 0.15%.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.25% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investme nt company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in other GMO Funds (excluding those Funds' Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund's Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $2,149 and $736, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Indirect Interest Expense | Total Indirect Expense | ||||||||||||
0.020 | % | 0.006 | % | 0.013 | % | 0.039 | % |
33
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended August 31, 2010 aggregated $63,664,681 and $50,200,000, respectively.
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, 65.33% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2010, 0.03% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 51.84% of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 1,620,402 | $ | 12,746,840 | 1,294,349 | $ | 9,676,543 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 500,029 | 3,850,220 | 287,450 | 2,026,517 | |||||||||||||||
Shares repurchased | (3,202,757 | ) | (24,276,188 | ) | (14,686,486 | ) | (107,912,241 | ) | |||||||||||
Redemption fees | — | — | — | 421,557 | |||||||||||||||
Net increase (decrease) | (1,082,326 | ) | $ | (7,679,128 | ) | (13,104,687 | ) | $ | (95,787,624 | ) |
34
GMO Global Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
10. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income* | Distributions of Realized Gains* | Return of Capital* | Value, end of period | ||||||||||||||||||||||||
GMO Emerging Country Debt Fund, Class III | $ | 9,552,710 | $ | 257,887 | $ | 4,100,000 | $ | 257,887 | $ | — | $ | — | $ | 6,721,998 | |||||||||||||||||
GMO Short-Duration Collateral Fund | 117,940,927 | — | — | 864,757 | — | 29,800,392 | 91,959,273 | ||||||||||||||||||||||||
GMO Special Purpose Holding Fund | 25,211 | — | — | — | — | — | 24,753 | ||||||||||||||||||||||||
GMO U.S. Treasury Fund | 3,526,004 | 46,354,343 | 37,300,000 | 3,820 | 523 | — | 12,580,306 | ||||||||||||||||||||||||
GMO World Opportunity Overlay Fund | 46,984,479 | 3,150,000 | 8,800,000 | — | — | — | 43,191,579 | ||||||||||||||||||||||||
Totals | $ | 178,029,331 | $ | 49,762,230 | $ | 50,200,000 | $ | 1,126,464 | $ | 523 | $ | 29,800,392 | $ | 154,477,909 |
* The table above includes estimated sources of all distributions paid by the underlying funds during the period March 1, 2010 through August 31, 2010. The actual tax characterization of distributions paid by the underlying funds will be determined through fiscal year ending February 28, 2011.
35
GMO Global Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of a composite of accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three-, five-, seven- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications
36
GMO Global Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took in to account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also con sidered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of other funds of the Trust in which it invests. The Trustees noted in particular that certain underlying funds do not charge any advisory fees, and that with respect to all other underlying funds, pursuant to a contractual expense reimbursement arrangement in place with the Fund, the Manager effectively reimburses the Fund for management fees, shareholder servicing fees and most other expenses of the underlying funds that the Fund would otherwise bear as a result of its investments in those other funds. In addition, the Trustees considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economie s of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources,
37
GMO Global Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determ ination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
38
GMO Global Bond Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1 | ) Actual | 0.43 | % | $ | 1,000 | $ | 1,088.10 | $ | 2.26 | ||||||||||
2 | ) Hypothetical | 0.43 | % | $ | 1,000 | $ | 1,023.04 | $ | 2.19 |
* Expenses are calculated using the Class's annualized net expense ratio (including interest expense and indirect expenses incurred) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
39
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 94.1 | % | |||||
Short-Term Investments | 3.1 | ||||||
Preferred Stocks | 1.6 | ||||||
Cash and Cash Equivalents | 1.2 | ||||||
Investment Funds | 0.1 | ||||||
Debt Obligations | 0.1 | ||||||
Options Purchased | 0.0 | ||||||
Private Equity Securities | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Written Options | (0.0 | ) | |||||
Forward Currency Contracts | (0.0 | ) | |||||
Swap Agreements | (0.3 | ) | |||||
Futures Contracts | (0.9 | ) | |||||
Other | 1.0 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
1
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2010 (Unaudited)
Country / Region Summary** | % of Investments | ||||||
United States | 35.0 | % | |||||
Euro Region*** | 13.9 | ||||||
Japan | 11.7 | ||||||
United Kingdom | 10.5 | ||||||
Switzerland | 5.4 | ||||||
South Korea | 3.4 | ||||||
Russia | 2.6 | ||||||
Brazil | 2.0 | ||||||
Sweden | 1.7 | ||||||
Singapore | 1.6 | ||||||
Taiwan | 1.4 | ||||||
China | 1.3 | ||||||
Turkey | 1.3 | ||||||
Australia | 1.1 | ||||||
Thailand | 1.1 | ||||||
India | 1.1 | ||||||
Denmark | 0.7 | ||||||
Hong Kong | 0.6 | ||||||
South Africa | 0.5 | ||||||
Indonesia | 0.4 | ||||||
Czech Republic | 0.4 | ||||||
Norway | 0.3 | ||||||
Egypt | 0.3 | ||||||
Hungary | 0.3 | ||||||
Mexico | 0.3 | ||||||
Malaysia | 0.3 | ||||||
Canada | 0.2 | ||||||
Poland | 0.2 | ||||||
New Zealand | 0.1 | ||||||
Chile | 0.1 | ||||||
Israel | 0.1 | ||||||
Philippines | 0.1 | ||||||
100.0 | % |
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds except for GMO Alpha Only Fund. The table excludes short-term investments. The table includes exposure through the use of derivative contracts.
*** The "Euro Region" is comprised of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
2
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||||||
AFFILIATED ISSUERS — 100.0% | |||||||||||||||
Mutual Funds — 100.0% | |||||||||||||||
2,363,073 | GMO Alpha Only Fund, Class IV | 11,508,165 | |||||||||||||
11,916,399 | GMO Emerging Markets Fund, Class VI | 146,810,040 | |||||||||||||
813,857 | GMO Flexible Equities Fund, Class VI | 13,900,675 | |||||||||||||
8,333,477 | GMO International Core Equity Fund, Class VI | 206,336,889 | |||||||||||||
3,916,319 | GMO International Growth Equity Fund, Class IV | 75,976,578 | |||||||||||||
3,969,828 | GMO International Intrinsic Value Fund, Class IV | 74,910,654 | |||||||||||||
18,341,066 | GMO Quality Fund, Class VI | 322,435,940 | |||||||||||||
17,024 | GMO Short-Duration Investment Fund, Class III | 139,939 | |||||||||||||
3,368,182 | GMO U.S. Core Equity Fund, Class VI | 33,210,276 | |||||||||||||
885,229,156 | |||||||||||||||
Private Investment Fund — 0.0% | |||||||||||||||
175 | GMO SPV I, LLC (a) | 30 | |||||||||||||
TOTAL AFFILIATED ISSUERS (COST $834,106,643) | 885,229,186 | ||||||||||||||
SHORT-TERM INVESTMENTS — 0.0% | |||||||||||||||
Time Deposits — 0.0% | |||||||||||||||
31,264 | State Street Eurodollar Time Deposit, 0.01%, due 09/01/2010 | 31,264 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $31,264) | 31,264 | ||||||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $834,137,907) | 885,260,450 | ||||||||||||||
Other Assets and Liabilities (net) — (0.0%) | (52,882 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 885,207,568 |
See accompanying notes to the financial statements.
3
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Notes to Schedule of Investments:
(a) Underlying investment represents interests in defaulted claims.
See accompanying notes to the financial statements.
4
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $31,264) (Notes 2 and 10) | $ | 31,264 | |||||
Investments in affiliated issuers, at value (cost $834,106,643) (Note 2) | 885,229,186 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 11,439 | ||||||
Total assets | 885,271,889 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 5): | |||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 1,290 | ||||||
Accrued expenses | 63,031 | ||||||
Total liabilities | 64,321 | ||||||
Net assets | $ | 885,207,568 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 988,834,441 | |||||
Accumulated undistributed net investment income | 5,329,922 | ||||||
Accumulated net realized loss | (160,079,338 | ) | |||||
Net unrealized appreciation | 51,122,543 | ||||||
$ | 885,207,568 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 885,207,568 | |||||
Shares outstanding: | |||||||
Class III | 123,523,161 | ||||||
Net asset value per share: | |||||||
Class III | $ | 7.17 |
See accompanying notes to the financial statements.
5
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 10) | $ | 5,365,698 | |||||
Interest | 2 | ||||||
Total investment income | 5,365,700 | ||||||
Expenses: | |||||||
Custodian, fund accounting agent and transfer agent fees | 25,300 | ||||||
Legal fees | 18,952 | ||||||
Audit and tax fees | 16,836 | ||||||
Trustees fees and related expenses (Note 5) | 8,153 | ||||||
Registration fees | 2,300 | ||||||
Miscellaneous | 6,624 | ||||||
Total expenses | 78,165 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (67,160 | ) | |||||
Expense reductions (Note 2) | (604 | ) | |||||
Net expenses | 10,401 | ||||||
Net investment income (loss) | 5,355,299 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | (803,443 | ) | |||||
Net realized gain (loss) | (803,443 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in affiliated issuers | (30,993,501 | ) | |||||
Net realized and unrealized gain (loss) | (31,796,944 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (26,441,645 | ) |
See accompanying notes to the financial statements.
6
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 5,355,299 | $ | 16,058,955 | |||||||
Net realized gain (loss) | (803,443 | ) | (139,014,177 | ) | |||||||
Change in net unrealized appreciation (depreciation) | (30,993,501 | ) | 282,127,540 | ||||||||
Net increase (decrease) in net assets from operations | (26,441,645 | ) | 159,172,318 | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (1,861,814 | ) | (14,212,365 | ) | |||||||
Net realized gains | |||||||||||
Class III | — | (3,648,757 | ) | ||||||||
(1,861,814 | ) | (17,861,122 | ) | ||||||||
Net share transactions (Note 9): | |||||||||||
Class III | 208,388,292 | 131,749,573 | |||||||||
Purchase premiums and redemption fees (Notes 2 and 9): | |||||||||||
Class III | 257,141 | 526,638 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees | 208,645,433 | 132,276,211 | |||||||||
Total increase (decrease) in net assets | 180,341,974 | 273,587,407 | |||||||||
Net assets: | |||||||||||
Beginning of period | 704,865,594 | 431,278,187 | |||||||||
End of period (including accumulated undistributed net investment income of $5,329,922 and $1,836,437, respectively) | $ | 885,207,568 | $ | 704,865,594 |
See accompanying notes to the financial statements.
7
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 7.40 | $ | 5.29 | $ | 10.25 | $ | 11.96 | $ | 11.89 | $ | 11.63 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.05 | 0.20 | 0.34 | 0.20 | 0.23 | 0.23 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.26 | ) | 2.11 | (4.01 | ) | 0.09 | (b) | 1.08 | 1.32 | ||||||||||||||||||
Total from investment operations | (0.21 | ) | 2.31 | (3.67 | ) | 0.29 | 1.31 | 1.55 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.02 | ) | (0.15 | ) | (0.31 | ) | (0.49 | ) | (0.38 | ) | (0.34 | ) | |||||||||||||||
From net realized gains | — | (0.05 | ) | (0.98 | ) | (1.51 | ) | (0.86 | ) | (0.95 | ) | ||||||||||||||||
Total distributions | (0.02 | ) | (0.20 | ) | (1.29 | ) | (2.00 | ) | (1.24 | ) | (1.29 | ) | |||||||||||||||
Net asset value, end of period | $ | 7.17 | $ | 7.40 | $ | 5.29 | $ | 10.25 | $ | 11.96 | $ | 11.89 | |||||||||||||||
Total Return(c) | (2.90 | )%** | 43.73 | % | (39.44 | )% | 1.01 | % | 11.56 | % | 13.91 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 885,208 | $ | 704,866 | $ | 431,278 | $ | 356,524 | $ | 354,236 | $ | 326,032 | |||||||||||||||
Net expenses to average daily net assets(d)(e) | 0.00 | %*(f) | 0.00 | %(f) | 0.00 | %(f) | 0.00 | %(f) | 0.00 | % | 0.00 | % | |||||||||||||||
Net investment income (loss) to average daily net assets(a) | 1.30 | %* | 2.78 | % | 4.27 | % | 1.63 | % | 1.90 | % | 1.99 | % | |||||||||||||||
Portfolio turnover rate | 6 | %** | 34 | % | 52 | % | 30 | % | 15 | % | 20 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | %* | 0.02 | % | 0.03 | % | 0.02 | % | 0.02 | % | 0.02 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | 0.00 | (g) | $ | 0.01 | $ | 0.01 | $ | 0.00 | (g) | $ | 0.00 | (g) | $ | 0.00 | (g) |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(b) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain (loss) on investments due to the timing of purchases and redemptions of Fund shares in relation to fluctuating market values of the investments of the Fund.
(c) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(e) Net expenses to average daily net assets were less than 0.01%.
(f) The net expense ratio does not include the effect of expense reductions (Note 2).
(g) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
8
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO Global Equity Allocation Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks total return greater than that of its benchmark, the MSCI ACWI (All Country World Index). The Fund is a fund of funds and invests primarily in shares of the GMO International Equity Funds and the GMO U.S. Equity Funds. The Fund also may invest in shares of other GMO Funds, including the GMO Fixed Income Funds, GMO Alpha Only Fund, and GMO Alternative Asset Opportunity Fund (GMO Funds in which the Fund invests are collectively referred to as "underlying funds"). In addition, the Fund may hold securities directly. Although the Fund's primary exposure is to foreign and U.S. equity investments (including emerging country equities, both growth and value style equities, and equities of any market capitalization), the Fund also may have exposure to foreign and U.S. fixed income securities (including fixed income securities of any credit quality and having any maturity or duration), the investment returns of commodities a nd, from time to time, other alternative asset classes. Under normal circumstances, the Fund invests (including through investment in the underlying funds) at least 80%of its assets in equity investments. The term "equity investments" refers to direct and indirect (e.g., through the underlying funds) investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts.
The Manager uses proprietary quantitative models and fundamental investment techniques to select the underlying funds in which the Fund invests and to decide how much to invest in each. The models use multi-year forecasts of relative value and risk among asset classes (e.g., U.S. equity, foreign equity, emerging country equity, emerging country debt, foreign fixed income, U.S. fixed income, and commodities). The Manager changes the Fund's holdings of the underlying funds in response to changes in its investment outlook and market valuations and may use redemption/purchase activity to rebalance the Fund's investments.
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
The financial statements of the underlying funds should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect).
9
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Shares of the underlying funds and other investment funds are generally valued at their net asset value. Investments held by the underlying funds are valued as follows. Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the over-the-counter ("OTC") market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximat es market value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of August 31, 2010, the total value of securities held indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 1.3% of net assets. The underlying funds classify such securities (as defined below) as Level 3. Additionally, because many foreign equity securities markets and exchanges close prior to the cl ose of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund and the underlying funds generally value foreign equity securities as of the NYSE close using fair value prices, which are based on local closing prices and adjustments supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2010, equity securities and futures contracts representing 56.8% and (0.1)%, respectively, of the net assets of the Fund, through investments in the underlying funds, were valued using fair value prices based on those adjustments. Those underlying funds classify such securities (as defined below) as Level 2.
10
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Mutual Funds | $ | 885,229,156 | $ | — | $ | — | $ | 885,229,156 | |||||||||||
Private Investment Fund | — | 30 | — | 30 | |||||||||||||||
Short-Term Investments | 31,264 | — | — | 31,264 | |||||||||||||||
Total Investments | 885,260,420 | 30 | — | 885,260,450 | |||||||||||||||
Total | $ | 885,260,420 | $ | 30 | $ | — | $ | 885,260,450 |
The underlying funds held at period end are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements. The aggregate net values of the Fund's indirect investments in securities using Level 3 inputs were 1.3% of total net assets.
The Fund held no investments or other financial instruments at either August 31, 2010 or February 28, 2010, whose fair value was determined using Level 3 inputs.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after
11
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund elected to defer to March 1, 2010 post-October capital losses of $4,714,325.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2018 | $ | (12,045,252 | ) | ||||
Total | $ | (12,045,252 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 974,580,034 | $ | — | $ | (89,319,584 | ) | $ | (89,319,584 | ) |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the
12
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact its operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Income dividends and capital gain distributions from the underlying funds are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for the purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 5).
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
Prior to June 30, 2010, the premium on cash purchases and the fee on cash redemptions were each 0.11% of the amount invested or redeemed. Effective June 30, 2010, the premium on cash purchases and the fee on cash redemptions were each 0.13% of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by a Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a
13
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
result of the purchase or redemption. The Fund charges purchase premiums and redemption fees based on the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premiums and/or redemption fees, if any, imposed by the underlying Funds in which it invests, provided that, if that weighted average is less than 0.05%, the Fund generally will not charge a purchase premium or redemption fee. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchas e occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager may consider known cash flows out of or into other series of the Trust when placing orders for the cash purchase or redemption of shares by the Fund shareholders or other prospective or existing shareholders of the Funds for whom GMO provides asset allocation advice. Consequently, the Fund and those other shareholders for whom GMO provides asset allocation advice will tend to benefit from waivers of the Funds' purchase premiums and redemption fees to a greater extent than other prospective and existing shareholders of the other series of the Trust. All or a portion of the Fund's purchase premiums and /or redemption fees may be waived at the Manager's discretion when they are de minimis and /or the Manager deems it equitable to do so, including without limitation when the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the pu rchase premiums and /or redemption fees, if any, imposed by the underlying funds are less than the purchase premiums and /or redemption fees imposed by the Fund. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waive d for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. References to investments include those held directly by the Fund and indirectly through the Fund's investments in the underlying funds. Some of the underlying funds are non-diversified investment companies under the Investment Company Act of 1940, as
14
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
amended, and therefore a decline in the market value of a particular security held by those funds may affect their performance more than if they were diversified. The principal risks of investing in the Fund are summarized below, including those risks to which the Fund is exposed as a result of its investments in the underlying funds. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund and the underlying funds normally do not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund's investments.
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund or the underlying funds may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund or the underlying funds need to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund or the underlying funds to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund's investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund's investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund or an underlying fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
• Derivatives risk — The use of derivatives involves the risk that their value may not correlate with the value of the relevant underlying assets, rates or indices. Derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk.
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in the underlying funds, including the risk that the underlying funds in which it invests do not perform as expected. Because the Fund bears the fees and expenses of the underlying funds in which it invests, new
15
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
investments in underlying funds with higher fees or expenses than those of the underlying funds in which the Fund is currently invested will increase the Fund's total expenses. The fees and expenses associated with an investment in the Fund are less predictable and may be higher than fees and expenses associated with an investment in funds that charge a fixed management fee.
• Market Risk — Fixed Income Securities — Typically, the value of fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.
Other principal risks of an investment in the Fund include Smaller Company Risk (greater market risk and liquidity risk resulting from investments in companies with smaller market capitalizations); Market Risk — Value Securities (risk that the price of investments held by the Fund will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Market Risk — Growth Securities (greater price fluctuati ons resulting from dependence on future earnings expectations); Commodities Risk (value of an underlying fund's shares may be affected by factors particular to the commodities markets and may fluctuate more than the share value of a fund with a broader range of investments); Currency Risk (risk that fluctuations in exchange rates may adversely affect the value of investments denominated in foreign currencies or that the U.S. dollar will decline in value relative to a foreign currency being hedged); Leveraging Risk (increased risk of loss from use of reverse repurc hase agreements and other derivatives and securities lending); Credit and Counterparty Risk (risk of default of an issuer of a portfolio security, a derivatives counterparty, or a borrower of the Fund's securities); Real Estate Risk (risk to an underlying fund that concentrates its assets in real estate related investments that factors affecting the real estate industry may cause the value of the Fund's investments to fluctuate more than if it invested in securities of companies in a broader range of industries); Short Sales Risk (risk that an underlying fund's lo ss on the short sale of securities that it does not own is unlimited); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk t hat shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
4. Derivative financial instruments
At August 31, 2010, the Fund held no derivative contracts.
16
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
5. Fees and other transactions with affiliates
The Manager decides how to allocate the assets of the Fund among underlying funds. The Manager does not charge the Fund a management fee or shareholder service fee, but it receives management and shareholder service fees from the underlying funds in which the Fund invests. Because those fees vary from fund to fund, the levels of indirect net expenses set forth below are affected by the Manager's asset allocation decisions.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.00% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investme nt company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). This contractual expense limitation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ending August 31, 2010 was $8,153 and $2,852, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
17
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Indirect Interest Expense | Total Indirect Expenses | ||||||||||||
0.456 | % | 0.062 | % | 0.000 | % | 0.518 | % |
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments and class exchanges, for the period ended August 31, 2010 aggregated $258,858,037 and $46,717,187, respectively.
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, the Fund had no shareholders who individually held more than 10% of the fund's outstanding shares.
As of August 31, 2010, less than 0.01% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and none of the Fund's shares were held by accounts for which the Manager had investment discretion
18
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 30,174,061 | $ | 222,221,641 | 46,544,896 | $ | 312,606,188 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 186,093 | 1,332,426 | 1,696,262 | 12,485,743 | |||||||||||||||
Shares repurchased | (2,131,936 | ) | (15,165,775 | ) | (34,398,417 | ) | (193,342,358 | ) | |||||||||||
Purchase premiums | — | 249,380 | — | 336,280 | |||||||||||||||
Redemption fees | — | 7,761 | — | 190,358 | |||||||||||||||
Net increase (decrease) | 28,228,218 | $ | 208,645,433 | 13,842,741 | $ | 132,276,211 |
10. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO Alpha Only Fund, Class IV | $ | 10,242,390 | $ | 1,344,516 | $ | — | $ | — | $ | — | $ | 11,508,165 | |||||||||||||||
GMO Emerging Markets Fund, Class VI | 91,427,217 | 50,061,976 | 1,500,000 | — | — | 146,810,040 | |||||||||||||||||||||
GMO Flexible Equities Fund, Class VI | 14,048,654 | 1,084,266 | — | — | — | 13,900,675 | |||||||||||||||||||||
GMO International Core Equity Fund, Class VI | 124,737,553 | 88,890,479 | 1,127,196 | 1,012,657 | — | 206,336,889 | |||||||||||||||||||||
GMO International Growth Equity Fund, Class IV | 65,456,833 | 12,590,165 | 565,418 | 262,588 | — | 75,976,578 | |||||||||||||||||||||
GMO International Intrinsic Value Fund, Class IV | 64,812,931 | 13,793,866 | 550,000 | 316,279 | — | 74,910,654 | |||||||||||||||||||||
GMO International Small Companies Fund, Class III | 12,192,825 | 533,947 | 12,981,911 | 131,599 | — | — |
19
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO Quality Fund, Class VI | $ | 284,801,188 | $ | 77,584,476 | $ | 16,282,070 | $ | 3,330,447 | $ | — | $ | 322,435,940 | |||||||||||||||
GMO Short-Duration Investment Fund, Class III | 137,011 | 379 | — | 379 | — | 139,939 | |||||||||||||||||||||
GMO SPV I, LLC | 32 | — | — | — | — | 30 | |||||||||||||||||||||
GMO U.S. Core Equity Fund, Class VI | 37,011,744 | 12,972,905 | 13,691,448 | 311,685 | — | 33,210,276 | |||||||||||||||||||||
GMO U.S. Growth Fund, Class III | 16,902 | 1,061 | 19,145 | 64 | — | — | |||||||||||||||||||||
Totals | $ | 704,885,280 | $ | 258,858,036 | $ | 46,717,188 | $ | 5,365,698 | $ | — | $ | 885,229,186 |
20
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of a composite of accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three-, five-, seven- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications
21
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fact that the Fund does not pay a management fee to the Manager under the Fund's investment management agreement, but that the Fund indirectly bears management and shareholder servicing fees paid to the Manager by other funds of the Trust in which it invests. The Trustees also considered so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees noted that they had approved renewal of the Manager's investment management agreements with the other funds of the Trust in which the Fund may invest and had concluded that the advisory fees charged to those funds were reasonable, after considering, among other things: possible economies of scale to the Manager in connection with its management of the other funds of the Trust; the Manager's profitability with respect to the other funds of the Trust and the Trust as a whole (including the effect of recent changes in assets under management); and information prepared by a third-party data service concerning fee s paid to managers of funds deemed by that service to have similar objectives to those of the other funds of the Trust.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
22
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
23
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including indirect management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.52 | % | $ | 1,000.00 | $ | 971.00 | $ | 2.58 | |||||||||||
2) Hypothetical | 0.52 | % | $ | 1,000.00 | $ | 1,022.58 | $ | 2.65 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
24
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 95.2 | % | |||||
Short-Term Investments | 6.2 | ||||||
Options Purchased | 2.2 | ||||||
Swap Agreements | 0.6 | ||||||
Loan Participations | 0.2 | ||||||
Loan Assignments | 0.1 | ||||||
Rights and Warrants | 0.0 | ||||||
Promissory Notes | 0.0 | ||||||
Forward Currency Contracts | (0.1 | ) | |||||
Futures Contracts | (0.3 | ) | |||||
Reverse Repurchase Agreements | (1.5 | ) | |||||
Written Options | (1.8 | ) | |||||
Other | (0.8 | ) | |||||
100.0 | % | ||||||
Country / Region Summary** | % of Investments | ||||||
United States | 95.7 | % | |||||
Canada | 3.7 | ||||||
Emerging*** | 3.6 | ||||||
Euro Region**** | 3.3 | ||||||
Sweden | 0.7 | ||||||
Norway | 0.0 | ||||||
New Zealand | 0.0 | ||||||
Switzerland | (0.7 | ) | |||||
Australia | (1.8 | ) | |||||
Japan | (1.9 | ) | |||||
United Kingdom | (2.6 | ) | |||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds. The table excludes short-term investments. The table includes exposure through the use of derivative contracts. The table is based on duration adjusted exposures, taking into account the market value of securities and the notional amounts of swaps and other derivative contracts. Duration is based on the Manager's models. The greater the duration of a bond, the greater its contribution to the concentration percentage. Credit default swap exposures (both positive and negative) are factored into the duration-adjusted exposure using the reference security and applying the same methodology to that security.
*** The "Emerging" exposure is associated only with investments in the GMO Emerging Country Debt Fund, which is exposed to emerging countries primarily comprised of Russia, Argentina, Brazil, Philippines, Mexico, Venezuela, Colombia, Ukraine, Turkey, and Indonesia. Additional information about the fund's emerging country exposure is available in the financial statements of the GMO Emerging Country Debt Fund.
**** The "Euro Region" is comprised of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
1
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) / Shares | Description | Value ($) | |||||||||
DEBT OBLIGATIONS — 27.3% | |||||||||||
U.S. Government — 27.3% | |||||||||||
23,718,750 | U.S. Treasury Inflation Indexed Bond, 0.63%, due 04/15/13 (a) | 24,243,148 | |||||||||
11,993,760 | U.S. Treasury Inflation Indexed Bond, 1.25%, due 07/15/20 (a) | 12,336,710 | |||||||||
4,482,480 | U.S. Treasury Inflation Indexed Bond, 1.88%, due 07/15/15 (a) | 4,824,269 | |||||||||
6,050,880 | U.S. Treasury Inflation Indexed Bond, 2.13%, due 02/15/40 (a) | 6,796,367 | |||||||||
15,132,040 | U.S. Treasury Inflation Indexed Bond, 2.38%, due 01/15/17 (a) | 16,863,947 | |||||||||
11,269,164 | U.S. Treasury Inflation Indexed Bond, 2.50%, due 01/15/29 (a) | 13,225,423 | |||||||||
4,912,040 | U.S. Treasury Inflation Indexed Bond, 3.38%, due 04/15/32 (a) | 6,607,460 | |||||||||
5,303,680 | U.S. Treasury Inflation Indexed Bond, 3.88%, due 04/15/29 (a) (b) | 7,349,739 | |||||||||
13,507,491 | U.S. Treasury Inflation Indexed Note, 2.38%, due 04/15/11 (a) (b) | 13,675,281 | |||||||||
Total U.S. Government | 105,922,344 | ||||||||||
TOTAL DEBT OBLIGATIONS (COST $101,958,540) | 105,922,344 | ||||||||||
MUTUAL FUNDS — 70.6% | |||||||||||
Affiliated Issuers — 70.6% | |||||||||||
1,423,864 | GMO Emerging Country Debt Fund, Class IV | 13,512,468 | |||||||||
13,970,321 | GMO Short-Duration Collateral Fund | 163,173,353 | |||||||||
28,918 | GMO Special Purpose Holding Fund (c) | 15,616 | |||||||||
223,987 | GMO U.S. Treasury Fund | 5,599,665 | |||||||||
4,132,071 | GMO World Opportunity Overlay Fund | 91,608,004 | |||||||||
TOTAL MUTUAL FUNDS (COST $270,042,983) | 273,909,106 | ||||||||||
SHORT-TERM INVESTMENTS — 1.3% | |||||||||||
Money Market Funds — 1.0% | |||||||||||
3,972,133 | State Street Institutional Treasury Plus Money Market Fund-Institutional Class | 3,972,133 |
See accompanying notes to the financial statements.
2
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
U.S. Government — 0.3% | |||||||||||
1,200,000 | U.S. Treasury Bill, 0.21%, due 06/30/11 (b) (d) | 1,197,886 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $5,169,199) | 5,170,019 | ||||||||||
TOTAL INVESTMENTS — 99.2% (Cost $377,170,722) | 385,001,469 | ||||||||||
Other Assets and Liabilities (net) — 0.8% | 3,254,832 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 388,256,301 |
See accompanying notes to the financial statements.
3
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
A summary of outstanding financial instruments at August 31, 2010 is as follows:
Reverse Repurchase Agreements
Average balance outstanding | $ | (4,670,000 | ) | ||||
Average interest rate | 0.26 | % | |||||
Maximum balance outstanding | $ | (4,670,000 | ) |
Average balance outstanding was calculated based on daily face value balances outstanding during the period that the Fund has entered into reverse repurchase agreements.
Forward Currency Contracts
Settlement Date | Counterparty | Deliver/ Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||
Buys † | |||||||||||||||||||||||
10/26/10 | Citigroup | AUD | 700,000 | $ | 618,818 | $ | (13,324 | ) | |||||||||||||||
10/26/10 | Deutsche Bank AG | AUD | 18,900,000 | 16,708,091 | 162,479 | ||||||||||||||||||
10/26/10 | Royal Bank of Scotland PLC | AUD | 4,200,000 | 3,712,909 | (28,559 | ) | |||||||||||||||||
11/02/10 | Deutsche Bank AG | CAD | 13,000,000 | 12,178,971 | (399,633 | ) | |||||||||||||||||
11/02/10 | Royal Bank of Scotland PLC | CAD | 1,600,000 | 1,498,950 | (44,743 | ) | |||||||||||||||||
10/05/10 | Royal Bank of Scotland PLC | CHF | 1,400,000 | 1,379,377 | 31,337 | ||||||||||||||||||
10/05/10 | Citigroup | CHF | 2,500,000 | �� | 2,463,173 | 56,249 | |||||||||||||||||
10/05/10 | Deutsche Bank AG | CHF | 28,800,000 | 28,375,753 | 1,219,840 | ||||||||||||||||||
10/12/10 | Deutsche Bank AG | EUR | 13,800,000 | 17,487,176 | (249,940 | ) | |||||||||||||||||
10/12/10 | Royal Bank of Scotland PLC | EUR | 1,500,000 | 1,900,780 | (4,820 | ) | |||||||||||||||||
9/07/10 | Citigroup | GBP | 2,800,000 | 4,294,073 | (160,601 | ) | |||||||||||||||||
9/07/10 | Deutsche Bank AG | GBP | 2,700,000 | 4,140,713 | (92,517 | ) | |||||||||||||||||
10/19/10 | Deutsche Bank AG | JPY | 1,906,700,000 | 22,707,567 | 1,017,466 | ||||||||||||||||||
9/21/10 | Deutsche Bank AG | NZD | 17,000,000 | 11,836,519 | 410,029 | ||||||||||||||||||
$ | 129,302,870 | $ | 1,903,263 |
See accompanying notes to the financial statements.
4
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Forward Currency Contracts — continued
Settlement Date | Counterparty | Deliver/ Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||
Sales # | |||||||||||||||||||||||
11/02/10 | Royal Bank of Scotland PLC | CAD | 8,300,000 | $ | 7,775,805 | $ | 100,258 | ||||||||||||||||
11/02/10 | Deutsche Bank AG | CAD | 25,200,000 | 23,608,467 | 520,826 | ||||||||||||||||||
10/05/10 | Deutsche Bank AG | CHF | 33,600,000 | 33,105,045 | (2,579,433 | ) | |||||||||||||||||
10/12/10 | Deutsche Bank AG | EUR | 18,400,000 | 23,316,234 | 293,772 | ||||||||||||||||||
9/07/10 | Barclays | GBP | 5,900,000 | 9,048,225 | (563,612 | ) | |||||||||||||||||
9/07/10 | Deutsche Bank AG | GBP | 1,400,000 | 2,147,037 | 24,588 | ||||||||||||||||||
9/07/10 | Royal Bank of Scotland PLC | GBP | 2,600,000 | 3,987,353 | 82,700 | ||||||||||||||||||
10/19/10 | Deutsche Bank AG | JPY | 160,000,000 | 1,905,497 | (41,347 | ) | |||||||||||||||||
10/19/10 | Royal Bank of Scotland PLC | JPY | 150,000,000 | 1,786,403 | (15,604 | ) | |||||||||||||||||
9/21/10 | Citigroup | NZD | 2,400,000 | 1,671,038 | 73,762 | ||||||||||||||||||
9/21/10 | Deutsche Bank AG | NZD | 2,300,000 | 1,601,411 | 22,435 | ||||||||||||||||||
9/21/10 | Royal Bank of Scotland PLC | NZD | 9,500,000 | 6,614,525 | 233,750 | ||||||||||||||||||
$ | 116,567,040 | $ | (1,847,905 | ) |
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.
Forward Cross Currency Contracts
Settlement Date | Counterparty | Deliver/Units of Currency | Receive/In Exchange For | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
9/14/10 | Deutsche Bank AG | NOK | 62,254,381 | EUR | 7,800,000 | $ | 20,507 | ||||||||||||
9/28/10 | Deutsche Bank AG | SEK | 39,099,170 | EUR | 4,100,000 | (92,088 | ) | ||||||||||||
9/14/10 | Deutsche Bank AG | EUR | 13,200,000 | NOK | 104,426,729 | (181,560 | ) | ||||||||||||
9/14/10 | Royal Bank of Scotland PLC | EUR | 1,500,000 | NOK | 12,002,610 | 907 | |||||||||||||
$ | (252,234 | ) |
See accompanying notes to the financial statements.
5
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
114 | Canadian Government Bond 10 Yr. | December 2010 | $ | 13,501,252 | $ | 64,812 | |||||||||||||
18 | Euro BOBL | September 2010 | 2,804,961 | 44,262 | |||||||||||||||
37 | Euro Bund | September 2010 | 6,321,591 | 247,005 | |||||||||||||||
38 | U.S. Treasury Bond 30 Yr. (CBT) | September 2010 | 5,184,625 | 409,136 | |||||||||||||||
39 | U.S. Treasury Note 2 Yr. (CBT) | December 2010 | 8,546,484 | 492 | |||||||||||||||
60 | U.S. Treasury Note 5 Yr. (CBT) | December 2010 | 7,219,219 | 16,527 | |||||||||||||||
$ | 43,578,132 | $ | 782,234 | ||||||||||||||||
Sales | |||||||||||||||||||
54 | Australian Government Bond 3 Yr. | September 2010 | $ | 5,035,331 | $ | (47,969 | ) | ||||||||||||
27 | Australian Government Bond 10 Yr. | September 2010 | 2,638,059 | (80,017 | ) | ||||||||||||||
5 | Japanese Government Bond 10 Yr. (TSE) | September 2010 | 8,514,348 | (105,859 | ) | ||||||||||||||
52 | UK Gilt Long Bond | December 2010 | 10,010,629 | (10,513 | ) | ||||||||||||||
34 | U.S. Treasury Note 10 Yr. (CBT) | September 2010 | 4,301,000 | (206,680 | ) | ||||||||||||||
$ | 30,499,367 | $ | (451,038 | ) |
Swap Agreements
Interest Rate Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay)# | Fixed Rate | Variable Rate | Market Value | |||||||||||||||||||||||||
7,300,000 | CHF | 3/16/2016 | JPMorgan Chase Bank | Receive | 1.30 | % | 6 Month CHF LIBOR | $ | 26,241 | ||||||||||||||||||||||
14,600,000 | CHF | 3/16/2016 | Barclays Bank PLC | Receive | 1.30 | % | 6 Month CHF LIBOR | 52,481 | |||||||||||||||||||||||
29,700,000 | SEK | 9/15/2015 | Barclays Bank PLC | Receive | 2.50 | % | 3 Month SEK STIBOR | 80,564 | |||||||||||||||||||||||
$ | 159,286 | ||||||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | (45,210 | ) |
# Receive - Fund receives fixed rate and pays variable rate.
(Pay) - Fund pays fixed rate and receives variable rate.
See accompanying notes to the financial statements.
6
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Fund Pays | Fund Receives | Market Value | ||||||||||||||||||||||
275,000,000 | USD | 10/14/2010 | Barclays Bank PLC | 0.35 | % | Barclays TIPS Index | |||||||||||||||||||||
Total Return (a) | $ | 6,685,479 | |||||||||||||||||||||||||
$ | 6,685,479 | ||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
As of August 31, 2010, for forward currency contracts, futures contracts, swap agreements and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
Notes to Schedule of Investments:
BOBL - Bundesobligationen
CBT - Chicago Board of Trade
CHF LIBOR - London Interbank Offered Rate denominated in Swiss Franc.
SEK STIBOR - Stockholm Interbank Offered Rate denominated in Swedish Krona.
TIPS - Treasury Inflation Protected Securities
TSE - Tokyo Stock Exchange
(a) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic (Note 2).
(b) All or a portion of this security has been pledged to cover margin requirements on open financial futures contracts and/or collateral on open swap contracts (Note 4).
(c) Underlying investment represents interests in defaulted claims.
(d) Rate shown represents yield-to-maturity.
Currency Abbreviations:
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
EUR - Euro
GBP - British Pound
JPY - Japanese Yen
NOK - Norwegian Krone
NZD - New Zealand Dollar
SEK - Swedish Krona
USD - United States Dollar
See accompanying notes to the financial statements.
7
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $107,127,739) (Note 2) | $ | 111,092,363 | |||||
Investments in affiliated issuers, at value (cost $270,042,983) (Notes 2 and 10) | 273,909,106 | ||||||
Receivable for investments sold | 8,400,000 | ||||||
Dividends and interest receivable | 440,924 | ||||||
Unrealized appreciation on open forward currency contracts (Note 4) | 4,270,905 | ||||||
Receivable for collateral on open futures contracts (Note 4) | 71,357 | ||||||
Receivable for open swap contracts (Note 4) | 6,844,765 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 29,175 | ||||||
Total assets | 405,058,595 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 1,638 | ||||||
Payable for Fund shares repurchased | 12,000,000 | ||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 83,830 | ||||||
Shareholder service fee | 24,454 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 744 | ||||||
Payable for variation margin on open futures contracts (Note 4) | 110,249 | ||||||
Unrealized depreciation on open forward currency contracts (Note 4) | 4,467,781 | ||||||
Accrued expenses | 113,598 | ||||||
Total liabilities | 16,802,294 | ||||||
Net assets | $ | 388,256,301 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 420,138,523 | |||||
Distributions in excess of net investment income | (22,629,521 | ) | |||||
Accumulated net realized loss | (24,017,270 | ) | |||||
Net unrealized appreciation | 14,764,569 | ||||||
$ | 388,256,301 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 75,537,988 | |||||
Class VI shares | $ | 312,718,313 | |||||
Shares outstanding: | |||||||
Class III | 3,759,612 | ||||||
Class VI | 15,561,598 | ||||||
Net asset value per share: | |||||||
Class III | $ | 20.09 | |||||
Class VI | $ | 20.10 |
See accompanying notes to the financial statements.
8
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 10) | $ | 2,060,545 | |||||
Interest | 1,403,388 | ||||||
Dividends | 209 | ||||||
Total investment income | 3,464,142 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 514,123 | ||||||
Shareholder service fee – Class III (Note 5) | 56,326 | ||||||
Shareholder service fee – Class VI (Note 5) | 92,455 | ||||||
Custodian, fund accounting agent and transfer agent fees | 79,672 | ||||||
Audit and tax fees | 34,776 | ||||||
Legal fees | 11,408 | ||||||
Trustees fees and related expenses (Note 5) | 4,455 | ||||||
Registration fees | 1,748 | ||||||
Interest expense (Note 2) | 163 | ||||||
Miscellaneous | 3,956 | ||||||
Total expenses | 799,082 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (128,248 | ) | |||||
Expense reductions (Note 2) | (9 | ) | |||||
Indirectly incurred fees waived or borne by Manager (Note 5) | (32,131 | ) | |||||
Shareholder service fee waived (Note 5) | (7,571 | ) | |||||
Net expenses | 631,123 | ||||||
Net investment income (loss) | 2,833,019 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | 1,207,220 | ||||||
Investments in affiliated issuers | 571,834 | ||||||
Realized gains distributions from affiliated issuers (Note 10) | 1,695 | ||||||
Closed futures contracts | 798,316 | ||||||
Closed swap contracts | 7,981,188 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (325,690 | ) | |||||
Net realized gain (loss) | 10,234,563 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | 4,029,532 | ||||||
Investments in affiliated issuers | 11,760,965 | ||||||
Open futures contracts | 354,588 | ||||||
Open swap contracts | 7,370,134 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (581,386 | ) | |||||
Net unrealized gain (loss) | 22,933,833 | ||||||
Net realized and unrealized gain (loss) | 33,168,396 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 36,001,415 |
See accompanying notes to the financial statements.
9
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 2,833,019 | $ | 6,098,911 | |||||||
Net realized gain (loss) | 10,234,563 | 24,421,315 | |||||||||
Change in net unrealized appreciation (depreciation) | 22,933,833 | 83,949,621 | |||||||||
Net increase (decrease) in net assets from operations | 36,001,415 | 114,469,847 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | — | (5,448,884 | ) | ||||||||
Class VI | — | (12,391,638 | ) | ||||||||
Total distributions from net investment income | — | (17,840,522 | ) | ||||||||
Return of capital | |||||||||||
Class III | — | (3,458,538 | ) | ||||||||
Class VI | — | (8,000,942 | ) | ||||||||
Total distributions from return of capital | — | (11,459,480 | ) | ||||||||
— | (29,300,002 | ) | |||||||||
Net share transactions (Note 9): | |||||||||||
Class III | (7,136,797 | ) | (63,026,588 | ) | |||||||
Class VI | (45,697,127 | ) | 15,144,929 | ||||||||
Increase (decrease) in net assets resulting from net share transactions | (52,833,924 | ) | (47,881,659 | ) | |||||||
Redemption fees (Notes 2 and 9): | |||||||||||
Class III | — | 9,699 | |||||||||
Class VI | — | 21,546 | |||||||||
Increase in net assets resulting from redemption fees | — | 31,245 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and redemption fees | (52,833,924 | ) | (47,850,414 | ) | |||||||
Total increase (decrease) in net assets | (16,832,509 | ) | 37,319,431 | ||||||||
Net assets: | |||||||||||
Beginning of period | 405,088,810 | 367,769,379 | |||||||||
End of period (including distributions in excess of net investment income of $22,629,521 and $25,462,540, respectively) | $ | 388,256,301 | $ | 405,088,810 |
See accompanying notes to the financial statements.
10
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007(a) | |||||||||||||||||||
Net asset value, beginning of period | $ | 18.40 | $ | 14.88 | $ | 23.52 | $ | 25.47 | $ | 24.96 | |||||||||||||
Net investment income (loss)(b)† | 0.12 | 0.25 | 0.82 | 1.13 | 0.75 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 1.57 | 4.45 | (6.90 | ) | (0.21 | ) | 0.68 | ||||||||||||||||
Total from investment operations | 1.69 | 4.70 | (6.08 | ) | 0.92 | 1.43 | |||||||||||||||||
From net investment income | — | (0.72 | ) | (2.56 | ) | (2.81 | ) | (0.87 | ) | ||||||||||||||
From net realized gains | — | — | — | (0.06 | ) | (0.05 | ) | ||||||||||||||||
Return of capital | — | (0.46 | ) | — | — | — | |||||||||||||||||
Total distributions | — | (1.18 | ) | (2.56 | ) | (2.87 | ) | (0.92 | ) | ||||||||||||||
Net asset value, end of period | $ | 20.09 | $ | 18.40 | $ | 14.88 | $ | 23.52 | $ | 25.47 | |||||||||||||
Total Return(c) | 9.18 | %** | 32.96 | % | (26.89 | )% | 3.95 | % | 5.79 | %** | |||||||||||||
Net assets, end of period (000's) | $ | 75,538 | $ | 76,048 | $ | 114,859 | $ | 137,492 | $ | 260,205 | |||||||||||||
Net operating expenses to average daily net assets(e) | 0.38 | %(d)* | 0.38 | % | 0.39 | %(d) | 0.37 | %(d) | 0.39 | %* | |||||||||||||
Interest expense to average daily net assets(g) | 0.00 | %(f)* | — | — | 0.07 | % | — | ||||||||||||||||
Total net expenses to average daily net assets(e) | 0.38 | %(d)* | 0.38 | % | 0.39 | %(d) | 0.44 | %(d) | 0.39 | %* | |||||||||||||
Net investment income (loss) to average daily net assets(b) | 1.29 | %* | 1.50 | % | 4.17 | % | 4.51 | % | 4.37 | %* | |||||||||||||
Portfolio turnover rate | 35 | %** | 44 | % | 56 | % | 131 | % | 37 | %†† | |||||||||||||
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets: | 0.08 | %* | 0.10 | % | 0.11 | % | 0.06 | % | 0.06 | %* | |||||||||||||
Redemption fees consisted of the following per share amounts:† | $ | 0.00 | (i) | $ | 0.00 | (h) | $ | 0.01 | — | — |
(a) Period from June 29, 2006 (commencement of operations) through February 28, 2007.
(b) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(c) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(d) The net expense ratio does not include the effect of expense reductions (Note 2).
(e) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(f) Interest expense was less than 0.01% to average daily net assets.
(g) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income.
(h) Redemption fees were less than $0.01 per share.
(i) There were no redemption fees during the period.
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the period from May 31, 2006 (commencement of operations) through February 28, 2007.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
11
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class VI share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007(a) | |||||||||||||||||||
Net asset value, beginning of period | $ | 18.39 | $ | 14.87 | $ | 23.51 | $ | 25.48 | $ | 25.00 | |||||||||||||
Net investment income (loss)(b)† | 0.13 | 0.26 | 1.37 | 1.38 | 0.83 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 1.58 | 4.45 | (7.43 | ) | (0.45 | ) | 0.60 | ||||||||||||||||
Total from investment operations | 1.71 | 4.71 | (6.06 | ) | 0.93 | 1.43 | |||||||||||||||||
From net investment income | — | (0.72 | ) | (2.58 | ) | (2.84 | ) | (0.90 | ) | ||||||||||||||
From net realized gains | — | — | — | (0.06 | ) | (0.05 | ) | ||||||||||||||||
Return of capital | — | (0.47 | ) | — | — | — | |||||||||||||||||
Total distributions | — | (1.19 | ) | (2.58 | ) | (2.90 | ) | (0.95 | ) | ||||||||||||||
Net asset value, end of period | $ | 20.10 | $ | 18.39 | $ | 14.87 | $ | 23.51 | $ | 25.48 | |||||||||||||
Total Return(c) | 9.30 | %** | 33.05 | % | (26.82 | )% | 4.00 | % | 5.75 | %** | |||||||||||||
Net assets, end of period (000's) | $ | 312,718 | $ | 329,041 | $ | 252,911 | $ | 90,360 | $ | 1,874,841 | |||||||||||||
Net operating expenses to average daily net assets(d) | 0.29 | %(e)* | 0.29 | % | 0.30 | %(e) | 0.29 | %(e) | 0.29 | %* | |||||||||||||
Interest expense to average daily net assets(g) | 0.00 | %(f)* | — | — | 0.07 | % | — | ||||||||||||||||
Total net expenses to average daily net assets(d) | 0.29 | %(e)* | 0.29 | % | 0.30 | %(e) | 0.36 | %(e) | 0.29 | %* | |||||||||||||
Net investment income (loss) to average daily net assets(b) | 1.40 | %* | 1.54 | % | 7.73 | % | 5.48 | % | 4.33 | %* | |||||||||||||
Portfolio turnover rate | 35 | %** | 44 | % | 56 | % | 131 | % | 37 | %** | |||||||||||||
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets: | 0.08 | %* | 0.10 | % | 0.09 | % | 0.06 | % | 0.06 | %* | |||||||||||||
Redemption fees consisted of the following per share amounts:† | $ | 0.00 | (i) | $ | 0.00 | (h) | $ | 0.01 | — | — |
(a) Period from May 31, 2006 (commencement of operations) through February 28, 2007.
(b) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(c) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(e) The net expense ratio does not include the effect of expense reductions (Note 2).
(g) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income.
(h) Redemption fees were less than $0.01 per share.
(i) There were no redemption fees during the period.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
12
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO Inflation Indexed Plus Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks total return in excess of that of its benchmark, the Barclays Capital U.S. Treasury Inflation Notes Index. The Fund's investment program has two principal components. One component of the investment program is designed to approximate the return of the Fund's benchmark. The second component seeks to add value relative to that benchmark by exploiting misvaluations in global markets (e.g., global interest rates, sectors, currencies, credit and emerging country debt markets) beyond those represented in the Fund's benchmark. As a result, the Fund's interest rate, sector, credit and currency exposures will differ from those of its benchmark.
The Manager uses fundamental investment techniques and quantitative models to determine the relative values of the interest rate and currency markets, to determine currency and interest rate exposures, and to identify investments the Manager believes are undervalued or are likely to provide downside protection. The Manager selects investments based on an evaluation of various factors including, but not limited to, fundamental factors such as inflation and current account positions, as well as price-based factors such as interest and exchange rates.
Under normal circumstances, the Fund invests directly and indirectly (e.g., through the GMO Funds in which the Fund invests, collectively referred to as the "underlying funds" or derivatives) at least 80% of its assets in inflation indexed bonds. The term "inflation indexed bonds" include instruments that are "linked" to general measures of inflation because their principal and/or interest components change with general movements of inflation in the country of issue.
The Fund implements its investment program by investing in or holding: exchange-traded and over-the-counter ("OTC") derivatives, including without limitation, futures contracts, currency options, interest rate options, currency forwards, reverse repurchase agreements, credit default swaps, and other swap contracts (to gain exposure to inflation indexed bonds and/or the global interest rate, credit, and currency markets); inflation indexed bonds issued by the U.S. and foreign governments and their agencies or instrumentalities (including securities neither guaranteed nor insured by the U.S. government), including Inflation-Protected Securities issued by the U.S. Treasury ("TIPS"), and inflation indexed bonds issued by corporations; non-inflation indexed (or nominal) fixed income securities issued by the U.S. and foreign governments and their agencies or
13
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
instrumentalities (including securities neither guaranteed nor insured by the U.S. government) and by corporations (to gain direct exposure to such securities and/or for use as part of a synthetic position); shares of GMO Short-Duration Collateral Fund ("SDCF") (a fund that invests primarily in asset-backed securities); shares of GMO World Opportunity Overlay Fund ("Overlay Fund") (to attempt to exploit misvaluations in world interest rates, currencies and credit markets); shares of GMO Emerging Country Debt Fund ("ECDF") (to gain exposure to emerging country debt markets); shares of GMO High Quality Short-Duration Bond Fund (to seek to generate a return in excess of that of the J.P. Morgan U.S. 3 Month Cash Index by investing in a wide variety of high quality U.S. and foreign debt investments); shares of GMO Debt Opportunities Fund (to seek to generate a positive return by investing in a wide variety of U.S. and foreign debt in vestments without regard to the credit quality of the investment); and shares of GMO U.S. Treasury Fund (for liquidity management purposes). In addition, the Fund may invest in unaffiliated money market funds.
Historically, the Fund has used derivatives and investments in other GMO Funds as the principal means to gain investment exposure. As a result, the Fund has substantial holdings of SDCF (a fund that invests primarily in asset-backed securities) and Overlay Fund (a fund that invests in asset-backed securities and uses derivatives to attempt to exploit misvaluations in world interest rates, currencies and credit markets). Because of the deterioration in credit markets that became acute in 2008, the Fund, including through its investment in SDCF and Overlay Fund, currently has and may continue to have material exposure to below investment grade securities. This is in addition to the Fund's below investment grade emerging country debt investments. The Fund is not limited in its use of derivatives or in the absolute face value of its derivatives positions, and, as a result, the Fund may be leveraged in relation to its assets.
The Fund, if deemed prudent by the Manager, will take temporary defensive measures until the Manager has determined that normal conditions have returned or that it is otherwise prudent to resume investing in accordance with the Fund's normal investment strategies. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
Throughout the period ended August 31, 2010, the Fund had two classes of shares outstanding: Class III and Class VI. Each class of shares bears a different shareholder service fee.
The financial statements of the underlying funds should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect). As of August 31, 2010, shares of GMO Special Purpose Holding Fund ("SPHF") and Overlay Fund were not publicly available.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP
14
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the OTC market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or who se values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of August 31, 2010, the total value of securities held indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 1.0% of net assets. The underlying funds classify such securities (as defined below) as Level 3. During the period ended August 31, 2010, the Manager has evaluated the Fund's OTC derivatives contracts and determined that no reduction in value was warranted on account of the creditworthiness of a counterparty. See note 4 for a further discussion on valuation of derivative financial instruments.
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. Although alternative prices are available for securities held by the Fund and the underlying funds, those alternative sources are not typically part of the valuation process and would not necessarily confirm the security price used by the Fund and the underlying funds. Therefore, the existence of those alternative sou rces does not necessarily provide greater certainty about the prices used by the Fund and the underlying funds. As of August 31, 2010, the total value of securities held directly and indirectly for which no alternative pricing source was available represented 6.0% of the net assets of the Fund.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based
15
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data.
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Debt Obligations | |||||||||||||||||||
U.S. Government | $ | — | $ | 105,922,344 | $ | — | $ | 105,922,344 | |||||||||||
TOTAL DEBT OBLIGATIONS | — | 105,922,344 | — | 105,922,344 | |||||||||||||||
Mutual Funds | 273,893,490 | 15,616 | — | 273,909,106 | |||||||||||||||
Short-Term Investments | 5,170,019 | — | — | 5,170,019 | |||||||||||||||
Total Investments | 279,063,509 | 105,937,960 | — | 385,001,469 | |||||||||||||||
Derivatives | |||||||||||||||||||
Swap Agreements | |||||||||||||||||||
Interest Rate Risk | — | 6,844,765 | — | 6,844,765 | |||||||||||||||
Futures Contracts | |||||||||||||||||||
Interest Rate Risk | 782,234 | — | — | 782,234 | |||||||||||||||
Forward Currency Contracts | |||||||||||||||||||
Foreign Exchange Risk | — | 4,270,905 | — | 4,270,905 | |||||||||||||||
Total | $ | 279,845,743 | $ | 117,053,630 | $ | — | $ | 396,899,373 |
16
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Futures Contracts | |||||||||||||||||||
Interest Rate Risk | $ | (451,038 | ) | $ | — | $ | — | $ | (451,038 | ) | |||||||||
Forward Currency Contracts | |||||||||||||||||||
Foreign Exchange Risk | — | (4,467,781 | ) | — | (4,467,781 | ) | |||||||||||||
Total | $ | (451,038 | ) | $ | (4,467,781 | ) | $ | — | $ | (4,918,819 | ) |
The underlying funds held at period end are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements. The aggregate net values of the Fund's indirect investments in securities and other financial instruments using Level 3 inputs were 38.2% and (0.1)% of total net assets, respectively.
The Fund held no direct investments or other financial instruments at either August 31, 2010 or February 28, 2010, whose fair value was determined using Level 3 inputs.
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are inclu ded with the net realized and unrealized gain or loss on investment securities.
Loan agreements
The Fund may invest in loans to corporate, governmental, or other borrowers. The Fund's investments in loans may be in the form of participations in loans or assignments of all or a portion of loans. A loan is often administered by a bank or other financial institution that acts as agent for all holders. The agent
17
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation, (i) the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the party from whom the Fund has purchased the participation and only upon receipt by that party of payments from the borrower and (ii) the Fund generally has no right to enforce compliance by the borrower with the terms of the loan agreement or to vote on matters arising under the loan agreement. Thus, the Fund may be subject to credit risk both of the party from whom it purchased the loan participation and the borrower and the Fund may have minimal control over the terms of any loan modification. When the Fund purchases assignments of loans, it acquires direct rights against the borrower. The Fund had no loan agreements outstanding at the end of the period.
Repurchase agreements
The Fund may enter into repurchase agreements. Under a repurchase agreement the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities it acquired under the repurchase agreement. The value of the securities acquired is required by contract to be marked to market daily so that their market value is at least equal to the amount owed to the Fund by the seller. If the seller of a repurchase agreement defaults or enters into insolvency proceedings and/or the value of the securities subject to the repurchase agreement is insufficient, the Fund's recovery of cash from the seller may be delayed and the Fund may incur a loss equal to the difference between the cash it paid and the value of the securities. The Fund had no repurchase agreements outstanding at the end of the period.
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at an agreed upon price and date. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which generally causes the Fund's portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the even t of a buyer's bankruptcy or insolvency, the Fund's use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund's right to repurchase the securities. The Fund had no reverse repurchase agreements outstanding at the end of the period.
Inflation-indexed bonds
The Fund may invest in inflation indexed bonds. Inflation indexed bonds are fixed income securities whose principal value is adjusted periodically according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that reflects inflation in the principal value of the bond. Most other issuers pay out any inflation related accruals as part of a semiannual coupon.
18
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The value of inflation indexed bonds is expected to change in response to changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal interest rates (i.e., stated interest rates) and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate than nominal interest rates, real interest rates (i.e. nominal interest rate minus inflation) might decline, leading to an increase in value of inflation indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation indexed bonds. There can be no assurance, however, that the value of inflation indexed bonds will be directly correlated to changes in nominal interest rates, and short term increases in inflation may lead to a decline in their value. Coupon payments received by the Fund from inflation indexed bonds are included in the Fund's gross income for the period in which they accrue. In addition, any increase or decrease in the principal amount of an inflation indexed bond will increase or decrease taxable ordinary income to the Fund, even though principal is not paid until maturity. Inflation-indexed bonds outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund has adopted a tax year-end of December 31. Unless otherwise indicated, all applicable tax disclosures reflect tax adjusted balances as of December 31, 2009. The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
19
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
As of December 31, 2009, the Fund elected to defer to January 1, 2010 post-October currency losses of $1,238,089.
As of December 31, 2009, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the code related to share ownership activity. Such losses expire as follows:
12/31/2015 | $ | (31,655,205 | ) | ||||
12/31/2016 | (22,723,556 | ) | |||||
Total | $ | (54,378,761 | ) |
Utilization of the capital loss carryforwards, post-October capital losses and future losses, if any, realized subsequent to January 1, 2010, could be subject to limitations imposed by the Code related to share ownership activity.
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 407,722,432 | $ | 11,365,797 | $ | (34,086,760 | ) | $ | (22,720,963 | ) |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010, that would materially impact i ts operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the periods ended December 31, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on
20
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 5).
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
For the period ended August 31, 2010, the Fund did not charge a premium on cash purchases or fee on cash redemptions of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by a Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind
21
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
Other matters
SPHF, an investment of the Fund, has litigation pending against various entities related to the 2002 fraud and related default of securities previously held by SPHF. The outcome of the lawsuits against the remaining defendants is not known and any potential recoveries are not reflected in the net asset value of SPHF. For the period ended August 31, 2010, the Fund received no distributions from SPHF in connection with settlement agreements related to litigation.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Fixed Income Securities — Typically, the value of fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities. In addition, increases in real interest rates need not be accompanied by increases in nominal interest rates. In such instances, the value of inflation indexed bonds may experience greater declines than non-inflation indexed (or nominal) fixed incom e investments with similar maturities. There can be no assurance that the value of the Fund's inflation indexed bond investments will be directly correlated to changes in nominal interest rates, and short-term increases in inflation may lead to a decline in their value.
• Credit and Counterparty Risk — The Fund runs the risk that the issuer or guarantor of a fixed income security, the counterparty to an over-the-counter derivatives contract, a borrower of the Fund's securities or the obligor of an obligation underlying an asset-backed security will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise honor its obligations. This risk is particularly pronounced for the Fund because it typically uses over-the-counter derivatives, including swap contracts with longer-term maturities, and may have significant exposure to a single counterparty. The risk
22
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
of counterparty default is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions.
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in underlying funds, including the risk that the underlying funds in which it invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments.
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
Other principal risks of an investment in the Fund include Foreign Investment Risk (risk that the market prices of foreign securities will fluctuate more rapidly and to a greater extent than those of U.S. securities); Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Leveraging Risk (increased risk of loss from use of reverse repurchase agreements and other derivatives and securities lending); Focused Investment Risk (increased risk from the Fund's focus on investments in countries, regions, sectors or companies with high positive correlations to one another); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
The most significant market risk for Funds investing in fixed income securities is that the securities in which they invest experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. These risks apply to the Fund because it invests in asset-backed securities. Asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as "collateralized debt obligations" or "collateralized loan obligations") and by the fees earned by service
23
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
providers. Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. Many asset-ba cked securities owned (directly or indirectly) by the Fund that were once rated investment grade are now rated below investment grade as of the date of this Report.
With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e .g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and a Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.
The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution's business may have a material impact on multiple investments.
24
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps or other derivatives on an index, a single security or a basket of securities to gain investment exposures (e.g., by selling protection under a credit default swap). The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). For example, the Fund may use credit default swaps to take a short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund's exposure to the credit of an issuer through the debt instrument, but adjust the Fund's interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed versus variable rates and shorter duration versus longer duration exposure. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default)
25
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be secured by collateral (e.g., foreign currency forwards; see "Currency Risk" above), that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
26
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. During the period ended August 31, 2010, the Fund used forward currency contracts to adjust exposure to foreign currencies and otherwise adjust currency exchange rate risk. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. During the period ended August 31, 2010, the Fund used futures contracts to adjust interest-rate exposure and enhance the
27
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
diversity and liquidity of the portfolio. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an of fsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
28
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment
29
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the pe riod ended August 31, 2010, the Fund used swap agreements to adjust interest rate exposure and adjust its exposure to certain markets. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
30
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Unrealized appreciation on futures contracts* | $ | 782,234 | $ | — | $ | — | $ | — | $ | — | $ | 782,234 | |||||||||||||||
Unrealized appreciation on forward currency contracts | — | 4,270,905 | — | — | — | 4,270,905 | |||||||||||||||||||||
Unrealized appreciation on swap agreements | 6,844,765 | — | — | — | 6,844,765 | ||||||||||||||||||||||
Total | $ | 7,626,999 | $ | 4,270,905 | $ | — | $ | — | $ | — | $ | 11,897,904 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Unrealized depreciation on futures contracts* | $ | (451,038 | ) | $ | — | $ | — | $ | — | $ | (451,038 | ) | |||||||||||||||
Unrealized depreciation on forward currency contracts | — | (4,467,781 | ) | — | — | (4,467,781 | ) | ||||||||||||||||||||
Total | $ | (451,038 | ) | $ | (4,467,781 | ) | $ | — | $ | — | $ | — | $ | (4,918,819 | ) |
The Effect of Derivative Instruments on the Statement of Operations for the period ended August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Futures contracts | $ | 798,316 | $ | — | $ | — | $ | — | $ | — | $ | 798,316 | |||||||||||||||
Forward currency contracts | — | (343,656 | ) | — | — | — | (343,656 | ) | |||||||||||||||||||
Swap contracts | 7,981,188 | — | — | — | — | 7,981,188 | |||||||||||||||||||||
Total | $ | 8,779,504 | $ | (343,656 | ) | $ | — | $ | — | $ | — | $ | 8,435,848 | ||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Futures contracts | $ | 354,588 | $ | — | $ | — | $ | — | $ | — | $ | 354,588 | |||||||||||||||
Forward currency contracts | — | (581,286 | ) | — | — | — | (581,286 | ) | |||||||||||||||||||
Swap contracts | 7,370,134 | — | — | — | — | 7,370,134 | |||||||||||||||||||||
Total | $ | 7,724,722 | $ | (581,286 | ) | $ | — | $ | — | $ | — | $ | 7,143,436 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair values of derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments.
31
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The volume of derivative activity, based on absolute values (forward currency contracts and futures contracts), or notional amounts (swap agreements) outstanding at each month-end, was as follows for the period ended August 31, 2010:
Forward Currency Contracts | Futures Contracts | Swap Agreements | |||||||||||||
Average amount outstanding | $ | 163,802,912 | $ | 124,538,506 | $ | 339,953,974 |
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.25% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets of each class at the annual rate of 0.15% for Class III shares and 0.055% for Class VI shares. The Manager has contractually agreed through at least June 30, 2011 to waive the Fund's shareholder service fee to the extent that the aggregate of any direct and indirect shareholder service fees borne by a class of shares of the Fund exceeds 0.15% for Class III shares and 0.055% for Class VI shares; provided, however, that the amount of this waiver will not exceed the respective Class's shareholder s ervice fee.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.25% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investme nt company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in other GMO Funds (excluding those Funds' Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund's Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
32
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $4,455 and $1,564, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
The Fund incurs fees and expenses indirectly as a shareholder in underlying funds. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Indirect Interest Expense | Total Indirect Expense | ||||||||||||
0.019 | % | 0.004 | % | 0.013 | % | 0.036 | % |
6. Purchases and sales of securities
For the period ended August 31, 2010, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | 88,131,874 | $ | 77,681,630 | |||||||
Investments (non-U.S. Government securities) | 62,477,808 | 63,921,330 |
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, 72.31% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
33
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
As of August 31, 2010, 0.08% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 81.40% of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 40,007 | $ | 778,772 | 21,496 | $ | 389,217 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 8,643 | 139,900 | |||||||||||||||
Shares repurchased | (413,514 | ) | (7,915,569 | ) | (3,615,300 | ) | (63,555,705 | ) | |||||||||||
Redemption fees | — | — | — | 9,699 | |||||||||||||||
Net increase (decrease) | (373,507 | ) | $ | (7,136,797 | ) | (3,585,161 | ) | $ | (63,016,889 | ) | |||||||||
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class VI: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 147,203 | $ | 2,877,873 | 1,044,739 | $ | 18,057,561 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | — | — | |||||||||||||||
Shares repurchased | (2,473,814 | ) | (48,575,000 | ) | (162,375 | ) | (2,912,632 | ) | |||||||||||
Redemption fees | — | — | — | 21,546 | |||||||||||||||
Net increase (decrease) | (2,326,611 | ) | $ | (45,697,127 | ) | 882,364 | $ | 15,166,475 |
34
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
10. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income* | Distributions of Realized Gains* | Return of Capital* | Value, end of period | ||||||||||||||||||||||||
GMO Emerging Country Debt Fund, Class IV | $ | 18,524,773 | $ | 519,971 | $ | 7,500,000 | $ | 519,970 | $ | — | $ | — | $ | 13,512,468 | |||||||||||||||||
GMO Short-Duration Collateral Fund | 209,275,413 | — | — | 1,534,433 | — | 52,878,081 | 163,173,353 | ||||||||||||||||||||||||
GMO Special Purpose Holding Fund | 15,905 | — | — | — | — | — | 15,616 | ||||||||||||||||||||||||
GMO U.S. Treasury Fund | 68,716 | 61,957,837 | 56,421,330 | 6,142 | 1,695 | — | 5,599,665 | ||||||||||||||||||||||||
GMO World Opportunity Overlay Fund | 88,013,103 | — | — | — | — | — | 91,608,004 | ||||||||||||||||||||||||
Totals | $ | 315,897,910 | $ | 62,477,808 | $ | 63,921,330 | $ | 2,060,545 | $ | 1,695 | $ | 52,878,081 | $ | 273,909,106 |
* The table above includes estimated sources of all distributions paid by the underlying funds during the period March 1, 2010 through August 31, 2010. The actual tax characterization of distributions paid by the underlying funds will be determined through fiscal year ending February 28, 2011.
35
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Board Review of Investments Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one- and three-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications and experience of the
36
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Board Review of Investments Management Agreement — (Continued)
August 31, 2010 (Unaudited)
personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took in to account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also con sidered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of other funds of the Trust in which it invests. The Trustees noted in particular that certain underlying funds do not charge any advisory fees, and that with respect to all other underlying funds, pursuant to a contractual expense reimbursement arrangement in place with the Fund, the Manager effectively reimburses the Fund for management fees, shareholder servicing fees and most other expenses of the underlying funds that the Fund would otherwise bear as a result of its investments in those other funds. In addition, the Trustees considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economie s of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory
37
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Board Review of Investments Management Agreement — (Continued)
August 31, 2010 (Unaudited)
compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
38
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.42 | % | $ | 1,000 | $ | 1,091.80 | $ | 2.21 | |||||||||||
2) Hypothetical | 0.42 | % | $ | 1,000 | $ | 1,023.09 | $ | 2.14 | |||||||||||
Class VI | |||||||||||||||||||
1) Actual | 0.33 | % | $ | 1,000 | $ | 1,093.00 | $ | 1.74 | |||||||||||
2) Hypothetical | 0.33 | % | $ | 1,000 | $ | 1,023.54 | $ | 1.68 |
* Expenses are calculated using each Class's annualized expense ratio (including interest expense and indirect expenses incurred) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
39
GMO International Bond Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO International Bond Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 95.2 | % | |||||
Short-Term Investments | 6.0 | ||||||
Forward Currency Contracts | 2.7 | ||||||
Options Purchased | 2.0 | ||||||
Loan Participations | 0.2 | ||||||
Futures Contracts | 0.2 | ||||||
Loan Assignments | 0.1 | ||||||
Rights and Warrants | 0.0 | ||||||
Promissory Notes | 0.0 | ||||||
Swap Agreements | (0.5 | ) | |||||
Written Options | (1.6 | ) | |||||
Reverse Repurchase Agreements | (4.3 | ) | |||||
Other | 0.0 | ||||||
100.0 | % | ||||||
Country / Region Summary** | % of Investments | ||||||
Euro Region*** | 41.9 | % | |||||
Japan | 41.3 | ||||||
United Kingdom | 6.3 | ||||||
Canada | 6.2 | ||||||
Emerging**** | 3.4 | ||||||
Sweden | 1.4 | ||||||
United States | 0.8 | ||||||
Norway | 0.0 | ||||||
New Zealand | 0.0 | ||||||
Switzerland | (0.3 | ) | |||||
Australia | (1.0 | ) | |||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds. The table excludes short-term investments. The table includes exposure through the use of derivative contracts. The table is based on duration adjusted exposures, taking into account the market value of securities and the notional amounts of swaps and other derivative contracts. Duration is based on the Manager's models. The greater the duration of a bond, the greater its contribution to the concentration percentage. Credit default swap exposures (both positive and negative) are factored into the duration-adjusted exposure using the reference security and applying the same methodology to that security.
*** The "Euro Region" is comprised of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
**** The "Emerging" exposure is associated only with investments in the GMO Emerging Country Debt Fund, which is exposed to emerging countries primarily comprised of Russia, Argentina, Brazil, Philippines, Mexico, Venezuela, Colombia, Ukraine, Turkey, and Indonesia. Additional information about the fund's emerging country exposure is available in the financial statements of the GMO Emerging Country Debt Fund.
1
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
DEBT OBLIGATIONS — 33.5% | |||||||||||||||
Canada — 1.9% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
CAD | 3,000,000 | Government of Canada, 3.50%, due 06/01/20 | 2,985,793 | ||||||||||||
France — 4.4% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
EUR | 4,500,000 | Government of France, 4.00%, due 10/25/38 | 6,777,002 | ||||||||||||
Germany — 3.3% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
EUR | 3,000,000 | Republic of Deutschland, 4.75%, due 07/04/34 (b) | 5,161,638 | ||||||||||||
Italy — 1.5% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
EUR | 2,000,000 | Republic of Italy, 4.00%, due 02/01/37 | 2,349,609 | ||||||||||||
Japan — 13.1% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
JPY | 1,538,400,000 | Japan Government Twenty Year Bond, 2.20%, due 06/20/26 | 20,167,671 | ||||||||||||
Spain — 1.2% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
EUR | 1,500,000 | Government of Spain, 4.70%, due 07/30/41 | 1,859,019 | ||||||||||||
United Kingdom — 4.9% | |||||||||||||||
Foreign Government Obligations | |||||||||||||||
GBP | 4,500,000 | U.K. Treasury Gilt, 4.25%, due 12/07/27 | 7,507,373 | ||||||||||||
Total Foreign Government Obligations | 46,808,105 |
See accompanying notes to the financial statements.
2
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value / Shares | Description | Value ($) | |||||||||||||
United States — 3.2% | |||||||||||||||
U.S. Government | |||||||||||||||
USD | 4,820,966 | U.S. Treasury Inflation Indexed Note, 2.38%, due 04/15/11 (a) (b) (c) | 4,880,852 | ||||||||||||
TOTAL DEBT OBLIGATIONS (COST $46,466,781) | 51,688,957 | ||||||||||||||
MUTUAL FUNDS — 65.0% | |||||||||||||||
United States — 65.0% | |||||||||||||||
Affiliated Issuers | |||||||||||||||
514,117 | GMO Emerging Country Debt Fund, Class III | 4,884,114 | |||||||||||||
5,107,044 | GMO Short-Duration Collateral Fund | 59,650,270 | |||||||||||||
37,466 | GMO Special Purpose Holding Fund (d) | 20,232 | |||||||||||||
136,002 | GMO U.S. Treasury Fund | 3,400,045 | |||||||||||||
1,462,102 | GMO World Opportunity Overlay Fund | 32,414,801 | |||||||||||||
Total United States | 100,369,462 | ||||||||||||||
TOTAL MUTUAL FUNDS (COST $104,392,204) | 100,369,462 | ||||||||||||||
SHORT-TERM INVESTMENTS — 0.8% | |||||||||||||||
Money Market Funds — 0.3% | |||||||||||||||
535,578 | State Street Institutional Treasury Plus Money Market Fund-Institutional Class | 535,578 | |||||||||||||
U.S. Government — 0.5% | |||||||||||||||
700,000 | U.S. Treasury Bill, 0.21%, due 06/30/11 (b) (e) | 698,767 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $1,233,867) | 1,234,345 | ||||||||||||||
TOTAL INVESTMENTS — 99.3% (Cost $152,092,852) | 153,292,764 | ||||||||||||||
Other Assets and Liabilities (net) — 0.7% | 1,147,566 | ||||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 154,440,330 |
See accompanying notes to the financial statements.
3
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
A summary of outstanding financial instruments at August 31, 2010 is as follows:
Forward Currency Contracts
Settlement Date | Counterparty | Deliver/ Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||
Buys † | |||||||||||||||||||||||
10/26/10 | Citibank N.A. | AUD | 400,000 | $ | 353,610 | $ | (7,614 | ) | |||||||||||||||
10/26/10 | Deutsche Bank AG | AUD | 8,800,000 | 7,779,428 | 84,853 | ||||||||||||||||||
10/26/10 | Royal Bank of Scotland PLC | AUD | 1,600,000 | 1,414,442 | (11,104 | ) | |||||||||||||||||
11/02/10 | Deutsche Bank AG | CAD | 4,700,000 | 4,403,167 | (143,911 | ) | |||||||||||||||||
11/02/10 | Royal Bank of Scotland PLC | CAD | 600,000 | 562,106 | (16,779 | ) | |||||||||||||||||
10/05/10 | Citibank N.A. | CHF | 600,000 | 591,162 | 13,500 | ||||||||||||||||||
10/05/10 | Deutsche Bank AG | CHF | 11,200,000 | 11,035,015 | 461,421 | ||||||||||||||||||
10/05/10 | Royal Bank of Scotland PLC | CHF | 300,000 | 295,581 | 6,715 | ||||||||||||||||||
9/07/10 | Barclays Bank PLC | GBP | 2,300,000 | 3,527,274 | 219,713 | ||||||||||||||||||
9/07/10 | Citibank N.A. | GBP | 1,100,000 | 1,686,957 | (63,293 | ) | |||||||||||||||||
9/07/10 | Deutsche Bank AG | GBP | 1,100,000 | 1,686,957 | (38,011 | ) | |||||||||||||||||
10/12/10 | Deutsche Bank AG | EUR | 45,000,000 | 57,023,400 | 1,500,428 | ||||||||||||||||||
10/12/10 | Royal Bank of Scotland PLC | EUR | 600,000 | 760,312 | (1,928 | ) | |||||||||||||||||
10/19/10 | Deutsche Bank AG | JPY | 4,613,900,000 | 54,948,572 | 2,663,177 | ||||||||||||||||||
9/21/10 | Deutsche Bank AG | NZD | 6,100,000 | 4,247,221 | 148,300 | ||||||||||||||||||
$ | 150,315,204 | $ | 4,815,467 | ||||||||||||||||||||
Sales # | |||||||||||||||||||||||
11/02/10 | Deutsche Bank AG | CAD | 8,000,000 | $ | 7,494,752 | $ | 155,144 | ||||||||||||||||
11/02/10 | Royal Bank of Scotland PLC | CAD | 3,400,000 | 3,185,269 | 41,918 | ||||||||||||||||||
10/05/10 | Deutsche Bank AG | CHF | 12,500,000 | 12,315,865 | (948,134 | ) | |||||||||||||||||
10/12/10 | Deutsche Bank AG | EUR | 6,400,000 | 8,109,995 | 154,595 | ||||||||||||||||||
10/12/10 | Royal Bank of Scotland PLC | EUR | 3,000,000 | 3,801,560 | 40,072 | ||||||||||||||||||
9/07/10 | Deutsche Bank AG | GBP | 700,000 | 1,073,518 | 12,294 | ||||||||||||||||||
9/07/10 | Royal Bank of Scotland PLC | GBP | 1,100,000 | 1,686,957 | 34,988 | ||||||||||||||||||
10/19/10 | Deutsche Bank AG | JPY | 90,000,000 | 1,071,842 | (21,829 | ) | |||||||||||||||||
10/19/10 | Royal Bank of Scotland PLC | JPY | 370,000,000 | 4,406,461 | (62,838 | ) | |||||||||||||||||
9/21/10 | Citibank N.A. | NZD | 800,000 | 557,013 | 24,587 | ||||||||||||||||||
9/21/10 | Deutsche Bank AG | NZD | 900,000 | 626,639 | 8,779 | ||||||||||||||||||
9/21/10 | Royal Bank of Scotland PLC | NZD | 3,300,000 | 2,297,677 | 77,009 | ||||||||||||||||||
$ | 46,627,548 | $ | (483,415 | ) |
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.
See accompanying notes to the financial statements.
4
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Forward Cross Currency Contracts
Settlement Date | Counterparty | Deliver/Units of Currency | Receive/In Exchange For | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
9/14/10 | Deutsche Bank AG | NOK | 20,761,434 | EUR | 2,600,000 | $ | 5,256 | ||||||||||||
9/14/10 | Deutsche Bank AG | EUR | 4,700,000 | NOK | 37,183,046 | (64,519 | ) | ||||||||||||
9/14/10 | Royal Bank of Scotland PLC | EUR | 600,000 | NOK | 4,801,044 | 363 | |||||||||||||
9/28/10 | Deutsche Bank AG | SEK | 7,579,088 | EUR | 800,000 | (11,205 | ) | ||||||||||||
$ | (70,105 | ) |
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
47 | Canadian Government Bond 10 Yr. | December 2010 | $ | 5,566,306 | $ | 26,721 | |||||||||||||
60 | Euro Bund | September 2010 | 10,221,389 | 394,301 | |||||||||||||||
350 | Federal Funds 30 Day | September 2010 | 145,575,187 | (763 | ) | ||||||||||||||
19 | Japanese Government Bond 10 Yr. (TSE) | September 2010 | 32,339,126 | 465,433 | |||||||||||||||
2 | UK Gilt Long Term Bond | December 2010 | 384,210 | 364 | |||||||||||||||
11 | U.S. Treasury Note 2 Yr. (CBT) | December 2010 | 2,410,547 | 139 | |||||||||||||||
23 | U.S. Treasury Note 5 Yr. (CBT) | December 2010 | 2,767,367 | 6,335 | |||||||||||||||
15 | U.S. Treasury Bond 30 Yr. (CBT) | September 2010 | 2,046,562 | 164,143 | |||||||||||||||
$ | 201,310,694 | $ | 1,056,673 | ||||||||||||||||
Sales | |||||||||||||||||||
11 | Australian Government Bond 3 Yr. | September 2010 | $ | 1,025,313 | $ | (10,281 | ) | ||||||||||||
6 | Australian Government Bond 10 Yr. | September 2010 | 586,005 | (17,016 | ) | ||||||||||||||
72 | Euro BOBL | September 2010 | 11,187,185 | (167,798 | ) | ||||||||||||||
11 | U.S. Treasury Note 10 Yr. (CBT) | September 2010 | 1,391,500 | (66,830 | ) | ||||||||||||||
$ | 14,190,003 | $ | (261,925 | ) |
See accompanying notes to the financial statements.
5
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Reverse Repurchase Agreements
Face Value | Description | Market Value | |||||||||||||
USD | 4,400,000 | Barclays Bank, 0.30%, dated 08/26/10, to be repurchased on demand at face value plus accrued interest with a stated maturity date of 10/08/10. | $ | (4,400,037 | ) |
Average balance outstanding | $ | (2,524,606 | ) | ||||
Average interest rate | 0.28 | % | |||||
Maximum balance outstanding | $ | (4,403,686 | ) |
Average balance outstanding was calculated based on daily face value balances outstanding during the period that the Fund has entered into reverse repurchase agreements.
Swap Agreements
Credit Default Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay)^ | Annual Premium | Implied Credit Spread (1) | Deliverable on Default | Maximum Potential Amount of Future Payments by the Fund Under the Contract (2) | Market Value | |||||||||||||||||||||||||||||||||||||||
21,000,000 | USD | 3/20/2014 | Deutsche | (Pay) | 1.70 | % | 2.20 | % | Republic of | N/A | $ | 280,803 | |||||||||||||||||||||||||||||||||||
Bank AG | Italy | ||||||||||||||||||||||||||||||||||||||||||||||
15,000,000 | USD | 3/20/2019 | Deutsche Bank AG | Receive | 1.66 | % | 2.33 | % | Republic of Italy | 15,000,000 | USD | (638,987 | ) | ||||||||||||||||||||||||||||||||||
$ | (358,184 | ) | |||||||||||||||||||||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
^ Receive - Fund receives premium and sells credit protection.
(Pay) - Fund pays premium and buys credit protection.
(1) Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on the reference security, as of August 31, 2010, serve as an indicator of the current status of the payment/performance risk and reflect the likelihood or risk of default for the reference entity. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection. Wider (i.e.. higher) credit spreads represent a deterioration of the referenced entity's credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.
(2) The maximum potential amount the Fund could be required to pay as a seller of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.
See accompanying notes to the financial statements.
6
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Interest Rate Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay)# | Fixed Rate | Variable Rate | Market Value | |||||||||||||||||||||||||
3,000,000 | CHF | 3/16/2016 | JPMorgan Chase Bank | Receive | 1.30 | % | 6 Month CHF LIBOR | $ | 10,784 | ||||||||||||||||||||||
5,500,000 | CHF | 3/16/2016 | Barclays | Receive | 1.30 | % | 6 Month CHF LIBOR | 19,770 | |||||||||||||||||||||||
22,300,000 | SEK | 9/15/2015 | Barclays | Receive | 2.50 | % | 3 Month SEK STIBOR | 60,491 | |||||||||||||||||||||||
54,000,000 | EUR | 3/28/2013 | Merrill Lynch | Receive | 2.22 | % | 6 Month EUR LIBOR | 1,042,736 | |||||||||||||||||||||||
$ | 1,133,781 | ||||||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | (14,096 | ) |
# Receive - Fund receives fixed rate and pays variable rate.
(Pay) - Fund pays fixed rate and receives variable rate.
As of August 31, 2010, for forward currency contracts, futures contracts, swap agreements and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
Notes to Schedule of Investments:
BOBL - Bundesobligationen
CBT - Chicago Board of Trade
CHF LIBOR - London Interbank Offered Rate denominated in Swiss Franc.
EUR LIBOR - London Interbank Offered Rate denominated in Euros.
SEK STIBOR - Stockholm Interbank Offered Rate denominated in Swedish Krona.
TSE - Tokyo Stock Exchange
(a) All or a portion of this security has been pledged to cover collateral requirements on reverse repurchase agreements (Note 2).
(b) All or a portion of this security has been pledged to cover margin requirements on open financial futures contracts and/or collateral on open swap contracts (Note 4).
(c) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic (Note 2).
(d) Underlying investment represents interests in defaulted claims.
(e) Rate shown represents yield-to-maturity.
See accompanying notes to the financial statements.
7
GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Currency Abbreviations:
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
EUR - Euro
GBP - British Pound
JPY - Japanese Yen
NOK - Norwegian Krone
NZD - New Zealand Dollar
SEK - Swedish Krona
USD - United States Dollar
See accompanying notes to the financial statements.
8
GMO International Bond Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $47,700,648) (Note 2) | $ | 52,923,302 | |||||
Investments in affiliated issuers, at value (cost $104,392,204) (Notes 2 and 10) | 100,369,462 | ||||||
Dividends and interest receivable | 458,442 | ||||||
Unrealized appreciation on open forward currency contracts (Note 4) | 5,653,112 | ||||||
Receivable for collateral on open futures contracts (Note 4) | 69,599 | ||||||
Receivable for variation margin on open futures contracts (Note 4) | 81,115 | ||||||
Receivable for open swap contracts (Note 4) | 1,414,584 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 18,110 | ||||||
Other expense reimbursement from Manager (Note 2) | 830,768 | ||||||
Total assets | 161,818,494 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 460 | ||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 33,275 | ||||||
Shareholder service fee | 19,965 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 303 | ||||||
Unrealized depreciation on open forward currency contracts (Note 4) | 1,391,165 | ||||||
Payable for open swap contracts (Note 4) | 638,987 | ||||||
Payable for reverse repurchase agreements (Note 2) | 4,400,037 | ||||||
Accrued expenses | 893,972 | ||||||
Total liabilities | 7,378,164 | ||||||
Net assets | $ | 154,440,330 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 222,592,339 | |||||
Accumulated undistributed net investment income | 3,184,161 | ||||||
Accumulated net realized loss | (78,342,836 | ) | |||||
Net unrealized appreciation | 7,006,666 | ||||||
$ | 154,440,330 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 154,440,330 | |||||
Shares outstanding: | |||||||
Class III | 21,759,780 | ||||||
Net asset value per share: | |||||||
Class III | $ | 7.10 |
See accompanying notes to the financial statements.
9
GMO International Bond Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 10) | $ | 792,870 | |||||
Interest | 698,459 | ||||||
Dividends | 104 | ||||||
Total investment income | 1,491,433 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 207,758 | ||||||
Shareholder service fee – Class III (Note 5) | 124,655 | ||||||
Custodian, fund accounting agent and transfer agent fees | 50,600 | ||||||
Audit and tax fees | 34,316 | ||||||
Legal fees | 4,784 | ||||||
Registration fees | 2,116 | ||||||
Trustees fees and related expenses (Note 5) | 1,752 | ||||||
Interest expense (Note 2) | 1,403 | ||||||
Miscellaneous | 1,564 | ||||||
Total expenses | 428,948 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (92,092 | ) | |||||
Expense reductions (Note 2) | (15 | ) | |||||
Indirectly incurred fees waived or borne by Manager (Note 3) | (12,868 | ) | |||||
Shareholder service fee waived (Note 5) | (4,555 | ) | |||||
Net expenses | 319,418 | ||||||
Net investment income (loss) | 1,172,015 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | (453,768 | ) | |||||
Investments in affiliated issuers | (5,245,913 | ) | |||||
Realized gains distributions from affiliated issuers (Note 10) | 127 | ||||||
Closed futures contracts | 2,843,996 | ||||||
Closed swap contracts | (282,155 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | (6,958,373 | ) | |||||
Net realized gain (loss) | (10,096,086 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | 4,658,436 | ||||||
Investments in affiliated issuers | 10,349,059 | ||||||
Open futures contracts | (68,805 | ) | |||||
Open swap contracts | 706,097 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 4,393,778 | ||||||
Net unrealized gain (loss) | 20,038,565 | ||||||
Net realized and unrealized gain (loss) | 9,942,479 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 11,114,494 |
See accompanying notes to the financial statements.
10
GMO International Bond Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 1,172,015 | $ | 2,771,503 | |||||||
Net realized gain (loss) | (10,096,086 | ) | (2,883,139 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 20,038,565 | 54,098,070 | |||||||||
Net increase (decrease) in net assets from operations | 11,114,494 | 53,986,434 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | — | (40,402,952 | ) | ||||||||
Net share transactions (Note 9): | |||||||||||
Class III | (65,823,853 | ) | (16,281,460 | ) | |||||||
Purchase premiums and redemption fees (Notes 2 and 9): | |||||||||||
Class III | — | 83,993 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and redemption fees | (65,823,853 | ) | (16,197,467 | ) | |||||||
Total increase (decrease) in net assets | (54,709,359 | ) | (2,613,985 | ) | |||||||
Net assets: | |||||||||||
Beginning of period | 209,149,689 | 211,763,674 | |||||||||
End of period (including accumulated undistributed net investment income of $3,184,161 and $2,012,146, respectively) | $ | 154,440,330 | $ | 209,149,689 |
See accompanying notes to the financial statements.
11
GMO International Bond Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 6.59 | $ | 6.17 | $ | 9.51 | $ | 9.73 | $ | 9.57 | $ | 10.61 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.05 | 0.09 | 0.19 | 0.41 | 0.41 | 0.21 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.46 | 1.65 | (2.32 | ) | 0.31 | 0.38 | (0.93 | ) | |||||||||||||||||||
Total from investment operations | 0.51 | 1.74 | (2.13 | ) | 0.72 | 0.79 | (0.72 | ) | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | — | (1.32 | ) | (1.21 | ) | (0.94 | ) | (0.54 | ) | (0.31 | ) | ||||||||||||||||
From net realized gains | — | — | — | — | (0.09 | ) | (0.01 | ) | |||||||||||||||||||
Total distributions | — | (1.32 | ) | (1.21 | ) | (0.94 | ) | (0.63 | ) | (0.32 | ) | ||||||||||||||||
Net asset value, end of period | $ | 7.10 | $ | 6.59 | $ | 6.17 | $ | 9.51 | $ | 9.73 | $ | 9.57 | |||||||||||||||
Total Return(b) | 7.74 | %** | 29.54 | % | (24.52 | )% | 8.09 | % | 8.32 | % | (6.83 | )% | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 154,440 | $ | 209,150 | $ | 211,764 | $ | 514,570 | $ | 449,478 | $ | 422,528 | |||||||||||||||
Net operating expenses to average daily net assets(d) | 0.38 | %(c)* | 0.38 | %(c) | 0.39 | % | 0.38 | %(c) | 0.39 | % | 0.39 | % | |||||||||||||||
Interest expense to average daily net assets(e) | 0.00 | %(f)* | 0.00 | %(f) | — | — | — | — | |||||||||||||||||||
Total net expenses to average daily net assets(d) | 0.38 | %(c)* | 0.38 | %(c) | 0.39 | % | 0.38 | %(c) | 0.39 | % | 0.39 | % | |||||||||||||||
Net investment income (loss) to average daily net assets(a) | 1.41 | %* | 1.32 | % | 2.20 | % | 4.26 | % | 4.17 | % | 2.13 | % | |||||||||||||||
Portfolio turnover rate | 20 | %** | 29 | % | 47 | % | 51 | % | 32 | % | 36 | % | |||||||||||||||
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets:(g) | 0.13 | %* | 0.12 | % | 0.09 | % | 0.07 | % | 0.26 | %(h) | 0.08 | % | |||||||||||||||
Redemption fees consisted of the following per share amounts:† | $ | 0.00 | (i) | $ | 0.00 | (j) | $ | 0.01 | $ | 0.00 | (i) | $ | 0.00 | (i) | $ | 0.00 | (i) |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(c) The net expense ratio does not include the effect of expense reductions (Note 2).
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(e) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income.
(f) Interest expense was less than 0.01% to average daily net assets.
(g) Ratios include reimbursement of direct operating expenses and waiver of expenses indirectly incurred through investment in the underlying funds (See Note 5).
(h) Includes 0.19% non-recurring Internal Revenue Code Section 860 expense reimbursed by the Manager (Note 2).
(i) There were no redemption fees during the period.
(j) Redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
12
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO International Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks total return in excess of that of its benchmark, the J.P. Morgan Non-U.S. Government Bond Index. The Fund seeks to add value relative to its benchmark by exploiting misvaluations in global interest rates, sectors, currencies, credit and emerging country debt markets. As a result, the Fund's interest rate, sector, credit and currency exposures will differ from those of its benchmark.
The Manager uses fundamental investment techniques and quantitative models to determine the relative values of the interest rate and currency markets, to determine currency and interest rate exposures, and to identify investments the Manager believes are undervalued or are likely to provide downside protection. The Manager selects investments based on an evaluation of various factors including, but not limited to, fundamental factors such as inflation and current account positions, as well as price-based factors such as interest and exchange rates.
Under normal circumstances, the Fund invests directly and indirectly (e.g., through the GMO Funds in which the Fund invests, collectively referred to as the "underlying funds" or derivatives) at least 80% of its assets in bonds. The term "bond" refers to any fixed income security, which includes (i) obligations of an issuer to make payments of principal and/or interest on future dates, (ii) synthetic debt instruments created by the Manager by using derivatives (e.g., a futures contract, swap contract, currency forward or option), and (iii) instruments with variable interest payments.
The Fund implements its investment program by investing in or holding: exchange-traded and over-the-counter ("OTC") derivatives, including without limitation, futures contracts, currency options, interest rate options, currency forwards, reverse repurchase agreements, credit default swaps, and other swap contracts (to gain exposure to the global interest rate, credit, and currency markets); foreign government securities and other investment-grade bonds denominated in various currencies, including U.S. government securities, asset-backed securities issued by foreign governments and U.S. government agencies (including securities neither guaranteed nor insured by the U.S. government), corporate bonds, and mortgage-backed and other asset-backed securities issued by private issuers; shares of GMO Short-Duration Collateral Fund ("SDCF") (a fund that invests primarily in asset-backed securities); shares of GMO World Opportunity Overlay Fund ("Overlay Fund") (to attempt to exploit misvaluations in world interest rates, currencies and
13
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
credit markets); shares of GMO Emerging Country Debt Fund ("ECDF") (to gain exposure to emerging country debt markets); shares of GMO High Quality Short-Duration Bond Fund (to seek to generate a return in excess of that of the J.P. Morgan U.S. 3 Month Cash Index by investing in a wide variety of high quality U.S. and foreign debt investments); shares of GMO Debt Opportunities Fund (to seek to generate a positive return by investing in a wide variety of U.S. and foreign debt investments without regard to the credit quality of the investment); and shares of GMO U.S. Treasury Fund (for liquidity management purposes). In addition, the Fund may invest in unaffiliated money market funds.
Historically, the Fund has used derivatives and investments in other GMO Funds as the principal means to gain investment exposure. As a result, the Fund has substantial holdings of SDCF (a fund that invests primarily in asset-backed securities) and Overlay Fund (a fund that invests in asset-backed securities and uses derivatives to attempt to exploit misvaluations in world interest rates, currencies and credit markets). Because of the deterioration in credit markets that became acute in 2008, the Fund, including through its investment in SDCF and Overlay Fund, currently has and may continue to have material exposure to below investment grade securities. This is in addition to the Fund's below investment grade emerging country debt investments. The Fund is not limited in its use of derivatives or in the absolute face value of its derivatives positions, and, as a result, the Fund may be leveraged in relation to its assets.
The Manager normally seeks to maintain the Fund's estimated interest rate duration within +/- 2 years of the benchmark's duration. The Fund, if deemed prudent by the Manager, will take temporary defensive measures until the Manager has determined that normal conditions have returned or that it is otherwise prudent to resume investing in accordance with the Fund's normal investment strategies. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
The financial statements of the underlying funds should be read in conjunction with the Fund's financial statements. These financial statements are available, upon request, without charge by calling (617) 346-7646 (collect). As of August 31, 2010, shares of the SDCF, Overlay Fund and GMO Special Purpose Holding Fund ("SPHF") were not publicly available for direct purchase.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
14
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the OTC market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or who se values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of August 31, 2010, the total value of securities held indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 0.9% of net assets. The underlying funds classify such securities (as defined below) as Level 3. During the period ended August 31, 2010, the Manager has evaluated the Fund's OTC derivatives contracts and determined that no reduction in value was warranted on account of the creditworthiness of a counterparty. See note 4 for a further discussion on valuation of derivative financial instruments.
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. Although alternative prices are available for securities held by the Fund and the underlying funds, those alternative sources are not typically part of the valuation process and would not necessarily confirm the security price used by the Fund and the underlying funds. Therefore, the existence of those alternative sou rces does not necessarily provide greater certainty about the prices used by the Fund and the underlying funds. As of August 31, 2010, the total value of securities held directly and indirectly for which no alternative pricing source was available represented 5.5% of the net assets of the Fund.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The
15
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data. The Fund also used third party valuation services (which use industry models and market data from pricing vendors) to value credit default swaps.
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Debt Obligations | |||||||||||||||||||
U.S. Government | $ | — | $ | 4,880,852 | $ | — | $ | 4,880,852 | |||||||||||
Foreign Government Obligations | — | 46,808,105 | — | 46,808,105 | |||||||||||||||
TOTAL DEBT OBLIGATIONS | — | 51,688,957 | — | 51,688,957 | |||||||||||||||
Mutual Funds | 100,349,230 | 20,232 | — | 100,369,462 | |||||||||||||||
Short-Term Investments | 1,234,345 | — | — | 1,234,345 | |||||||||||||||
Total Investments | 101,583,575 | 51,709,189 | — | 153,292,764 | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts Foreign Exchange risk | — | 5,653,112 | — | 5,653,112 | |||||||||||||||
Futures Contracts Interest Rate risk | 1,057,436 | — | — | 1,057,436 | |||||||||||||||
Swap Agreements Credit risk | — | 280,803 | — | 280,803 | |||||||||||||||
Interest Rate risk | — | 1,133,781 | — | 1,133,781 | |||||||||||||||
Total | $ | 102,641,011 | $ | 58,776,885 | $ | — | $ | 161,417,896 |
16
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts Foreign Exchange risk | $ | — | $ | (1,391,165 | ) | $ | — | $ | (1,391,165 | ) | |||||||||
Futures Contracts Interest Rate risk | (262,688 | ) | — | — | (262,688 | ) | |||||||||||||
Swap Agreements Credit risk | — | (638,987 | ) | — | (638,987 | ) | |||||||||||||
Total | $ | (262,688 | ) | $ | (2,030,152 | ) | $ | — | $ | (2,292,840 | ) |
The underlying funds held at period end are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements. The aggregate net values of the Fund's indirect investments in securities and other financial instruments using Level 3 inputs were 34.8% and (0.1%) of total net assets, respectively.
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2010 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Transfer into Level 3* | Transfers out of Level 3* | Balances as of August 31, 2010 | ||||||||||||||||||||||||||||
Swap Agreements | $ | 17,943 | $ | 54,600 | $ | — | $ | (54,600 | ) | $ | (376,127 | ) | $ | — | $ | 358,184 | ** | $ | — | ||||||||||||||||
Total | $ | 17,943 | $ | 54,600 | $ | — | $ | (54,600 | ) | $ | (376,127 | ) | $ | — | $ | 358,184 | $ | — |
* The Fund recognizes investments and derivatives transferred into Level 3 at the value at the beginning of the period and transferred out of Level 3 at the value at the end of the period.
** Financial assets transferred between Level 2 and Level 3 were due to a change in observable and/or unobservable inputs.
17
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are inclu ded with the net realized and unrealized gain or loss on investment securities.
Repurchase agreements
The Fund may enter into repurchase agreements. Under a repurchase agreement the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities it acquired under the repurchase agreement. The value of the securities acquired is required by contract to be marked to market daily so that their market value is at least equal to the amount owed to the Fund by the seller. If the seller of a repurchase agreement defaults or enters into insolvency proceedings and/or the value of the securities subject to the repurchase agreement is insufficient, the Fund's recovery of cash from the seller may be delayed and the Fund may incur a loss equal to the difference between the cash it paid and the value of the securities. The Fund had no repurchase agreements outstanding at the end of the period.
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at an agreed upon price and date. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which generally causes the Fund's portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the even t of a buyer's bankruptcy or insolvency, the Fund's use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund's right to repurchase the securities. As of August 31, 2010, the Fund had received $4,400,000 from reverse repurchase agreements relating to securities with a market value, plus accrued interest, of $4,486,866. Reverse repurchase agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
18
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Inflation-indexed bonds
The Fund may invest in inflation indexed bonds. Inflation indexed bonds are fixed income securities whose principal value is adjusted periodically according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that reflects inflation in the principal value of the bond. Most other issuers pay out any inflation related accruals as part of a semiannual coupon.
The value of inflation indexed bonds is expected to change in response to changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal interest rates (i.e., stated interest rates) and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate than nominal interest rates, real interest rates (i.e. nominal interest rate minus inflation) might decline, leading to an increase in value of inflation indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation indexed bonds. There can be no assurance, however, that the value of inflation indexed bonds will be directly correlated to changes in nominal interest rates, and short term increases in inflation may lead to a decline in their value. Coupon payments received by the Fund from inflation indexed bonds are included in the Fund's gross income for the period in which they accrue. In addition, any increase or decrease in the principal amount of an inflation indexed bond will increase or decrease taxable ordinary income to the Fund, even though principal is not paid until maturity. Inflation-indexed bonds outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country's tax treaty with the United States. The foreign withholding rates applicable to a Fund's investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Transaction based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
19
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund elected to defer to March 1, 2010 post-October currency losses of $285,064.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2015 | $ | (23,687,952 | ) | ||||
2/29/2016 | (507,910 | ) | |||||
2/28/2017 | (20,766,787 | ) | |||||
2/28/2018 | (8,506,660 | ) | |||||
Total | $ | (53,469,309 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 163,117,178 | $ | 5,646,466 | $ | (15,470,880 | ) | $ | (9,824,414 | ) |
On October 12, 2006, the Fund paid a dividend under Code Section 860 of $0.09229 per share to shareholders of record as of October 11, 2006. It is anticipated the Fund will be required to make a payment, estimated to be, $830,768 to the Internal Revenue Service ("IRS") related to such dividend, which has been included in accrued expenses on the Statement of Assets and Liabilities. The Manager will make a reimbursement payment to the Fund concurrent with the Fund's payment to the IRS.
20
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which co llection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 5).
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
21
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Purchases and redemptions of Fund shares
For the period ended August 31, 2010, the Fund did not charge a premium on cash purchases or fee on cash redemptions of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by a Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund sha res executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions the day after those orders are received by the broker or agent.
Other matters
SPHF, an investment of the Fund, has litigation pending against various entities related to the 2002 fraud and related default of securities previously held by SPHF. The outcome of the lawsuits against the remaining defendants is not known and any potential recoveries are not reflected in the net asset value of SPHF. For the period ended August 31, 2010, the Fund received no distributions from SPHF in connection with settlement agreements related to litigation.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not
22
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
• Market Risk — Fixed Income Securities — Typically, the value of the Fund's fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
• Credit and Counterparty Risk — The Fund runs the risk that the issuer or guarantor of a fixed income security, the counterparty to an over-the-counter derivatives contract, a borrower of the Fund's securities or the obligor of an obligation underlying an asset-backed security will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise honor its obligations. This risk is particularly pronounced for the Fund because it typically uses over-the-counter derivatives, including swap contracts with longer-term maturities, and may have significant exposure to a single counterparty. The risk of counterparty default is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type ev idenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions.
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in underlying funds, including the risk that the underlying funds in which it invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments.
Other principal risks of an investment in the Fund include Foreign Investment Risk (risk that the market prices of foreign securities will fluctuate more rapidly and to a greater extent than those of U.S. securities); Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Leveraging Risk (increased risk of loss from use of reverse repurchase agreements and other derivatives and securities lending); Focused Investment Risk (increased risk from the Fund's focus on investments in countries, regions, sectors or companies with high positive correlations to one another); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and
23
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
have adverse long term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, accredited investors, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
The most significant market risk for Funds investing in fixed income securities is that the securities in which they invest experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. These risks apply to the Fund because it invests in asset-backed securities. Asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as "collateralized debt obligations" or "collateralized loan obligations") and by the fees earned by service providers. Payment of interest on asset-backed securities and repayment of principal largely depend on t he cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. Many asset-backed securities owned (directly or indirectly) by the Fund that were once rated investment grade are now rated below investment grade as of the date of this Report.
With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e .g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some
24
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and a Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.
The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution's business may have a material impact on multiple investments.
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps or other derivatives on an index, a single security or a basket of securities to gain investment exposures (e.g., by selling protection under a credit default swap). The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). For example, the Fund may use credit default swaps to take a short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may alter the interest rate
25
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund's exposure to the credit of an issuer through the debt instrument, but adjust the Fund's interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed versus variable rates and shorter duration versus longer duration exposure. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedin gs. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be secured by collateral (e.g., foreign currency forwards; see "Currency Risk" above), that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance
26
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. During the period ended August 31, 2010, the Fund used forward currency contracts to adjust exposure to foreign currencies and otherwise adjust currency exchange rate risk. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash,
27
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount tha t the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. During the period ended August 31, 2010, the Fund used futures contracts to adjust interest-rate exposure and enhance the diversity and liquidity of the portfolio. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an of fsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
28
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to
29
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the pe riod ended August 31, 2010, the Fund used swap agreements to adjust interest rate exposure, achieve exposure to a reference entity's credit, and/or provide a measure of protection against default loss. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated
30
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair values of derivative instruments on the Statement of Assets and Liabilities as of August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Unrealized appreciation on futures contracts* | $ | 1,057,436 | $ | — | $ | — | $ | — | $ | — | $ | 1,057,436 | |||||||||||||||
Unrealized appreciation on forward currency contracts | — | 5,653,112 | — | — | — | 5,653,112 | |||||||||||||||||||||
Unrealized appreciation on swap agreements | 1,133,781 | — | 280,803 | — | — | 1,414,584 | |||||||||||||||||||||
Total | $ | 2,191,217 | $ | 5,653,112 | $ | 280,803 | $ | — | $ | — | $ | 8,125,132 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Unrealized depreciation on futures contracts* | $ | (262,688 | ) | $ | — | $ | — | $ | — | $ | — | $ | (262,688 | ) | |||||||||||||
Unrealized depreciation on forward currency contracts | — | (1,391,165 | ) | — | — | — | (1,391,165 | ) | |||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | (638,987 | ) | — | — | (638,987 | ) | |||||||||||||||||||
Total | $ | (262,688 | ) | $ | (1,391,165 | ) | $ | (638,987 | ) | $ | — | $ | — | $ | (2,292,840 | ) |
31
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the period ended August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Futures contracts | $ | 2,843,996 | $ | — | $ | — | $ | — | $ | — | $ | 2,843,996 | |||||||||||||||
Forward currency contracts | (6,973,517 | ) | — | — | — | (6,973,517 | ) | ||||||||||||||||||||
Swap contracts | (227,555 | ) | — | (54,600 | ) | — | — | (282,155 | ) | ||||||||||||||||||
Total | $ | 2,616,441 | $ | (6,973,517 | ) | $ | (54,600 | ) | $ | — | $ | — | $ | (4,411,676 | ) | ||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Futures contracts | $ | (68,805 | ) | $ | — | $ | — | $ | — | $ | — | $ | (68,805 | ) | |||||||||||||
Forward currency contracts | 4,375,194 | — | — | — | 4,375,194 | ||||||||||||||||||||||
Swap contracts | 1,082,224 | — | (376,127 | ) | — | — | 706,097 | ||||||||||||||||||||
Total | $ | 1,013,419 | $ | 4,375,194 | $ | (376,127 | ) | $ | — | $ | — | $ | 5,012,486 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments.
The volume of derivative activity, based on absolute values (forward currency contracts and futures contracts), or notional amounts (swap agreements) outstanding at each month-end, was as follows for the period ended August 31, 2010:
Forward Currency Contracts | Futures Contracts | Swap Agreements | |||||||||||||
Average amount outstanding | $ | 194,842,470 | $ | 106,077,626 | $ | 116,312,447 |
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.25% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares. The Manager has contractually
32
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
agreed through at least June 30, 2011 to waive the Fund's shareholder service fee to the extent that the aggregate of any direct and indirect shareholder service fees borne by the Fund exceeds 0.15%; provided, however, that the amount of this waiver will not exceed 0.15%.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.25% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investme nt company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in other GMO Funds (excluding those Funds' Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund's Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $1,752 and $644, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Indirect Interest Expense | Total Indirect Expenses | ||||||||||||
0.020 | % | 0.005 | % | 0.013 | % | 0.038 | % |
33
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended August 31, 2010 aggregated $33,584,678 and $79,717,205, respectively.
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, 69.33% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2010, 3.83% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 47.25% of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 1,166 | $ | 7,699 | 655,777 | $ | 4,339,722 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 1,101,072 | 7,286,041 | |||||||||||||||
Shares repurchased | (9,959,993 | ) | (65,831,552 | ) | (4,346,752 | ) | (27,907,223 | ) | |||||||||||
Redemption fees | — | — | — | 83,993 | |||||||||||||||
Net increase (decrease) | (9,958,827 | ) | $ | (65,823,853 | ) | (2,589,903 | ) | $ | (16,197,467 | ) |
34
GMO International Bond Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
10. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income* | Distributions of Realized Gains* | Return of Capital* | Value, end of period | ||||||||||||||||||||||||
GMO Emerging Country Debt Fund, Class III | $ | 9,209,717 | $ | 187,377 | $ | 5,400,000 | $ | 187,377 | $ | — | $ | — | $ | 4,884,114 | |||||||||||||||||
GMO Short-Duration Collateral Fund | 95,722,342 | — | 18,000,000 | 603,541 | — | 20,798,623 | 59,650,270 | ||||||||||||||||||||||||
GMO Special Purpose Holding Fund | 20,606 | — | — | — | — | — | 20,232 | ||||||||||||||||||||||||
GMO U.S. Treasury Fund | 2,918,168 | 22,902,077 | 22,420,000 | 1,952 | 127 | — | 3,400,045 | ||||||||||||||||||||||||
GMO World Opportunity Overlay Fund | 45,924,652 | 1,000,000 | 16,000,000 | — | — | — | 32,414,801 | ||||||||||||||||||||||||
Totals | $ | 153,795,485 | $ | 24,089,454 | $ | 61,820,000 | $ | 792,870 | $ | 127 | $ | 20,798,623 | $ | 100,369,462 |
* The table above includes estimated sources of all distributions paid by the underlying funds during the period March 1, 2010 through August 31, 2010. The actual tax characterization of distributions paid by the underlying funds will be determined through fiscal year ending February 28, 2011.
35
GMO International Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of a composite of accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three-, five-, seven- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications
36
GMO International Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took in to account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also con sidered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of other funds of the Trust in which it invests. The Trustees noted in particular that certain underlying funds do not charge any advisory fees, and that with respect to all other underlying funds, pursuant to a contractual expense reimbursement arrangement in place with the Fund, the Manager effectively reimburses the Fund for management fees, shareholder servicing fees and most other expenses of the underlying funds that the Fund would otherwise bear as a result of its investments in those other funds. In addition, the Trustees considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economie s of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources,
37
GMO International Bond Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determ ination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
38
GMO International Bond Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.42 | % | $ | 1,000.00 | $ | 1,077.40 | $ | 2.20 | |||||||||||
2) Hypothetical | 0.42 | % | $ | 1,000.00 | $ | 1,023.09 | $ | 2.14 |
* Expenses are calculated using the Class's annualized net expense ratio (including interest expense and indirect expenses incurred) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
39
GMO International Core Equity Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO International Core Equity Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 95.0 | % | |||||
Short-Term Investments | 3.8 | ||||||
Preferred Stocks | 0.6 | ||||||
Options Purchased | 0.1 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Written Options | 0.0 | ||||||
Swap Agreements | 0.0 | ||||||
Futures Contracts | (0.1 | ) | |||||
Other | 0.6 | ||||||
100.0 | % | ||||||
Country Summary | % of Equity Investments* | ||||||
Japan | 24.5 | % | |||||
United Kingdom | 21.8 | ||||||
France | 9.9 | ||||||
Switzerland | 7.0 | ||||||
Italy | 5.9 | ||||||
Germany | 5.2 | ||||||
Australia | 4.6 | ||||||
Sweden | 4.0 | ||||||
Netherlands | 3.5 | ||||||
Singapore | 2.7 | ||||||
Spain | 1.8 | ||||||
Canada | 1.7 | ||||||
Hong Kong | 1.5 | ||||||
Belgium | 1.2 | ||||||
Denmark | 1.2 | ||||||
Finland | 0.8 | ||||||
Ireland | 0.6 | ||||||
Austria | 0.6 | ||||||
Norway | 0.5 | ||||||
Greece | 0.4 | ||||||
Israel | 0.3 | ||||||
New Zealand | 0.3 | ||||||
Malta | 0.0 | ||||||
Portugal | 0.0 | ||||||
100.0 | % |
1
GMO International Core Equity Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2010 (Unaudited)
Industry Group Summary | % of Equity Investments* | ||||||
Pharmaceuticals, Biotechnology & Life Sciences | 15.1 | % | |||||
Banks | 10.7 | ||||||
Energy | 10.1 | ||||||
Capital Goods | 10.1 | ||||||
Materials | 8.2 | ||||||
Telecommunication Services | 5.8 | ||||||
Food, Beverage & Tobacco | 5.2 | ||||||
Automobiles & Components | 4.7 | ||||||
Retailing | 4.0 | ||||||
Utilities | 3.6 | ||||||
Consumer Durables & Apparel | 3.4 | ||||||
Diversified Financials | 2.6 | ||||||
Real Estate | 2.7 | ||||||
Technology Hardware & Equipment | 2.1 | ||||||
Media | 1.8 | ||||||
Food & Staples Retailing | 1.8 | ||||||
Semiconductors & Semiconductor Equipment | 1.5 | ||||||
Software & Services | 1.5 | ||||||
Transportation | 1.4 | ||||||
Household & Personal Products | 1.3 | ||||||
Insurance | 0.8 | ||||||
Consumer Services | 0.6 | ||||||
Health Care Equipment & Services | 0.6 | ||||||
Commercial & Professional Services | 0.4 | ||||||
100.0 | % |
* Equity investments may consist of common stocks, preferred stocks and rights and warrants. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
2
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
COMMON STOCKS — 95.0% | |||||||||||||||
Australia — 4.3% | |||||||||||||||
4,436,474 | BlueScope Steel Ltd * | 8,519,005 | |||||||||||||
1,158,740 | Boart Longyear Group * | 3,008,372 | |||||||||||||
18,536,235 | Charter Hall Office (REIT) | 4,061,606 | |||||||||||||
1,160,779 | Commonwealth Bank of Australia | 52,170,713 | |||||||||||||
6,872,281 | Dexus Property Group (REIT) | 5,096,157 | |||||||||||||
1,816,100 | Goodman Fielder Ltd | 2,168,862 | |||||||||||||
12,577,100 | Goodman Group (REIT) | 7,143,832 | |||||||||||||
4,520,763 | GPT Group (REIT) | 12,065,572 | |||||||||||||
7,959,974 | ING Office Fund | 4,265,680 | |||||||||||||
3,788,830 | Mirvac Group (REIT) | 4,533,610 | |||||||||||||
351,266 | National Australia Bank Ltd | 7,283,916 | |||||||||||||
909,163 | OneSteel Ltd | 2,345,168 | |||||||||||||
2,750,256 | Pacific Brands Ltd * | 2,564,114 | |||||||||||||
2,421,137 | Qantas Airways Ltd * | 5,436,054 | |||||||||||||
253,824 | Rio Tinto Ltd | 15,941,399 | |||||||||||||
4,721,716 | Stockland (REIT) | 16,621,310 | |||||||||||||
999,058 | Suncorp-Metway Ltd | 7,443,591 | |||||||||||||
727,083 | TABCORP Holdings Ltd | 4,138,992 | |||||||||||||
7,678,605 | Telstra Corp Ltd | 18,859,541 | |||||||||||||
441,970 | Woodside Petroleum Ltd | 16,529,837 | |||||||||||||
414,920 | Woolworths Ltd | 10,256,292 | |||||||||||||
Total Australia | 210,453,623 | ||||||||||||||
Austria — 0.6% | |||||||||||||||
128,844 | Erste Group Bank AG | 4,646,811 | |||||||||||||
1,248,325 | Immofinanz AG * | 4,062,910 | |||||||||||||
412,816 | OMV AG | 13,271,668 | |||||||||||||
100,040 | Raiffeisen International Bank Holding | 4,068,416 | |||||||||||||
88,544 | Voestalpine AG | 2,619,211 | |||||||||||||
Total Austria | 28,669,016 |
See accompanying notes to the financial statements.
3
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Belgium — 1.2% | |||||||||||||||
3,091,208 | Ageas | 7,779,087 | |||||||||||||
211,644 | Anheuser-Busch InBev NV | 10,962,162 | |||||||||||||
253,767 | Belgacom SA | 9,021,951 | |||||||||||||
38,591 | Colruyt SA | 9,538,121 | |||||||||||||
103,910 | Delhaize Group | 6,944,978 | |||||||||||||
1,454,004 | Dexia SA * | 6,035,171 | |||||||||||||
86,280 | KBC Groep NV * | 3,561,855 | |||||||||||||
99,017 | Umicore | 3,428,443 | |||||||||||||
Total Belgium | 57,271,768 | ||||||||||||||
Canada — 1.7% | |||||||||||||||
192,000 | Bank of Montreal | 10,605,149 | |||||||||||||
170,000 | BCE Inc | 5,319,923 | |||||||||||||
610,400 | EnCana Corp | 16,743,283 | |||||||||||||
203,500 | Magna International Inc Class A | 15,847,180 | |||||||||||||
190,900 | Methanex Corp | 4,074,538 | |||||||||||||
110,200 | Metro Inc Class A | 4,664,911 | |||||||||||||
114,500 | National Bank of Canada | 6,612,191 | |||||||||||||
280,100 | Sun Life Financial Inc | 6,577,300 | |||||||||||||
306,400 | Teck Resources Ltd Class B | 10,249,250 | |||||||||||||
Total Canada | 80,693,725 | ||||||||||||||
Denmark — 1.1% | |||||||||||||||
50,244 | Danisco A/S | 3,615,051 | |||||||||||||
244,782 | Danske Bank A/S * | 5,406,716 | |||||||||||||
48,274 | FLSmidth & Co A/S | 2,835,355 | |||||||||||||
506,409 | Novo-Nordisk A/S Class B | 43,267,507 | |||||||||||||
Total Denmark | 55,124,629 | ||||||||||||||
Finland — 0.8% | |||||||||||||||
240,291 | Metso Oyj | 8,744,635 | |||||||||||||
354,172 | Neste Oil Oyj | 4,754,482 | |||||||||||||
943,195 | Nokia Oyj | 8,037,002 | |||||||||||||
95,462 | Outokumpu Oyj | 1,555,296 |
See accompanying notes to the financial statements.
4
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Finland — continued | |||||||||||||||
217,397 | Rautaruukki Oyj | 3,806,045 | |||||||||||||
139,865 | Sampo Oyj Class A | 3,360,166 | |||||||||||||
265,183 | Tieto Oyj | 4,350,399 | |||||||||||||
317,158 | UPM-Kymmene Oyj | 4,340,107 | |||||||||||||
Total Finland | 38,948,132 | ||||||||||||||
France — 9.5% | |||||||||||||||
93,731 | Air Liquide SA | 9,694,854 | |||||||||||||
230,178 | ArcelorMittal | 6,671,413 | |||||||||||||
866,349 | BNP Paribas | 53,671,509 | |||||||||||||
76,544 | Casino Guichard-Perrachon SA | 6,183,567 | |||||||||||||
147,119 | Cie Generale de Geophysique * | 2,467,267 | |||||||||||||
180,434 | Essilor International SA | 10,916,664 | |||||||||||||
459,522 | France Telecom SA | 9,340,561 | |||||||||||||
111,570 | GDF Suez | 3,440,491 | |||||||||||||
61,959 | Hermes International | 11,197,238 | |||||||||||||
107,612 | L'Oreal SA | 10,655,337 | |||||||||||||
243,985 | Lagardere SCA | 8,751,836 | |||||||||||||
185,807 | LVMH Moet Hennessy Louis Vuitton SA | 21,527,232 | |||||||||||||
979,112 | Natixis * | 5,304,042 | |||||||||||||
125,596 | Nexans SA | 7,500,521 | |||||||||||||
208,057 | Peugeot SA * | 5,436,858 | |||||||||||||
74,226 | PPR | 9,622,144 | |||||||||||||
347,689 | Renault SA * | 14,045,492 | |||||||||||||
470,715 | Rhodia SA | 8,798,519 | |||||||||||||
160,037 | Safran SA | 3,930,463 | |||||||||||||
1,655,401 | Sanofi-Aventis | 94,765,579 | |||||||||||||
86,603 | Schneider Electric SA | 9,152,481 | |||||||||||||
316,304 | Silicon-On-Insulator Technologies * | 2,669,716 | |||||||||||||
570,066 | Societe Generale | 28,747,249 | |||||||||||||
175,365 | Technicolor * | 841,545 | |||||||||||||
211,424 | Technip SA | 13,783,955 | |||||||||||||
1,276,056 | Total SA | 59,354,998 | |||||||||||||
118,243 | Valeo SA * | 4,111,511 |
See accompanying notes to the financial statements.
5
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
France — continued | |||||||||||||||
50,134 | Vallourec SA | 4,291,739 | |||||||||||||
992,348 | Vivendi SA | 23,023,884 | |||||||||||||
147,020 | Wendel | 7,495,887 | |||||||||||||
Total France | 457,394,552 | ||||||||||||||
Germany — 4.4% | |||||||||||||||
97,110 | Adidas AG | 4,925,107 | |||||||||||||
269,587 | Aixtron AG | 6,657,636 | |||||||||||||
175,859 | Aurubis AG | 6,977,021 | |||||||||||||
384,277 | BASF AG | 20,211,346 | |||||||||||||
173,264 | Bayerische Motoren Werke AG | 9,103,801 | |||||||||||||
52,798 | Bilfinger & Berger AG | 3,141,839 | |||||||||||||
384,990 | Daimler AG (Registered) * | 18,625,823 | |||||||||||||
406,370 | Deutsche Telekom AG (Registered) | 5,338,550 | |||||||||||||
521,105 | E.ON AG | 14,625,980 | |||||||||||||
49,634 | Hochtief AG | 3,279,889 | |||||||||||||
2,938,292 | Infineon Technologies AG * | 16,293,810 | |||||||||||||
354,328 | Kloeckner & Co AG * | 6,925,800 | |||||||||||||
244,171 | Lanxess AG | 10,641,257 | |||||||||||||
65,385 | MAN SE | 5,622,896 | |||||||||||||
204,999 | MTU Aero Engines Holding AG | 11,394,499 | |||||||||||||
26,302 | Muenchener Rueckversicherungs-Gesellschaft AG (Registered) | 3,351,739 | |||||||||||||
69,246 | RWE AG | 4,532,344 | |||||||||||||
112,695 | Salzgitter AG | 6,849,314 | |||||||||||||
610,054 | SAP AG | 26,565,144 | |||||||||||||
68,814 | Siemens AG (Registered) | 6,237,843 | |||||||||||||
96,383 | Software AG | 10,118,272 | |||||||||||||
122,572 | Stada Arzneimittel AG | 3,742,481 | |||||||||||||
341,599 | Suedzucker AG | 6,217,556 | |||||||||||||
Total Germany | 211,379,947 | ||||||||||||||
Greece — 0.4% | |||||||||||||||
616,831 | Alpha Bank A.E. * | 3,949,365 | |||||||||||||
686,315 | National Bank of Greece SA * | 8,521,156 |
See accompanying notes to the financial statements.
6
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Greece — continued | |||||||||||||||
402,701 | OPAP SA | 6,112,778 | |||||||||||||
Total Greece | 18,583,299 | ||||||||||||||
Hong Kong — 1.4% | |||||||||||||||
2,810,221 | CLP Holdings Ltd | 21,455,557 | |||||||||||||
815,600 | Esprit Holdings Ltd | 4,601,631 | |||||||||||||
2,462,500 | Hong Kong Electric Holdings Ltd | 15,007,246 | |||||||||||||
504,000 | Li & Fung Ltd | 2,544,813 | |||||||||||||
9,448,000 | Pacific Basin Shipping Ltd | 6,489,661 | |||||||||||||
437,000 | Sun Hung Kai Properties Ltd | 6,162,727 | |||||||||||||
304,500 | Swire Pacific Ltd | 3,682,812 | |||||||||||||
2,267,500 | Yue Yuen Industrial Holdings | 7,449,023 | |||||||||||||
Total Hong Kong | 67,393,470 | ||||||||||||||
Ireland — 0.5% | |||||||||||||||
1,300,225 | C&C Group Plc | 5,063,799 | |||||||||||||
485,741 | CRH Plc | 7,478,858 | |||||||||||||
253,413 | DCC Plc | 6,341,168 | |||||||||||||
208,810 | Kerry Group Plc Class A | 6,855,799 | |||||||||||||
Total Ireland | 25,739,624 | ||||||||||||||
Israel — 0.3% | |||||||||||||||
2,539,190 | Bezeq Israeli Telecommunication Corp Ltd | 5,598,470 | |||||||||||||
319,794 | Israel Chemicals Ltd | 4,045,694 | |||||||||||||
194,954 | Partner Communications Co Ltd | 3,235,860 | |||||||||||||
Total Israel | 12,880,024 | ||||||||||||||
Italy — 5.6% | |||||||||||||||
125,215 | Atlantia SPA | 2,353,372 | |||||||||||||
243,609 | Azimut Holding SPA | 2,083,012 | |||||||||||||
1,536,848 | Bulgari SPA | 11,308,937 | |||||||||||||
10,402,460 | Enel SPA | 49,364,638 | |||||||||||||
4,510,989 | ENI SPA | 89,128,549 | |||||||||||||
396,875 | Fondiaria-Sai SPA | 3,751,195 |
See accompanying notes to the financial statements.
7
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Italy — continued | |||||||||||||||
422,848 | Mediobanca SPA * | 3,309,386 | |||||||||||||
2,954,455 | Parmalat SPA | 7,089,267 | |||||||||||||
335,008 | Recordati SPA | 2,630,543 | |||||||||||||
354,324 | Saipem SPA | 12,333,043 | |||||||||||||
1,735,647 | Snam Rete Gas SPA | 8,023,725 | |||||||||||||
6,922,660 | Telecom Italia SPA | 9,328,204 | |||||||||||||
14,120,021 | Telecom Italia SPA-Di RISP | 15,489,448 | |||||||||||||
348,778 | Tenaris SA | 5,882,141 | |||||||||||||
1,810,844 | Terna SPA | 7,269,371 | |||||||||||||
17,582,466 | UniCredit SPA | 40,985,930 | |||||||||||||
Total Italy | 270,330,761 | ||||||||||||||
Japan — 23.5% | |||||||||||||||
837 | Advance Residence Investment Corp (REIT) * | 1,308,095 | |||||||||||||
159,300 | Advantest Corp | 3,020,244 | |||||||||||||
1,416,050 | Aiful Corp * | 1,769,241 | |||||||||||||
1,315,600 | Alps Electric Co Ltd * | 9,090,922 | |||||||||||||
1,301,000 | Asahi Glass Co Ltd | 12,694,100 | |||||||||||||
685,200 | Astellas Pharma Inc | 23,661,752 | |||||||||||||
273,800 | Canon Inc | 11,209,501 | |||||||||||||
973,600 | Chuo Mitsui Trust Holdings Inc | 3,448,126 | |||||||||||||
4,971 | CyberAgent Inc | 7,974,444 | |||||||||||||
407,150 | Daiei Inc * | 1,653,508 | |||||||||||||
1,158,000 | Daiichi Chuo Kisen Kaisha * | 2,840,843 | |||||||||||||
2,560,000 | Daikyo Inc * | 3,599,900 | |||||||||||||
1,137,000 | Dainippon Ink and Chemicals Inc | 1,861,409 | |||||||||||||
1,451,000 | Dainippon Screen Manufacturing Co Ltd * | 6,365,896 | |||||||||||||
367,300 | Daito Trust Construction Co Ltd | 21,092,443 | |||||||||||||
397,100 | Dena Co Ltd | 11,953,800 | |||||||||||||
258,600 | Don Quijote Co Ltd | 6,325,715 | |||||||||||||
1,725,000 | Dowa Holdings Co Ltd | 8,911,014 | |||||||||||||
1,082,000 | Ebara Corp * | 4,286,477 | |||||||||||||
246,400 | Eisai Co Ltd | 8,889,011 | |||||||||||||
655,900 | Elpida Memory Inc * | 7,864,248 |
See accompanying notes to the financial statements.
8
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
211,000 | Fanuc Ltd | 22,708,240 | |||||||||||||
77,300 | Fast Retailing Co Ltd | 10,676,758 | |||||||||||||
354,000 | Fujitsu Ltd | 2,451,176 | |||||||||||||
1,713,000 | Fuji Electric Holdings Co Ltd | 4,243,681 | |||||||||||||
1,811,000 | Fuji Heavy Industries Ltd * | 10,135,892 | |||||||||||||
268,100 | Fuji Oil Co Ltd | 4,130,256 | |||||||||||||
58,500 | Gree Inc | 4,308,394 | |||||||||||||
790,000 | Hanwa Co Ltd | 2,858,951 | |||||||||||||
5,271,500 | Haseko Corp * | 4,396,069 | |||||||||||||
139,700 | Hikari Tsushin Inc | 2,462,242 | |||||||||||||
244,500 | Hitachi Construction Machinery Co Ltd | 4,864,318 | |||||||||||||
3,900,000 | Hitachi Ltd * | 15,848,543 | |||||||||||||
1,009,400 | Honda Motor Co Ltd | 33,433,582 | |||||||||||||
1,087 | INPEX Corp | 4,922,041 | |||||||||||||
4,473,000 | Isuzu Motors Ltd | 14,840,162 | |||||||||||||
1,502,600 | Itochu Corp | 12,249,672 | |||||||||||||
190,800 | JFE Holdings Inc | 5,629,932 | |||||||||||||
7,172,630 | JX Holdings Inc * | 36,314,520 | |||||||||||||
310,020 | K's Holdings Corp | 6,697,198 | |||||||||||||
3,032,000 | Kajima Corp | 7,098,080 | |||||||||||||
294 | Kakaku.com Inc | 1,434,303 | |||||||||||||
805,600 | Kao Corp | 18,753,652 | |||||||||||||
2,717,000 | Kawasaki Kisen Kaisha Ltd * | 10,118,626 | |||||||||||||
3,225 | KDDI Corp | 15,553,083 | |||||||||||||
603,100 | Komatsu Ltd | 12,245,753 | |||||||||||||
335,100 | Konami Corp | 5,389,608 | |||||||||||||
42,700 | Kyocera Corp | 3,626,983 | |||||||||||||
127,300 | Lawson Inc | 5,791,331 | |||||||||||||
1,223,100 | Leopalace21 Corp * | 2,615,728 | |||||||||||||
2,718,000 | Marubeni Corp | 13,993,436 | |||||||||||||
4,895,000 | Mazda Motor Corp | 10,943,699 | |||||||||||||
33,004 | Meiji Holdings Co Ltd | 1,536,658 | |||||||||||||
1,221,700 | Mitsubishi Corp | 26,177,881 | |||||||||||||
1,336,000 | Mitsubishi Electric Corp | 10,661,589 |
See accompanying notes to the financial statements.
9
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
2,091,700 | Mitsubishi UFJ Financial Group Inc | 9,917,816 | |||||||||||||
172,040 | Mitsubishi UFJ Lease & Finance Co Ltd | 6,115,729 | |||||||||||||
574,000 | Mitsui & Co Ltd | 7,472,051 | |||||||||||||
1,374,000 | Mitsui OSK Lines Ltd | 8,636,644 | |||||||||||||
15,738,800 | Mizuho Financial Group Inc | 24,138,867 | |||||||||||||
53,200 | Murata Manufacturing Co Ltd | 2,527,493 | |||||||||||||
2,098 | Net One Systems Co Ltd | 2,413,338 | |||||||||||||
149,700 | Nidec Corp | 13,184,934 | |||||||||||||
33,500 | Nintendo Co Ltd | 9,287,209 | |||||||||||||
608,000 | Nippon Denko Co Ltd | 4,533,177 | |||||||||||||
819,000 | Nippon Electric Glass Co Ltd | 9,166,768 | |||||||||||||
2,303,000 | Nippon Light Metal * | 3,683,581 | |||||||||||||
1,587,000 | Nippon Sheet Glass | 3,476,976 | |||||||||||||
538,800 | Nippon Telegraph & Telephone Corp | 23,167,198 | |||||||||||||
1,013,500 | Nippon Yakin Koguo Co Ltd * | 2,932,022 | |||||||||||||
2,876,000 | Nippon Yusen KK | 11,077,521 | |||||||||||||
4,869,800 | Nissan Motor Co Ltd * | 37,117,588 | |||||||||||||
115,550 | Nitori Co Ltd | 10,069,243 | |||||||||||||
327,600 | Nitto Denko Corp | 10,513,119 | |||||||||||||
595,000 | NSK Ltd | 3,540,621 | |||||||||||||
1,519 | NTT Data Corp | 4,756,989 | |||||||||||||
18,727 | NTT Docomo Inc | 31,733,360 | |||||||||||||
1,911,000 | Obayashi Corp | 7,269,375 | |||||||||||||
544,000 | OKUMA Corp * | 2,635,942 | |||||||||||||
76,300 | Omron Corp | 1,622,669 | |||||||||||||
127,400 | Ono Pharmaceutical Co Ltd | 5,592,926 | |||||||||||||
304,970 | ORIX Corp | 22,931,916 | |||||||||||||
3,774,000 | Osaka Gas Co Ltd | 14,230,923 | |||||||||||||
1,378,000 | Pacific Metals Co Ltd | 9,904,369 | |||||||||||||
2,156,400 | Pioneer Corp * | 6,395,480 | |||||||||||||
89,930 | Point Inc | 4,203,569 | |||||||||||||
1,296,900 | Resona Holdings Inc | 12,810,677 | |||||||||||||
524,000 | Ricoh Company Ltd | 6,715,914 | |||||||||||||
466,400 | Round One Corp | 2,019,708 |
See accompanying notes to the financial statements.
10
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
121,700 | Ryohin Keikaku Co Ltd | 4,251,960 | |||||||||||||
223,200 | Sankyo Co Ltd | 11,290,490 | |||||||||||||
120,000 | Secom Co Ltd | 5,233,415 | |||||||||||||
961,300 | Seven & I Holdings Co Ltd | 21,931,460 | |||||||||||||
202,900 | SoftBank Corp | 5,815,952 | |||||||||||||
6,230,400 | Sojitz Corp | 10,021,656 | |||||||||||||
200,400 | Sony Corp | 5,616,817 | |||||||||||||
196,500 | SUMCO Corp * | 3,345,265 | |||||||||||||
743,000 | Sumitomo Heavy Industries Ltd | 3,438,637 | |||||||||||||
1,438,800 | Sumitomo Corp | 16,482,312 | |||||||||||||
258,400 | Sumitomo Electric Industries Ltd | 2,769,629 | |||||||||||||
112,000 | Sumitomo Metal Mining Co Ltd | 1,437,992 | |||||||||||||
2,388,068 | Sumitomo Trust & Banking Co Ltd | 12,665,026 | |||||||||||||
3,643,000 | Taisei Corp | 7,186,760 | |||||||||||||
317,000 | Taisho Pharmaceutical Co Ltd | 6,331,064 | |||||||||||||
577,000 | Taiyo Yuden Co Ltd | 6,365,753 | |||||||||||||
1,379,600 | Takeda Pharmaceutical Co Ltd | 63,408,377 | |||||||||||||
393,280 | Takefuji Corp | 942,055 | |||||||||||||
85,300 | TDK Corp | 4,475,311 | |||||||||||||
58,800 | Tokyo Electron Ltd | 2,758,780 | |||||||||||||
1,410,000 | Tokyo Gas Co Ltd | 6,571,391 | |||||||||||||
778,200 | Tokyo Steel Manufacturing Co | 8,493,580 | |||||||||||||
2,105,000 | Tokyo Tatemono Co Ltd | 7,364,452 | |||||||||||||
363,000 | TonenGeneral Sekiyu KK | 3,279,721 | |||||||||||||
997,000 | Toshiba Corp * | 4,686,242 | |||||||||||||
927,400 | Toyota Motor Corp | 31,462,793 | |||||||||||||
619,600 | Toyota Tsusho Corp | 8,867,684 | |||||||||||||
751,300 | UNY Co Ltd | 5,516,863 | |||||||||||||
67,330 | USS Co Ltd | 4,967,577 | |||||||||||||
142,630 | Yamada Denki Co Ltd | 8,873,727 | |||||||||||||
482,000 | Zeon Corp | 3,247,012 | |||||||||||||
Total Japan | 1,133,828,191 |
See accompanying notes to the financial statements.
11
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Malta — 0.0% | |||||||||||||||
15,998,662 | BGP Holdings Plc * | — | |||||||||||||
Netherlands — 3.3% | |||||||||||||||
302,950 | ASML Holding NV | 7,496,140 | |||||||||||||
113,214 | Boskalis Westminster | 4,208,141 | |||||||||||||
148,841 | CSM | 3,864,482 | |||||||||||||
464,720 | Heineken NV | 20,770,765 | |||||||||||||
5,931,482 | ING Groep NV * | 52,378,377 | |||||||||||||
342,061 | Koninklijke Ahold NV | 4,199,088 | |||||||||||||
1,098,805 | Koninklijke BAM Groep NV | 5,465,500 | |||||||||||||
243,286 | Koninklijke DSM NV | 10,067,298 | |||||||||||||
1,164,409 | Koninklijke Philips Electronics NV | 32,448,319 | |||||||||||||
392,844 | Reed Elsevier NV | 4,685,090 | |||||||||||||
535,487 | TomTom NV * | 2,852,996 | |||||||||||||
219,015 | Unilever NV | 5,844,536 | |||||||||||||
85,138 | Wereldhave NV (REIT) | 7,013,742 | |||||||||||||
Total Netherlands | 161,294,474 | ||||||||||||||
New Zealand — 0.3% | |||||||||||||||
1,073,250 | Fletcher Building Ltd | 5,634,751 | |||||||||||||
6,473,610 | Telecom Corp of New Zealand | 9,298,938 | |||||||||||||
Total New Zealand | 14,933,689 | ||||||||||||||
Norway — 0.5% | |||||||||||||||
166,474 | Acergy SA | 2,540,004 | |||||||||||||
835,670 | DnB NOR ASA | 9,176,105 | |||||||||||||
110,710 | Frontline Ltd | 2,925,737 | |||||||||||||
1,211,488 | Golden Ocean Group Ltd | 1,546,982 | |||||||||||||
292,332 | Petroleum Geo-Services ASA * | 2,607,102 | |||||||||||||
134,577 | Yara International ASA | 5,372,317 | |||||||||||||
Total Norway | 24,168,247 | ||||||||||||||
Portugal — 0.0% | |||||||||||||||
441,493 | EDP-Energias de Portugal SA | 1,343,021 |
See accompanying notes to the financial statements.
12
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Singapore — 2.6% | |||||||||||||||
3,513,000 | CapitaCommercial Trust (REIT) | 3,636,482 | |||||||||||||
2,344,000 | Ezra Holdings Ltd | 3,060,775 | |||||||||||||
36,284,000 | Golden Agri-Resources Ltd | 15,056,026 | |||||||||||||
761,000 | Indofood Agri Resources Ltd * | 1,298,242 | |||||||||||||
2,845,000 | Jaya Holdings Ltd * | 1,420,659 | |||||||||||||
1,116,200 | MobileOne Ltd | 1,790,377 | |||||||||||||
4,709,000 | Neptune Orient Lines Ltd * | 6,661,781 | |||||||||||||
6,052,181 | Noble Group Ltd | 7,057,598 | |||||||||||||
1,772,000 | Oversea-Chinese Banking Corp Ltd | 11,363,565 | |||||||||||||
1,371,000 | SembCorp Marine Ltd | 3,866,934 | |||||||||||||
216,000 | Singapore Airlines Ltd | 2,410,579 | |||||||||||||
2,819,000 | Singapore Exchange Ltd | 15,677,419 | |||||||||||||
2,944,000 | Singapore Press Holdings Ltd | 8,878,822 | |||||||||||||
10,169,000 | Singapore Telecommunications | 23,171,209 | |||||||||||||
5,529,000 | Suntec Real Estate Investment Trust (REIT) | 5,801,595 | |||||||||||||
692,000 | United Overseas Bank Ltd | 9,576,410 | |||||||||||||
708,000 | Venture Corp Ltd | 4,548,197 | |||||||||||||
Total Singapore | 125,276,670 | ||||||||||||||
Spain — 1.7% | |||||||||||||||
1,565,531 | Banco Bilbao Vizcaya Argentaria SA | 18,857,247 | |||||||||||||
1,020,636 | Banco Popular Espanol SA | 6,038,142 | |||||||||||||
1,758,739 | Banco Santander SA | 20,479,251 | |||||||||||||
170,432 | Inditex SA | 11,334,251 | |||||||||||||
1,064,938 | Repsol YPF SA | 24,240,616 | |||||||||||||
Total Spain | 80,949,507 | ||||||||||||||
Sweden — 3.8% | |||||||||||||||
409,799 | Alfa Laval AB | 5,972,537 | |||||||||||||
319,237 | Assa Abloy AB Class B | 6,356,095 | |||||||||||||
740,413 | Atlas Copco AB Class A | 11,217,372 | |||||||||||||
1,080,182 | Boliden AB | 12,193,946 | |||||||||||||
435,021 | Electrolux AB Class B | 8,356,295 | |||||||||||||
453,605 | Ericsson LM B Shares | 4,380,019 |
See accompanying notes to the financial statements.
13
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Sweden — continued | |||||||||||||||
1,241,771 | Hennes & Mauritz AB Class B | 40,466,957 | |||||||||||||
168,393 | Modern Times Group AB Class B | 9,652,884 | |||||||||||||
147,298 | NCC Class B | 2,415,711 | |||||||||||||
946,022 | Nordea Bank AB | 8,436,083 | |||||||||||||
1,030,726 | Sandvik AB | 12,161,127 | |||||||||||||
717,371 | Skandinaviska Enskilda Banken AB Class A | 4,441,297 | |||||||||||||
348,879 | SKF AB Class B | 6,235,398 | |||||||||||||
603,329 | Svenska Handelsbanken AB Class A | 15,680,641 | |||||||||||||
1,860,780 | Swedbank AB Class A * | 20,744,927 | |||||||||||||
655,151 | Trelleborg AB Class B | 4,336,554 | |||||||||||||
831,514 | Volvo AB Class B * | 9,586,468 | |||||||||||||
Total Sweden | 182,634,311 | ||||||||||||||
Switzerland — 6.7% | |||||||||||||||
108,829 | Actelion Ltd (Registered) * | 4,656,207 | |||||||||||||
293,909 | Clariant AG (Registered) * | 3,768,300 | |||||||||||||
590,941 | Compagnie Financiere Richemont SA Class A | 22,852,947 | |||||||||||||
1,712,024 | Nestle SA (Registered) | 88,504,430 | |||||||||||||
2,152,081 | Novartis AG (Registered) | 112,815,783 | |||||||||||||
405,471 | Roche Holding AG (Non Voting) | 55,001,964 | |||||||||||||
61,126 | Swatch Group AG | 19,608,275 | |||||||||||||
13,251 | Swisscom AG (Registered) | 5,143,431 | |||||||||||||
119,787 | Synthes Inc | 13,174,170 | |||||||||||||
Total Switzerland | 325,525,507 | ||||||||||||||
United Kingdom — 20.8% | |||||||||||||||
2,244,902 | 3i Group Plc | 8,928,763 | |||||||||||||
210,583 | Aggreko Plc | 4,565,300 | |||||||||||||
721,944 | Anglo American Plc | 25,748,998 | |||||||||||||
2,188,947 | ARM Holdings Plc | 12,215,190 | |||||||||||||
2,395,214 | AstraZeneca Plc | 117,737,680 | |||||||||||||
396,756 | Barclays Plc | 1,821,515 | |||||||||||||
706,723 | BBA Aviation Plc | 1,917,617 | |||||||||||||
1,617,814 | BG Group Plc | 25,912,103 |
See accompanying notes to the financial statements.
14
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
United Kingdom — continued | |||||||||||||||
755,753 | BHP Billiton Plc | 21,074,649 | |||||||||||||
1,838,967 | BP Plc | 10,613,125 | |||||||||||||
388,494 | British American Tobacco Plc | 13,163,387 | |||||||||||||
6,986,617 | BT Group Plc | 14,247,769 | |||||||||||||
1,518,137 | Burberry Group Plc | 19,710,786 | |||||||||||||
831,635 | Capita Group Plc | 8,944,414 | |||||||||||||
1,431,771 | Centrica Plc | 7,122,766 | |||||||||||||
1,177,888 | Compass Group Plc | 9,603,201 | |||||||||||||
1,208,613 | Diageo Plc | 19,645,233 | |||||||||||||
15,613,768 | Dixons Retail Plc * | 5,736,900 | |||||||||||||
1,193,979 | Drax Group Plc | 7,238,541 | |||||||||||||
363,752 | Eurasian Natural Resources Corp | 4,700,466 | |||||||||||||
690,472 | Firstgroup Plc | 3,671,775 | |||||||||||||
1,456,479 | Game Group Plc | 1,473,310 | |||||||||||||
8,142,209 | GlaxoSmithKline Plc | 151,945,086 | |||||||||||||
2,001,467 | Home Retail Group Plc | 6,670,577 | |||||||||||||
2,613,054 | HSBC Holdings Plc | 25,593,996 | |||||||||||||
149,961 | IMI Plc | 1,561,590 | |||||||||||||
194,139 | Imperial Tobacco Group Plc | 5,342,886 | |||||||||||||
696,571 | Kazakhmys Plc | 12,260,237 | |||||||||||||
2,472,066 | Kesa Electricals Plc | 5,035,155 | |||||||||||||
871,524 | Ladbrokes Plc | 1,746,772 | |||||||||||||
475,528 | Lancashire Holdings Ltd | 3,879,733 | |||||||||||||
12,675,717 | Lloyds Banking Group Plc * | 13,342,372 | |||||||||||||
599,616 | Next Plc | 18,131,764 | |||||||||||||
1,492,363 | Northern Foods Plc | 1,036,816 | |||||||||||||
474,775 | Pearson Plc | 7,040,373 | |||||||||||||
231,396 | Petrofac Ltd | 4,951,099 | |||||||||||||
242,407 | Provident Financial Plc | 3,069,743 | |||||||||||||
438,705 | Reckitt Benckiser Group Plc | 21,866,031 | |||||||||||||
1,158,623 | Rio Tinto Plc | 58,276,478 | |||||||||||||
773,172 | Rolls-Royce Group Plc * | 6,541,790 | |||||||||||||
567,226 | Royal Dutch Shell Group Class A (Amsterdam) | 15,017,345 | |||||||||||||
2,340,637 | Royal Dutch Shell Plc A Shares (London) | 61,989,078 |
See accompanying notes to the financial statements.
15
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
United Kingdom — continued | |||||||||||||||
1,364,911 | Royal Dutch Shell Plc B Shares (London) | 34,787,757 | |||||||||||||
446,805 | SABMiller Plc | 12,687,534 | |||||||||||||
295,868 | Scottish & Southern Energy Plc | 5,191,081 | |||||||||||||
268,124 | Shire Plc | 5,768,222 | |||||||||||||
647,273 | Smith & Nephew Plc | 5,356,725 | |||||||||||||
220,599 | Spectris Plc | 2,964,359 | |||||||||||||
1,226,943 | Stagecoach Group Plc | 3,229,776 | |||||||||||||
850,110 | Standard Chartered Plc | 22,702,266 | |||||||||||||
1,076,605 | Tesco Plc | 6,699,790 | |||||||||||||
1,375,900 | Tomkins Plc | 6,814,720 | |||||||||||||
943,419 | Travis Perkins Plc * | 10,995,723 | |||||||||||||
1,037,238 | Trinity Mirror Plc * | 1,746,705 | |||||||||||||
580,556 | Tullett Prebon Plc | 3,279,865 | |||||||||||||
194,452 | Unilever Plc | 5,122,810 | |||||||||||||
263,325 | Vedanta Resources Plc | 7,586,971 | |||||||||||||
22,849,017 | Vodafone Group Plc | 54,861,811 | |||||||||||||
162,783 | Weir Group Plc (The) | 3,005,719 | |||||||||||||
368,168 | WH Smith Plc | 2,295,106 | |||||||||||||
2,472,926 | William Hill Plc | 6,323,873 | |||||||||||||
735,488 | Wolseley Plc * | 14,144,587 | |||||||||||||
564,567 | WPP Plc | 5,581,425 | |||||||||||||
892,222 | Xstrata Plc | 13,923,458 | |||||||||||||
Total United Kingdom | 1,006,162,692 | ||||||||||||||
TOTAL COMMON STOCKS (COST $5,091,940,206) | 4,590,978,879 | ||||||||||||||
PREFERRED STOCKS — 0.6% | |||||||||||||||
Germany — 0.6% | |||||||||||||||
202,758 | Henkel AG & Co KGaA 1.40% | 9,503,213 | |||||||||||||
205,396 | Porsche Automobil Holding SE 0.13% | 9,579,820 | |||||||||||||
333,546 | ProSiebenSat.1 Media AG 0.13% | 5,985,651 |
See accompanying notes to the financial statements.
16
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares / Par Value | Description | Value ($) | |||||||||||||
Germany — continued | |||||||||||||||
39,948 | Volkswagen AG 2.10% | 3,966,838 | |||||||||||||
Total Germany | 29,035,522 | ||||||||||||||
TOTAL PREFERRED STOCKS (COST $29,925,828) | 29,035,522 | ||||||||||||||
OPTIONS PURCHASED — 0.1% | |||||||||||||||
United Kingdom — 0.1% | |||||||||||||||
GBP | 7,593,720 | Barclays PLC Call Options, Expires 09/17/10, Strike 280.00 | 2,896,457 | ||||||||||||
TOTAL OPTIONS PURCHASED (COST $4,751,998) | 2,896,457 | ||||||||||||||
SHORT-TERM INVESTMENTS — 3.8% | |||||||||||||||
Time Deposits — 3.1% | |||||||||||||||
AUD | 1,041,766 | Bank of America (Charlotte) Time Deposit, 4.44%, due 09/01/10 | 926,859 | ||||||||||||
USD | 29,600,000 | BNP Paribas (Grand Cayman) Time Deposit, 0.22%, due 09/01/10 | 29,600,000 | ||||||||||||
CHF | 10,450 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.02%, due 09/01/10 | 10,293 | ||||||||||||
SEK | 70,956 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.20%, due 09/01/10 | 9,600 | ||||||||||||
NZD | 13,771 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 3.07%, due 09/01/10 | 9,603 | ||||||||||||
GBP | 2,263 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.46%, due 09/01/10 | 3,471 | ||||||||||||
NOK | 60,095 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 1.89%, due 09/01/10 | 9,528 | ||||||||||||
EUR | 234,693 | Citibank (New York) Time Deposit, 0.28%, due 09/01/10 | 297,415 | ||||||||||||
DKK | 671,252 | Citibank (New York) Time Deposit, 0.10%, due 09/01/10 | 114,264 | ||||||||||||
USD | 29,600,000 | Commerzbank (Grand Cayman) Time Deposit, 0.20%, due 09/01/10 | 29,600,000 | ||||||||||||
CAD | 123,924 | Deustche Bank (Frankfurt) Time Deposit, 0.70%, due 09/01/10 | 116,214 | ||||||||||||
USD | 81,869 | DnB Nor Bank (Oslo) Time Deposit, 0.21%, due 09/01/10 | 81,869 | ||||||||||||
HKD | 550,027 | HSBC Bank (Hong Kong) Time Deposit, 0.03%, due 09/01/10 | 70,709 | ||||||||||||
SGD | 1,235,987 | HSBC Bank (Hong Kong) Time Deposit, 0.13%, due 09/01/10 | 911,832 | ||||||||||||
JPY | 32,841,760 | HSBC Bank (Hong Kong) Time Deposit, 0.04%, due 09/01/10 | 390,927 | ||||||||||||
GBP | 341,495 | HSBC Bank (London) Time Deposit, 0.46%, due 09/01/10 | 523,734 | ||||||||||||
USD | 29,800,000 | HSBC Bank (USA) Time Deposit, 0.17%, due 09/01/10 | 29,800,000 | ||||||||||||
USD | 29,600,000 | Royal Bank of Canada (Grand Cayman) Time Deposit, 0.18%, due 09/01/10 | 29,600,000 |
See accompanying notes to the financial statements.
17
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
Time Deposits — continued | |||||||||||||||
USD | 29,600,000 | Societe Generale (Grand Cayman) Time Deposit, 0.20%, due 09/01/10 | 29,600,000 | ||||||||||||
Total Time Deposits | 151,676,318 | ||||||||||||||
U.S. Government — 0.7% | |||||||||||||||
31,424,000 | U.S. Treasury Bill, 0.15%, due 09/23/10 (a) | 31,420,543 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $183,096,861) | 183,096,861 | ||||||||||||||
TOTAL INVESTMENTS — 99.5% (Cost $5,309,714,893) | 4,806,007,719 | ||||||||||||||
Other Assets and Liabilities (net) — 0.5% | 25,341,901 | ||||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 4,831,349,620 |
See accompanying notes to the financial statements.
18
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
A summary of outstanding financial instruments at August 31, 2010 is as follows:
Forward Currency Contracts
Settlement Date | Counterparty | Deliver/ Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||
Buys † | |||||||||||||||||||||||
10/22/10 | Deutsche Bank AG | CHF | 11,126,000 | $ | 10,963,866 | $ | 232,667 | ||||||||||||||||
10/22/10 | Brown Brothers Harriman & Co. | CHF | 27,299,333 | 26,901,514 | 583,830 | ||||||||||||||||||
10/22/10 | Bank Of America | GBP | 27,166,412 | 41,649,412 | (914,922 | ) | |||||||||||||||||
10/22/10 | Royal Bank Of Scotland PLC | GBP | 10,579,539 | 16,219,719 | (365,401 | ) | |||||||||||||||||
10/22/10 | Deutsche Bank AG | GBP | 23,133,355 | 35,466,245 | (672,219 | ) | |||||||||||||||||
10/22/10 | JP Morgan Chase | HKD | 60,254,935 | 7,748,917 | (7,521 | ) | |||||||||||||||||
10/22/10 | Royal Bank Of Scotland PLC | SEK | 245,448,852 | 33,179,377 | (109,592 | ) | |||||||||||||||||
10/22/10 | Barclays | SEK | 148,010,367 | 20,007,801 | (72,837 | ) | |||||||||||||||||
10/22/10 | JP Morgan Chase | SEK | 98,804,003 | 13,356,164 | 4,891 | ||||||||||||||||||
10/22/10 | Brown Brothers Harriman & Co. | SEK | 153,695,375 | 20,776,291 | (44,845 | ) | |||||||||||||||||
10/22/10 | Bank Of America | SEK | 148,010,367 | 20,007,801 | (61,160 | ) | |||||||||||||||||
10/22/10 | Deutsche Bank AG | SEK | 98,804,003 | 13,356,165 | (31,549 | ) | |||||||||||||||||
10/22/10 | Mellon Bank | SEK | 139,303,875 | 18,830,871 | (70,091 | ) | |||||||||||||||||
$ | 278,464,143 | $ | (1,528,749 | ) | |||||||||||||||||||
Sales # | |||||||||||||||||||||||
10/22/10 | Barclays | CAD | 27,203,691 | $ | 25,490,643 | $ | 540,351 | ||||||||||||||||
10/22/10 | Morgan Stanley | CAD | 39,011,168 | 36,554,590 | 799,656 | ||||||||||||||||||
10/22/10 | Deutsche Bank AG | CAD | 6,014,000 | 5,635,292 | 130,491 | ||||||||||||||||||
10/22/10 | Royal Bank of Scotland PLC | EUR | 9,037,163 | 11,451,565 | 148,366 | ||||||||||||||||||
10/22/10 | Bank Of America | EUR | 25,349,395 | 32,121,834 | 433,355 | ||||||||||||||||||
10/22/10 | Bank Of America | NZD | 12,464,049 | 8,655,253 | 99,819 | ||||||||||||||||||
10/22/10 | Barclays | SGD | 31,007,360 | 22,874,831 | (91,552 | ) | |||||||||||||||||
10/22/10 | Brown Brothers Harriman & Co. | SGD | 31,007,360 | 22,874,831 | (99,584 | ) | |||||||||||||||||
$ | 165,658,839 | $ | 1,960,902 |
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.
See accompanying notes to the financial statements.
19
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
225 | DAX | September 2010 | $ | 41,992,340 | $ | (1,430,726 | ) | ||||||||||||
512 | FTSE 100 | September 2010 | 40,635,515 | (176,371 | ) | ||||||||||||||
10 | Hang Seng | September 2010 | 1,311,958 | (6,763 | ) | ||||||||||||||
499 | FTSE/MIB | September 2010 | 62,061,978 | (1,163,822 | ) | ||||||||||||||
381 | CAC 40 | September 2010 | 16,750,137 | (775,889 | ) | ||||||||||||||
968 | MSCI Singapore | September 2010 | 49,851,031 | 1,046,660 | |||||||||||||||
318 | TOPIX | September 2010 | 30,281,731 | (2,863,323 | ) | ||||||||||||||
$ | 242,884,690 | $ | (5,370,234 | ) | |||||||||||||||
Sales | |||||||||||||||||||
511 | S&P Toronto 60 | September 2010 | $ | 66,446,533 | $ | (1,246,959 | ) | ||||||||||||
625 | SPI 200 | September 2010 | 61,236,012 | 1,578,385 | |||||||||||||||
$ | 127,682,545 | $ | 331,426 |
Written Options
Notional Amount | Expiration Date | Description | Premiums | Market Value | |||||||||||||||||||||||
Put | 7,593,720 | 09/17/2010 | GBP | Barclays PLC Put, Strike, 240.00 | $ | (3,563,998 | ) | $ | (100,401 | ) | |||||||||||||||||
$ | (3,563,998 | ) | $ | (100,401 | ) |
Swap Agreements
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Fund Pays | Fund Receives | Market Value | ||||||||||||||||||||||
56,700,000 | JPY | 09/21/2010 | Goldman Sachs | 1 Month JPY | Return on Takefuji Corp | ||||||||||||||||||||||
LIBOR - 5.00% | $ | (27,712 | ) | ||||||||||||||||||||||||
$ | (27,712 | ) | |||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
As of August 31, 2010, for futures contracts, swap agreements and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
See accompanying notes to the financial statements.
20
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Notes to Schedule of Investments:
JPY LIBOR - London Interbank Offered Rate denominated in Japanese Yen
MSCI - Morgan Stanley Capital International
REIT - Real Estate Investment Trust
* Non-income producing security.
(a) Rate shown represents yield-to-maturity.
Currency Abbreviations:
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
DKK - Danish Krone
EUR - Euro
GBP - British Pound
HKD - Hong Kong Dollar
JPY - Japanese Yen
NOK - Norwegian Krone
NZD - New Zealand Dollar
SEK - Swedish Krona
SGD - Singapore Dollar
USD - United States Dollar
See accompanying notes to the financial statements.
21
GMO International Core Equity Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments, at value (cost $5,309,714,893) (Note 2) | $ | 4,806,007,719 | |||||
Dividends and interest receivable | 13,998,649 | ||||||
Foreign taxes receivable | 3,654,351 | ||||||
Unrealized appreciation on open forward currency contracts (Note 4) | 2,973,426 | ||||||
Receivable for collateral on open futures contracts (Note 4) | 26,533,710 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 172,980 | ||||||
Total assets | 4,853,340,835 | ||||||
Liabilities: | |||||||
Foreign currency due to custodian (proceeds $1,231,948) | 1,238,099 | ||||||
Payable for Fund shares repurchased | 15,078,302 | ||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 1,610,876 | ||||||
Shareholder service fee | 334,062 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 7,703 | ||||||
Payable for variation margin on open futures contracts (Note 4) | 428,643 | ||||||
Unrealized depreciation on open forward currency contracts (Note 4) | 2,541,273 | ||||||
Payable for open swap contracts (Note 4) | 27,712 | ||||||
Written options outstanding, at value (premiums $3,563,998) (Note 4) | 100,401 | ||||||
Accrued expenses | 624,144 | ||||||
Total liabilities | 21,991,215 | ||||||
Net assets | $ | 4,831,349,620 |
See accompanying notes to the financial statements.
22
GMO International Core Equity Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited) — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 6,538,859,049 | |||||
Accumulated undistributed net investment income | 45,138,414 | ||||||
Accumulated net realized loss | (1,247,954,554 | ) | |||||
Net unrealized depreciation | (504,693,289 | ) | |||||
$ | 4,831,349,620 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 857,249,602 | |||||
Class IV shares | $ | 975,565,411 | |||||
Class VI shares | $ | 2,998,534,607 | |||||
Shares outstanding: | |||||||
Class III | 34,584,089 | ||||||
Class IV | 39,366,709 | ||||||
Class VI | 121,100,881 | ||||||
Net asset value per share: | |||||||
Class III | $ | 24.79 | |||||
Class IV | $ | 24.78 | |||||
Class VI | $ | 24.76 |
See accompanying notes to the financial statements.
23
GMO International Core Equity Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $8,207,631) | $ | 78,114,856 | |||||
Interest | 239,980 | ||||||
Total investment income | 78,354,836 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 8,802,002 | ||||||
Shareholder service fee – Class III (Note 5) | 712,531 | ||||||
Shareholder service fee – Class IV (Note 5) | 417,982 | ||||||
Shareholder service fee – Class VI (Note 5) | 757,279 | ||||||
Custodian and fund accounting agent fees | 823,768 | ||||||
Legal fees | 106,444 | ||||||
Trustees fees and related expenses (Note 5) | 46,777 | ||||||
Audit and tax fees | 43,148 | ||||||
Transfer agent fees | 24,840 | ||||||
Registration fees | 10,120 | ||||||
Miscellaneous | 50,140 | ||||||
Total expenses | 11,795,031 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (1,042,176 | ) | |||||
Expense reductions (Note 2) | (622 | ) | |||||
Net expenses | 10,752,233 | ||||||
Net investment income (loss) | 67,602,603 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | (31,233,220 | ) | |||||
Closed futures contracts | (286,781 | ) | |||||
Closed swaps contracts | (502,961 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | (8,352,973 | ) | |||||
Net realized gain (loss) | (40,375,935 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | (159,938,187 | ) | |||||
Open futures contracts | 2,438,428 | ||||||
Written options | 1,611,714 | ||||||
Open swap contracts | 2,740 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 2,587,151 | ||||||
Net unrealized gain (loss) | (153,298,154 | ) | |||||
Net realized and unrealized gain (loss) | (193,674,089 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (126,071,486 | ) |
See accompanying notes to the financial statements.
24
GMO International Core Equity Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 67,602,603 | $ | 93,456,349 | |||||||
Net realized gain (loss) | (40,375,935 | ) | (785,833,674 | ) | |||||||
Change in net unrealized appreciation (depreciation) | (153,298,154 | ) | 2,113,210,885 | ||||||||
Net increase (decrease) in net assets from operations | (126,071,486 | ) | 1,420,833,560 | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (4,249,303 | ) | (36,644,433 | ) | |||||||
Class IV | (4,961,748 | ) | (31,139,124 | ) | |||||||
Class VI | (15,414,917 | ) | (72,326,484 | ) | |||||||
Total distributions from net investment income | (24,625,968 | ) | (140,110,041 | ) | |||||||
Net share transactions (Note 9): | |||||||||||
Class III | (137,400,566 | ) | (205,314,911 | ) | |||||||
Class IV | 212,116,834 | (846,830,399 | ) | ||||||||
Class VI | 803,822,351 | 754,238,113 | |||||||||
Increase (decrease) in net assets resulting from net share transactions | 878,538,619 | (297,907,197 | ) | ||||||||
Total increase (decrease) in net assets | 727,841,165 | 982,816,322 | |||||||||
Net assets: | |||||||||||
Beginning of period | 4,103,508,455 | 3,120,692,133 | |||||||||
End of period (including accumulated undistributed net investment income of $45,138,414 and $2,161,779, respectively) | $ | 4,831,349,620 | $ | 4,103,508,455 |
See accompanying notes to the financial statements.
25
GMO International Core Equity Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 25.63 | $ | 18.15 | $ | 37.25 | $ | 39.38 | $ | 35.23 | $ | 30.81 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.38 | 0.55 | 0.92 | 1.01 | 0.86 | 0.72 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (1.10 | ) | 7.79 | (18.54 | ) | (0.51 | ) | 6.06 | 4.79 | ||||||||||||||||||
Total from investment operations | (0.72 | ) | 8.34 | (17.62 | ) | 0.50 | 6.92 | 5.51 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.12 | ) | (0.86 | ) | (1.19 | ) | (0.68 | ) | (0.77 | ) | (0.16 | ) | |||||||||||||||
From net realized gains | — | — | (0.29 | ) | (1.95 | ) | (2.00 | ) | (0.93 | ) | |||||||||||||||||
Total distributions | (0.12 | ) | (0.86 | ) | (1.48 | ) | (2.63 | ) | (2.77 | ) | (1.09 | ) | |||||||||||||||
Net asset value, end of period | $ | 24.79 | $ | 25.63 | $ | 18.15 | $ | 37.25 | $ | 39.38 | $ | 35.23 | |||||||||||||||
Total Return(a) | (2.81 | )%** | 45.97 | % | (48.61 | )% | 0.69 | % | 20.04 | % | 18.26 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 857,250 | $ | 1,017,207 | $ | 855,690 | $ | 917,685 | $ | 877,816 | $ | 820,336 | |||||||||||||||
Net expenses to average daily net assets | 0.53 | %(b)* | 0.53 | %(b) | 0.53 | %(c) | 0.53 | %(c) | 0.53 | % | 0.54 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 2.95 | %* | 2.22 | % | 3.08 | % | 2.44 | % | 2.29 | % | 2.26 | % | |||||||||||||||
Portfolio turnover rate | 15 | %** | 48 | % | 41 | % | 43 | % | 47 | % | 43 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.05 | %* | 0.05 | % | 0.05 | % | 0.05 | % | 0.05 | % | 0.10 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions. (Note 2)
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
26
GMO International Core Equity Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 25.62 | $ | 18.14 | $ | 37.23 | $ | 39.36 | $ | 35.21 | $ | 30.80 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.38 | 0.64 | 0.94 | 1.04 | 0.85 | 0.65 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (1.09 | ) | 7.71 | (18.53 | ) | (0.52 | ) | 6.09 | 4.87 | ||||||||||||||||||
Total from investment operations | (0.71 | ) | 8.35 | (17.59 | ) | 0.52 | 6.94 | 5.52 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.13 | ) | (0.87 | ) | (1.21 | ) | (0.70 | ) | (0.79 | ) | (0.18 | ) | |||||||||||||||
From net realized gains | — | — | (0.29 | ) | (1.95 | ) | (2.00 | ) | (0.93 | ) | |||||||||||||||||
Total distributions | (0.13 | ) | (0.87 | ) | (1.50 | ) | (2.65 | ) | (2.79 | ) | (1.11 | ) | |||||||||||||||
Net asset value, end of period | $ | 24.78 | $ | 25.62 | $ | 18.14 | $ | 37.23 | $ | 39.36 | $ | 35.21 | |||||||||||||||
Total Return(a) | (2.80 | )%** | 46.04 | % | (48.56 | )% | 0.75 | % | 20.14 | % | 18.31 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 975,565 | $ | 797,730 | $ | 1,166,165 | $ | 947,063 | $ | 711,712 | $ | 1,183,535 | |||||||||||||||
Net expenses to average daily net assets | 0.47 | %(b)* | 0.47 | %(b) | 0.47 | %(c) | 0.47 | %(c) | 0.47 | % | 0.48 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 2.91 | %* | 2.65 | % | 3.18 | % | 2.51 | % | 2.27 | % | 1.98 | % | |||||||||||||||
Portfolio turnover rate | 15 | %** | 48 | % | 41 | % | 43 | % | 47 | % | 43 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.05 | %* | 0.05 | % | 0.05 | % | 0.05 | % | 0.05 | % | 0.11 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions. (Note 2)
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
27
GMO International Core Equity Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class VI share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007(a) | |||||||||||||||||||
Net asset value, beginning of period | $ | 25.60 | $ | 18.13 | $ | 37.22 | $ | 39.35 | $ | 36.09 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)† | 0.38 | 0.52 | 0.92 | 0.98 | 0.74 | ||||||||||||||||||
Net realized and unrealized gain (loss) | (1.09 | ) | 7.83 | (18.50 | ) | (0.45 | ) | 5.33 | |||||||||||||||
Total from investment operations | (0.71 | ) | 8.35 | (17.58 | ) | 0.53 | 6.07 | ||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.13 | ) | (0.88 | ) | (1.22 | ) | (0.71 | ) | (0.81 | ) | |||||||||||||
From net realized gains | — | — | (0.29 | ) | (1.95 | ) | (2.00 | ) | |||||||||||||||
Total distributions | (0.13 | ) | (0.88 | ) | (1.51 | ) | (2.66 | ) | (2.81 | ) | |||||||||||||
Net asset value, end of period | $ | 24.76 | $ | 25.60 | $ | 18.13 | $ | 37.22 | $ | 39.35 | |||||||||||||
Total Return(b) | (2.79 | )%** | 46.11 | % | (48.56 | )% | 0.78 | % | 17.24 | %** | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 2,998,535 | $ | 2,288,572 | $ | 1,098,838 | $ | 3,567,360 | $ | 1,377,829 | |||||||||||||
Net expenses to average daily net assets | 0.44 | %(c)* | 0.44 | %(c) | 0.44 | %(d) | 0.44 | %(d) | 0.44 | %* | |||||||||||||
Net investment income (loss) to average daily net assets | 2.91 | %* | 2.08 | % | 3.07 | % | 2.36 | % | 2.11 | %* | |||||||||||||
Portfolio turnover rate | 15 | %** | 48 | % | 41 | % | 43 | % | 47 | %†† | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.04 | %* | 0.05 | % | 0.05 | % | 0.05 | % | 0.05 | %* |
(a) Period from March 28, 2006 (commencement of operations) through February 28, 2007.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(c) The net expense ratio does not include the effect of expense reductions (Note 2).
(d) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions. (Note 2)
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the year ended February 28, 2007.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
28
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO International Core Equity Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks high total return. The Fund seeks to achieve its investment objective by outperforming its benchmark, the MSCI EAFE Index (Europe, Australasia, and Far East). The Fund typically makes equity investments directly and indirectly (e.g., through the GMO Funds in which the Fund invests, collectively referred to as the "underlying funds" or derivatives) in companies tied economically to countries other than the U.S. Under normal circumstances, the Fund invests directly and indirectly at least 80% of its assets in equity investments. The term "equity investments" refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts.
The Manager relies principally on proprietary quantitative models and also employs fundamental investment techniques to evaluate and select individual equity investments, countries, and currencies. The Manager selects equity investments it believes (i) are undervalued (e.g., equity investments trading at prices below what the Manager believes to be their fundamental value); (ii) have superior fundamentals (e.g., earnings stability); and/or (iii) have shown indications of improving investor sentiment (e.g., positive price movement or upgraded analyst ratings). In selecting countries in which to invest and determining the Fund's currency exposures, the Manager considers many factors, which may include aggregate stock market valuations, global competitiveness, and investor sentiment. The Manager also uses proprietary techniques to adjust the composition of the portfolio for other factors such as position size, country, industry and sector weights, and market capitalization. The factors considered and the models used by the Manager may change over time based on the Manager's assessment of what combination of models and factors are best positioned to achieve the Fund's investment objective.
The Fund may make investments tied economically to emerging countries. In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the-counter derivatives, including options, futures, and swap contracts, (i) as a substitute for direct investment; (ii) in an attempt to reduce investment exposures (which may result in a reduction below zero); (iii) to effect transactions intended as substitutes for securities lending; and/or (iv) in an attempt to adjust elements of its investment and/or foreign currency exposure. The Fund's foreign currency exposure may differ from the currency exposure represented by its equity investments. In addition, the Fund may take
29
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
active overweighted and underweighted positions in particular currencies relative to its benchmark. In addition, the Fund may lend its portfolio securities.
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
Throughout the period ended August 31, 2010, the Fund had three classes of shares outstanding: Class III, Class IV and Class VI. Each class of shares bears a different shareholder service fee.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the over-the-counter ("OTC") market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not rea dily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. Additionally, because many foreign equity securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on local closing prices and adjustments supplied by a third part y vendor using that vendor's proprietary
30
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
models. As of August 31, 2010, 93.5% of the net assets of the Fund were valued using fair value prices based on those adjustments and are classified as using Level 2 inputs in the table below. See note 4 for a further discussion on valuation of derivative financial instruments.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include: fair value adjustments applied to closing prices of foreign securities due to market events that have occurred since the local market close but before the Fund's daily NAV calculation.
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | |||||||||||||||||||
Australia | $ | — | $ | 210,453,623 | $ | — | $ | 210,453,623 | |||||||||||
Austria | — | 28,669,016 | — | 28,669,016 | |||||||||||||||
Belgium | — | 57,271,768 | — | 57,271,768 | |||||||||||||||
Canada | 80,693,725 | — | — | 80,693,725 | |||||||||||||||
Denmark | — | 55,124,629 | — | 55,124,629 | |||||||||||||||
Finland | — | 38,948,132 | — | 38,948,132 | |||||||||||||||
France | 9,340,561 | 448,053,991 | — | 457,394,552 | |||||||||||||||
Germany | — | 211,379,947 | — | 211,379,947 | |||||||||||||||
Greece | — | 18,583,299 | — | 18,583,299 | |||||||||||||||
Hong Kong | — | 67,393,470 | — | 67,393,470 | |||||||||||||||
Ireland | — | 25,739,624 | — | 25,739,624 | |||||||||||||||
Israel | — | 12,880,024 | — | 12,880,024 |
31
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
ASSET VALUATION INPUTS — continued
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Italy | $ | — | $ | 270,330,761 | $ | — | $ | 270,330,761 | |||||||||||
Japan | — | 1,133,828,191 | — | 1,133,828,191 | |||||||||||||||
Malta | — | 0 | * | — | 0 | ||||||||||||||
Netherlands | — | 161,294,474 | — | 161,294,474 | |||||||||||||||
New Zealand | 9,298,938 | 5,634,751 | — | 14,933,689 | |||||||||||||||
Norway | — | 24,168,247 | — | 24,168,247 | |||||||||||||||
Portugal | — | 1,343,021 | — | 1,343,021 | |||||||||||||||
Singapore | 3,060,775 | 122,215,895 | — | 125,276,670 | |||||||||||||||
Spain | — | 80,949,507 | — | 80,949,507 | |||||||||||||||
Sweden | — | 182,634,311 | — | 182,634,311 | |||||||||||||||
Switzerland | — | 325,525,507 | — | 325,525,507 | |||||||||||||||
United Kingdom | — | 1,006,162,692 | — | 1,006,162,692 | |||||||||||||||
TOTAL COMMON STOCKS | 102,393,999 | 4,488,584,880 | — | 4,590,978,879 | |||||||||||||||
Preferred Stocks | |||||||||||||||||||
Germany | — | 29,035,522 | — | 29,035,522 | |||||||||||||||
TOTAL PREFERRED STOCKS | — | 29,035,522 | — | 29,035,522 | |||||||||||||||
Options Purchased | |||||||||||||||||||
United Kingdom | — | 2,896,457 | — | 2,896,457 | |||||||||||||||
TOTAL OPTIONS PURCHASED | — | 2,896,457 | — | 2,896,457 | |||||||||||||||
Short-Term Investments | 151,676,318 | 31,420,543 | — | 183,096,861 | |||||||||||||||
Total Investments | 254,070,317 | 4,551,937,402 | — | 4,806,007,719 | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts Foreign exchange risk | — | 2,973,426 | — | 2,973,426 | |||||||||||||||
Futures Contracts Equity risk | — | 2,625,045 | — | 2,625,045 | |||||||||||||||
Total Derivatives | — | 5,598,471 | — | 5,598,471 | |||||||||||||||
Total | $ | 254,070,317 | $ | 4,557,535,873 | $ | — | $ | 4,811,606,190 |
32
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts Foreign exchange risk | $ | — | $ | (2,541,273 | ) | $ | — | $ | (2,541,273 | ) | |||||||||
Futures Contracts Equity risk | (1,246,959 | ) | (6,416,894 | ) | — | (7,663,853 | ) | ||||||||||||
Written Options Equity risk | — | (100,401 | ) | — | (100,401 | ) | |||||||||||||
Swap Agreements Equity risk | — | (27,712 | ) | — | (27,712 | ) | |||||||||||||
Total | $ | (1,246,959 | ) | $ | (9,086,280 | ) | $ | — | $ | (10,333,239 | ) |
* Represents the interest in securities that have no value at August 31, 2010.
The Fund held no investments or other financial instruments at either August 31, 2010 or February 28, 2010, whose fair value was determined using Level 3 inputs.
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are inclu ded with the net realized and unrealized gain or loss on investment securities.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend
33
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
income are generally withheld in accordance with the applicable country's tax treaty with the United States. The foreign withholding rates applicable to a Fund's investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if paid by the shareholders of the Fund.
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Transaction based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund elected to defer to March 1, 2010 post-October capital losses of $25,121,678.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (215,235,940 | ) | ||||
2/28/2018 | (906,840,158 | ) | |||||
Total | $ | (1,122,076,098 | ) |
34
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 5,388,497,191 | $ | 240,862,340 | $ | (823,351,812 | ) | $ | (582,489,472 | ) |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which co llection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. Investment income, common expenses and realized and unrealized gains and losses are
35
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
allocated among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class's operations.
Brown Brothers Harriman & Co. ("BBH") serves as the Fund's custodian and fund accounting agent. State Street Bank and Trust Company ("State Street") serves as the Fund's transfer agent. BBH's and State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund's investments.
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to rec eipt) may expose the Fund to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund's investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund's investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
36
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Other principal risks of an investment in the Fund include Market Risk — Value Securities (risk that the price of the Fund's investments will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Credit and Counterpar ty Risk (risk of default of a derivatives counterparty or a borrower of the Fund's securities); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes,
37
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index). The Funds also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedin gs. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be secured by collateral (e.g., foreign currency forwards; see "Currency Risk" above), that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a
38
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. During the period ended August 31, 2010, the Fund used forward currency contracts to manage against anticipated currency exchange rate changes and adjust exposure to foreign
39
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
currencies. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because regular trading on many foreign exchanges closes prior to the close of the NYSE, closing prices for foreign futures contracts on those exchanges do not reflect events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures contracts using fair value prices, which are based on adjustments to local closing prices, and supplied by a third par ty vendor based on that vendor's proprietary models. As of August 31, 2010, futures contracts representing (0.1)% of the net assets of the Fund were valued using fair value prices based on those adjustments and are classified using Level 2 inputs in the table above. During the period ended August 31, 2010, the Fund used futures contracts to adjust exposure to certain securities markets and maintain the diversity and liquidity of the portfolio. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. During the period ended August 31, 2010, the Fund used purchased call option contracts as a substitute for direct equity investment (when paired with written put options). Option cont racts purchased by the Fund and outstanding at the end of the period are listed in the Fund's Schedule of Investments.
40
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an of fsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. During the period ended August 31, 2010, the Fund used written put option contracts as a substitute for direct equity investment (when paired with purchased call options). Written options outstanding at the end of the period are listed in the Fund's Schedule of Investments.
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
For the period ended August 31, 2010, investment activity in options contracts written by the Fund was as follows:
Puts | Calls | ||||||||||||||||||||||||||
Principal Amount of Contracts | Number of Contracts | Premiums | Principal Amount of Contracts | Number of Contracts | Premiums | ||||||||||||||||||||||
Outstanding, beginning of period | $ | (7,593,720 | ) | — | $ | (3,563,998 | ) | $ | — | — | $ | — | |||||||||||||||
Options written | — | — | — | — | — | — | |||||||||||||||||||||
Options exercised | |||||||||||||||||||||||||||
Options expired | — | — | — | — | — | — | |||||||||||||||||||||
Options sold | — | — | — | — | — | — | |||||||||||||||||||||
Outstanding, end of period | $ | (7,593,720 | ) | — | $ | (3,563,998 | ) | $ | — | — | $ | — |
41
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level
42
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the pe riod ended August 31, 2010, the Fund used total return swap agreements to achieve returns comparable to holding and lending a direct equity position. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. During the period ended August 31, 2010, the Fund held rights and warrants received as a result of a corporate action. The Fund held no rights or warrants at the end of the period.
43
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair values of derivative instruments on the Statement of Assets and Liabilities as of August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (purchased options) | $ | — | $ | — | $ | — | $ | 2,896,457 | $ | — | $ | 2,896,457 | |||||||||||||||
Unrealized appreciation on future contracts* | — | — | — | 2,625,045 | — | 2,625,045 | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | 2,973,426 | — | — | — | 2,973,426 | |||||||||||||||||||||
Total | $ | — | $ | 2,973,426 | $ | — | $ | 5,521,502 | $ | — | $ | 8,494,928 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | — | $ | — | $ | — | $ | (100,401 | ) | $ | — | $ | (100,401 | ) | |||||||||||||
Unrealized depreciation on future contracts* | — | — | — | (7,663,853 | ) | — | (7,663,853 | ) | |||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | (2,541,273 | ) | — | — | — | (2,541,273 | ) | |||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | — | (27,712 | ) | — | (27,712 | ) | |||||||||||||||||||
Total | $ | — | $ | (2,541,273 | ) | $ | — | $ | (7,791,966 | ) | $ | — | $ | (10,333,239 | ) |
44
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the period ended August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (rights and warrants) | $ | — | $ | — | $ | — | $ | (1,076,003 | ) | $ | — | $ | (1,076,003 | ) | |||||||||||||
Future contracts | — | — | — | (286,781 | ) | — | (286,781 | ) | |||||||||||||||||||
Forward currency contracts | — | (6,934,270 | ) | — | — | — | (6,934,270 | ) | |||||||||||||||||||
Swap Agreements | — | — | — | (502,961 | ) | — | (502,961 | ) | |||||||||||||||||||
Total | $ | — | $ | (6,934,270 | ) | $ | — | $ | (1,865,745 | ) | $ | — | $ | (8,800,015 | ) | ||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | — | $ | — | $ | — | $ | (3,650,637 | ) | $ | — | $ | (3,650,637 | ) | |||||||||||||
Written options | — | — | — | 1,611,714 | — | 1,611,714 | |||||||||||||||||||||
Future contracts | — | — | — | 2,438,428 | — | 2,438,428 | |||||||||||||||||||||
Forward currency contracts | — | 2,433,989 | — | — | — | 2,433,989 | |||||||||||||||||||||
Swap Agreements | — | — | — | 2,740 | — | 2,740 | |||||||||||||||||||||
Total | $ | — | $ | 2,433,989 | $ | — | $ | 402,245 | $ | — | $ | 2,836,234 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments.
The volume of derivative activity, based on absolute values (forward currency contracts, futures contracts and rights and warrants), notional amounts (swap agreements), or principal amounts (options) outstanding at each month-end, was as follows for the period ended August 31, 2010:
Forward Currency Contracts | Futures Contracts | Swap Agreements | Options | Rights/ Warrants | |||||||||||||||||||
Average amount outstanding | $ | 799,141,183 | $ | 326,381,418 | $ | 965,939 | $ | 22,841,702 | $ | 56,038 |
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.38% of average daily net assets. The Fund has adopted a Shareholder Service Plan under
45
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets of each class at the annual rate of 0.15% for Class III shares, 0.09% for Class IV shares and 0.055% for Class VI shares.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.38% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investme nt company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund's Expense Reimbursement Amount. These contractual expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $46,777 and $16,284, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended August 31, 2010 aggregated $1,481,329,278 and $633,650,105, respectively. Cost of purchases of securities for in-kind transactions for the period ended August 31, 2010 were $22,334,850.
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may
46
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, 26.02% of the outstanding shares of the Fund were held by one shareholder. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2010, less than 0.01% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 53.62% of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 1,547,005 | $ | 39,835,896 | 5,821,799 | $ | 134,795,005 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 135,470 | 3,450,417 | 1,151,413 | 29,417,970 | |||||||||||||||
Shares repurchased | (6,784,649 | ) | (180,686,879 | ) | (14,431,649 | ) | (369,527,886 | ) | |||||||||||
Net increase (decrease) | (5,102,174 | ) | $ | (137,400,566 | ) | (7,458,437 | ) | $ | (205,314,911 | ) | |||||||||
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 8,899,569 | $ | 229,468,680 | 9,373,640 | $ | 227,088,783 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 192,485 | 4,900,686 | 1,230,113 | 31,139,124 | |||||||||||||||
Shares repurchased | (861,877 | ) | (22,252,532 | ) | (43,764,218 | ) | (1,105,058,306 | ) | |||||||||||
Net increase (decrease) | 8,230,177 | $ | 212,116,834 | (33,160,465 | ) | $ | (846,830,399 | ) |
47
GMO International Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class VI: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 34,711,321 | $ | 878,748,116 | 37,566,602 | $ | 943,897,308 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 605,694 | 15,408,842 | 2,801,043 | 72,288,666 | |||||||||||||||
Shares repurchased | (3,621,390 | ) | (90,334,607 | ) | (11,578,500 | ) | (261,947,861 | ) | |||||||||||
Net increase (decrease) | 31,695,625 | $ | 803,822,351 | 28,789,145 | $ | 754,238,113 |
48
GMO International Core Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of a composite of accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three-, five- and seven-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications and experience of the
49
GMO International Core Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparis on to the Manager's separate account clients and the expenses and risks borne by the Manager as a result of the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by , for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating
50
GMO International Core Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
51
GMO International Core Equity Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
52
GMO International Core Equity Fund
(A Series of GMO Trust)
Fund Expenses — (Continued)
August 31, 2010 (Unaudited)
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.53 | % | $ | 1,000.00 | $ | 971.90 | $ | 2.63 | |||||||||||
2) Hypothetical | 0.53 | % | $ | 1,000.00 | $ | 1,022.53 | $ | 2.70 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.47 | % | $ | 1,000.00 | $ | 972.00 | $ | 2.34 | |||||||||||
2) Hypothetical | 0.47 | % | $ | 1,000.00 | $ | 1,022.84 | $ | 2.40 | |||||||||||
Class VI | |||||||||||||||||||
1) Actual | 0.44 | % | $ | 1,000.00 | $ | 972.10 | $ | 2.19 | |||||||||||
2) Hypothetical | 0.44 | % | $ | 1,000.00 | $ | 1,022.99 | $ | 2.24 |
* Expenses are calculated using each Class's annualized net expense ratio for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
53
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 93.6 | % | |||||
Short-Term Investments | 3.0 | ||||||
Preferred Stocks | 2.5 | ||||||
Debt Obligations | 0.1 | ||||||
Investment Funds | 0.1 | ||||||
Options Purchased | 0.0 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Written Options | (0.0 | ) | |||||
Futures Contracts | (0.1 | ) | |||||
Swap Agreements | (0.1 | ) | |||||
Other | 0.9 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
1
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2010 (Unaudited)
Country / Region Summary** | % of Investments | ||||||
Euro Region*** | 19.7 | % | |||||
Japan | 18.5 | ||||||
United Kingdom | 16.8 | ||||||
Switzerland | 6.4 | ||||||
South Korea | 5.3 | ||||||
Russia | 4.1 | ||||||
Sweden | 3.2 | ||||||
Brazil | 3.1 | ||||||
Singapore | 3.0 | ||||||
Taiwan | 2.1 | ||||||
China | 1.9 | ||||||
Australia | 1.8 | ||||||
Turkey | 1.8 | ||||||
Thailand | 1.8 | ||||||
India | 1.8 | ||||||
Denmark | 1.6 | ||||||
Hong Kong | 1.3 | ||||||
Norway | 0.9 | ||||||
South Africa | 0.7 | ||||||
Indonesia | 0.6 | ||||||
Czech Republic | 0.6 | ||||||
Canada | 0.5 | ||||||
Mexico | 0.5 | ||||||
Egypt | 0.4 | ||||||
Hungary | 0.4 | ||||||
Malaysia | 0.4 | ||||||
Poland | 0.3 | ||||||
Philippines | 0.2 | ||||||
Chile | 0.1 | ||||||
New Zealand | 0.1 | ||||||
Israel | 0.1 | ||||||
Morocco | 0.0 | ||||||
100.0 | % |
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds. The table excludes short-term investments. The table includes exposure through the use of derivative contracts.
*** The "Euro Region" is comprised of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
2
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
MUTUAL FUNDS — 100.0% | |||||||||||
Affiliated Issuers — 100.0% | |||||||||||
23,324,061 | GMO Emerging Markets Fund, Class VI | 287,352,437 | |||||||||
1,148,005 | GMO Flexible Equities Fund, Class VI | 19,607,917 | |||||||||
20,056,813 | GMO International Growth Equity Fund, Class IV | 389,102,167 | |||||||||
20,457,693 | GMO International Intrinsic Value Fund, Class IV | 386,036,663 | |||||||||
TOTAL MUTUAL FUNDS (COST $1,201,067,058) | 1,082,099,184 | ||||||||||
SHORT-TERM INVESTMENTS — 0.0% | |||||||||||
Time Deposits — 0.0% | |||||||||||
32,953 | State Street Eurodollar Time Deposit, 0.01%, due 09/01/2010 | 32,953 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $32,953) | 32,953 | ||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $1,201,100,011) | 1,082,132,137 | ||||||||||
Other Assets and Liabilities (net) — (0.0%) | (56,421 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 1,082,075,716 |
See accompanying notes to the financial statements.
3
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $32,953) (Note 2) | $ | 32,953 | |||||
Investments in affiliated issuers, at value (cost $1,201,067,058) (Notes 2 and 10) | 1,082,099,184 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 12,803 | ||||||
Miscellaneous receivable | 176 | ||||||
Total assets | 1,082,145,116 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 5): | |||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 1,816 | ||||||
Accrued expenses | 67,584 | ||||||
Total liabilities | 69,400 | ||||||
Net assets | $ | 1,082,075,716 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 1,296,928,252 | |||||
Accumulated undistributed net investment income | 3,180,981 | ||||||
Accumulated net realized loss | (99,065,643 | ) | |||||
Net unrealized depreciation | (118,967,874 | ) | |||||
$ | 1,082,075,716 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 1,082,075,716 | |||||
Shares outstanding: | |||||||
Class III | $ | 121,593,630 | |||||
Net asset value per share: | |||||||
Class III | $ | 8.90 |
See accompanying notes to the financial statements.
4
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 10) | $ | 3,226,623 | |||||
Interest | 178 | ||||||
Total investment income | 3,226,801 | ||||||
Expenses: | |||||||
Legal fees | 25,300 | ||||||
Custodian, fund accounting agent and transfer agent fees | 24,840 | ||||||
Audit and tax fees | 16,836 | ||||||
Trustees fees and related expenses (Note 5) | 10,712 | ||||||
Registration fees | 2,484 | ||||||
Miscellaneous | 8,924 | ||||||
Total expenses | 89,096 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (74,520 | ) | |||||
Expense reductions (Note 2) | (794 | ) | |||||
Net expenses | 13,782 | ||||||
Net investment income (loss) | 3,213,019 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | (12,932,803 | ) | |||||
Net realized gain (loss) | (12,932,803 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in affiliated issuers | 10,730,406 | ||||||
Net realized and unrealized gain (loss) | (2,202,397 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | 1,010,622 |
See accompanying notes to the financial statements.
5
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 3,213,019 | $ | 27,661,703 | |||||||
Net realized gain (loss) | (12,932,803 | ) | (29,625,725 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 10,730,406 | 278,327,502 | |||||||||
Net increase (decrease) in net assets from operations | 1,010,622 | 276,363,480 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (4,774,180 | ) | (22,901,437 | ) | |||||||
Net realized gains | |||||||||||
Class III | — | (9,699,836 | ) | ||||||||
(4,774,180 | ) | (32,601,273 | ) | ||||||||
Net share transactions (Note 9): | |||||||||||
Class III | 67,885,582 | 253,658,379 | |||||||||
Purchase premiums and redemption fees (Notes 2 and 9): | |||||||||||
Class III | 222,439 | 647,780 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees | 68,108,021 | 254,306,159 | |||||||||
Total increase (decrease) in net assets | 64,344,463 | 498,068,366 | |||||||||
Net assets: | |||||||||||
Beginning of period | 1,017,731,253 | 519,662,887 | |||||||||
End of period (including accumulated undistributed net investment income of $3,180,981 and $4,742,142, respectively) | $ | 1,082,075,716 | $ | 1,017,731,253 |
See accompanying notes to the financial statements.
6
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 8.96 | $ | 6.17 | $ | 16.45 | $ | 17.96 | $ | 17.13 | $ | 15.19 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.03 | 0.28 | 0.40 | 0.31 | 0.33 | 0.18 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.05 | ) | 2.81 | (7.20 | ) | 1.32 | 2.85 | 2.90 | |||||||||||||||||||
Total from investment operations | (0.02 | ) | 3.09 | (6.80 | ) | 1.63 | 3.18 | 3.08 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.04 | ) | (0.20 | ) | (0.39 | ) | (1.00 | ) | (0.83 | ) | (0.47 | ) | |||||||||||||||
From net realized gains | — | (0.10 | ) | (3.09 | ) | (2.14 | ) | (1.52 | ) | (0.67 | ) | ||||||||||||||||
Total distributions | (0.04 | ) | (0.30 | ) | (3.48 | ) | (3.14 | ) | (2.35 | ) | (1.14 | ) | |||||||||||||||
Net asset value, end of period | $ | 8.90 | $ | 8.96 | $ | 6.17 | $ | 16.45 | $ | 17.96 | $ | 17.13 | |||||||||||||||
Total Return(b) | (0.23 | )%** | 50.37 | % | (48.63 | )% | 7.81 | % | 19.33 | % | 21.15 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,082,076 | $ | 1,017,731 | $ | 519,663 | $ | 755,542 | $ | 758,757 | $ | 659,520 | |||||||||||||||
Net expenses to average daily net assets(c)(d) | 0.00 | %(e)* | 0.00 | %(e) | 0.00 | %(e) | 0.00 | %(e) | 0.00 | % | 0.00 | % | |||||||||||||||
Net investment income (loss) to average daily net assets(a) | 0.60 | %* | 3.21 | % | 3.46 | % | 1.66 | % | 1.87 | % | 1.15 | % | |||||||||||||||
Portfolio turnover rate | 5 | %** | 11 | % | 33 | % | 9 | % | 4 | % | 7 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.01 | %* | 0.02 | % | 0.02 | % | 0.01 | % | 0.01 | % | 0.02 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.00 | (f) | $ | 0.01 | $ | 0.01 | $ | 0.00 | (f) | $ | 0.00 | (f) | $ | 0.00 | (f) |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(d) Net expenses to average daily net assets were less than 0.01%.
(e) The net expense ratio does not include the effect of expense reductions (Note 2).
(f) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
7
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO International Equity Allocation Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks total return greater than that of its benchmark, the MSCI ACWI (All Country World Index) ex-U.S. Index. The Fund is a fund of funds and invests primarily in shares of the GMO International Equity Funds. The Fund also may invest in shares of other GMO Funds, including the GMO Fixed Income Funds, GMO Alpha Only Fund, and GMO Alternative Asset Opportunity Fund (GMO Funds in which the Fund invests are collectively referred to as "underlying funds"). In addition, the Fund may hold securities directly. Although the Fund's primary exposure is to foreign equity investments (including emerging country equities, both growth and value style equities, and equities of any market capitalization), the Fund also may have exposure to foreign and U.S. fixed income securities (including fixed income securities of any credit quality and having any maturity or duration), as well as to the investment returns of commodities and, from ti me to time, other alternative asset classes. Under normal circumstances, the Fund invests (including through investment in the underlying funds) at least 80% of its assets in equity investments. The term "equity investments" refers to direct and indirect (e.g., through the underlying funds) investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts.
The Manager uses proprietary quantitative models and fundamental investment techniques to select the underlying funds in which the Fund invests and to decide how much to invest in each. The models use multi-year forecasts of relative value and risk among asset classes (e.g., foreign equity, emerging country equity, emerging country debt, foreign fixed income, U.S. fixed income, and commodities). The Manager changes the Fund's holdings of underlying funds in response to changes in its investment outlook and market valuations and may use redemption/purchase activity to rebalance the Fund's investments.
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
The financial statements of the underlying funds should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect) or by visiting GMO's website at www.gmo.com.
8
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Shares of the underlying funds and other investment funds are generally valued at their net asset value. Investments held by the underlying funds are valued as follows. Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the over-the-counter ("OTC") market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximat es market value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of August 31, 2010, the total value of securities held indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 2.1% of net assets. The underlying funds classify such securities (as defined below) as Level 3. Additionally, because many foreign equity securities markets and exchanges close prior to the cl ose of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund and the underlying funds generally value foreign equity securities as of the NYSE close using fair value prices, which are based on local closing prices and adjustments supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2010, equity securities and futures contracts representing 88.1% and (0.1)%, respectively, of the net assets of the Fund, through investments in the underlying funds, were valued using fair value prices based on those adjustments. Those underlying funds classify such securities (as defined below) as Level 2.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation
9
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Mutual Funds | $ | 1,082,099,184 | $ | — | $ | — | $ | 1,082,099,184 | |||||||||||
Short-Term Investments | 32,953 | — | — | 32,953 | |||||||||||||||
Total Investments | 1,082,132,137 | — | — | 1,082,132,137 | |||||||||||||||
Total | $ | 1,082,132,137 | $ | — | $ | — | $ | 1,082,132,137 |
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements. The aggregate net values of the Fund's indirect investments in securities using Level 3 inputs were 2.1% of total net assets.
The Fund held no direct investments or other financial instruments at either August 31, 2010 or February 28, 2010, whose fair value was determined using Level 3 inputs.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
10
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund elected to defer to March 1, 2010 post-October capital losses of $2,753,614.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2018 | $ | (165,440 | ) | ||||
Total | $ | (165,440 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 1,296,260,510 | $ | 15,172,372 | $ | (229,300,745 | ) | $ | (214,128,373 | ) |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts
11
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact its operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Income dividends and capital gain distributions from the underlying funds are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for the purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 5).
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
Prior to June 30, 2010, the premium on cash purchases and the fee on cash redemptions were each 0.18% of the amount invested or redeemed. Effective June 30, 2010, the premium on cash purchases and the fee on cash redemptions were each 0.21% of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by a Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. The Fund charges purchase premiums and redemption fees based on the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase
12
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
premiums and/or redemption fees, if any, imposed by the underlying Funds in which it invests, provided that, if that weighted average is less than 0.05%, the Fund generally will not charge a purchase premium or redemption fee. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager may consider known cash flows out of or into other series of the Trust when placing orders for the cash purchase or redemption of shares by the Fund shareholders or other prospective or existing shareholders of the Funds for whom GMO provides asset allocation advice. Consequently, the Fund and those other shareholders for whom GMO provides asset allocation advice will tend to benefit from waivers of the Funds' purchase premiums and redemption fees to a greater extent than other prospective and existing shareholders of the other series of the Trust. All or a portion of the Fund's purchase premiums and/or redemption fees may be waived at the Manager's discretion when they are de minimis and/or the Manager deems it equitable to do so, including without limitation when the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premiums and/or redemption fees, if any, imposed by the underlying funds are less than the purchase premiums and/or redemption fees imposed by the Fund. The Manager also may waive or reduce the purchase p remium or redemption fee relating to a cash purchase or redemption of a Fund's shares if the Fund will not incur transaction costs or will incur/reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of a Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for pu rchases and redemptions to the Manager the day after those orders are received by the broker or agent.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. References to investments include those held directly by the Fund and indirectly through the Fund's investments in the underlying funds. Some of the underlying funds are non-diversified investment companies under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by those funds may affect their performance more than if they were diversified. The principal risks of investing in the Fund are
13
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
summarized below, including those risks to which the Fund is exposed as a result of its investments in the underlying funds. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund and the underlying funds normally do not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund's investments.
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund or the underlying funds may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund or the underlying funds need to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund or the underlying funds to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund's investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund's investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of foreign currency holdings and investments denominated in foreign currencies.
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund or an underlying fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
• Derivatives Risk — The use of derivatives involves the risk that their value may not correlate with the value of the relevant underlying assets, rates or indices. Derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk.
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in the underlying funds, including the risk that the underlying funds in which it invests do not perform as expected. Because the Fund bears the fees and expenses of the underlying funds in which it invests, new
14
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
investments in underlying funds with higher fees or expenses than those of the underlying funds in which the Fund is currently invested will increase the Fund's total expenses. The fees and expenses associated with an investment in the Fund are less predictable and may be higher than fees and expenses associated with an investment in funds that charge a fixed management fee.
Other principal risks of an investment in the Fund include Market Risk — Fixed Income Securities (risk that the value of fixed income securities will decline during periods of rising interest rates and widening of credit spreads); Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Market Risk — Value Securities (risk that the price of investments held by the Fund will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Market Risk — Growth Securities (greater price fluctuations resulting from dependence on future earnings expectations); Commodities Risk (value of an underlying fund's shares may be affected by factors particular to the commodities markets and may fluctuate more than the share value of a fund with a broader range of investments); Leveraging Risk (increased risk of loss from use of reverse repurchase agreements and other derivatives and se curities lending); Credit and Counterparty Risk (risk of default of an issuer of a portfolio security, a derivatives counterparty, or a borrower of the Fund's securities); Short Sales Risk (risk that an underlying fund's loss on the short sale of securities that it does not own is unlimited); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls may cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
4. Derivative financial instruments
At August 31, 2010, the Fund held no derivative contracts.
5. Fees and other transactions with affiliates
The Manager decides how to allocate the assets of the Fund among underlying funds. The Manager does not charge the Fund a management fee or shareholder service fee, but it receives management and shareholder service fees from the underlying funds in which the Fund invests. Because those fees vary from fund to fund, the levels of indirect net expenses set forth below are affected by the Manager's asset allocation decisions.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.00% of the Fund's average daily net assets (the "Expense Reimbursement
15
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). This contractual expense limitation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $10,712 and $3,864, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees) | Indirect Shareholder Service Fees | Total Indirect Expenses | |||||||||
0.585 | % | 0.081 | % | 0.666 | % |
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments and class exchanges, for the period ended August 31, 2010 aggregated $116,783,220 and $50,240,810, respectively.
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss
16
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, the Fund had no shareholders who individually held more than 10% of the Fund's outstanding shares.
As of August 31, 2010, 0.01% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and none of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 10,967,189 | $ | 94,779,482 | 37,135,791 | $ | 324,432,360 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 500,593 | 4,410,225 | 3,381,013 | 29,900,935 | |||||||||||||||
Shares repurchased | (3,481,536 | ) | (31,304,125 | ) | (11,107,975 | ) | (100,674,916 | ) | |||||||||||
Purchase premiums | — | 181,212 | — | 533,167 | |||||||||||||||
Redemption fees | — | 41,227 | — | 114,613 | |||||||||||||||
Net increase (decrease) | 7,986,246 | $ | 68,108,021 | 29,408,829 | $ | 254,306,159 |
17
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
10. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO Asset Allocation Bond Fund, Class VI | $ | — | $ | 24,975 | $ | 24,881 | $ | — | $ | — | $ | — | |||||||||||||||
GMO Emerging Markets Fund, Class VI | 225,157,009 | 50,067,172 | 3,860,715 | — | — | 287,352,437 | |||||||||||||||||||||
GMO Flexible Equities Fund, Class VI | 20,420,861 | 1,042,367 | 195,228 | — | — | 19,607,917 | |||||||||||||||||||||
GMO International Growth Equity Fund, Class IV | 378,180,167 | 34,434,946 | 18,735,936 | 1,368,323 | — | 389,102,167 | |||||||||||||||||||||
GMO International Intrinsic Value Fund, Class IV | 374,634,191 | 31,012,911 | 7,392,213 | 1,657,451 | — | 386,036,663 | |||||||||||||||||||||
GMO International Small Companies III | 19,366,944 | 200,849 | 20,031,837 | 200,849 | — | — | |||||||||||||||||||||
Totals | $ | 1,017,759,172 | $ | 116,783,220 | $ | 50,240,810 | $ | 3,226,623 | $ | — | $ | 1,082,099,184 |
18
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of a composite of accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including a one-year period and for the life of the Fund one-, three-, five-, seven- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees
19
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fact that the Fund does not pay a management fee to the Manager under the Fund's investment management agreement, but that the Fund indirectly bears management and shareholder servicing fees paid to the Manager by other funds of the Trust in which it invests. The Trustees also considered so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees noted that they had approved renewal of the Manager's investment management agreements with the other funds of the Trust in which the Fund may invest and had concluded that the advisory fees charged to those funds were reasonable, after considering, among other things: possible economies of scale to the Manager in connection with its management of the other funds of the Trust; the Manager's profitability with respect to the other funds of the Trust and the Trust as a whole (including the effect of recent changes in assets under management); and information prepared by a third-party data service concerning fee s paid to managers of funds deemed by that service to have similar objectives to those of the other funds of the Trust.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
20
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
21
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including indirect management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.67 | % | $ | 1,000 | $ | 997.70 | $ | 3.37 | |||||||||||
2) Hypothetical | 0.67 | % | $ | 1,000 | $ | 1,021.83 | $ | 3.41 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
22
GMO International Growth Equity Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO International Growth Equity Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 95.0 | % | |||||
Short-Term Investments | 3.5 | ||||||
Preferred Stocks | 0.3 | ||||||
Forward Currency Contracts | 0.1 | ||||||
Futures Contracts | 0.0 | ||||||
Other | 1.1 | ||||||
100.0 | % | ||||||
Country Summary | % of Equity Investments* | ||||||
United Kingdom | 24.3 | % | |||||
Japan | 20.8 | ||||||
Switzerland | 12.5 | ||||||
Sweden | 5.9 | ||||||
Germany | 5.1 | ||||||
Australia | 4.8 | ||||||
France | 4.8 | ||||||
Netherlands | 4.4 | ||||||
Denmark | 3.5 | ||||||
Canada | 3.0 | ||||||
Singapore | 2.8 | ||||||
Hong Kong | 1.9 | ||||||
Norway | 1.9 | ||||||
Belgium | 1.3 | ||||||
Spain | 1.3 | ||||||
Finland | 0.5 | ||||||
Greece | 0.4 | ||||||
Italy | 0.4 | ||||||
Austria | 0.2 | ||||||
Ireland | 0.1 | ||||||
Portugal | 0.1 | ||||||
100.0 | % |
* Equity investments may consist of common stocks, preferred stocks and rights and warrants. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
1
GMO International Growth Equity Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2010 (Unaudited)
Industry Group Summary | % of Equity Investments* | ||||||
Pharmaceuticals, Biotechnology & Life Sciences | 18.3 | % | |||||
Materials | 11.8 | ||||||
Capital Goods | 11.6 | ||||||
Food, Beverage & Tobacco | 9.7 | ||||||
Telecommunication Services | 5.1 | ||||||
Banks | 4.1 | ||||||
Energy | 3.9 | ||||||
Retailing | 3.7 | ||||||
Technology Hardware & Equipment | 3.4 | ||||||
Consumer Durables & Apparel | 3.3 | ||||||
Software & Services | 3.2 | ||||||
Household & Personal Products | 3.1 | ||||||
Automobiles & Components | 2.9 | ||||||
Health Care Equipment & Services | 2.4 | ||||||
Media | 2.2 | ||||||
Food & Staples Retailing | 2.1 | ||||||
Transportation | 2.0 | ||||||
Commercial & Professional Services | 1.8 | ||||||
Semiconductors & Semiconductor Equipment | 1.5 | ||||||
Utilities | 1.4 | ||||||
Diversified Financials | 1.1 | ||||||
Consumer Services | 0.7 | ||||||
Real Estate | 0.5 | ||||||
Insurance | 0.2 | ||||||
100.0 | % |
* Equity investments may consist of common stocks, preferred stocks and rights and warrants. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
2
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 95.0% | |||||||||||
Australia — 4.6% | |||||||||||
428,303 | BHP Billiton Ltd | 14,210,178 | |||||||||
102,383 | Cochlear Ltd | 6,318,192 | |||||||||
644,905 | Commonwealth Bank of Australia | 28,984,978 | |||||||||
131,200 | CSL Ltd | 3,857,125 | |||||||||
127,022 | Newcrest Mining Ltd | 4,230,567 | |||||||||
504,431 | Rio Tinto Ltd | 31,680,754 | |||||||||
2,745,087 | Telstra Corp Ltd | 6,742,251 | |||||||||
70,971 | Westpac Banking Corp | 1,375,395 | |||||||||
300,432 | Woodside Petroleum Ltd | 11,236,265 | |||||||||
1,230,630 | Woolworths Ltd | 30,419,599 | |||||||||
Total Australia | 139,055,304 | ||||||||||
Austria — 0.2% | |||||||||||
39,776 | Andritz AG | 2,414,315 | |||||||||
17,004 | Erste Group Bank AG | 613,256 | |||||||||
616,518 | Immofinanz AG * | 2,006,575 | |||||||||
946,419 | Immofinanz AG (Entitlement Shares) * | — | |||||||||
27,324 | Raiffeisen International Bank Holding | 1,111,209 | |||||||||
37,675 | Voestalpine AG | 1,114,460 | |||||||||
Total Austria | 7,259,815 | ||||||||||
Belgium — 1.2% | |||||||||||
93,049 | Anheuser-Busch InBev NV | 4,819,500 | |||||||||
9,850 | Bekaert NV | 1,991,216 | |||||||||
172,966 | Belgacom SA | 6,149,305 | |||||||||
24,517 | Colruyt SA | 6,059,602 | |||||||||
41,750 | Delhaize Group | 2,790,423 | |||||||||
12,674 | Groupe Bruxelles Lambert SA | 931,786 | |||||||||
69,806 | Mobistar SA | 3,904,886 | |||||||||
257,355 | Nyrstar | 2,748,768 | |||||||||
90,188 | Telenet Group Holding NV * | 2,688,582 | |||||||||
156,443 | Umicore | 5,416,807 | |||||||||
Total Belgium | 37,500,875 |
See accompanying notes to the financial statements.
3
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Canada — 2.9% | |||||||||||
76,300 | Barrick Gold Corp | 3,574,047 | |||||||||
294,000 | Canadian National Railway Co | 17,940,245 | |||||||||
78,300 | IGM Financial Inc | 2,940,793 | |||||||||
45,200 | Imperial Oil Ltd | 1,666,680 | |||||||||
81,500 | Metro Inc Class A | 3,450,002 | |||||||||
201,700 | Pacific Rubiales Energy Corp * | 4,757,120 | |||||||||
45,200 | Petrobank Energy & Resources Ltd * | 1,567,493 | |||||||||
174,200 | Red Back Mining Inc * | 5,199,781 | |||||||||
220,300 | Research In Motion Ltd * | 9,441,281 | |||||||||
172,900 | Rogers Communications Inc Class B | 6,000,871 | |||||||||
126,000 | Royal Bank of Canada | 6,026,164 | |||||||||
95,200 | Shaw Communications Inc Class B | 1,952,477 | |||||||||
127,700 | Shoppers Drug Mart Corp | 4,348,279 | |||||||||
563,100 | Teck Resources Ltd Class B | 18,836,008 | |||||||||
Total Canada | 87,701,241 | ||||||||||
Denmark — 3.4% | |||||||||||
204 | AP Moller-Maersk A/S Class A | 1,528,482 | |||||||||
109,187 | Danske Bank A/S * | 2,411,709 | |||||||||
39,984 | FLSmidth & Co A/S | 2,348,446 | |||||||||
1,053,806 | Novo-Nordisk A/S Class B | 90,037,022 | |||||||||
50,762 | Novozymes A/S Class B | 5,939,459 | |||||||||
Total Denmark | 102,265,118 | ||||||||||
Finland — 0.5% | |||||||||||
124,922 | Alma Media Corp | 1,008,746 | |||||||||
75,844 | Kone Oyj Class B | 3,478,502 | |||||||||
146,174 | Metso Oyj | 5,319,543 | |||||||||
353,774 | Nokia Oyj | 3,014,522 | |||||||||
180,403 | UPM-Kymmene Oyj | 2,468,702 | |||||||||
Total Finland | 15,290,015 |
See accompanying notes to the financial statements.
4
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
France — 4.6% | |||||||||||
37,598 | Air Liquide SA | 3,888,864 | |||||||||
147,819 | BNP Paribas | 9,157,590 | |||||||||
31,481 | Bureau Veritas SA | 1,913,480 | |||||||||
133,721 | Danone SA | 7,158,343 | |||||||||
55,638 | Dassault Systemes SA | 3,347,379 | |||||||||
73,628 | Essilor International SA | 4,454,660 | |||||||||
51,633 | Eutelsat Communications | 1,851,615 | |||||||||
72,505 | Hermes International | 13,103,113 | |||||||||
30,534 | Iliad SA | 2,867,649 | |||||||||
124,154 | L'Oreal SA | 12,293,264 | |||||||||
120,296 | Legrand SA | 3,644,020 | |||||||||
137,822 | LVMH Moet Hennessy Louis Vuitton SA | 15,967,785 | |||||||||
19,922 | Neopost SA | 1,404,057 | |||||||||
95,929 | Renault SA * | 3,875,216 | |||||||||
320,145 | Sanofi-Aventis | 18,327,116 | |||||||||
61,410 | Schneider Electric SA | 6,490,004 | |||||||||
219,715 | SES SA | 5,032,575 | |||||||||
143,158 | Silicon-On-Insulator Technologies * | 1,208,303 | |||||||||
74,219 | Societe Generale | 3,742,711 | |||||||||
89,887 | Technip SA | 5,860,254 | |||||||||
194,213 | Total SA | 9,033,704 | |||||||||
35,424 | Vallourec SA | 3,032,484 | |||||||||
34,253 | Zodiac Aerospace | 2,058,858 | |||||||||
Total France | 139,713,044 | ||||||||||
Germany — 4.5% | |||||||||||
43,478 | Adidas AG | 2,205,064 | |||||||||
231,388 | Aixtron AG | 5,714,286 | |||||||||
255,541 | BASF AG | 13,440,376 | |||||||||
228,093 | Bayerische Motoren Werke AG | 11,984,678 | |||||||||
59,394 | Beiersdorf AG | 3,175,291 | |||||||||
359,905 | Daimler AG (Registered) * | 17,412,210 | |||||||||
18,771 | Fielmann AG | 1,546,720 | |||||||||
79,090 | HeidelbergCement AG | 3,159,437 |
See accompanying notes to the financial statements.
5
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Germany — continued | |||||||||||
56,482 | Henkel AG & Co KGaA | 2,269,498 | |||||||||
1,550,048 | Infineon Technologies AG * | 8,595,534 | |||||||||
195,507 | Lanxess AG | 8,520,423 | |||||||||
34,446 | MAN SE | 2,962,243 | |||||||||
56,447 | MTU Aero Engines Holding AG | 3,137,505 | |||||||||
3,822 | Puma AG Rudolf Dassler Sport | 1,038,072 | |||||||||
952,605 | SAP AG | 41,481,720 | |||||||||
38,747 | Software AG | 4,067,654 | |||||||||
92,255 | Stada Arzneimittel AG | 2,816,815 | |||||||||
53,119 | Suedzucker AG | 966,836 | |||||||||
102,041 | Symrise AG | 2,516,371 | |||||||||
Total Germany | 137,010,733 | ||||||||||
Greece — 0.4% | |||||||||||
257,869 | Alpha Bank A.E. * | 1,651,050 | |||||||||
213,637 | EFG Eurobank Ergasias * | 1,379,115 | |||||||||
318,276 | National Bank of Greece SA * | 3,951,654 | |||||||||
325,489 | OPAP SA | 4,940,742 | |||||||||
Total Greece | 11,922,561 | ||||||||||
Hong Kong — 1.9% | |||||||||||
508,500 | BOC Hong Kong Holdings Ltd | 1,342,884 | |||||||||
1,922,500 | CLP Holdings Ltd | 14,677,959 | |||||||||
933,274 | Esprit Holdings Ltd | 5,265,550 | |||||||||
549,100 | Hang Seng Bank Ltd | 7,555,574 | |||||||||
1,382,500 | Hong Kong Electric Holdings Ltd | 8,425,388 | |||||||||
4,050,340 | Hong Kong & China Gas | 9,815,873 | |||||||||
89,200 | Hong Kong Aircraft Engineering Co Ltd | 1,217,290 | |||||||||
297,600 | Hong Kong Exchanges & Clearing Ltd | 4,694,625 | |||||||||
132,000 | Sun Hung Kai Properties Ltd | 1,861,510 | |||||||||
120,500 | Swire Pacific Ltd | 1,457,402 | |||||||||
Total Hong Kong | 56,314,055 |
See accompanying notes to the financial statements.
6
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Ireland — 0.1% | |||||||||||
100,427 | CRH Plc | 1,546,255 | |||||||||
Italy — 0.3% | |||||||||||
92,156 | ENI SPA | 1,820,827 | |||||||||
168,278 | Saipem SPA | 5,857,294 | |||||||||
168,950 | Tenaris SA | 2,849,342 | |||||||||
Total Italy | 10,527,463 | ||||||||||
Japan — 19.8% | |||||||||||
41,300 | ABC-Mart Inc | 1,238,539 | |||||||||
967,000 | Asahi Glass Co Ltd | 9,435,200 | |||||||||
331,500 | Astellas Pharma Inc | 11,447,564 | |||||||||
617,850 | Canon Inc | 25,295,070 | |||||||||
357 | Central Japan Railway Co | 2,878,986 | |||||||||
294,700 | Chugai Pharmaceutical Co Ltd | 5,038,418 | |||||||||
859 | CyberAgent Inc | 1,378,002 | |||||||||
160,700 | Daiichi Sankyo Co Ltd | 3,210,653 | |||||||||
115,500 | Daito Trust Construction Co Ltd | 6,632,663 | |||||||||
173,300 | Dena Co Ltd | 5,216,806 | |||||||||
27,900 | Disco Corp | 1,393,607 | |||||||||
252,300 | Eisai Co Ltd | 9,101,857 | |||||||||
292,800 | Elpida Memory Inc * | 3,510,675 | |||||||||
329,600 | Fanuc Ltd | 35,472,207 | |||||||||
107,200 | Fast Retailing Co Ltd | 14,806,578 | |||||||||
393,000 | Fujitsu Ltd | 2,721,221 | |||||||||
425,000 | Fuji Heavy Industries Ltd * | 2,378,660 | |||||||||
45,600 | Hirose Electric Co Ltd | 4,409,367 | |||||||||
120,500 | Hisamitsu Pharmaceutical Co Inc | 4,973,299 | |||||||||
104,100 | Hitachi Construction Machinery Co Ltd | 2,071,066 | |||||||||
983,000 | Hitachi Ltd * | 3,994,645 | |||||||||
758,900 | Honda Motor Co Ltd | 25,136,463 | |||||||||
427,900 | Hoya Corp | 9,427,705 | |||||||||
712 | INPEX Corp | 3,224,005 | |||||||||
421,000 | Isuzu Motors Ltd | 1,396,760 |
See accompanying notes to the financial statements.
7
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
547,100 | Itochu Corp | 4,460,133 | |||||||||
87,700 | Ito En Ltd | 1,435,008 | |||||||||
768 | Japan Tobacco Inc | 2,385,876 | |||||||||
704 | Kakaku.com Inc | 3,434,521 | |||||||||
708,700 | Kao Corp | 16,497,906 | |||||||||
874 | KDDI Corp | 4,215,006 | |||||||||
51,830 | Keyence Corp | 10,728,419 | |||||||||
1,108,000 | Kintetsu Corp | 3,700,697 | |||||||||
145,000 | Koito Manufacturing Co Ltd | 1,992,395 | |||||||||
575,500 | Komatsu Ltd | 11,685,344 | |||||||||
142,000 | Kuraray Co Ltd | 1,607,017 | |||||||||
113,300 | Lawson Inc | 5,154,422 | |||||||||
159,600 | Makita Corp | 4,537,409 | |||||||||
695,000 | Marubeni Corp | 3,578,160 | |||||||||
826,000 | Mitsubishi Chemical Holdings Corp | 3,908,074 | |||||||||
570,500 | Mitsubishi Corp | 12,224,344 | |||||||||
1,135,000 | Mitsubishi Electric Corp | 9,057,562 | |||||||||
151,200 | Mitsui & Co Ltd | 1,968,248 | |||||||||
985,000 | Mitsui OSK Lines Ltd | 6,191,481 | |||||||||
1,951,300 | Mizuho Financial Group Inc | 2,992,742 | |||||||||
167,100 | Murata Manufacturing Co Ltd | 7,938,800 | |||||||||
269,000 | NHK Spring Co Ltd | 2,230,685 | |||||||||
190,500 | Nidec Corp | 16,778,423 | |||||||||
221,100 | Nikon Corp | 3,684,661 | |||||||||
67,000 | Nintendo Co Ltd | 18,574,417 | |||||||||
491,000 | Nippon Electric Glass Co Ltd | 5,495,583 | |||||||||
609,000 | Nippon Yusen KK | 2,345,692 | |||||||||
1,253,800 | Nissan Motor Co Ltd * | 9,556,456 | |||||||||
91,050 | Nitori Co Ltd | 7,934,267 | |||||||||
200,800 | Nitto Denko Corp | 6,443,939 | |||||||||
148,100 | Nomura Research Institute Ltd | 2,881,563 | |||||||||
795,000 | NSK Ltd | 4,730,745 | |||||||||
601 | NTT Data Corp | 1,882,127 | |||||||||
9,472 | NTT Docomo Inc | 16,050,536 |
See accompanying notes to the financial statements.
8
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
557,000 | Odakyu Electric Railway Co Ltd | 5,144,715 | |||||||||
146,900 | Olympus Corp | 3,511,268 | |||||||||
54,600 | Ono Pharmaceutical Co Ltd | 2,396,968 | |||||||||
33,200 | Oriental Land Co Ltd | 2,942,575 | |||||||||
40,150 | ORIX Corp | 3,019,039 | |||||||||
4,389 | Rakuten Inc | 3,326,545 | |||||||||
152,200 | Resona Holdings Inc | 1,503,420 | |||||||||
175,000 | Ricoh Company Ltd | 2,242,910 | |||||||||
74,400 | Sankyo Co Ltd | 3,763,497 | |||||||||
44,300 | Santen Pharmaceutical Co Ltd | 1,585,671 | |||||||||
138,700 | Secom Co Ltd | 6,048,956 | |||||||||
210,900 | Seven & I Holdings Co Ltd | 4,811,552 | |||||||||
706 | Seven Bank Ltd | 1,343,803 | |||||||||
28,000 | Shimamura Co Ltd | 2,549,595 | |||||||||
216,200 | Shin-Etsu Chemical Co Ltd | 10,008,682 | |||||||||
187,200 | Shionogi & Co Ltd | 3,274,564 | |||||||||
284,000 | Shiseido Co Ltd | 6,374,712 | |||||||||
51,300 | SMC Corp | 6,325,619 | |||||||||
372,600 | SoftBank Corp | 10,680,255 | |||||||||
220,200 | Sony Corp | 6,171,771 | |||||||||
203,400 | Stanley Electric Co Ltd | 3,137,794 | |||||||||
69,200 | Sysmex Corp | 4,376,328 | |||||||||
612,600 | Takeda Pharmaceutical Co Ltd | 28,155,967 | |||||||||
280,700 | Terumo Corp | 13,913,844 | |||||||||
109,200 | THK Co Ltd | 1,796,116 | |||||||||
374,000 | Tobu Railway Co Ltd | 2,135,386 | |||||||||
119,300 | Tokyo Electron Ltd | 5,597,321 | |||||||||
2,116,000 | Toshiba Corp * | 9,945,927 | |||||||||
87,900 | Toyota Boshoku Corp | 1,279,010 | |||||||||
92,400 | Toyota Tsusho Corp | 1,322,424 | |||||||||
107,000 | Toyo Suisan Kaisha Ltd | 2,254,519 | |||||||||
158,400 | Trend Micro Inc | 4,307,007 | |||||||||
116,500 | Tsumura & Co | 3,626,963 | |||||||||
80,100 | Unicharm Corp | 9,765,259 |
See accompanying notes to the financial statements.
9
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
22,420 | Yahoo Japan Corp | 8,055,642 | |||||||||
64,280 | Yamada Denki Co Ltd | 3,999,181 | |||||||||
Total Japan | 604,767,479 | ||||||||||
Netherlands — 4.2% | |||||||||||
424,472 | ASML Holding NV | 10,503,058 | |||||||||
108,350 | Boskalis Westminster | 4,027,348 | |||||||||
66,838 | Fugro NV | 3,745,225 | |||||||||
92,727 | Heineken NV | 4,144,454 | |||||||||
64,753 | Koninklijke Vopak NV | 2,593,369 | |||||||||
942,313 | Koninklijke KPN NV | 13,623,899 | |||||||||
1,712,550 | Koninklijke Philips Electronics NV | 47,723,239 | |||||||||
115,301 | Randstad Holdings NV * | 4,276,415 | |||||||||
543,143 | Reed Elsevier NV | 6,477,569 | |||||||||
215,419 | TNT NV | 5,444,658 | |||||||||
909,919 | Unilever NV | 24,281,689 | |||||||||
Total Netherlands | 126,840,923 | ||||||||||
Norway — 1.8% | |||||||||||
389,627 | Acergy SA | 5,944,797 | |||||||||
267,226 | Aker Solutions ASA | 2,932,188 | |||||||||
65,501 | Frontline Ltd | 1,730,997 | |||||||||
1,015,622 | Golden Ocean Group Ltd | 1,296,875 | |||||||||
3,149,209 | Marine Harvest | 2,389,411 | |||||||||
731,116 | Norsk Hydro ASA | 3,460,403 | |||||||||
415,342 | Petroleum Geo-Services ASA * | 3,704,142 | |||||||||
192,689 | Schibsted ASA | 4,369,059 | |||||||||
209,845 | Seadrill Ltd | 4,851,167 | |||||||||
91,282 | Statoil ASA | 1,708,267 | |||||||||
203,454 | Subsea 7 Inc * | 3,214,988 | |||||||||
489,441 | Telenor ASA | 7,138,635 | |||||||||
259,408 | TGS Nopec Geophysical Co ASA | 3,467,212 | |||||||||
224,519 | Yara International ASA | 8,962,803 | |||||||||
Total Norway | 55,170,944 |
See accompanying notes to the financial statements.
10
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Portugal — 0.1% | |||||||||||
320,859 | Portugal Telecom SGPS SA | 3,762,700 | |||||||||
Singapore — 2.7% | |||||||||||
1,559,000 | Ezra Holdings Ltd | 2,035,729 | |||||||||
4,641,000 | Genting Singapore Plc * | 5,804,458 | |||||||||
11,242,000 | Golden Agri-Resources Ltd | 4,664,862 | |||||||||
928,000 | Hyflux Ltd | 2,058,856 | |||||||||
1,005,000 | Keppel Corp Ltd | 6,660,310 | |||||||||
866,000 | Keppel Land Ltd | 2,487,670 | |||||||||
2,275,000 | Midas Holdings Ltd | 1,457,059 | |||||||||
1,079,000 | Olam International Ltd | 2,134,944 | |||||||||
231,000 | Oversea-Chinese Banking Corp Ltd | 1,481,368 | |||||||||
1,540,000 | SembCorp Marine Ltd | 4,343,602 | |||||||||
1,545,000 | Singapore Exchange Ltd | 8,592,271 | |||||||||
2,509,000 | Singapore Press Holdings Ltd | 7,566,903 | |||||||||
3,765,000 | Singapore Technologies Engineering Ltd | 8,915,731 | |||||||||
6,212,500 | Singapore Telecommunications | 14,155,879 | |||||||||
1,286,000 | SMRT Corp Ltd | 1,955,765 | |||||||||
1,406,000 | StarHub Ltd | 2,553,734 | |||||||||
880,000 | Wilmar International Ltd | 4,075,110 | |||||||||
Total Singapore | 80,944,251 | ||||||||||
Spain — 1.2% | |||||||||||
432,089 | Banco Santander SA | 5,031,366 | |||||||||
215,331 | Inditex SA | 14,320,172 | |||||||||
786,367 | Telefonica SA | 17,380,169 | |||||||||
Total Spain | 36,731,707 | ||||||||||
Sweden — 5.6% | |||||||||||
466,057 | Alfa Laval AB | 6,792,458 | |||||||||
218,038 | Alliance Oil Company Ltd SDR * | 2,532,212 | |||||||||
336,646 | Assa Abloy AB Class B | 6,702,712 | |||||||||
527,263 | Atlas Copco AB | 7,200,584 | |||||||||
951,948 | Atlas Copco AB Class A | 14,422,160 |
See accompanying notes to the financial statements.
11
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Sweden — continued | |||||||||||
427,718 | Boliden AB | 4,828,418 | |||||||||
277,299 | Electrolux AB Class B | 5,326,622 | |||||||||
182,705 | Elekta AB Class B | 5,263,678 | |||||||||
286,258 | Ericsson LM B Shares | 2,764,113 | |||||||||
193,552 | Getinge AB Class B | 3,879,891 | |||||||||
1,216,859 | Hennes & Mauritz AB Class B | 39,655,122 | |||||||||
300,179 | Hexagon AB Class B | 4,888,070 | |||||||||
100,973 | Investor AB Class B | 1,736,047 | |||||||||
230,770 | Kinnevik Investment AB | 4,175,778 | |||||||||
266,059 | Lundin Petroleum AB * | 1,475,833 | |||||||||
55,859 | Millicom International Cellular SA SDR | 5,114,355 | |||||||||
124,104 | Modern Times Group AB Class B | 7,114,082 | |||||||||
37,627 | Oriflame Cosmetics SA SDR | 1,964,036 | |||||||||
611,711 | Sandvik AB | 7,217,335 | |||||||||
600,914 | Scania AB Class B | 11,049,923 | |||||||||
148,898 | Securitas AB Class B | 1,366,401 | |||||||||
228,963 | Skandinaviska Enskilda Banken AB Class A | 1,417,527 | |||||||||
482,152 | SKF AB Class B | 8,617,342 | |||||||||
309,947 | Swedish Match AB | 7,127,673 | |||||||||
239,107 | Tele2 AB Class B | 4,299,672 | |||||||||
379,201 | Volvo AB Class B * | 4,371,783 | |||||||||
Total Sweden | 171,303,827 | ||||||||||
Switzerland — 11.9% | |||||||||||
81,798 | Actelion Ltd (Registered) * | 3,499,696 | |||||||||
407,558 | Clariant AG (Registered) * | 5,225,430 | |||||||||
531,739 | Compagnie Financiere Richemont SA Class A | 20,563,479 | |||||||||
43,257 | Geberit AG (Registered) | 6,957,677 | |||||||||
64,048 | Holcim Ltd | 3,840,054 | |||||||||
25,499 | Kuehne & Nagel International AG (Registered) | 2,651,730 | |||||||||
2,073,991 | Nestle SA (Registered) | 107,216,599 | |||||||||
72,257 | Nobel Biocare Holding AG | 1,133,113 | |||||||||
1,488,142 | Novartis AG (Registered) | 78,010,960 | |||||||||
591,162 | Roche Holding AG (Non Voting) | 80,190,866 | |||||||||
45,714 | Schindler Holding AG | 4,545,468 | |||||||||
5,546 | SGS SA (Registered) | 8,018,846 |
See accompanying notes to the financial statements.
12
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Switzerland — continued | |||||||||||
3,265 | Sika AG | 5,724,863 | |||||||||
89,837 | Sonova Holding AG (Registered) | 11,465,748 | |||||||||
36,371 | Swatch Group AG | 11,667,254 | |||||||||
11,493 | Swisscom AG (Registered) | 4,461,056 | |||||||||
73,452 | Synthes Inc | 8,078,248 | |||||||||
Total Switzerland | 363,251,087 | ||||||||||
United Kingdom — 23.1% | |||||||||||
321,923 | Admiral Group Plc | 7,485,562 | |||||||||
556,510 | Aggreko Plc | 12,064,769 | |||||||||
720,660 | Anglo American Plc | 25,703,203 | |||||||||
1,281,114 | ARM Holdings Plc | 7,149,123 | |||||||||
183,356 | Associated British Foods Plc | 2,965,802 | |||||||||
669,929 | AstraZeneca Plc | 32,930,622 | |||||||||
264,779 | Barclays Plc | 1,215,606 | |||||||||
549,664 | BG Group Plc | 8,803,824 | |||||||||
546,891 | BHP Billiton Plc | 15,250,400 | |||||||||
1,358,736 | British American Tobacco Plc | 46,038,207 | |||||||||
910,732 | British Sky Broadcasting Group Plc | 9,831,218 | |||||||||
1,010,658 | Burberry Group Plc | 13,121,914 | |||||||||
653,827 | Capita Group Plc | 7,032,050 | |||||||||
168,068 | Carnival Plc | 5,434,974 | |||||||||
683,532 | Centrica Plc | 3,400,431 | |||||||||
1,477,786 | Cobham Plc | 4,723,329 | |||||||||
230,733 | Croda International Plc | 4,512,081 | |||||||||
2,137,769 | Diageo Plc | 34,748,070 | |||||||||
343,520 | Drax Group Plc | 2,082,603 | |||||||||
483,842 | Eurasian Natural Resources Corp | 6,252,289 | |||||||||
176,508 | Experian Plc | 1,677,754 | |||||||||
7,104,493 | GlaxoSmithKline Plc | 132,579,844 | |||||||||
916,067 | HSBC Holdings Plc | 8,972,572 | |||||||||
268,079 | Informa Plc | 1,571,060 | |||||||||
433,147 | Inmarsat Plc | 4,429,710 | |||||||||
222,260 | Intertek Group Plc | 5,723,754 | |||||||||
2,830,044 | ITV Plc * | 2,421,347 | |||||||||
333,922 | Kazakhmys Plc | 5,877,309 |
See accompanying notes to the financial statements.
13
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
434,914 | LG Group Holdings Plc | 3,466,087 | |||||||||
2,669,109 | Lloyds Banking Group Plc * | 2,809,486 | |||||||||
575,534 | Man Group Plc | 1,828,646 | |||||||||
307,887 | Micro Focus International Plc | 1,422,120 | |||||||||
213,711 | Next Plc | 6,462,398 | |||||||||
235,331 | Petrofac Ltd | 5,035,295 | |||||||||
103,522 | Petropavlovsk Plc | 1,683,098 | |||||||||
27,976 | Randgold Resources Ltd | 2,586,359 | |||||||||
658,320 | Reckitt Benckiser Group Plc | 32,812,130 | |||||||||
1,028,647 | Reed Elsevier Plc | 8,231,676 | |||||||||
241,297 | Rightmove Plc | 2,386,711 | |||||||||
1,543,881 | Rio Tinto Plc | 77,654,204 | |||||||||
766,399 | Rolls-Royce Group Plc * | 6,484,484 | |||||||||
187,108 | Royal Dutch Shell Plc A Shares (London) | 4,955,340 | |||||||||
194,653 | Royal Dutch Shell Plc B Shares (London) | 4,961,160 | |||||||||
678,764 | SABMiller Plc | 19,274,272 | |||||||||
658,507 | Sage Group Plc (The) | 2,465,895 | |||||||||
388,876 | Serco Group Plc | 3,462,376 | |||||||||
761,062 | Shire Plc | 16,372,928 | |||||||||
187,570 | Smiths Group Plc | 3,280,114 | |||||||||
986,291 | Smith & Nephew Plc | 8,162,382 | |||||||||
834,820 | Standard Chartered Plc | 22,293,945 | |||||||||
502,838 | Tesco Plc | 3,129,197 | |||||||||
280,882 | TUI Travel Plc | 864,136 | |||||||||
346,578 | Tullett Prebon Plc | 1,958,001 | |||||||||
183,023 | Tullow Oil Plc | 3,406,683 | |||||||||
196,456 | Unilever Plc | 5,175,605 | |||||||||
183,603 | Vedanta Resources Plc | 5,290,005 | |||||||||
5,570,333 | Vodafone Group Plc | 13,374,692 | |||||||||
312,103 | Weir Group Plc (The) | 5,762,850 | |||||||||
414,605 | William Hill Plc | 1,060,246 | |||||||||
867,650 | Xstrata Plc | 13,540,002 | |||||||||
Total United Kingdom | 705,651,950 | ||||||||||
TOTAL COMMON STOCKS (COST $2,950,602,226) | 2,894,531,347 |
See accompanying notes to the financial statements.
14
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares / Par Value | Description | Value ($) | |||||||||
PREFERRED STOCKS — 0.3% | |||||||||||
Germany — 0.3% | |||||||||||
78,885 | Henkel AG & Co KGaA 1.40% | 3,697,319 | |||||||||
168,386 | ProSiebenSat.1 Media AG 0.13% | 3,021,771 | |||||||||
30,966 | Volkswagen AG 2.10% | 3,074,926 | |||||||||
Total Germany | 9,794,016 | ||||||||||
TOTAL PREFERRED STOCKS (COST $10,098,684) | 9,794,016 | ||||||||||
SHORT-TERM INVESTMENTS — 3.5% | |||||||||||
Time Deposits — 3.5% | |||||||||||
USD | 25,000,000 | BNP Paribas (Grand Cayman) Time Deposit, 0.22%, due 09/01/10 | 25,000,000 | ||||||||
JPY | 37,990,680 | BNP Paribas (Paris) Time Deposit, 0.04%, due 09/01/10 | 452,216 | ||||||||
NOK | 59,625 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 1.89%, due 09/01/10 | 9,453 | ||||||||
SEK | 70,955 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.20%, due 09/01/10 | 9,600 | ||||||||
AUD | 10,948 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 4.44%, due 09/01/10 | 9,740 | ||||||||
CHF | 10,449 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.02%, due 09/01/10 | 10,292 | ||||||||
NZD | 1,445 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 3.07%, due 09/01/10 | 1,008 | ||||||||
DKK | 56,256 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.10%, due 09/01/10 | 9,576 | ||||||||
HKD | 77,635 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.03%, due 09/01/10 | 9,980 | ||||||||
EUR | 221,393 | Citibank (New York) Time Deposit, 0.28%, due 09/01/10 | 280,560 | ||||||||
USD | 25,000,000 | Commerzbank (Grand Cayman) Time Deposit, 0.20%, due 09/01/10 | 25,000,000 | ||||||||
CAD | 69,761 | Deustche Bank (Frankfurt) Time Deposit, 0.70%, due 09/01/10 | 65,420 | ||||||||
USD | 23,258 | DnB Nor Bank (Oslo) Time Deposit, 0.21%, due 09/01/10 | 23,258 | ||||||||
SGD | 748,281 | HSBC Bank (Hong Kong) Time Deposit, 0.13%, due 09/01/10 | 552,034 | ||||||||
USD | 5,000,000 | HSBC Bank (USA) Time Deposit, 0.17%, due 09/01/10 | 5,000,000 | ||||||||
GBP | 319,845 | JPMorgan Chase (New York) Time Deposit, 0.46%, due 09/01/10 | 490,530 | ||||||||
USD | 25,000,000 | Royal Bank of Canada (Grand Cayman) Time Deposit, 0.18%, due 09/01/10 | 25,000,000 | ||||||||
USD | 25,000,000 | Societe Generale (Grand Cayman) Time Deposit, 0.20%, due 09/01/10 | 25,000,000 | ||||||||
Total Time Deposits | 106,923,667 | ||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $106,923,667) | 106,923,667 | ||||||||||
TOTAL INVESTMENTS — 98.8% (Cost $3,067,624,577) | 3,011,249,030 | ||||||||||
Other Assets and Liabilities (net) — 1.2% | 37,362,594 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 3,048,611,624 |
See accompanying notes to the financial statements.
15
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
A summary of outstanding financial instruments at August 31, 2010 is as follows:
Forward Currency Contracts
Settlement Date | Counterparty | Deliver/ Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||||||
Buys † | |||||||||||||||||||||||||||
10/22/10 | Royal Bank of Scotland PLC | EUR | 13,577,107 | $ | 17,204,418 | $ | (222,899 | ) | |||||||||||||||||||
10/22/10 | Brown Brothers Harriman & Co. | EUR | 3,313,000 | 4,198,113 | (53,128) | ||||||||||||||||||||||
10/22/10 | Mellon Bank | EUR | 4,336,880 | 5,495,537 | (72,453 | ) | |||||||||||||||||||||
10/22/10 | Deutsche Bank AG | EUR | 12,366,987 | 15,670,997 | (228,991 | ) | |||||||||||||||||||||
10/22/10 | JP Morgan Chase Bank | GBP | 12,751,260 | 19,549,232 | (385,566 | ) | |||||||||||||||||||||
10/22/10 | Brown Brothers Harriman & Co. | GBP | 4,516,958 | 6,925,046 | (147,517) | ||||||||||||||||||||||
10/22/10 | Royal Bank of Scotland PLC | GBP | 2,745,963 | 4,209,895 | (94,841 | ) | |||||||||||||||||||||
10/22/10 | Mellon Bank | GBP | 4,859,031 | 7,449,485 | (163,839 | ) | |||||||||||||||||||||
10/22/10 | Bank of America | GBP | 17,224,874 | 26,407,826 | (580,107 | ) | |||||||||||||||||||||
10/22/10 | JP Morgan Chase Bank | HKD | 56,620,174 | 7,281,479 | (7,067 | ) | |||||||||||||||||||||
10/22/10 | Mellon Bank | JPY | 2,604,486,482 | 31,019,338 | 468,177 | ||||||||||||||||||||||
10/22/10 | JP Morgan Chase Bank | JPY | 2,831,679,057 | 33,725,193 | 527,319 | ||||||||||||||||||||||
10/22/10 | Barclays | JPY | 478,170,000 | 5,694,987 | 84,573 | ||||||||||||||||||||||
10/22/10 | Deutsche Bank AG | JPY | 1,795,793,886 | 21,387,839 | 343,543 | ||||||||||||||||||||||
10/22/10 | Brown Brothers Harriman & Co. | SEK | 12,295,432 | 1,662,076 | (3,588) | ||||||||||||||||||||||
10/22/10 | Mellon Bank | SEK | 81,091,237 | 10,961,781 | (40,801 | ) | |||||||||||||||||||||
10/22/10 | Barclays | SEK | 83,548,547 | 11,293,957 | (41,115 | ) | |||||||||||||||||||||
10/22/10 | Deutsche Bank AG | SEK | 130,569,675 | 17,650,196 | (41,692 | ) | |||||||||||||||||||||
$ | 247,787,395 | $ | (659,992 | ) |
See accompanying notes to the financial statements.
16
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Forward Currency Contracts — continued
Settlement Date | Counterparty | Deliver/ Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||
Sales # | |||||||||||||||||||||||
10/22/10 | Mellon Bank | AUD | 8,943,511 | $ | 7,908,516 | $ | 43,571 | ||||||||||||||||
10/22/10 | Bank of America | AUD | 8,943,511 | 7,908,516 | 29,020 | ||||||||||||||||||
10/22/10 | Deutsche Bank AG | CAD | 38,057,437 | 35,660,916 | 825,769 | ||||||||||||||||||
10/22/10 | Mellon Bank | CAD | 36,147,437 | 33,871,191 | 679,750 | ||||||||||||||||||
10/22/10 | Brown Brothers Harriman & Co. | CHF | 141,990 | 139,921 | (3,037 | ) | |||||||||||||||||
10/22/10 | Royal Bank of Scotland PLC | CHF | 2,235,693 | 2,203,113 | (45,712 | ) | |||||||||||||||||
10/22/10 | Bank of America | CHF | 320,289 | 315,621 | (7,434 | ) | |||||||||||||||||
10/22/10 | Brown Brothers Harriman & Co. | NOK | 96,142,830 | 15,201,438 | 341,319 | ||||||||||||||||||
10/22/10 | Royal Bank of Scotland PLC | NOK | 83,072,481 | 13,134,845 | 321,950 | ||||||||||||||||||
10/22/10 | Barclays | NOK | 88,728,481 | 14,029,132 | 362,460 | ||||||||||||||||||
10/22/10 | Bank of America | SGD | 25,270,713 | 18,642,777 | (77,287 | ) | |||||||||||||||||
10/22/10 | Brown Brothers Harriman & Co. | SGD | 1,104,000 | 814,446 | (3,546 | ) | |||||||||||||||||
10/22/10 | Deutsche Bank AG | SGD | 25,270,713 | 18,642,777 | (84,295 | ) | |||||||||||||||||
$ | 168,473,209 | $ | 2,382,528 |
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.
See accompanying notes to the financial statements.
17
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
231 | CAC 40 | September 2010 | $ | 10,155,595 | $ | (470,421 | ) | ||||||||||||
160 | DAX | September 2010 | 29,861,220 | (1,130,403 | ) | ||||||||||||||
1,099 | FTSE 100 | September 2010 | 87,223,498 | 647,432 | |||||||||||||||
17 | FTSE/MIB | September 2010 | 2,114,336 | 4,143 | |||||||||||||||
14 | Hang Seng | September 2010 | 1,836,741 | (9,359 | ) | ||||||||||||||
627 | MSCI Singapore | September 2010 | 32,289,873 | 666,528 | |||||||||||||||
617 | OMXS30 | September 2010 | 8,422,119 | (131,917 | ) | ||||||||||||||
79 | TOPIX | September 2010 | 7,522,820 | (84,727 | ) | ||||||||||||||
$ | 179,426,202 | $ | (508,724 | ) | |||||||||||||||
Sales | |||||||||||||||||||
456 | S&P Toronto 60 | September 2010 | $ | 59,294,753 | $ | (1,214,040 | ) | ||||||||||||
229 | SPI 200 | September 2010 | 22,436,875 | 785,765 | |||||||||||||||
$ | 81,731,628 | $ | (428,275 | ) |
As of August 31, 2010, for futures contracts, swap agreements and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
Notes to Schedule of Investments:
MSCI - Morgan Stanley Capital International
SDR - Swedish Depository Receipt
* Non-income producing security.
Currency Abbreviations:
AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc DKK - Danish Krone EUR - Euro GBP - British Pound HKD - Hong Kong Dollar | JPY - Japanese Yen NOK - Norwegian Krone NZD - New Zealand Dollar SEK - Swedish Krona SGD - Singapore Dollar USD - United States Dollar | ||||||
See accompanying notes to the financial statements.
18
GMO International Growth Equity Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments, at value (cost $3,067,624,577) (Note 2) | $ | 3,011,249,030 | |||||
Receivable for investments sold | 265,227 | ||||||
Receivable for Fund shares sold | 10,836,051 | ||||||
Dividends and interest receivable | 7,851,045 | ||||||
Foreign taxes receivable | 3,645,951 | ||||||
Unrealized appreciation on open forward currency contracts (Note 4) | 4,027,451 | ||||||
Receivable for collateral on open futures contracts (Note 4) | 16,074,155 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 145,359 | ||||||
Total assets | 3,054,094,269 | ||||||
Liabilities: | |||||||
Foreign currency due to custodian (proceeds $620,569) | 622,183 | ||||||
Payable for investments purchased | 277,952 | ||||||
Payable for Fund shares repurchased | 179 | ||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 1,313,684 | ||||||
Shareholder service fee | 267,881 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 5,097 | ||||||
Payable for variation margin on open futures contracts (Note 4) | 206,466 | ||||||
Unrealized depreciation on open forward currency contracts (Note 4) | 2,304,915 | ||||||
Accrued expenses | 484,288 | ||||||
Total liabilities | 5,482,645 | ||||||
Net assets | $ | 3,048,611,624 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 3,889,492,964 | |||||
Accumulated undistributed net investment income | 35,986,170 | ||||||
Accumulated net realized loss | (821,614,486 | ) | |||||
Net unrealized depreciation | (55,253,024 | ) | |||||
$ | 3,048,611,624 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 596,825,311 | |||||
Class IV shares | $ | 2,451,786,313 | |||||
Shares outstanding: | |||||||
Class III | 30,784,130 | ||||||
Class IV | 126,383,104 | ||||||
Net asset value per share: | |||||||
Class III | $ | 19.39 | |||||
Class IV | $ | 19.40 |
See accompanying notes to the financial statements.
19
GMO International Growth Equity Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $4,976,348) | $ | 48,574,310 | |||||
Interest | 98,877 | ||||||
Total investment income | 48,673,187 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 7,557,571 | ||||||
Shareholder service fee – Class III (Note 5) | 462,097 | ||||||
Shareholder service fee – Class IV (Note 5) | 1,083,104 | ||||||
Custodian and fund accounting agent fees | 669,116 | ||||||
Legal fees | 78,568 | ||||||
Audit and tax fees | 41,768 | ||||||
Trustees fees and related expenses (Note 5) | 31,484 | ||||||
Transfer agent fees | 23,000 | ||||||
Registration fees | 2,208 | ||||||
Miscellaneous | 38,824 | ||||||
Total expenses | 9,987,740 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (835,360 | ) | |||||
Expense reductions (Note 2) | (38 | ) | |||||
Net expenses | 9,152,342 | ||||||
Net investment income (loss) | 39,520,845 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | (914,251 | ) | |||||
Closed futures contracts | 2,925,407 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (3,260,956 | ) | |||||
Net realized gain (loss) | (1,249,800 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | (77,686,273 | ) | |||||
Open futures contracts | (961,010 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 497,895 | ||||||
Net unrealized gain (loss) | (78,149,388 | ) | |||||
Net realized and unrealized gain (loss) | (79,399,188 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (39,878,343 | ) |
See accompanying notes to the financial statements.
20
GMO International Growth Equity Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 39,520,845 | $ | 48,888,962 | |||||||
Net realized gain (loss) | (1,249,800 | ) | (346,641,383 | ) | |||||||
Change in net unrealized appreciation (depreciation) | (78,149,388 | ) | 1,102,964,055 | ||||||||
Net increase (decrease) in net assets from operations | (39,878,343 | ) | 805,211,634 | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (2,056,061 | ) | (23,585,622 | ) | |||||||
Class IV | (8,401,525 | ) | (68,814,208 | ) | |||||||
Total distributions from net investment income | (10,457,586 | ) | (92,399,830 | ) | |||||||
Net share transactions (Note 9): | |||||||||||
Class III | 6,694,982 | (161,885,236 | ) | ||||||||
Class IV | 272,660,477 | 284,191,131 | |||||||||
Increase (decrease) in net assets resulting from net share transactions | 279,355,459 | 122,305,895 | |||||||||
Total increase (decrease) in net assets | 229,019,530 | 835,117,699 | |||||||||
Net assets: | |||||||||||
Beginning of period | 2,819,592,094 | 1,984,474,395 | |||||||||
End of period (including accumulated undistributed net investment income of $35,986,170 and $6,922,911, respectively) | $ | 3,048,611,624 | $ | 2,819,592,094 |
See accompanying notes to the financial statements.
21
GMO International Growth Equity Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 19.68 | $ | 14.46 | $ | 27.68 | $ | 31.37 | $ | 29.90 | $ | 27.22 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.26 | 0.37 | 0.54 | 0.69 | 0.77 | 0.53 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.48 | ) | 5.52 | (11.93 | ) | 1.28 | 4.80 | 3.57 | |||||||||||||||||||
Total from investment operations | (0.22 | ) | 5.89 | (11.39 | ) | 1.97 | 5.57 | 4.10 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.07 | ) | (0.67 | ) | (0.88 | ) | (0.40 | ) | (0.49 | ) | (0.10 | ) | |||||||||||||||
From net realized gains | — | — | (0.95 | ) | (5.26 | ) | (3.61 | ) | (1.32 | ) | |||||||||||||||||
Total distributions | (0.07 | ) | (0.67 | ) | (1.83 | ) | (5.66 | ) | (4.10 | ) | (1.42 | ) | |||||||||||||||
Net asset value, end of period | $ | 19.39 | $ | 19.68 | $ | 14.46 | $ | 27.68 | $ | 31.37 | $ | 29.90 | |||||||||||||||
Total Return(a) | (1.15 | )%** | 41.10 | % | (43.54 | )% | 5.04 | % | 19.21 | % | 15.54 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 596,825 | $ | 599,455 | $ | 564,067 | $ | 1,018,040 | $ | 950,332 | $ | 3,119,919 | |||||||||||||||
Net expenses to average daily net assets | 0.65 | %(b)* | 0.65 | %(b) | 0.66 | %(c) | 0.67 | %(c) | 0.67 | % | 0.68 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 2.58 | %* | 2.00 | % | 2.43 | % | 2.13 | % | 2.46 | % | 1.89 | % | |||||||||||||||
Portfolio turnover rate | 23 | %** | 65 | % | 63 | % | 92 | % | 74 | % | 57 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.06 | %* | 0.06 | % | 0.06 | % | 0.05 | % | 0.05 | % | 0.08 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions. (Note 2)
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
22
GMO International Growth Equity Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007(a) | |||||||||||||||||||
Net asset value, beginning of period | $ | 19.69 | $ | 14.46 | $ | 27.70 | $ | 31.38 | $ | 29.92 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)† | 0.26 | 0.35 | 0.55 | 0.73 | 0.20 | ||||||||||||||||||
Net realized and unrealized gain (loss) | (0.48 | ) | 5.56 | (11.95 | ) | 1.26 | 4.48 | ||||||||||||||||
Total from investment operations | (0.22 | ) | 5.91 | (11.40 | ) | 1.99 | 4.68 | ||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.07 | ) | (0.68 | ) | (0.89 | ) | (0.41 | ) | (0.50 | ) | |||||||||||||
From net realized gains | — | — | (0.95 | ) | (5.26 | ) | (2.72 | ) | |||||||||||||||
Total distributions | (0.07 | ) | (0.68 | ) | (1.84 | ) | (5.67 | ) | (3.22 | ) | |||||||||||||
Net asset value, end of period | $ | 19.40 | $ | 19.69 | $ | 14.46 | $ | 27.70 | $ | 31.38 | |||||||||||||
Total Return(b) | (1.13 | )%** | 41.26 | % | (43.53 | )% | 5.11 | % | 15.79 | %** | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 2,451,786 | $ | 2,220,138 | $ | 1,420,407 | $ | 2,516,653 | $ | 2,864,791 | |||||||||||||
Net expenses to average daily net assets | 0.59 | %(c)* | 0.59 | %(c) | 0.60 | %(d) | 0.61 | %(d) | 0.61 | %* | |||||||||||||
Net investment income (loss) to average daily net assets | 2.62 | %* | 1.89 | % | 2.47 | % | 2.24 | % | 1.01 | %* | |||||||||||||
Portfolio turnover rate | 23 | %** | 65 | % | 63 | % | 92 | % | 74 | %†† | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.06 | %* | 0.06 | % | 0.06 | % | 0.05 | % | 0.05 | %* |
(a) Period from July 12, 2006 (commencement of operations) through February 28, 2007.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(c) The net expense ratio does not include the effect of expense reductions (Note 2).
(d) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions. (Note 2)
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the year ended February 28, 2007.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
23
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO International Growth Equity Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks high total return. The Fund seeks to achieve its investment objective by outperforming its benchmark, the MSCI EAFE Growth Index (Europe, Australasia, and Far East).
The Fund typically makes equity investments directly and indirectly (e.g., through the GMO funds in which the Fund invests, collectively referred to as the "underlying funds" or derivatives) in companies tied economically to countries other than the U.S. Under normal circumstances, the Fund invests directly and indirectly at least 80% of its assets in equity investments. The term "equity investments" refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts.
The Manager relies principally on proprietary quantitative models and also employs fundamental investment techniques to evaluate and select individual equity investments, countries, and currencies. When evaluating equity investments, the Manager begins with the stocks that are included in the Fund's benchmark or that it believes have similar growth characteristics. From that universe, the Manager selects stocks it believes (i) are undervalued (e.g., stocks trading at prices below what the Manager believes to be their fundamental value); (ii) have superior fundamentals (e.g., earnings stability); and/or (iii) have shown indications of improving investor sentiment (e.g., positive price movement or upgraded analyst ratings). In selecting countries in which to invest and determining the Fund's currency exposures, the Manager considers many factors, which may include aggregate stock market valuations, global competitiveness, and inve stor sentiment. The Manager also uses proprietary techniques to adjust the composition of the portfolio for other factors such as position size, country, industry and sector weights, and market capitalization. The factors considered and the models used by the Manager may change over time based on the Manager's assessment of what combination of models and factors are best positioned to achieve the Fund's investment objective.
The Fund may make investments tied economically to emerging countries. In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the-counter ("OTC") derivatives, including options, futures, and swap contracts, (i) as a substitute for direct investment; (ii) in an attempt to reduce investment exposures (which may result in a reduction below zero); (iii) to effect transactions intended as substitutes for securities lending; and/or (iv) in an attempt to
24
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
adjust elements of its investment and/or foreign currency exposure. The Fund's foreign currency exposure may differ from the currency exposure represented by its equity investments. In addition, the Fund may take active overweighted and underweighted positions in particular currencies relative to its benchmark.
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
Throughout the period ended August 31, 2010, the Fund had two classes of shares outstanding: Class III and Class IV. Each class of shares bears a different shareholder service fee.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the OTC market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or who se values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. Additionally, because many foreign equity securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on local closing
25
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
prices and adjustments supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2010, 92.3% of the net assets of the Fund were valued using fair value prices based on those adjustments and are classified as using Level 2 inputs in the table below. See note 4 for a further discussion on valuation of derivative financial instruments.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include: fair value adjustments applied to closing prices of foreign securities due to market events that have occurred since the local market close but before the Fund's daily NAV calculation.
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | |||||||||||||||||||
Australia | $ | — | $ | 139,055,304 | $ | — | $ | 139,055,304 | |||||||||||
Austria | — | 7,259,815 | — | 7,259,815 | |||||||||||||||
Belgium | — | 37,500,875 | — | 37,500,875 | |||||||||||||||
Canada | 87,701,241 | — | — | 87,701,241 | |||||||||||||||
Denmark | — | 102,265,118 | — | 102,265,118 | |||||||||||||||
Finland | — | 15,290,015 | — | 15,290,015 | |||||||||||||||
France | — | 139,713,044 | — | 139,713,044 | |||||||||||||||
Germany | — | 137,010,733 | — | 137,010,733 | |||||||||||||||
Greece | — | 11,922,561 | — | 11,922,561 | |||||||||||||||
Hong Kong | — | 56,314,055 | — | 56,314,055 | |||||||||||||||
Ireland | — | 1,546,255 | — | 1,546,255 |
26
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
ASSET VALUATION INPUTS — continued
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Italy | $ | — | $ | 10,527,463 | $ | — | $ | 10,527,463 | |||||||||||
Japan | — | 604,767,479 | — | 604,767,479 | |||||||||||||||
Netherlands | — | 126,840,923 | — | 126,840,923 | |||||||||||||||
Norway | — | 55,170,944 | — | 55,170,944 | |||||||||||||||
Portugal | — | 3,762,700 | — | 3,762,700 | |||||||||||||||
Singapore | 2,035,729 | 78,908,522 | — | 80,944,251 | |||||||||||||||
Spain | — | 36,731,707 | — | 36,731,707 | |||||||||||||||
Sweden | — | 171,303,827 | — | 171,303,827 | |||||||||||||||
Switzerland | — | 363,251,087 | — | 363,251,087 | |||||||||||||||
United Kingdom | — | 705,651,950 | — | 705,651,950 | |||||||||||||||
TOTAL COMMON STOCKS | 89,736,970 | 2,804,794,377 | — | 2,894,531,347 | |||||||||||||||
Preferred Stocks | |||||||||||||||||||
Germany | — | 9,794,016 | — | 9,794,016 | |||||||||||||||
TOTAL PREFERRED STOCKS | — | 9,794,016 | — | 9,794,016 | |||||||||||||||
Short-Term Investments | 106,923,667 | — | — | 106,923,667 | |||||||||||||||
Total Investments | 196,660,637 | 2,814,588,393 | — | 3,011,249,030 | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts Foreign exchange risk | — | 4,027,451 | — | 4,027,451 | |||||||||||||||
Futures Contracts Equity risk | — | 2,103,868 | — | 2,103,868 | |||||||||||||||
Total Derivatives | — | 6,131,319 | — | 6,131,319 | |||||||||||||||
Total | $ | 196,660,637 | $ | 2,820,719,712 | $ | — | $ | 3,017,380,349 |
27
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts Foreign exchange risk | $ | — | $ | (2,304,915 | ) | $ | — | $ | (2,304,915 | ) | |||||||||
Futures Contracts Equity risk | (1,214,040 | ) | (1,826,827 | ) | — | (3,040,867 | ) | ||||||||||||
Total Derivatives | (1,214,040 | ) | (4,131,742 | ) | — | (5,345,782 | ) | ||||||||||||
Total | $ | (1,214,040 | ) | $ | (4,131,742 | ) | $ | — | $ | (5,345,782 | ) |
The Fund held no investments or other financial instruments at either August 31, 2010 or February 28, 2010, whose fair value was determined using Level 3 inputs.
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are inclu ded with the net realized and unrealized gain or loss on investment securities.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country's tax treaty with the United
28
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
States. The foreign withholding rates applicable to a Fund's investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if paid by the shareholders of the Fund.
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Transaction based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund elected to defer to March 1, 2010 post-October capital losses of $2,957,204.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (208,609,786 | ) | ||||
2/28/2018 | (590,232,407 | ) | |||||
Total | $ | (798,842,193 | ) |
29
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 3,075,686,446 | $ | 195,058,632 | $ | (259,496,048 | ) | $ | (64,437,416 | ) |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which co llection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. Investment income, common expenses and realized and unrealized gains and losses are
30
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
allocated among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class's operations.
Brown Brothers Harriman & Co. ("BBH") serves as the Fund's custodian and fund accounting agent. State Street Bank and Trust Company ("State Street") serves as the Fund's transfer agent. BBH's and State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund's investments.
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to rec eipt) may expose the Fund to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund's investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund's investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
31
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
• Market Risk — Growth Securities — Because growth securities typically trade at higher multiples of current earnings than other securities, their market values are often more sensitive than other securities to changes in future earnings expectations.
Other principal risks of an investment in the Fund include Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund's securities); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes,
32
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index). The Funds also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedin gs. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be secured by collateral (e.g., foreign currency forwards; see "Currency Risk" above), that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a
33
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. During the period ended August 31, 2010, the Fund used forward currency contracts to manage against anticipated currency exchange rate changes and adjust exposure to foreign currencies. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
34
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because regular trading on many foreign exchanges closes prior to the close of the NYSE, closing prices for foreign futures contracts on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures contracts using fair value prices, which are based on adjustments to local closing prices, and supplied by a third party vendor based on that vendor's proprietary models. As of August 31, 2010, futures contracts representing less than 0.1% of the net assets of the Fund were valued using fair value prices based on those adjustments and are classified using Level 2 inputs in the table above. During the period ended August 31, 2010, the Fund used futures contracts to adjust exposure to certain securities markets and maintain the diversity and liquidity of the portfolio. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash,
35
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
36
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type
37
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. During the period ended August 31, 2010, the Fund held rights and warrants received as a result of a corporate action. The Fund held no rights or warrants at the end of the period.
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Unrealized appreciation on futures contracts* | $ | — | $ | — | $ | — | $ | 2,103,868 | $ | — | $ | 2,103,868 | |||||||||||||||
Unrealized appreciation on forward currency contracts | — | 4,027,541 | — | — | — | 4,027,541 | |||||||||||||||||||||
Total | $ | — | $ | 4,027,541 | $ | — | $ | 2,103,868 | $ | — | $ | 6,131,409 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Unrealized depreciation on futures contracts* | $ | — | $ | — | $ | — | $ | (3,040,867 | ) | $ | — | $ | (3,040,867 | ) | |||||||||||||
Unrealized depreciation on forward currency contracts | — | (2,304,915 | ) | — | — | — | (2,304,915 | ) | |||||||||||||||||||
Total | $ | — | $ | (2,304,915 | ) | $ | — | $ | (3,040,867 | ) | $ | — | $ | (5,345,782 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments.
38
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Period Ended August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (rights and warrants) | $ | — | $ | — | $ | — | $ | (208,804 | ) | $ | — | $ | (208,804 | ) | |||||||||||||
Futures contracts | — | — | — | 2,925,407 | — | 2,925,407 | |||||||||||||||||||||
Forward currency contracts | — | (2,542,817 | ) | — | — | — | (2,542,817 | ) | |||||||||||||||||||
Total | $ | — | $ | (2,542,817 | ) | $ | — | $ | 2,716,603 | $ | — | $ | 173,786 | ||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Futures contracts | $ | — | $ | — | $ | — | $ | (961,010 | ) | $ | — | $ | (961,010 | ) | |||||||||||||
Forward currency contracts | — | 362,578 | — | — | — | 362,578 | |||||||||||||||||||||
Total | $ | — | $ | 362,578 | $ | — | $ | (961,010 | ) | $ | — | $ | (598,432 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
The volume of derivative activity, based on absolute values (forward currency contracts, futures contracts, and rights and warrants) outstanding at each month-end, was as follows for the period ended August 31, 2010:
Forward Currency Contracts | Futures Contracts | Rights/ Warrants | |||||||||||||
Average amount outstanding | $ | 484,532,287 | $ | 218,567,660 | $ | 16,398 |
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at an annual rate of 0.50% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares and 0.09% for Class IV shares.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.50% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means
39
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund's Expense Reimbursement Amount. These contractual expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $31,484 and $10,948, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended August 31, 2010 aggregated $982,359,393 and $653,671,239, respectively.
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, 48.62% of the outstanding shares of the Fund were held by four shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund. Four of the shareholders are other funds of the Trust.
40
GMO International Growth Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
As of August 31, 2010, less than 0.01% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 96.62% of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 2,053,968 | $ | 40,555,014 | 3,178,735 | $ | 55,629,413 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 83,919 | 1,664,967 | 1,004,291 | 18,257,187 | |||||||||||||||
Shares repurchased | (1,814,709 | ) | (35,524,999 | ) | (12,738,058 | ) | (235,771,836 | ) | |||||||||||
Net increase (decrease) | 323,178 | $ | 6,694,982 | (8,555,032 | ) | $ | (161,885,236 | ) | |||||||||||
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 23,961,411 | $ | 470,532,564 | 48,775,661 | $ | 853,284,883 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 416,792 | 8,273,325 | 3,733,797 | 68,447,053 | |||||||||||||||
Shares repurchased | (10,760,785 | ) | (206,145,412 | ) | (37,956,677 | ) | (637,540,805 | ) | |||||||||||
Net increase (decrease) | 13,617,418 | $ | 272,660,477 | 14,552,781 | $ | 284,191,131 |
41
GMO International Growth Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of a composite of accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three-, five- and seven-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications and experience of the
42
GMO International Growth Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparis on to the Manager's separate account clients and the expenses and risks borne by the Manager as a result of the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by , for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating
43
GMO International Growth Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
44
GMO International Growth Equity Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.65 | % | $ | 1,000.00 | $ | 988.50 | $ | 3.26 | |||||||||||
2) Hypothetical | 0.65 | % | $ | 1,000.00 | $ | 1,021.93 | $ | 3.31 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.59 | % | $ | 1,000.00 | $ | 988.70 | $ | 2.96 | |||||||||||
2) Hypothetical | 0.59 | % | $ | 1,000.00 | $ | 1,022.23 | $ | 3.01 |
* Expenses are calculated using each Class's annualized net expense ratio for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
45
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 96.1 | % | |||||
Short-Term Investments | 3.3 | ||||||
Preferred Stocks | 0.5 | ||||||
Options Purchased | 0.1 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Written Options | 0.0 | ||||||
Swap Agreements | 0.0 | ||||||
Futures Contracts | (0.2 | ) | |||||
Other | 0.2 | ||||||
100.0 | % | ||||||
Country Summary | % of Equity Investments* | ||||||
Japan | 26.0 | % | |||||
United Kingdom | 20.5 | ||||||
France | 10.7 | ||||||
Italy | 7.0 | ||||||
Switzerland | 5.9 | ||||||
Germany | 4.1 | ||||||
Australia | 3.8 | ||||||
Singapore | 3.4 | ||||||
Sweden | 2.8 | ||||||
Netherlands | 2.7 | ||||||
Canada | 2.4 | ||||||
Spain | 2.1 | ||||||
Hong Kong | 1.8 | ||||||
Belgium | 1.3 | ||||||
Denmark | 1.2 | ||||||
Austria | 0.9 | ||||||
Finland | 0.8 | ||||||
Norway | 0.7 | ||||||
Ireland | 0.6 | ||||||
Greece | 0.6 | ||||||
New Zealand | 0.4 | ||||||
Israel | 0.3 | ||||||
Malta | 0.0 | ||||||
Portugal | 0.0 | ||||||
100.0 | % |
* Equity investments may consist of common stocks, preferred stocks and rights and warrants. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
1
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2010 (Unaudited)
Industry Group Summary | % of Equity Investments* | ||||||
Pharmaceuticals, Biotechnology & Life Sciences | 16.5 | % | |||||
Energy | 12.1 | ||||||
Banks | 10.8 | ||||||
Capital Goods | 8.5 | ||||||
Materials | 7.0 | ||||||
Telecommunication Services | 6.5 | ||||||
Utilities | 4.7 | ||||||
Automobiles & Components | 4.4 | ||||||
Food, Beverage & Tobacco | 3.7 | ||||||
Retailing | 3.4 | ||||||
Consumer Durables & Apparel | 3.0 | ||||||
Diversified Financials | 2.7 | ||||||
Real Estate | 2.5 | ||||||
Transportation | 2.3 | ||||||
Media | 2.0 | ||||||
Technology Hardware & Equipment | 1.8 | ||||||
Food & Staples Retailing | 1.8 | ||||||
Software & Services | 1.5 | ||||||
Household & Personal Products | 1.2 | ||||||
Insurance | 1.2 | ||||||
Consumer Services | 1.0 | ||||||
Health Care Equipment & Services | 0.7 | ||||||
Commercial & Professional Services | 0.4 | ||||||
Semiconductors & Semiconductor Equipment | 0.3 | ||||||
100.0 | % |
* Equity investments may consist of common stocks, preferred stocks and rights and warrants. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
2
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
COMMON STOCKS — 96.1% | |||||||||||||||
Australia — 3.7% | |||||||||||||||
2,959,618 | BlueScope Steel Ltd * | 5,683,117 | |||||||||||||
21,863,674 | Charter Hall Office (REIT) | 4,790,705 | |||||||||||||
982,242 | Commonwealth Bank of Australia | 44,146,444 | |||||||||||||
7,389,438 | Goodman Group (REIT) | 4,197,224 | |||||||||||||
3,114,885 | GPT Group (REIT) | 8,313,390 | |||||||||||||
7,350,905 | ING Office Fund | 3,939,285 | |||||||||||||
4,361,096 | Intoll Group | 5,730,389 | |||||||||||||
146,755 | JB Hi–Fi Ltd | 2,726,761 | |||||||||||||
895,183 | Macquarie Atlas Roads Group * | 999,163 | |||||||||||||
6,221,395 | Mirvac Group (REIT) | 7,444,351 | |||||||||||||
2,751,793 | Pacific Brands Ltd * | 2,565,547 | |||||||||||||
1,706,985 | Qantas Airways Ltd * | 3,832,606 | |||||||||||||
216,110 | Rio Tinto Ltd | 13,572,774 | |||||||||||||
4,920,084 | Stockland (REIT) | 17,319,602 | |||||||||||||
1,666,513 | Suncorp-Metway Ltd | 12,416,538 | |||||||||||||
1,044,879 | TABCORP Holdings Ltd | 5,948,077 | |||||||||||||
9,145,572 | Telstra Corp Ltd | 22,462,581 | |||||||||||||
390,160 | Woodside Petroleum Ltd | 14,592,125 | |||||||||||||
291,653 | Woolworths Ltd | 7,209,289 | |||||||||||||
Total Australia | 187,889,968 | ||||||||||||||
Austria — 0.9% | |||||||||||||||
160,306 | Erste Group Bank AG | 5,781,500 | |||||||||||||
2,076,930 | Immofinanz AG * | 6,759,762 | |||||||||||||
1,167,625 | Immofinanz AG (Entitlement Shares) * | — | |||||||||||||
594,635 | OMV AG | 19,116,988 | |||||||||||||
160,796 | Raiffeisen International Bank Holding | 6,539,235 | |||||||||||||
127,306 | Voestalpine AG | 3,765,825 | |||||||||||||
284,827 | Wienerberger AG * | 3,683,327 | |||||||||||||
Total Austria | 45,646,637 |
See accompanying notes to the financial statements.
3
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Belgium — 1.3% | |||||||||||||||
2,070,261 | Ageas | 5,209,854 | |||||||||||||
21,522 | Bekaert NV | 4,350,756 | |||||||||||||
292,450 | Belgacom SA | 10,397,213 | |||||||||||||
37,317 | Colruyt SA | 9,223,240 | |||||||||||||
100,966 | Delhaize Group | 6,748,211 | |||||||||||||
2,045,262 | Dexia SA * | 8,489,321 | |||||||||||||
284,915 | KBC Groep NV * | 11,762,005 | |||||||||||||
57,923 | Mobistar SA | 3,240,161 | |||||||||||||
259,413 | Nyrstar | 2,770,749 | |||||||||||||
107,804 | Umicore | 3,732,691 | |||||||||||||
Total Belgium | 65,924,201 | ||||||||||||||
Canada — 2.3% | |||||||||||||||
155,800 | Bank of Montreal | 8,605,636 | |||||||||||||
251,900 | BCE Inc | 7,882,874 | |||||||||||||
58,700 | Canadian National Railway Co | 3,581,947 | |||||||||||||
118,500 | Canadian Pacific Railway Ltd | 6,979,871 | |||||||||||||
896,000 | EnCana Corp | 24,577,296 | |||||||||||||
261,894 | HudBay Minerals Inc * | 3,625,034 | |||||||||||||
165,600 | IGM Financial Inc | 6,219,609 | |||||||||||||
206,600 | Magna International Inc Class A | 16,088,586 | |||||||||||||
205,900 | Methanex Corp | 4,394,696 | |||||||||||||
93,200 | Metro Inc Class A | 3,945,279 | |||||||||||||
80,300 | National Bank of Canada | 4,637,196 | |||||||||||||
286,700 | Penn West Energy Trust | 5,385,287 | |||||||||||||
440,807 | Precision Drilling Corp * | 2,761,374 | |||||||||||||
409,800 | Sun Life Financial Inc | 9,622,912 | |||||||||||||
313,900 | Teck Resources Ltd Class B | 10,500,130 | |||||||||||||
Total Canada | 118,807,727 | ||||||||||||||
Denmark — 1.1% | |||||||||||||||
453 | AP Moller – Maersk A/S Class A | 3,394,130 | |||||||||||||
357,510 | Danske Bank A/S * | 7,896,638 | |||||||||||||
10,789 | Greentech Energy Systems A/S * | 22,247 | |||||||||||||
526,244 | Novo-Nordisk A/S Class B | 44,962,206 | |||||||||||||
Total Denmark | 56,275,221 |
See accompanying notes to the financial statements.
4
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Finland — 0.7% | |||||||||||||||
51,210 | Cargotec Oyj Class B | 1,656,052 | |||||||||||||
101,092 | Metso Oyj | 3,678,925 | |||||||||||||
311,426 | Neste Oil Oyj | 4,180,650 | |||||||||||||
859,721 | Nokia Oyj | 7,325,717 | |||||||||||||
153,447 | Rautaruukki Oyj | 2,686,450 | |||||||||||||
250,656 | Sampo Oyj Class A | 6,021,848 | |||||||||||||
38,587 | Stockmann Oyj AB Class A | 1,280,829 | |||||||||||||
276,229 | Stora Enso Oyj Class R | 2,117,078 | |||||||||||||
196,811 | Tieto Oyj | 3,228,738 | |||||||||||||
405,153 | UPM–Kymmene Oyj | 5,544,263 | |||||||||||||
Total Finland | 37,720,550 | ||||||||||||||
France — 10.3% | |||||||||||||||
67,723 | Air Liquide SA | 7,004,775 | |||||||||||||
215,948 | ArcelorMittal | 6,258,975 | |||||||||||||
1,063,671 | BNP Paribas | 65,895,878 | |||||||||||||
14,799 | Bongrain SA | 983,567 | |||||||||||||
111,812 | Casino Guichard-Perrachon SA | 9,032,673 | |||||||||||||
68,080 | CNP Assurances | 1,154,856 | |||||||||||||
139,538 | Dassault Systemes SA | 8,395,101 | |||||||||||||
156,014 | Essilor International SA | 9,439,199 | |||||||||||||
539,277 | France Telecom SA | 10,961,716 | |||||||||||||
3,561 | Fromageries Bel | 625,228 | |||||||||||||
67,258 | Hermes International | 12,154,874 | |||||||||||||
110,597 | L'Oreal SA | 10,950,901 | |||||||||||||
221,233 | Lagardere SCA | 7,935,713 | |||||||||||||
156,387 | Legrand SA | 4,737,292 | |||||||||||||
139,541 | LVMH Moet Hennessy Louis Vuitton SA | 16,166,945 | |||||||||||||
316,777 | Natixis * | 1,716,043 | |||||||||||||
110,541 | Nexans SA | 6,601,445 | |||||||||||||
157,364 | Peugeot SA * | 4,112,170 | |||||||||||||
47,036 | PPR | 6,097,421 | |||||||||||||
55,694 | Publicis Groupe SA | 2,325,117 | |||||||||||||
530,162 | Renault SA * | 21,416,801 |
See accompanying notes to the financial statements.
5
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
France — continued | |||||||||||||||
398,351 | Rhodia SA | 7,445,904 | |||||||||||||
96,078 | Safran SA | 2,359,648 | |||||||||||||
2,119,054 | Sanofi-Aventis | 121,307,997 | |||||||||||||
71,823 | Schneider Electric SA | 7,590,483 | |||||||||||||
805,017 | Societe Generale | 40,595,342 | |||||||||||||
201,047 | Technicolor * | 964,789 | |||||||||||||
84,179 | Technip SA | 5,488,116 | |||||||||||||
1,898,994 | Total SA | 88,330,594 | |||||||||||||
29,638 | Vallourec SA | 2,537,172 | |||||||||||||
1,320,115 | Vivendi SA | 30,628,544 | |||||||||||||
102,788 | Wendel | 5,240,697 | |||||||||||||
Total France | 526,455,976 | ||||||||||||||
Germany — 3.5% | |||||||||||||||
66,262 | Adidas AG | 3,360,595 | |||||||||||||
199,845 | Aurubis AG | 7,928,641 | |||||||||||||
307,530 | BASF AG | 16,174,778 | |||||||||||||
115,495 | Bayerische Motoren Werke AG | 6,068,447 | |||||||||||||
279,447 | Daimler AG (Registered) * | 13,519,650 | |||||||||||||
322,232 | Deutsche Post AG (Registered) | 5,258,750 | |||||||||||||
426,694 | Deutsche Telekom AG (Registered) | 5,605,550 | |||||||||||||
724,116 | E.ON AG | 20,323,939 | |||||||||||||
128,126 | Freenet AG | 1,283,469 | |||||||||||||
196,166 | Gildemeister AG | 2,399,248 | |||||||||||||
470,820 | Heidelberger Druckmaschinen AG * | 3,644,162 | |||||||||||||
1,512,779 | Infineon Technologies AG * | 8,388,865 | |||||||||||||
274,836 | Kloeckner & Co AG * | 5,372,026 | |||||||||||||
131,693 | Lanxess AG | 5,739,334 | |||||||||||||
55,088 | MAN SE | 4,737,388 | |||||||||||||
131,621 | MTU Aero Engines Holding AG | 7,315,916 | |||||||||||||
33,554 | Muenchener Rueckversicherungs-Gesellschaft AG (Registered) | 4,275,882 | |||||||||||||
23,089 | Puma AG Rudolf Dassler Sport | 6,271,074 | |||||||||||||
76,168 | RWE AG | 4,985,408 | |||||||||||||
162,250 | Salzgitter AG | 9,861,141 |
See accompanying notes to the financial statements.
6
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Germany — continued | |||||||||||||||
551,185 | SAP AG | 24,001,661 | |||||||||||||
44,780 | Software AG | 4,700,997 | |||||||||||||
63,702 | Stada Arzneimittel AG | 1,945,008 | |||||||||||||
90,648 | Symrise AG | 2,235,415 | |||||||||||||
Total Germany | 175,397,344 | ||||||||||||||
Greece — 0.6% | |||||||||||||||
858,474 | Alpha Bank A.E. * | 5,496,525 | |||||||||||||
862,199 | National Bank of Greece SA * | 10,704,899 | |||||||||||||
593,528 | OPAP SA | 9,009,425 | |||||||||||||
562,075 | Piraeus Bank SA * | 2,891,857 | |||||||||||||
183,049 | Public Power Corp SA | 2,599,602 | |||||||||||||
Total Greece | 30,702,308 | ||||||||||||||
Hong Kong — 1.8% | |||||||||||||||
2,110,500 | BOC Hong Kong Holdings Ltd | 5,573,562 | |||||||||||||
3,013,098 | CLP Holdings Ltd | 23,004,488 | |||||||||||||
1,038,390 | Esprit Holdings Ltd | 5,858,616 | |||||||||||||
128,000 | Guoco Group | 1,298,963 | |||||||||||||
540,700 | Hong Kong Ferry Co Ltd | 522,190 | |||||||||||||
2,615,469 | Hong Kong Electric Holdings Ltd | 15,939,487 | |||||||||||||
6,090,530 | Hong Kong & China Gas | 14,760,210 | |||||||||||||
107,100 | Hong Kong Aircraft Engineering Co Ltd | 1,461,567 | |||||||||||||
12,925,000 | Pacific Basin Shipping Ltd | 8,877,949 | |||||||||||||
512,000 | Swire Pacific Ltd | 6,192,445 | |||||||||||||
2,147,900 | Yue Yuen Industrial Holdings | 7,056,123 | |||||||||||||
Total Hong Kong | 90,545,600 | ||||||||||||||
Ireland — 0.6% | |||||||||||||||
1,488,751 | C&C Group Plc | 5,798,024 | |||||||||||||
727,570 | CRH Plc | 11,202,251 | |||||||||||||
295,994 | DCC Plc | 7,406,675 | |||||||||||||
241,730 | Irish Life & Permanent Group Holdings Plc * | 441,163 | |||||||||||||
365,426 | Kingspan Group Plc * | 2,515,677 |
See accompanying notes to the financial statements.
7
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Ireland — continued | |||||||||||||||
19,544 | Paddy Power Plc | 678,170 | |||||||||||||
433,359 | Smurfit Kappa Group Plc * | 3,701,614 | |||||||||||||
Total Ireland | 31,743,574 | ||||||||||||||
Israel — 0.3% | |||||||||||||||
1,627,479 | Bezeq Israeli Telecommunication Corp Ltd | 3,588,307 | |||||||||||||
36,065 | Discount Investment Corp (Registered) | 678,904 | |||||||||||||
310,775 | Israel Chemicals Ltd | 3,931,595 | |||||||||||||
1,116,400 | Machteshim-Agan Industries Ltd | 3,840,641 | |||||||||||||
247,553 | Partner Communications Co Ltd | 4,108,902 | |||||||||||||
Total Israel | 16,148,349 | ||||||||||||||
Italy — 6.8% | |||||||||||||||
1,133,536 | A2A SPA | 1,578,048 | |||||||||||||
986,771 | Bulgari SPA | 7,261,181 | |||||||||||||
1,754,671 | CIR-Compagnie Industriali Riunite SPA * | 3,030,033 | |||||||||||||
15,248,184 | Enel SPA | 72,359,912 | |||||||||||||
5,815,070 | ENI SPA | 114,894,705 | |||||||||||||
402,419 | Fondiaria–Sai SPA | 3,803,596 | |||||||||||||
38,147 | Fondiaria–Sai SPA-Di RISP | 228,240 | |||||||||||||
213,082 | Indesit Company SPA | 2,045,816 | |||||||||||||
1,998,751 | Intesa San Paolo | 5,569,391 | |||||||||||||
216,205 | Italcementi SPA-Di RISP | 876,221 | |||||||||||||
104,199 | Luxottica Group SPA | 2,401,230 | |||||||||||||
703,199 | Maire Tecnimont SPA | 2,345,112 | |||||||||||||
1,660,338 | Mediaset SPA | 10,255,085 | |||||||||||||
380,778 | Mediobanca SPA * | 2,980,129 | |||||||||||||
1,593,945 | Milano Assicurazioni SPA | 2,757,753 | |||||||||||||
94,800 | Natuzzi SPA ADR * | 321,372 | |||||||||||||
1,710,336 | Parmalat SPA | 4,103,981 | |||||||||||||
381,723 | Recordati SPA | 2,997,358 | |||||||||||||
186,081 | Saipem SPA | 6,476,967 | |||||||||||||
1,747,361 | Snam Rete Gas SPA | 8,077,877 | |||||||||||||
9,797,369 | Telecom Italia SPA | 13,201,841 |
See accompanying notes to the financial statements.
8
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Italy — continued | |||||||||||||||
18,383,670 | Telecom Italia SPA-Di RISP | 20,166,607 | |||||||||||||
234,457 | Tenaris SA | 3,954,117 | |||||||||||||
1,961,313 | Terna SPA | 7,873,407 | |||||||||||||
18,951,752 | UniCredit SPA | 44,177,829 | |||||||||||||
Total Italy | 343,737,808 | ||||||||||||||
Japan — 25.1% | |||||||||||||||
1,009 | Advance Residence Investment Corp (REIT) * | 1,576,903 | |||||||||||||
618,800 | Aeon Co Ltd | 6,596,845 | |||||||||||||
412,700 | Aeon Credit Service Co Ltd | 4,359,275 | |||||||||||||
1,899,050 | Aiful Corp * | 2,372,710 | |||||||||||||
312,100 | Aisin Seiki Co Ltd | 8,062,521 | |||||||||||||
1,110,000 | Alps Electric Co Ltd * | 7,670,206 | |||||||||||||
281,000 | Asahi Breweries Ltd | 5,296,750 | |||||||||||||
1,116,000 | Asahi Glass Co Ltd | 10,889,021 | |||||||||||||
1,292,000 | Asahi Kasei Corp | 6,384,845 | |||||||||||||
925,900 | Astellas Pharma Inc | 31,973,754 | |||||||||||||
743,000 | Bank of Yokohama Ltd (The) | 3,220,961 | |||||||||||||
305,400 | Canon Inc | 12,503,220 | |||||||||||||
537 | Central Japan Railway Co | 4,330,575 | |||||||||||||
135,100 | Circle K Sunkus Co Ltd | 1,845,287 | |||||||||||||
3,560,000 | Cosmo Oil Co Ltd | 8,512,895 | |||||||||||||
330,700 | Credit Saison Co Ltd | 4,204,394 | |||||||||||||
598,200 | CSK Holdings Corp * | 1,962,257 | |||||||||||||
1,801 | CyberAgent Inc | 2,889,152 | |||||||||||||
440,750 | Daiei Inc * | 1,789,963 | |||||||||||||
220,000 | Daihatsu Motor Co Ltd | 2,778,089 | |||||||||||||
2,385,000 | Daikyo Inc * | 3,353,813 | |||||||||||||
996,000 | Dainippon Screen Manufacturing Co Ltd * | 4,369,699 | |||||||||||||
369,800 | Daito Trust Construction Co Ltd | 21,236,007 | |||||||||||||
185,000 | Dai Nippon Printing Co Ltd | 2,151,236 | |||||||||||||
1,566,000 | Denki Kagaku Kogyo K K | 6,305,083 | |||||||||||||
284,000 | Don Quijote Co Ltd | 6,947,035 | |||||||||||||
1,683,000 | Dowa Holdings Co Ltd | 8,694,050 |
See accompanying notes to the financial statements.
9
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
463,000 | Ebara Corp * | 1,834,232 | |||||||||||||
336,900 | Eisai Co Ltd | 12,153,846 | |||||||||||||
232,300 | Electric Power Development Co Ltd | 7,470,088 | |||||||||||||
39,700 | Fanuc Ltd | 4,272,593 | |||||||||||||
51,000 | Fast Retailing Co Ltd | 7,044,174 | |||||||||||||
1,620,000 | Fujikura Ltd | 7,025,049 | |||||||||||||
2,466,000 | Fuji Electric Holdings Co Ltd | 6,109,117 | |||||||||||||
1,250,000 | Fuji Heavy Industries Ltd * | 6,996,060 | |||||||||||||
295,100 | Fuji Oil Co Ltd | 4,546,209 | |||||||||||||
67,300 | Funai Electric Co Ltd | 2,043,559 | |||||||||||||
974,000 | Hanwa Co Ltd | 3,524,833 | |||||||||||||
9,830,000 | Haseko Corp * | 8,197,546 | |||||||||||||
150,300 | Hikari Tsushin Inc | 2,649,069 | |||||||||||||
3,450,000 | Hitachi Ltd * | 14,019,865 | |||||||||||||
1,002,800 | Honda Motor Co Ltd | 33,214,975 | |||||||||||||
235,700 | Hosiden Corp | 2,197,120 | |||||||||||||
539 | INPEX Corp | 2,440,644 | |||||||||||||
1,583,000 | Isuzu Motors Ltd | 5,251,951 | |||||||||||||
1,713,800 | Itochu Corp | 13,971,442 | |||||||||||||
4,222 | Japan Retail Fund Investment Corp (REIT) | 5,650,110 | |||||||||||||
149,300 | JFE Holdings Inc | 4,405,392 | |||||||||||||
8,572,090 | JX Holdings Inc * | 43,399,887 | |||||||||||||
365,400 | K's Holdings Corp | 7,893,543 | |||||||||||||
2,672,000 | Kajima Corp | 6,255,300 | |||||||||||||
1,095,300 | Kao Corp | 25,497,611 | |||||||||||||
3,962,000 | Kawasaki Kisen Kaisha Ltd * | 14,755,244 | |||||||||||||
4,211 | KDDI Corp | 20,308,228 | |||||||||||||
279,700 | Komatsu Ltd | 5,679,219 | |||||||||||||
264,600 | Konami Corp | 4,255,716 | |||||||||||||
51,900 | Kyocera Corp | 4,408,440 | |||||||||||||
218,000 | Kyowa Exeo Corp | 1,899,817 | |||||||||||||
98,700 | Lawson Inc | 4,490,215 | |||||||||||||
1,268,400 | Leopalace21 Corp * | 2,712,607 | |||||||||||||
1,802,000 | Marubeni Corp | 9,277,473 |
See accompanying notes to the financial statements.
10
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
4,555,000 | Mazda Motor Corp | 10,183,564 | |||||||||||||
232,100 | Miraca Holdings Inc | 7,759,887 | |||||||||||||
2,058,500 | Mitsubishi Chemical Holdings Corp | 9,739,431 | |||||||||||||
892,200 | Mitsubishi Corp | 19,117,546 | |||||||||||||
838,000 | Mitsubishi Electric Corp | 6,687,434 | |||||||||||||
367,000 | Mitsubishi Gas Chemical Co Inc | 1,983,355 | |||||||||||||
2,386,000 | Mitsubishi UFJ Financial Group Inc | 11,313,242 | |||||||||||||
194,470 | Mitsubishi UFJ Lease & Finance Co Ltd | 6,913,078 | |||||||||||||
904,000 | Mitsui Chemicals Inc | 2,312,954 | |||||||||||||
551,000 | Mitsui & Co Ltd | 7,172,648 | |||||||||||||
3,686,000 | Mitsui Mining & Smelting Co Ltd | 9,945,265 | |||||||||||||
2,598,000 | Mitsui OSK Lines Ltd | 16,330,424 | |||||||||||||
15,447,200 | Mizuho Financial Group Inc | 23,691,635 | |||||||||||||
141,900 | Murata Manufacturing Co Ltd | 6,741,566 | |||||||||||||
203,000 | Nabtesco Corp | 3,057,374 | |||||||||||||
2,147 | Net One Systems Co Ltd | 2,469,703 | |||||||||||||
368,000 | NHK Spring Co Ltd | 3,051,644 | |||||||||||||
992,000 | Nichirei Corp | 4,221,876 | |||||||||||||
88,800 | Nidec Corp | 7,821,123 | |||||||||||||
46,900 | Nintendo Co Ltd | 13,002,092 | |||||||||||||
342,000 | Nippon Denko Co Ltd | 2,549,912 | |||||||||||||
352,000 | Nippon Electric Glass Co Ltd | 3,939,807 | |||||||||||||
155,000 | Nippon Kayaku Co Ltd | 1,459,815 | |||||||||||||
751,200 | Nippon Telegraph & Telephone Corp | 32,299,924 | |||||||||||||
1,130,000 | Nippon Yakin Koguo Co Ltd * | 3,269,052 | |||||||||||||
2,762,000 | Nippon Yusen KK | 10,638,426 | |||||||||||||
4,073,100 | Nissan Motor Co Ltd * | 31,045,145 | |||||||||||||
755,000 | Nisshinbo Holdings Inc | 7,136,487 | |||||||||||||
39,000 | Nitori Co Ltd | 3,398,533 | |||||||||||||
133,500 | Nitto Denko Corp | 4,284,192 | |||||||||||||
687 | NTT Data Corp | 2,151,449 | |||||||||||||
26,538 | NTT Docomo Inc | 44,969,291 | |||||||||||||
1,288,000 | Obayashi Corp | 4,899,506 | |||||||||||||
25,700 | Okinawa Electric Power Co | 1,359,261 |
See accompanying notes to the financial statements.
11
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
356,000 | OKUMA Corp * | 1,724,992 | |||||||||||||
175,200 | Omron Corp | 3,725,972 | |||||||||||||
38,100 | Ono Pharmaceutical Co Ltd | 1,672,610 | |||||||||||||
331,970 | ORIX Corp | 24,962,155 | |||||||||||||
4,042,000 | Osaka Gas Co Ltd | 15,241,492 | |||||||||||||
1,459,000 | Pacific Metals Co Ltd | 10,486,556 | |||||||||||||
2,462,800 | Pioneer Corp * | 7,304,205 | |||||||||||||
101,670 | Point Inc | 4,752,328 | |||||||||||||
1,443,800 | Resona Holdings Inc | 14,261,743 | |||||||||||||
781,000 | Ricoh Company Ltd | 10,009,788 | |||||||||||||
655,300 | Round One Corp | 2,837,724 | |||||||||||||
137,400 | Ryohin Keikaku Co Ltd | 4,800,487 | |||||||||||||
124,700 | Saizeriya Co Ltd | 2,430,538 | |||||||||||||
282,900 | Sankyo Co Ltd | 14,310,392 | |||||||||||||
14,700 | Sawai Pharmaceuticals Co Ltd | 1,505,964 | |||||||||||||
192,600 | Secom Co Ltd | 8,399,632 | |||||||||||||
289,500 | Sega Sammy Holdings Inc | 4,298,887 | |||||||||||||
464,000 | Seino Holdings Co Ltd | 2,884,367 | |||||||||||||
1,053,200 | Seven & I Holdings Co Ltd | 24,028,101 | |||||||||||||
81,600 | Shimamura Co Ltd | 7,430,248 | |||||||||||||
996,000 | Showa Shell Sekiyu KK | 7,218,069 | |||||||||||||
19,000 | SMC Corp | 2,342,822 | |||||||||||||
200,400 | SoftBank Corp | 5,744,292 | |||||||||||||
5,471,400 | Sojitz Corp | 8,800,798 | |||||||||||||
1,673,400 | Sumitomo Corp | 19,169,795 | |||||||||||||
223,900 | Sumitomo Electric Industries Ltd | 2,399,845 | |||||||||||||
2,968,286 | Sumitomo Trust & Banking Co Ltd | 15,742,189 | |||||||||||||
2,515,000 | Taiheiyo Cement Co Ltd * | 2,815,149 | |||||||||||||
3,582,000 | Taisei Corp | 7,066,422 | |||||||||||||
324,000 | Taiyo Yuden Co Ltd | 3,574,530 | |||||||||||||
96,500 | Takata Corp | 2,065,235 | |||||||||||||
1,869,800 | Takeda Pharmaceutical Co Ltd | 85,938,665 | |||||||||||||
419,650 | Takefuji Corp | 1,005,221 | |||||||||||||
39,200 | TDK Corp | 2,056,650 |
See accompanying notes to the financial statements.
12
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Japan — continued | |||||||||||||||
49,100 | Terumo Corp | 2,433,807 | |||||||||||||
718,000 | Toho Zinc Co Ltd | 2,520,360 | |||||||||||||
291,000 | Tokai Rika Co Ltd | 4,530,520 | |||||||||||||
1,351,000 | Tokyo Gas Co Ltd | 6,296,418 | |||||||||||||
869,100 | Tokyo Steel Manufacturing Co | 9,485,699 | |||||||||||||
2,324,000 | Tokyo Tatemono Co Ltd | 8,130,635 | |||||||||||||
639,000 | TonenGeneral Sekiyu KK | 5,773,393 | |||||||||||||
3,066,000 | Tosoh Corp | 7,682,301 | |||||||||||||
1,071,700 | Toyota Motor Corp | 36,358,286 | |||||||||||||
551,500 | Toyota Tsusho Corp | 7,893,040 | |||||||||||||
754,000 | Toyo Engineering Corp | 2,146,674 | |||||||||||||
22,000 | Unicharm Corp | 2,682,094 | |||||||||||||
830,500 | UNY Co Ltd | 6,098,435 | |||||||||||||
76,410 | USS Co Ltd | 5,637,495 | |||||||||||||
13,647 | Yahoo Japan Corp | 4,903,450 | |||||||||||||
189,980 | Yamada Denki Co Ltd | 11,819,608 | |||||||||||||
125,400 | Yamato Kogyo Co Ltd | 2,830,250 | |||||||||||||
674,000 | Zeon Corp | 4,540,427 | |||||||||||||
Total Japan | 1,279,815,116 | ||||||||||||||
Malta — 0.0% | |||||||||||||||
15,984,486 | BGP Holdings Plc * | — | |||||||||||||
Netherlands — 2.6% | |||||||||||||||
176,330 | Aalberts Industries NV | 2,486,961 | |||||||||||||
217,979 | CSM | 5,659,569 | |||||||||||||
11,644 | Gamma Holdings NV * | 320,420 | |||||||||||||
273,342 | Heineken NV | 12,217,082 | |||||||||||||
7,528,389 | ING Groep NV * | 66,479,979 | |||||||||||||
1,193,293 | Koninklijke BAM Groep NV | 5,935,487 | |||||||||||||
197,330 | Koninklijke DSM NV | 8,165,616 | |||||||||||||
852,486 | Koninklijke Philips Electronics NV | 23,756,032 | |||||||||||||
82,239 | TNT NV | 2,078,569 | |||||||||||||
163,095 | Unilever NV | 4,352,280 | |||||||||||||
Total Netherlands | 131,451,995 |
See accompanying notes to the financial statements.
13
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
New Zealand — 0.4% | |||||||||||||||
1,565,976 | Fletcher Building Ltd | 8,221,649 | |||||||||||||
454,330 | Sky City Entertainment Group Ltd | 910,985 | |||||||||||||
7,886,210 | Telecom Corp of New Zealand | 11,328,050 | |||||||||||||
1,357 | Vector Ltd | 2,015 | |||||||||||||
Total New Zealand | 20,462,699 | ||||||||||||||
Norway — 0.7% | |||||||||||||||
112,574 | Acergy SA | 1,717,616 | |||||||||||||
1,349,969 | DnB NOR ASA | 14,823,383 | |||||||||||||
167,250 | Frontline Ltd | 4,419,922 | |||||||||||||
1,574,800 | Golden Ocean Group Ltd | 2,010,905 | |||||||||||||
461,100 | Petroleum Geo–Services ASA * | 4,112,225 | |||||||||||||
275,100 | Telenor ASA | 4,012,411 | |||||||||||||
239,600 | TGS Nopec Geophysical Co ASA | 3,202,461 | |||||||||||||
Total Norway | 34,298,923 | ||||||||||||||
Portugal — 0.0% | |||||||||||||||
92,388 | Jeronimo Martins SGPS SA | 1,017,443 | |||||||||||||
Singapore — 3.3% | |||||||||||||||
9,436,000 | CapitaCommercial Trust (REIT) | 9,767,677 | |||||||||||||
4,786,000 | Cosco Corp | 5,601,078 | |||||||||||||
4,226,000 | Ezra Holdings Ltd | 5,518,274 | |||||||||||||
398,000 | Fraser & Neave Ltd | 1,634,941 | |||||||||||||
32,295,000 | Golden Agri-Resources Ltd | 13,400,793 | |||||||||||||
2,138,000 | Ho Bee Investment Ltd | 2,295,824 | |||||||||||||
3,074,000 | Indofood Agri Resources Ltd * | 5,244,149 | |||||||||||||
3,088,000 | Jaya Holdings Ltd * | 1,542,002 | |||||||||||||
585,000 | Keppel Corp Ltd | 3,876,897 | |||||||||||||
2,666,000 | Midas Holdings Ltd | 1,707,481 | |||||||||||||
9,592,500 | Neptune Orient Lines Ltd * | 13,570,426 | |||||||||||||
4,907,127 | Noble Group Ltd | 5,722,322 | |||||||||||||
1,527,000 | Oversea-Chinese Banking Corp Ltd | 9,792,417 | |||||||||||||
2,950,100 | Sembcorp Industries Ltd | 9,306,622 |
See accompanying notes to the financial statements.
14
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Singapore — continued | |||||||||||||||
4,720,000 | SembCorp Marine Ltd | 13,312,858 | |||||||||||||
347,000 | Singapore Airlines Ltd | 3,872,551 | |||||||||||||
1,182,000 | Singapore Exchange Ltd | 6,573,504 | |||||||||||||
3,573,000 | Singapore Press Holdings Ltd | 10,775,825 | |||||||||||||
2,267,000 | Singapore Technologies Engineering Ltd | 5,368,383 | |||||||||||||
7,692,000 | Singapore Telecommunications | 17,527,086 | |||||||||||||
6,885,000 | Suntec Real Estate Investment Trust (REIT) | 7,224,450 | |||||||||||||
3,582,000 | Swiber Holdings Ltd * | 2,546,859 | |||||||||||||
542,000 | United Overseas Bank Ltd | 7,500,598 | |||||||||||||
838,000 | Venture Corp Ltd | 5,383,318 | |||||||||||||
Total Singapore | 169,066,335 | ||||||||||||||
Spain — 2.0% | |||||||||||||||
1,859,792 | Banco Bilbao Vizcaya Argentaria SA | 22,401,700 | |||||||||||||
892,911 | Banco Popular Espanol SA | 5,282,513 | |||||||||||||
2,634,592 | Banco Santander SA | 30,677,930 | |||||||||||||
193,283 | Inditex SA | 12,853,913 | |||||||||||||
1,327,381 | Repsol YPF SA | 30,214,466 | |||||||||||||
Total Spain | 101,430,522 | ||||||||||||||
Sweden — 2.7% | |||||||||||||||
168,160 | Alfa Laval AB | 2,450,816 | |||||||||||||
156,237 | Assa Abloy AB Class B | 3,110,721 | |||||||||||||
233,139 | Atlas Copco AB | 3,183,870 | |||||||||||||
540,413 | Atlas Copco AB Class A | 8,187,341 | |||||||||||||
104,439 | Electrolux AB Class B | 2,006,163 | |||||||||||||
494,941 | Ericsson LM B Shares | 4,779,160 | |||||||||||||
966,313 | Hennes & Mauritz AB Class B | 31,490,304 | |||||||||||||
101,746 | Modern Times Group AB Class B | 5,832,442 | |||||||||||||
380,724 | NCC Class B | 6,243,935 | |||||||||||||
914,862 | Nordea Bank AB | 8,158,216 | |||||||||||||
638,560 | Sandvik AB | 7,534,116 | |||||||||||||
214,873 | Scania AB Class B | 3,951,198 | |||||||||||||
1,250,607 | Skandinaviska Enskilda Banken AB Class A | 7,742,600 |
See accompanying notes to the financial statements.
15
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Sweden — continued | |||||||||||||||
250,635 | SKF AB Class B | 4,479,516 | |||||||||||||
428,094 | Svenska Handelsbanken AB Class A | 11,126,248 | |||||||||||||
1,751,253 | Swedbank AB Class A * | 19,523,864 | |||||||||||||
644,212 | Trelleborg AB Class B | 4,264,147 | |||||||||||||
462,466 | Volvo AB Class B * | 5,331,739 | |||||||||||||
Total Sweden | 139,396,396 | ||||||||||||||
Switzerland — 5.7% | |||||||||||||||
445,524 | Compagnie Financiere Richemont SA Class A | 17,229,362 | |||||||||||||
1,500,561 | Nestle SA (Registered) | 77,572,684 | |||||||||||||
2,268,496 | Novartis AG (Registered) | 118,918,457 | |||||||||||||
375,814 | Roche Holding AG (Non Voting) | 50,979,004 | |||||||||||||
36,028 | Swatch Group AG | 11,557,225 | |||||||||||||
13,953 | Swisscom AG (Registered) | 5,415,916 | |||||||||||||
76,595 | Synthes Inc | 8,423,915 | |||||||||||||
Total Switzerland | 290,096,563 | ||||||||||||||
United Kingdom — 19.7% | |||||||||||||||
1,166,363 | 3i Group Plc | 4,639,035 | |||||||||||||
797,847 | Amlin Plc | 4,950,993 | |||||||||||||
378,875 | Anglo American Plc | 13,513,031 | |||||||||||||
3,074,783 | AstraZeneca Plc | 151,142,159 | |||||||||||||
1,034,822 | Barratt Developments Plc * | 1,518,596 | |||||||||||||
1,568,005 | BG Group Plc | 25,114,325 | |||||||||||||
479,094 | BHP Billiton Plc | 13,359,838 | |||||||||||||
3,264,951 | BP Plc | 18,842,825 | |||||||||||||
324,629 | British American Tobacco Plc | 10,999,441 | |||||||||||||
9,443,209 | BT Group Plc | 19,257,483 | |||||||||||||
1,177,788 | Burberry Group Plc | 15,291,852 | |||||||||||||
498,637 | Capita Group Plc | 5,362,949 | |||||||||||||
65,633 | Carnival Plc | 2,122,436 | |||||||||||||
1,069,765 | Centrica Plc | 5,321,860 | |||||||||||||
94,544 | Charter International Plc | 881,513 | |||||||||||||
2,388,188 | Cobham Plc | 7,633,174 |
See accompanying notes to the financial statements.
16
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
United Kingdom — continued | |||||||||||||||
1,214,704 | Compass Group Plc | 9,903,358 | |||||||||||||
452,674 | Cookson Group Plc * | 2,896,733 | |||||||||||||
701,906 | Daily Mail & General Trust Plc | 4,846,554 | |||||||||||||
1,842,520 | Debenhams Plc * | 1,623,629 | |||||||||||||
1,028,635 | Diageo Plc | 16,719,805 | |||||||||||||
1,447,765 | Drax Group Plc | 8,777,128 | |||||||||||||
15,940,897 | DSG International Plc * | 5,857,096 | |||||||||||||
172,919 | Eurasian Natural Resources Corp | 2,234,489 | |||||||||||||
284,225 | Firstgroup Plc | 1,511,445 | |||||||||||||
1,376,945 | Game Group Plc | 1,392,856 | |||||||||||||
9,836,199 | GlaxoSmithKline Plc | 183,557,325 | |||||||||||||
3,310,039 | Home Retail Group Plc | 11,031,843 | |||||||||||||
1,596,200 | HSBC Holdings Plc | 15,634,249 | |||||||||||||
1,422,878 | Inchcape Plc * | 5,568,482 | |||||||||||||
829,121 | Intermediate Capital Group Plc | 3,452,799 | |||||||||||||
259,663 | Jardine Lloyd Thompson Group Plc | 2,298,365 | |||||||||||||
184,084 | JD Wetherspoon Plc | 1,179,037 | |||||||||||||
171,793 | Kazakhmys Plc | 3,023,702 | |||||||||||||
1,811,236 | Kesa Electricals Plc | 3,689,163 | |||||||||||||
540,592 | Lancashire Holdings Ltd | 4,410,577 | |||||||||||||
13,945,792 | Lloyds Banking Group Plc * | 14,679,244 | |||||||||||||
349,725 | Michael Page International Plc | 2,121,012 | |||||||||||||
303,354 | Micro Focus International Plc | 1,401,183 | |||||||||||||
779,913 | Mitchells & Butlers Plc * | 3,449,538 | |||||||||||||
601,774 | National Express Group Plc * | 2,059,849 | |||||||||||||
375,742 | Next Plc | 11,362,047 | |||||||||||||
357,384 | Pearson Plc | 5,299,598 | |||||||||||||
2,553,174 | Punch Taverns Plc * | 3,133,503 | |||||||||||||
299,427 | Reckitt Benckiser Group Plc | 14,924,107 | |||||||||||||
1,013,455 | Reed Elsevier Plc | 8,110,103 | |||||||||||||
933,007 | Rio Tinto Plc | 46,928,433 | |||||||||||||
340,216 | Rolls–Royce Group Plc * | 2,878,560 | |||||||||||||
3,749,072 | Royal Dutch Shell Plc A Shares (London) | 99,289,859 | |||||||||||||
1,800,305 | Royal Dutch Shell Plc B Shares (London) | 45,884,730 |
See accompanying notes to the financial statements.
17
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
United Kingdom — continued | |||||||||||||||
300,087 | SABMiller Plc | 8,521,310 | |||||||||||||
1,358,987 | Sage Group Plc (The) | 5,088,964 | |||||||||||||
477,894 | Scottish & Southern Energy Plc | 8,384,775 | |||||||||||||
114,739 | Shire Plc | 2,468,410 | |||||||||||||
881,430 | Smith & Nephew Plc | 7,294,570 | |||||||||||||
538,204 | Standard Chartered Plc | 14,372,788 | |||||||||||||
5,445,307 | Taylor Wimpey Plc * | 2,148,737 | |||||||||||||
998,370 | Tesco Plc | 6,212,928 | |||||||||||||
664,736 | Travis Perkins Plc * | 7,747,621 | |||||||||||||
557,980 | United Utilities Group Plc | 4,875,811 | |||||||||||||
53,179 | Vedanta Resources Plc | 1,532,204 | |||||||||||||
23,874,610 | Vodafone Group Plc | 57,324,319 | |||||||||||||
252,216 | Weir Group Plc (The) | 4,657,062 | |||||||||||||
2,984,724 | William Hill Plc | 7,632,665 | |||||||||||||
504,442 | Wolseley Plc * | 9,701,210 | |||||||||||||
332,978 | WPP Plc | 3,291,889 | |||||||||||||
Total United Kingdom | 1,002,337,174 | ||||||||||||||
TOTAL COMMON STOCKS (COST $5,601,978,970) | 4,896,368,429 | ||||||||||||||
PREFERRED STOCKS — 0.5% | |||||||||||||||
Germany — 0.5% | |||||||||||||||
148,157 | Henkel AG & Co KGaA 1.40% | 6,944,079 | |||||||||||||
212,818 | Porsche Automobil Holding SE 0.13% | 9,925,988 | |||||||||||||
319,486 | ProSiebenSat.1 Media AG 0.13% | 5,733,337 | |||||||||||||
9,049 | Villeroy & Boch AG (Non Voting) * | 47,225 | |||||||||||||
33,719 | Volkswagen AG 2.10% | 3,348,298 | |||||||||||||
Total Germany | 25,998,927 | ||||||||||||||
TOTAL PREFERRED STOCKS (COST $25,595,884) | 25,998,927 |
See accompanying notes to the financial statements.
18
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares / Par Value | Description | Value ($) | |||||||||||||
OPTIONS PURCHASED — 0.1% | |||||||||||||||
United Kingdom — 0.1% | |||||||||||||||
GBP | 11,299,914 | Barclays Plc Call Options, Expires 09/17/10, Strike 280.00 | 4,310,103 | ||||||||||||
TOTAL OPTIONS PURCHASED (COST $7,071,260) | 4,310,103 | ||||||||||||||
SHORT-TERM INVESTMENTS — 3.3% | |||||||||||||||
Time Deposits — 2.4% | |||||||||||||||
AUD | 947,655 | Bank of America (Charlotte) Time Deposit, 4.44%, due 09/01/10 | 843,129 | ||||||||||||
USD | 25,000,000 | BNP Paribas (Grand Cayman) Time Deposit, 0.22%, due 09/01/10 | 25,000,000 | ||||||||||||
JPY | 37,851,520 | BNP Paribas (Paris) Time Deposit, 0.04%, due 09/01/10 | 450,560 | ||||||||||||
NOK | 63,667 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 1.89%, due 09/01/10 | 10,094 | ||||||||||||
NZD | 15,025 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 3.07%, due 09/01/10 | 10,477 | ||||||||||||
SEK | 70,955 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.20%, due 09/01/10 | 9,599 | ||||||||||||
CHF | 10,359 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.02%, due 09/01/10 | 10,203 | ||||||||||||
DKK | 54,953 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.10%, due 09/01/10 | 9,354 | ||||||||||||
EUR | 165,910 | Citibank (New York) Time Deposit, 0.28%, due 09/01/10 | 210,249 | ||||||||||||
USD | 25,000,000 | Commerzbank (Grand Cayman) Time Deposit, 0.20%, due 09/01/10 | 25,000,000 | ||||||||||||
CAD | 139,530 | Deustche Bank (Frankfurt) Time Deposit, 0.70%, due 09/01/10 | 130,849 | ||||||||||||
USD | 43,016 | DnB Nor Bank (Oslo) Time Deposit, 0.21%, due 09/01/10 | 43,016 | ||||||||||||
HKD | 723,880 | HSBC Bank (Hong Kong) Time Deposit, 0.03%, due 09/01/10 | 93,059 | ||||||||||||
SGD | 1,494,419 | HSBC Bank (Hong Kong) Time Deposit, 0.13%, due 09/01/10 | 1,102,486 | ||||||||||||
USD | 16,400,000 | HSBC Bank (USA) Time Deposit, 0.17%, due 09/01/10 | 16,400,000 | ||||||||||||
GBP | 315,686 | JPMorgan Chase (New York) Time Deposit, 0.46%, due 09/01/10 | 484,152 | ||||||||||||
USD | 25,000,000 | Royal Bank of Canada (Grand Cayman) Time Deposit, 0.18%, due 09/01/10 | 25,000,000 | ||||||||||||
USD | 25,000,000 | Societe Generale (Grand Cayman) Time Deposit, 0.20%, due 09/01/10 | 25,000,000 | ||||||||||||
Total Time Deposits | 119,807,227 |
See accompanying notes to the financial statements.
19
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value | Description | Value ($) | |||||||||||||
U.S. Government — 0.9% | |||||||||||||||
46,762,000 | U.S. Treasury Bill, 0.15%, due 09/23/10 (a) | 46,756,856 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $166,564,083) | 166,564,083 | ||||||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $5,801,210,197) | 5,093,241,542 | ||||||||||||||
Other Assets and Liabilities (net) — 0.00% | 2,449,944 | ||||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 5,095,691,486 |
See accompanying notes to the financial statements.
20
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
A summary of outstanding financial instruments at August 31, 2010 is as follows:
Forward Currency Contracts
Settlement Date | Counterparty | Deliver/ Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||
Buys † | |||||||||||||||||||||||
Royal Bank of Scotland | |||||||||||||||||||||||
10/22/10 | PLC | EUR | 27,819,947 | $ | 35,252,428 | $ | (456,727 | ) | |||||||||||||||
10/22/10 | Barclays | EUR | 30,014,098 | 38,032,777 | (504,725 | ) | |||||||||||||||||
10/22/10 | Brown Brothers Harriman & Co. | GBP | 7,673,119 | 11,763,824 | (250,592 | ) | |||||||||||||||||
10/22/10 | Bank Of America | GBP | 37,488,223 | 57,474,003 | (1,262,545 | ) | |||||||||||||||||
10/22/10 | Mellon Bank | GBP | 5,974,347 | 9,159,400 | (201,446 | ) | |||||||||||||||||
10/22/10 | JP Morgan Chase and Co. | SEK | 385,594,753 | 52,124,072 | 19,088 | ||||||||||||||||||
10/22/10 | Brown Brothers Harriman & Co. | SEK | 86,884,852 | 11,744,953 | (25,351 | ) | |||||||||||||||||
10/22/10 | Bank Of America | SEK | 137,140,850 | 18,538,477 | (56,668 | ) | |||||||||||||||||
10/22/10 | Deutsche Bank AG | SEK | 143,155,023 | 19,351,463 | (45,711 | ) | |||||||||||||||||
10/22/10 | Mellon Bank | SEK | 189,395,437 | 25,602,167 | (95,295 | ) | |||||||||||||||||
10/22/10 | Royal Bank of Scotland PLC | SEK | 189,395,437 | 25,602,167 | (84,564 | ) | |||||||||||||||||
10/22/10 | Barclays | SEK | 144,360,624 | 19,514,434 | (71,041 | ) | |||||||||||||||||
$ | 324,160,165 | $ | (3,035,577 | ) | |||||||||||||||||||
Sales # | |||||||||||||||||||||||
10/22/10 | JP Morgan Chase and Co. | CAD | 28,817,533 | $ | 27,002,860 | $ | 519,604 | ||||||||||||||||
10/22/10 | Brown Brothers Harriman & Co. | CAD | 16,303,957 | 15,277,278 | 312,361 | ||||||||||||||||||
10/22/10 | Morgan Stanley | CAD | 44,371,131 | 41,577,030 | 909,525 | ||||||||||||||||||
10/22/10 | Barclays | CAD | 28,817,533 | 27,002,860 | 572,407 | ||||||||||||||||||
10/22/10 | Royal Bank of Scotland PLC | NOK | 63,038,511 | 9,967,212 | 244,308 | ||||||||||||||||||
10/22/10 | Barclays | NOK | 63,038,511 | 9,967,212 | 257,515 | ||||||||||||||||||
10/22/10 | Bank Of America | NZD | 14,352,230 | 9,966,439 | 114,941 | ||||||||||||||||||
$ | 140,760,891 | $ | 2,930,661 |
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.
See accompanying notes to the financial statements.
21
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Sales | |||||||||||||||||||
753 | S&P Toronto 60 | September 2010 | $ | 97,914,362 | $ | (1,838,040 | ) | ||||||||||||
1,324 | SPI 200 | September 2010 | 129,722,368 | 4,482,012 | |||||||||||||||
1 | OMXS 30 | September 2010 | 13,650 | 523 | |||||||||||||||
$ | 227,650,380 | $ | 2,644,495 | ||||||||||||||||
Buys | |||||||||||||||||||
543 | DAX | September 2010 | $ | 101,341,514 | $ | (3,418,894 | ) | ||||||||||||
1,091 | FTSE/MIB | September 2010 | 135,690,617 | (3,142,024 | ) | ||||||||||||||
712 | CAC 40 | September 2010 | 31,302,093 | (1,449,954 | ) | ||||||||||||||
1,033 | MSCI Singapore | September 2010 | 53,198,467 | 1,116,942 | |||||||||||||||
400 | TOPIX | September 2010 | 38,090,227 | (3,648,542 | ) | ||||||||||||||
$ | 359,622,918 | $ | (10,542,472 | ) |
Written Options
Notional Amount | Expiration Date | Description | Premiums | Market Value | |||||||||||||||||||||||
PUT | 11,299,914 | 09/17/2010 | GBP | Barclays PLC, Strike, 240.00 | $ | (5,303,445 | ) | $ | (149,403 | ) |
Swap Agreements
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Fund Pays | Fund Receives | Market Value | ||||||||||||||||||||||
67,200,000 | JPY | 9/21/2010 | Goldman Sachs | 1 Month JPY | Return on | ||||||||||||||||||||||
LIBOR - 5.00% | Takefuji Corp | $ | (32,844 | ) | |||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
As of August 31, 2010, for futures contracts, swap agreements, and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
See accompanying notes to the financial statements.
22
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Notes to Schedule of Investments:
ADR - American Depositary Receipt
JPY LIBOR - London Interbank Offered Rate denominated in Japanese Yen
MSCI - Morgan Stanley Capital International
REIT - Real Estate Investment Trust
* Non-income producing security.
(a) Rate shown represents yield-to-maturity.
Currency Abbreviations:
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
DKK - Danish Krone
EUR - Euro
GBP - British Pound
HKD - Hong Kong Dollar
JPY - Japanese Yen
NOK - Norwegian Krone
NZD - New Zealand Dollar
SEK - Swedish Krona
SGD - Singapore Dollar
USD - United States Dollar
See accompanying notes to the financial statements.
23
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments, at value (cost $5,801,210,197) (Note 2) | $ | 5,093,241,542 | |||||
Receivable for investments sold | 814,182 | ||||||
Receivable for Fund shares sold | 11,977,668 | ||||||
Dividends and interest receivable | 15,183,507 | ||||||
Foreign taxes receivable | 3,872,635 | ||||||
Unrealized appreciation on open forward currency contracts (Note 4) | 2,949,749 | ||||||
Receivable for collateral on open futures contracts (Note 4) | 45,717,727 | ||||||
Receivable for variation margin on open futures contracts (Note 4) | 223,317 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 224,657 | ||||||
Total assets | 5,174,204,984 | ||||||
Liabilities: | |||||||
Foreign currency due to custodian (Proceeds $1,554,233) | 1,559,455 | ||||||
Payable for investments purchased | 862,943 | ||||||
Payable for Fund shares repurchased | 69,249,978 | ||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 2,264,448 | ||||||
Shareholder service fee | 534,272 | ||||||
Administration fee – Class M | 2,124 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 9,611 | ||||||
Payable for 12b-1 fee – Class M | 5,247 | ||||||
Unrealized depreciation on open forward currency contracts (Note 4) | 3,054,665 | ||||||
Payable for open swap contracts (Note 4) | 32,844 | ||||||
Written options outstanding, at value (premiums $5,303,445) (Note 4) | 149,403 | ||||||
Accrued expenses | 788,508 | ||||||
Total liabilities | 78,513,498 | ||||||
Net assets | $ | 5,095,691,486 |
See accompanying notes to the financial statements.
24
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited) — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 7,126,350,249 | |||||
Accumulated undistributed net investment income | 55,767,124 | ||||||
Accumulated net realized loss | (1,375,738,949 | ) | |||||
Net unrealized depreciation | (710,686,938 | ) | |||||
$ | 5,095,691,486 | ||||||
Net assets attributable to: | |||||||
Class II shares | $ | 225,769,474 | |||||
Class III shares | $ | 1,849,463,026 | |||||
Class IV shares | $ | 3,008,388,593 | |||||
Class M shares | $ | 12,070,393 | |||||
Shares outstanding: | |||||||
Class II | 12,089,171 | ||||||
Class III | 97,972,538 | ||||||
Class IV | 159,418,040 | ||||||
Class M | 648,734 | ||||||
Net asset value per share: | |||||||
Class II | $ | 18.68 | |||||
Class III | $ | 18.88 | |||||
Class IV | $ | 18.87 | |||||
Class M | $ | 18.61 |
See accompanying notes to the financial statements.
25
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $9,836,372) | $ | 94,602,571 | |||||
Interest | 354,267 | ||||||
Total investment income | 94,956,838 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 13,222,592 | ||||||
Shareholder service fee – Class II (Note 5) | 342,212 | ||||||
Shareholder service fee – Class III (Note 5) | 1,476,434 | ||||||
Shareholder service fee – Class IV (Note 5) | 1,348,420 | ||||||
12b-1 fee – Class M (Note 5) | 16,084 | ||||||
Administration fee – Class M (Note 5) | 12,867 | ||||||
Custodian and fund accounting agent fees | 1,045,580 | ||||||
Legal fees | 135,700 | ||||||
Trustees fees and related expenses (Note 5) | 56,448 | ||||||
Audit and tax fees | 47,656 | ||||||
Transfer agent fees | 45,632 | ||||||
Registration fees | 10,212 | ||||||
Miscellaneous | 62,284 | ||||||
Total expenses | 17,822,121 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (1,320,752 | ) | |||||
Expense reductions (Note 2) | (190 | ) | |||||
Net expenses | 16,501,179 | ||||||
Net investment income (loss) | 78,455,659 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | (38,682,878 | ) | |||||
Closed futures contracts | (9,295,998 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | (21,108,130 | ) | |||||
Net realized gain (loss) | (69,087,006 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | (188,040,389 | ) | |||||
Open futures contracts | 5,462,968 | ||||||
Written options | 2,398,327 | ||||||
Open swap contracts | 3,247 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 5,400,968 | ||||||
Net unrealized gain (loss) | (174,774,879 | ) | |||||
Net realized and unrealized gain (loss) | (243,861,885 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (165,406,226 | ) |
See accompanying notes to the financial statements.
26
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 78,455,659 | $ | 112,766,188 | |||||||
Net realized gain (loss) | (69,087,006 | ) | (854,873,916 | ) | |||||||
Change in net unrealized appreciation (depreciation) | (174,774,879 | ) | 2,406,061,414 | ||||||||
Net increase (decrease) in net assets from operations | (165,405,226 | ) | 1,663,953,686 | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class II | (966,467 | ) | (14,988,152 | ) | |||||||
Class III | (7,964,707 | ) | (64,034,986 | ) | |||||||
Class IV | (12,542,412 | ) | (84,268,877 | ) | |||||||
Class M | (44,714 | ) | (381,852 | ) | |||||||
Total distributions from net investment income | (21,518,300 | ) | (163,673,867 | ) | |||||||
Net share transactions (Note 9): | |||||||||||
Class II | (163,829,506 | ) | (155,183,758 | ) | |||||||
Class III | (4,435,849 | ) | (152,663,373 | ) | |||||||
Class IV | 339,783,391 | 127,643,067 | |||||||||
Class M | (705,752 | ) | 712,594 | ||||||||
Increase (decrease) in net assets resulting from net share transactions | 170,812,284 | (179,491,470 | ) | ||||||||
Total increase (decrease) in net assets | (16,112,242 | ) | 1,320,788,349 | ||||||||
Net assets: | |||||||||||
Beginning of period | 5,111,803,728 | 3,791,015,379 | |||||||||
End of period (including accumulated undistributed net investment income of $55,767,124 and distributions in excess of net investment income of $1,170,235, respectively) | $ | 5,095,691,486 | $ | 5,111,803,728 |
See accompanying notes to the financial statements.
27
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class II share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 19.35 | $ | 13.86 | $ | 29.69 | $ | 34.99 | $ | 32.35 | $ | 29.04 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.29 | 0.41 | 0.79 | 0.93 | 0.79 | 0.65 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.89 | ) | 5.68 | (14.01 | ) | (0.86 | ) | 5.60 | 4.45 | ||||||||||||||||||
Total from investment operations | (0.60 | ) | 6.09 | (13.22 | ) | 0.07 | 6.39 | 5.10 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.07 | ) | (0.60 | ) | (0.99 | ) | (0.83 | ) | (0.54 | ) | (0.36 | ) | |||||||||||||||
From net realized gains | — | — | (1.62 | ) | (4.54 | ) | (3.21 | ) | (1.43 | ) | |||||||||||||||||
Total distributions | (0.07 | ) | (0.60 | ) | (2.61 | ) | (5.37 | ) | (3.75 | ) | (1.79 | ) | |||||||||||||||
Net asset value, end of period | $ | 18.68 | $ | 19.35 | $ | 13.86 | $ | 29.69 | $ | 34.99 | $ | 32.35 | |||||||||||||||
Total Return(a) | (3.10 | )%** | 44.05 | % | (48.04 | )% | (1.11 | )% | 20.46 | % | 18.16 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 225,769 | $ | 394,009 | $ | 394,070 | $ | 510,006 | $ | 564,440 | $ | 567,313 | |||||||||||||||
Net expenses to average daily net assets | 0.72 | %(b)* | 0.72 | %(b) | 0.74 | %(c) | 0.76 | %(c) | 0.76 | % | 0.76 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 2.95 | %* | 2.21 | % | 3.41 | % | 2.59 | % | 2.32 | % | 2.16 | % | |||||||||||||||
Portfolio turnover rate | 19 | %** | 40 | % | 53 | % | 47 | % | 36 | % | 38 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.05 | %* | 0.05 | % | 0.05 | % | 0.05 | % | 0.04 | % | 0.06 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions. (Note 2)
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
28
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 19.56 | $ | 14.00 | $ | 29.97 | $ | 35.28 | $ | 32.59 | $ | 29.23 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.29 | 0.42 | 0.79 | 0.94 | 0.81 | 0.72 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.89 | ) | 5.76 | (14.13 | ) | (0.86 | ) | 5.66 | 4.44 | ||||||||||||||||||
Total from investment operations | (0.60 | ) | 6.18 | (13.34 | ) | 0.08 | 6.47 | 5.16 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.08 | ) | (0.62 | ) | (1.01 | ) | (0.85 | ) | (0.57 | ) | (0.37 | ) | |||||||||||||||
From net realized gains | — | — | (1.62 | ) | (4.54 | ) | (3.21 | ) | (1.43 | ) | |||||||||||||||||
Total distributions | (0.08 | ) | (0.62 | ) | (2.63 | ) | (5.39 | ) | (3.78 | ) | (1.80 | ) | |||||||||||||||
Net asset value, end of period | $ | 18.88 | $ | 19.56 | $ | 14.00 | $ | 29.97 | $ | 35.28 | $ | 32.59 | |||||||||||||||
Total Return(a) | (3.08 | )%** | 44.21 | % | (48.01 | )% | (1.06 | )% | 20.54 | % | 18.26 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,849,463 | $ | 1,925,104 | $ | 1,487,839 | $ | 2,615,878 | $ | 2,703,050 | $ | 2,795,610 | |||||||||||||||
Net expenses to average daily net assets | 0.65 | %(b)* | 0.65 | %(b) | 0.67 | %(c) | 0.69 | %(c) | 0.69 | % | 0.69 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 2.95 | %* | 2.19 | % | 3.38 | % | 2.61 | % | 2.36 | % | 2.39 | % | |||||||||||||||
Portfolio turnover rate | 19 | %** | 40 | % | 53 | % | 47 | % | 36 | % | 38 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.05 | %* | 0.05 | % | 0.05 | % | 0.05 | % | 0.04 | % | 0.06 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions. (Note 2)
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
29
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 19.55 | $ | 14.00 | $ | 29.96 | $ | 35.26 | $ | 32.58 | $ | 29.22 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.29 | 0.43 | 0.82 | 0.96 | 0.80 | 0.74 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.89 | ) | 5.75 | (14.14 | ) | (0.85 | ) | 5.68 | 4.43 | ||||||||||||||||||
Total from investment operations | (0.60 | ) | 6.18 | (13.32 | ) | 0.11 | 6.48 | 5.17 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.08 | ) | (0.63 | ) | (1.02 | ) | (0.87 | ) | (0.59 | ) | (0.38 | ) | |||||||||||||||
From net realized gains | — | — | (1.62 | ) | (4.54 | ) | (3.21 | ) | (1.43 | ) | |||||||||||||||||
Total distributions | (0.08 | ) | (0.63 | ) | (2.64 | ) | (5.41 | ) | (3.80 | ) | (1.81 | ) | |||||||||||||||
Net asset value, end of period | $ | 18.87 | $ | 19.55 | $ | 14.00 | $ | 29.96 | $ | 35.26 | $ | 32.58 | |||||||||||||||
Total Return(a) | (3.08 | )%** | 44.22 | % | (47.95 | )% | (0.98 | )% | 20.61 | % | 18.32 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 3,008,389 | $ | 2,779,470 | $ | 1,900,168 | $ | 4,131,392 | $ | 4,566,106 | $ | 3,150,741 | |||||||||||||||
Net expenses to average daily net assets | 0.59 | %(b)* | 0.59 | %(b) | 0.61 | %(c) | 0.63 | %(c) | 0.63 | % | 0.63 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 2.98 | %* | 2.25 | % | 3.47 | % | 2.67 | % | 2.32 | % | 2.45 | % | |||||||||||||||
Portfolio turnover rate | 19 | %** | 40 | % | 53 | % | 47 | % | 36 | % | 38 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.05 | %* | 0.05 | % | 0.05 | % | 0.05 | % | 0.04 | % | 0.06 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions. (Note 2)
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
30
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class M share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 19.30 | $ | 13.83 | $ | 29.60 | $ | 34.93 | $ | 32.28 | $ | 28.98 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.26 | 0.35 | 0.73 | 0.79 | 0.68 | 0.61 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.88 | ) | 5.69 | (13.95 | ) | (0.81 | ) | 5.62 | 4.41 | ||||||||||||||||||
Total from investment operations | (0.62 | ) | 6.04 | (13.22 | ) | (0.02 | ) | 6.30 | 5.02 | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.07 | ) | (0.57 | ) | (0.93 | ) | (0.77 | ) | (0.44 | ) | (0.29 | ) | |||||||||||||||
From net realized gains | — | — | (1.62 | ) | (4.54 | ) | (3.21 | ) | (1.43 | ) | |||||||||||||||||
Total distributions | (0.07 | ) | (0.57 | ) | (2.55 | ) | (5.31 | ) | (3.65 | ) | (1.72 | ) | |||||||||||||||
Net asset value, end of period | $ | 18.61 | $ | 19.30 | $ | 13.83 | $ | 29.60 | $ | 34.93 | $ | 32.28 | |||||||||||||||
Total Return(a) | (3.23 | )%** | 43.72 | % | (48.14 | )% | (1.36 | )% | 20.18 | % | 17.92 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 12,070 | $ | 13,221 | $ | 8,938 | $ | 18,687 | $ | 17,371 | $ | 29,984 | |||||||||||||||
Net expenses to average daily net assets | 0.95 | %(b)* | 0.95 | %(b) | 0.97 | %(c) | 0.99 | %(c) | 0.99 | % | 0.99 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 2.67 | %* | 1.84 | % | 3.13 | % | 2.22 | % | 2.00 | % | 2.07 | % | |||||||||||||||
Portfolio turnover rate | 19 | %** | 40 | % | 53 | % | 47 | % | 36 | % | 38 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.05 | %* | 0.05 | % | 0.05 | % | 0.05 | % | 0.04 | % | 0.06 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions. (Note 2)
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
31
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO International Intrinsic Value Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks high total return. The Fund seeks to achieve its investment objective by outperforming its benchmark, the MSCI EAFE Value Index (Europe, Australasia, and Far East). The Fund typically makes equity investments directly and indirectly (e.g., through the GMO funds in which the Fund invests, collectively referred to as the "underlying funds" or derivatives) in companies tied economically to countries other than the U.S. The term "equity investments" refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts.
The Manager relies principally on proprietary quantitative models and also employs fundamental investment techniques to evaluate and select individual equity investments, countries and currencies. The Manager selects equity investments it believes (i) are undervalued (e.g., equity investments trading at prices below what the Manager believes to be their fundamental value); (ii) have superior fundamentals (e.g., earnings stability); and/or (iii) have shown indications of improving investor sentiment (e.g., positive price movement or upgraded analyst ratings). In selecting countries in which to invest and determining the Fund's currency exposures, the Manager considers many factors, which may include aggregate stock market valuations, global competitiveness, and investor sentiment. The Manager also uses proprietary techniques to adjust the composition of the portfolio for other factors such as position size, country, industry and sector weights, and market capitalization. The factors considered and the models used by the Manager may change over time based on the Manager's assessment of what combination of models and factors are best positioned to achieve the Fund's investment objective.
The Fund may make investments tied economically to emerging countries. In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the-counter derivatives, including options, futures, and swap contracts, (i) as a substitute for direct investment; (ii) in an attempt to reduce investment exposures (which may result in a reduction below zero); (iii) to effect transactions intended as substitutes for securities lending; and/or (iv) in an attempt to adjust elements of its investment and/or foreign currency exposure. The Fund's foreign currency exposure may differ from the currency exposure represented by its equity investments. In addition, the Fund often takes active
32
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
overweighted and underweighted positions in particular currencies relative to its benchmark. In addition, the Fund may lend its portfolio securities.
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
Throughout the period ended August 31, 2010, the Fund had four classes of shares outstanding: Class II, Class III, Class IV and Class M. Class M shares bear an administration fee and a 12b-1 fee while classes II, III, and IV bear a shareholder service fee (See Note 5). The principal economic difference among the classes of shares is the type and level of fees they bear.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the over-the-counter ("OTC") market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not rea dily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. Additionally, because many foreign equity securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund
33
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
generally values foreign equity securities as of the NYSE close using fair value prices, which are based on local closing prices and adjustments supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2010, 93.7% of the net assets of the Fund were valued using fair value prices based on those adjustments and are classified as using Level 2 inputs in the table below. See note 4 for a further discussion on valuation of derivative financial instruments.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include: fair value adjustments applied to closing prices of foreign securities due to market events that have occurred since the local market close but before the Fund's daily NAV calculation.
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | |||||||||||||||||||
Australia | $ | — | $ | 187,889,968 | $ | — | $ | 187,889,968 | |||||||||||
Austria | — | 45,646,637 | — | 45,646,637 | |||||||||||||||
Belgium | — | 65,924,201 | — | 65,924,201 | |||||||||||||||
Canada | 118,807,727 | — | — | 118,807,727 | |||||||||||||||
Denmark | — | 56,275,221 | — | 56,275,221 | |||||||||||||||
Finland | — | 37,720,550 | — | 37,720,550 | |||||||||||||||
France | 10,961,716 | 515,494,260 | — | 526,455,976 | |||||||||||||||
Germany | — | 175,397,344 | — | 175,397,344 | |||||||||||||||
Greece | — | 30,702,308 | — | 30,702,308 | |||||||||||||||
Hong Kong | — | 90,545,600 | — | 90,545,600 | |||||||||||||||
Ireland | 441,163 | 31,302,411 | — | 31,743,574 | |||||||||||||||
Israel | — | 16,148,349 | — | 16,148,349 |
34
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
ASSET VALUATION INPUTS — continued
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Italy | $ | 321,372 | $ | 343,416,436 | $ | — | $ | 343,737,808 | |||||||||||
Japan | — | 1,279,815,116 | — | 1,279,815,116 | |||||||||||||||
Malta | — | 0 | * | — | 0 | ||||||||||||||
Netherlands | — | 131,451,995 | — | 131,451,995 | |||||||||||||||
New Zealand | 11,328,050 | 9,134,649 | — | 20,462,699 | |||||||||||||||
Norway | — | 34,298,923 | — | 34,298,923 | |||||||||||||||
Portugal | — | 1,017,443 | — | 1,017,443 | |||||||||||||||
Singapore | 5,518,274 | 163,548,061 | — | 169,066,335 | |||||||||||||||
Spain | — | 101,430,522 | — | 101,430,522 | |||||||||||||||
Sweden | — | 139,396,396 | — | 139,396,396 | |||||||||||||||
Switzerland | — | 290,096,563 | — | 290,096,563 | |||||||||||||||
United Kingdom | — | 1,002,337,174 | — | 1,002,337,174 | |||||||||||||||
TOTAL COMMON STOCKS | 147,378,302 | 4,748,990,127 | — | 4,896,368,429 | |||||||||||||||
Preferred Stocks | |||||||||||||||||||
Germany | — | 25,998,927 | — | 25,998,927 | |||||||||||||||
TOTAL PREFERRED STOCKS | — | 25,998,927 | — | 25,998,927 | |||||||||||||||
Options Purchased | |||||||||||||||||||
United Kingdom | — | 4,310,103 | — | 4,310,103 | |||||||||||||||
TOTAL OPTIONS PURCHASED | — | 4,310,103 | — | 4,310,103 | |||||||||||||||
Short-Term Investments | 119,807,227 | 46,756,856 | — | 166,564,083 | |||||||||||||||
Total Investments | 267,185,529 | 4,826,056,013 | — | 5,093,241,542 | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts Foreign exchange risk | — | 2,949,749 | — | 2,949,749 | |||||||||||||||
Futures Contracts Equity risk | — | 5,599,477 | — | 5,599,477 | |||||||||||||||
Total Derivatives | — | 8,549,226 | — | 8,549,226 | |||||||||||||||
Total | $ | 267,185,529 | $ | 4,834,605,239 | $ | — | $ | 5,101,790,768 |
* Represents the interest in securities that have no value at August 31, 2010.
35
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts Foreign exchange risk | $ | — | $ | (3,054,665 | ) | $ | — | $ | (3,054,665 | ) | |||||||||
Futures Contracts Equity risk | (1,838,040 | ) | (11,659,414 | ) | — | (13,497,454 | ) | ||||||||||||
Swap Agreements Equity risk | — | (32,844 | ) | — | (32,844 | ) | |||||||||||||
Written Options Equity risk | — | (149,403 | ) | — | (149,403 | ) | |||||||||||||
Total | $ | (1,838,040 | ) | $ | (14,896,326 | ) | $ | — | $ | (16,734,366 | ) |
The Fund held no investments or other financial instruments at either August 31, 2010 or February 28, 2010, whose fair value was determined using Level 3 inputs.
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are inclu ded with the net realized and unrealized gain or loss on investment securities.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend
36
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
income are generally withheld in accordance with the applicable country's tax treaty with the United States. The foreign withholding rates applicable to a Fund's investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if paid by the shareholders of the Fund.
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Transaction based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund elected to defer to March 1, 2010 post-October capital losses of $97,233,515.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (154,259,096 | ) | ||||
2/28/2018 | (948,787,215 | ) | |||||
Total | $ | (1,103,046,311 | ) |
37
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 5,922,700,254 | $ | 260,429,728 | $ | (1,089,888,440 | ) | $ | (829,458,712 | ) |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which co llection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. Investment income, common expenses and realized and unrealized gains and losses are
38
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
allocated among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service, 12b-1, and administration fees, which are directly attributable to a class of shares, are charged to that class's operations.
Brown Brothers Harriman & Co. ("BBH") serves as the Fund's custodian and fund accounting agent. State Street Bank and Trust Company ("State Street") serves as the Fund's transfer agent. BBH's and State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund's investments.
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to rec eipt) may expose the Fund to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund's investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund's investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
39
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
• Market Risk — Value Securities — The Fund purchases some equity investments at prices below what the Manager believes to be their fundamental value. The Fund runs the risk that the prices of these investments will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value.
Other principal risks of an investment in the Fund include Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund's securities); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). The Fund also may use currency derivatives in an attempt to reduce (which may
40
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index). The Funds also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedin gs. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be secured by collateral (e.g., foreign currency forwards; see "Currency Risk" above), that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers
41
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. During the period ended August 31, 2010, the Fund used forward currency contracts to manage against anticipated currency exchange rate changes and adjust exposure to foreign
42
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
currencies. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because many foreign exchanges close prior to the close of the NYSE, closing prices for foreign futures contracts on those exchanges do not reflect events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures contracts using fair value prices, which are based on adjustments to closing prices supplied by a third party vendor based on that vendor' s proprietary models. As of August 31, 2010, futures contracts representing (0.2)% of the net assets of the Fund were valued using fair value prices based on those adjustment and are classified using Level 2 inputs in the table above. During the period ended August 31, 2010, the Fund used futures contracts to adjust exposure to certain securities markets and maintain the diversity and liquidity of the portfolio. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. During the period ended August 31, 2010, the Fund used purchased call option contracts as a substitute for direct equity investment (when paired with written put options). Option cont racts purchased by the Fund and outstanding at the end of the period are listed in the Fund's Schedule of Investments.
43
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an of fsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. During the period ended August 31, 2010, the Fund used written put option contracts as a substitute for direct equity investment (when paired with purchased call options). Written options outstanding at the end of the period are listed in the Fund's Schedule of Investments.
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
For the period ended August 31, 2010, investment activity in options contracts written by the Fund was as follows:
Puts | Calls | ||||||||||||||||||||||||||
Principal Amount of Contracts | Number of Contracts | Premiums | Principal Amount of Contracts | Number of Contracts | Premiums | ||||||||||||||||||||||
Outstanding, beginning of period | $ | (11,299,914 | ) | — | $ | (5,303,445 | ) | $ | — | — | $ | — | |||||||||||||||
Options written | — | — | — | — | — | — | |||||||||||||||||||||
Options exercised | — | — | — | — | — | — | |||||||||||||||||||||
Options expired | — | — | — | — | — | — | |||||||||||||||||||||
Options sold | — | — | — | — | — | — | |||||||||||||||||||||
Outstanding, end of period | $ | (11,299,914 | ) | — | $ | (5,303,445 | ) | $ | — | — | $ | — |
44
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level
45
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the pe riod ended August 31, 2010, the Fund used swap agreements to achieve returns comparable to holding and lending a direct equity position. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. During the period ended August 31, 2010, the Fund held rights and warrants received as a result of a corporate action. The Fund held no rights or warrants at the end of the period.
46
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (purchased options) | $ | — | $ | — | $ | — | $ | 4,310,103 | $ | — | $ | 4,310,103 | |||||||||||||||
Unrealized appreciation on future contracts* | — | — | — | 5,599,477 | — | 5,599,477 | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | 2,949,749 | — | — | — | 2,949,749 | |||||||||||||||||||||
Unrealized appreciation on swap agreements | — | — | — | — | — | — | |||||||||||||||||||||
Total | $ | — | $ | 2,949,749 | $ | — | $ | 9,909,580 | $ | — | $ | 12,859,329 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | — | $ | — | $ | — | $ | (149,403 | ) | $ | — | $ | (149,403 | ) | |||||||||||||
Unrealized depreciation on future contracts* | — | — | — | (13,497,454 | ) | — | (13,497,454 | ) | |||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | (3,054,665 | ) | — | — | — | (3,054,665 | ) | |||||||||||||||||||
Unrealized depreciation on swap agreements | — | — | — | (32,844 | ) | — | (32,844 | ) | |||||||||||||||||||
Total | $ | — | $ | (3,054,665 | ) | $ | — | $ | (13,679,701 | ) | $ | — | $ | (16,734,366 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments.
47
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Period Ended August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Future contracts | $ | — | $ | — | $ | — | $ | (9,295,998 | ) | $ | — | $ | (9,295,998 | ) | |||||||||||||
Forward currency contracts | — | (19,842,748 | ) | — | — | — | (19,842,748 | ) | |||||||||||||||||||
Total | $ | — | $ | (19,842,748 | ) | $ | — | $ | (9,295,998 | ) | $ | — | $ | (29,138,746 | ) | ||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (purchased options, rights and warrants) | $ | — | $ | — | $ | — | $ | (966,061 | ) | $ | — | $ | (966,061 | ) | |||||||||||||
Written options | — | — | — | 2,398,327 | — | 2,398,327 | |||||||||||||||||||||
Future contracts | — | — | — | 5,462,968 | — | 5,462,968 | |||||||||||||||||||||
Forward currency contracts | — | 5,193,980 | — | — | — | 5,193,980 | |||||||||||||||||||||
Swap contracts | — | — | — | 3,247 | — | 3,247 | |||||||||||||||||||||
Total | $ | — | $ | 5,193,980 | $ | — | $ | 6,898,481 | $ | — | $ | 12,092,461 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
The volume of derivative activity, based on absolute values (forward currency contracts, futures contracts, and rights and warrants), notional amounts (swap agreements) or principal amounts (options) outstanding at each month-end, was as follows for the period ended August 31, 2010:
Forward Currency Contracts | Futures Contracts | Swap Agreements | Options | Rights/ Warrants | |||||||||||||||||||
Average amount outstanding | $ | 721,491,536 | $ | 602,638,469 | $ | 1,145,361 | $ | 26,972,960 | $ | 64,244 |
5. Fees and other transactions with affiliates
GMO receives a management fee for management services provided to the Fund. That fee is paid monthly at the annual rate of 0.50% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated
48
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
based on average daily net assets of each class at the annual rate of 0.22% for Class II shares, 0.15% for Class III shares, and 0.09% for Class IV shares.
Holders of Class M shares of the Fund pay GMO an administration fee for support services provided to Class M shareholders. That fee is paid monthly at the annual rate of 0.20% of average daily net assets of Class M shares. Pursuant to a Rule 12b-1 distribution plan adopted by the Fund, holders of Class M shares of the Fund may pay a fee, at the annual rate of up to 1.00% of average daily net assets of Class M shares, for any activities or expenses primarily intended to result in the sale of Class M shares of the Fund and/or for the provision of services to Class M shareholders. The Trustees currently limit payments on Class M shares to 0.25% of the Fund's average daily net assets of Class M shares.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.50% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means administration fees and distribution (12b-1) fees (Class M Shares only), shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an inves tment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund's Expense Reimbursement Amount. These contractual expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ending August 31, 2010 was $56,448 and $19,872, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended August 31, 2010 aggregated $1,136,805,384 and $916,799,523, respectively.
49
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, the Fund had no shareholders who individually held more than 10% of the Fund's outstanding shares.
As of August 31, 2010, 0.18% shares of the Fund were held by senior management of the Manager and GMO Trust officers, and 58.70% of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class II: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 164,940 | $ | 3,173,809 | 3,477,961 | $ | 64,158,212 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 47,276 | 908,642 | 723,485 | 13,801,459 | |||||||||||||||
Shares repurchased | (8,483,819 | ) | (167,911,957 | ) | (12,277,870 | ) | (233,143,429 | ) | |||||||||||
Net increase (decrease) | (8,271,603 | ) | $ | (163,829,506 | ) | (8,076,424 | ) | $ | (155,183,758 | ) |
50
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 5,751,514 | $ | 114,601,028 | 15,318,786 | $ | 292,305,658 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 372,059 | 7,225,367 | 2,780,512 | 53,834,852 | |||||||||||||||
Shares repurchased | (6,564,030 | ) | (126,262,244 | ) | (25,929,276 | ) | (498,803,883 | ) | |||||||||||
Net increase (decrease) | (440,457 | ) | $ | (4,435,849 | ) | (7,829,978 | ) | $ | (152,663,373 | ) | |||||||||
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 28,325,756 | $ | 547,724,922 | 58,903,501 | $ | 1,049,593,338 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 581,916 | 11,300,812 | 3,883,242 | 75,263,129 | |||||||||||||||
Shares repurchased | (11,655,676 | ) | (219,242,343 | ) | (56,388,246 | ) | (997,213,400 | ) | |||||||||||
Net increase (decrease) | 17,251,996 | $ | 339,783,391 | 6,398,497 | $ | 127,643,067 | |||||||||||||
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class M: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 69,952 | $ | 1,365,732 | 140,341 | $ | 2,600,335 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 2,335 | 44,714 | 20,011 | 381,852 | |||||||||||||||
Shares repurchased | (108,553 | ) | (2,116,198 | ) | (121,740 | ) | (2,269,593 | ) | |||||||||||
Net increase (decrease) | (36,266 | ) | $ | (705,752 | ) | 38,612 | $ | 712,594 |
51
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three-, five-, seven- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received
52
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparis on to the Manager's separate account clients and the expenses and risks borne by the Manager as a result of the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by , for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating
53
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
54
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, distribution (12b-1) and/or administration fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
This example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
55
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Fund Expenses — (Continued)
August 31, 2010 (Unaudited)
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class II | |||||||||||||||||||
1) Actual | 0.72 | % | $ | 1,000.00 | $ | 969.00 | $ | 3.57 | |||||||||||
2) Hypothetical | 0.72 | % | $ | 1,000.00 | $ | 1,021.58 | $ | 3.67 | |||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.65 | % | $ | 1,000.00 | $ | 969.20 | $ | 3.23 | |||||||||||
2) Hypothetical | 0.65 | % | $ | 1,000.00 | $ | 1,021.93 | $ | 3.31 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.59 | % | $ | 1,000.00 | $ | 969.20 | $ | 2.93 | |||||||||||
2) Hypothetical | 0.59 | % | $ | 1,000.00 | $ | 1,022.23 | $ | 3.01 | |||||||||||
Class M | |||||||||||||||||||
1) Actual | 0.95 | % | $ | 1,000.00 | $ | 967.70 | $ | 4.71 | |||||||||||
2) Hypothetical | 0.95 | % | $ | 1,000.00 | $ | 1,020.42 | $ | 4.84 |
* Expenses are calculated using each Class's annualized net expense ratio for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
56
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 95.3 | % | |||||
Short-Term Investments | 3.4 | ||||||
Preferred Stocks | 0.7 | ||||||
Options Purchased | 0.0 | ||||||
Debt Obligations | 0.0 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Investment Funds | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Written Options | (0.0 | ) | |||||
Swap Agreements | (0.1 | ) | |||||
Futures Contracts | (0.1 | ) | |||||
Other | 0.8 | ||||||
100.0 | % | ||||||
Country / Region Summary** | % of Investments | ||||||
Euro Region*** | 26.1 | % | |||||
Japan | 23.6 | ||||||
United Kingdom | 22.1 | ||||||
Switzerland | 8.6 | ||||||
Sweden | 4.3 | ||||||
Singapore | 3.8 | ||||||
Australia | 2.4 | ||||||
Denmark | 2.2 | ||||||
Hong Kong | 1.8 | ||||||
Norway | 1.2 | ||||||
Canada | 0.6 | ||||||
South Korea | 0.6 | ||||||
Russia | 0.5 | ||||||
Brazil | 0.3 | ||||||
New Zealand | 0.2 | ||||||
India | 0.2 | ||||||
Israel | 0.2 | ||||||
Taiwan | 0.2 | ||||||
Thailand | 0.2 | ||||||
Turkey | 0.2 | ||||||
China | 0.2 | ||||||
Czech Republic | 0.1 | ||||||
Indonesia | 0.1 | ||||||
Mexico | 0.1 | ||||||
South Africa | 0.1 | ||||||
Hungary | 0.1 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds. The table excludes short-term investments. The table includes exposure through the use of derivative contracts.
*** The "Euro Region" is comprised of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
1
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
MUTUAL FUNDS — 100.0% | |||||||||||
Affiliated Issuers — 100.0% | |||||||||||
1,652,529 | GMO Emerging Markets Fund, Class VI | 20,359,163 | |||||||||
604,600 | GMO Flexible Equities Fund, Class VI | 10,326,564 | |||||||||
16,649,869 | GMO International Growth Equity Fund, Class IV | 323,007,449 | |||||||||
16,758,722 | GMO International Intrinsic Value Fund, Class IV | 316,237,081 | |||||||||
TOTAL MUTUAL FUNDS (COST $880,963,953) | 669,930,257 | ||||||||||
SHORT-TERM INVESTMENTS — 0.0% | |||||||||||
Time Deposits — 0.0% | |||||||||||
21,530 | State Street Eurodollar Time Deposit, 0.01%, due 09/01/2010 | 21,530 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $21,530) | 21,530 | ||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $880,985,483) | 669,951,787 | ||||||||||
Other Assets and Liabilities (net) — (0.0%) | (44,192 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 669,907,595 |
See accompanying notes to the financial statements.
2
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $21,530) (Note 2) | $ | 21,530 | |||||
Investments in affiliated issuers, at value (cost $880,963,953) (Notes 2 and 10) | 669,930,257 | ||||||
Receivable for Fund shares sold | 8,000,000 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 10,634 | ||||||
Total assets | 677,962,421 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 7,965,452 | ||||||
Payable for Fund shares repurchased | 34,548 | ||||||
Payable to affiliate for (Note 5): | |||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 1,196 | ||||||
Accrued expenses | 53,630 | ||||||
Total liabilities | 8,054,826 | ||||||
Net assets | $ | 669,907,595 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 1,025,059,660 | |||||
Accumulated undistributed net investment income | 2,530,973 | ||||||
Accumulated net realized loss | (146,649,342 | ) | |||||
Net unrealized depreciation | (211,033,696 | ) | |||||
$ | 669,907,595 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 669,907,595 | |||||
Shares outstanding: | |||||||
Class III | 53,902,787 | ||||||
Net asset value per share: | |||||||
Class III | $ | 12.43 |
See accompanying notes to the financial statements.
3
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 10) | $ | 2,540,103 | |||||
Interest | 2 | ||||||
Total investment income | 2,540,105 | ||||||
Expenses: | |||||||
Custodian, fund accounting agent and transfer agent fees | 23,920 | ||||||
Audit and tax fees | 16,836 | ||||||
Legal fees | 16,376 | ||||||
Trustees fees and related expenses (Note 5) | 6,932 | ||||||
Registration fees | 1,104 | ||||||
Miscellaneous | 5,980 | ||||||
Total expenses | 71,148 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (61,640 | ) | |||||
Expense reductions (Note 2) | (376 | ) | |||||
Net expenses | 9,132 | ||||||
Net investment income (loss) | 2,530,973 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | (18,095,616 | ) | |||||
Net realized gain (loss) | (18,095,616 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in affiliated issuers | (772,180 | ) | |||||
Net realized and unrealized gain (loss) | (18,867,796 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (16,336,823 | ) |
See accompanying notes to the financial statements.
4
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 2,530,973 | $ | 18,728,754 | |||||||
Net realized gain (loss) | (18,095,616 | ) | (85,397,014 | ) | |||||||
Change in net unrealized appreciation (depreciation) | (772,180 | ) | 239,801,080 | ||||||||
Net increase (decrease) in net assets from operations | (16,336,823 | ) | 173,132,820 | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | — | (18,742,240 | ) | ||||||||
— | (18,742,240 | ) | |||||||||
Net share transactions (Note 9): | |||||||||||
Class III | 25,141,295 | 97,429,157 | |||||||||
Purchase premiums and redemption fees (Notes 2 and 9): | |||||||||||
Class III | — | 5,113 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions | 25,141,295 | 97,434,270 | |||||||||
Total increase (decrease) in net assets | 8,804,472 | 251,824,850 | |||||||||
Net assets: | |||||||||||
Beginning of period | 661,103,123 | 409,278,273 | |||||||||
End of period (including accumulated undistributed net investment income of $2,530,973 and $0, respectively) | $ | 669,907,595 | $ | 661,103,123 |
See accompanying notes to the financial statements.
5
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007(a) | |||||||||||||||||||
Net asset value, beginning of period | $ | 12.69 | $ | 9.20 | $ | 20.63 | $ | 22.16 | $ | 20.00 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)(b)† | 0.05 | 0.41 | 0.65 | 0.47 | 0.53 | ||||||||||||||||||
Net realized and unrealized gain (loss) | (0.31 | ) | 3.49 | (9.20 | ) | 0.52 | 2.45 | ||||||||||||||||
Total from investment operations | (0.26 | ) | 3.90 | (8.55 | ) | 0.99 | 2.98 | ||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | — | (0.41 | ) | (0.62 | ) | (1.24 | ) | (0.72 | ) | ||||||||||||||
From net realized gains | — | — | (2.26 | ) | (1.28 | ) | (0.10 | ) | |||||||||||||||
Total distributions | — | (0.41 | ) | (2.88 | ) | (2.52 | ) | (0.82 | ) | ||||||||||||||
Net asset value, end of period | $ | 12.43 | $ | 12.69 | $ | 9.20 | $ | 20.63 | $ | 22.16 | |||||||||||||
Total Return(c) | (2.05 | )%** | 42.22 | % | (46.05 | )% | 3.57 | % | 14.93 | % | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 669,908 | $ | 661,103 | $ | 409,278 | $ | 718,390 | $ | 440,431 | |||||||||||||
Net expenses to average daily net assets(d)(e) | 0.00 | %(f)* | 0.00 | %(f) | 0.00 | %(f) | 0.00 | %(f) | 0.00 | %* | |||||||||||||
Net investment income (loss) to average daily net assets(b) | 0.75 | %* | 3.39 | % | 4.12 | % | 2.04 | % | 3.32 | %* | |||||||||||||
Portfolio turnover rate | 5 | %** | 20 | % | 33 | % | 4 | % | 1 | %** | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | %* | 0.02 | % | 0.01 | % | 0.02 | % | 0.03 | %* | |||||||||||||
Redemption fees consisted of the following per share amounts:† | $ | 0.00 | (g) | $ | 0.00 | (h) | $ | 0.00 | (h) | $ | 0.00 | (h) | $ | 0.01 |
(a) Period from June 5, 2006 (commencement of operations) through February 28, 2007.
(b) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(c) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(d) Net expenses to average daily net assets were less than 0.01%.
(e) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(f) The net expense ratio does not include the effect of expense reductions (Note 2).
(g) There were no purchase premiums and redemption fees throughout the period.
(h) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
6
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO International Opportunities Equity Allocation Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks total return greater than that of its benchmark, the MSCI EAFE Index (Europe, Australasia, and Far East). The Fund is a fund of funds and invests primarily in shares of the GMO International Equity Funds. The Fund also may invest in shares of other GMO Funds, including the GMO Fixed Income Funds, GMO Alpha Only Fund, and GMO Alternative Asset Opportunity Fund (GMO Funds in which the Fund invests are collectively referred to as "underlying funds"). In addition, the Fund may hold securities directly. Although the Fund's primary exposure is to foreign equity investments (including emerging country equities, both growth and value style equities, and equities of any market capitalization), the Fund also may have exposure to foreign and U.S. fixed income securities (including fixed income securities of any credit quality and having any maturity or duration), as well as to the investment returns of commodities and, from time to time, other alternative asset classes. Under normal circumstances, the Fund invests (including through investment in the underlying funds) at least 80% of its assets in equity investments. The term "equity investments" refers to direct and indirect (e.g., through the underlying funds) investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts.
The Manager uses proprietary quantitative models and fundamental investment techniques to select the underlying funds in which the Fund invests and to decide how much to invest in each. The models use multi-year forecasts of relative value and risk among asset classes (e.g., foreign equity, emerging country equity, emerging country debt, foreign fixed income, U.S. fixed income, and commodities). The Manager changes the Fund's holdings of the underlying funds in response to changes in its investment outlook and market valuations and may use redemption/purchase activity to rebalance the Fund's investments.
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
The financial statements of the underlying funds should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect) or by visiting GMO's website at www.gmo.com.
7
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Shares of the underlying funds and other investment funds are generally valued at their net asset value. Investments held by the underlying funds are valued as follows. Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the over-the-counter ("OTC") market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximat es market value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of August 31, 2010, the total value of securities held indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 0.2% of net assets. The underlying funds classify such securities (as defined below) as Level 3. Additionally, because many foreign equity securities markets and exchanges close prior to the cl ose of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund and the underlying funds generally value foreign equity securities as of the NYSE close using fair value prices, which are based on local closing prices and adjustments supplied by that third party vendor using that vendor's proprietary models. As of August 31, 2010, equity securities and futures contracts representing 92.5% and (0.1%), respectively, of the net assets of the Fund, through investments in the underlying funds, were valued using fair value prices based on those adjustments. Those underlying funds classify such securities (as defined below) as Level 2.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation
8
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Mutual Funds | $ | 669,930,257 | $ | — | $ | — | $ | 669,930,257 | |||||||||||
Short-Term Investments | 21,530 | — | — | 21,530 | |||||||||||||||
Total Investments | 669,951,787 | — | — | 669,951,787 | |||||||||||||||
Total | $ | 669,951,787 | $ | — | $ | — | $ | 669,951,787 |
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements. The aggregate net values of the Fund's indirect investments in securities using Level 3 inputs were 0.2% of total net assets.
The Fund held no investments or other financial instruments at either August 31, 2010 or February 28, 2010, whose fair value was determined using Level 3 inputs.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
9
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund elected to defer to March 1, 2010 post-October capital losses of $19,727.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2018 | $ | (39,084,586 | ) | ||||
Total | $ | (39,084,586 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 977,452,953 | $ | 283,663 | $ | (307,784,829 | ) | $ | (307,501,166 | ) |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations,
10
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact its operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Income dividends and capital gain distributions from the underlying funds are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for the purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 5).
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
For the period ended August 31, 2010, the Fund did not charge a premium on cash purchases or fee on cash redemptions of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by a Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. The Fund charges purchase premiums and redemption fees based on the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premiums and/or redemption fees, if any, imposed by the underlying Funds in which it invests, provided that, if that
11
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
weighted average is less than 0.05%, the Fund generally will not charge a purchase premium or redemption fee. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager may consider known cash flows out of or into other series of the Trust when placing orders for the cash purchase or redemption of shares by the Fund shareholders or other prospectiv e or existing shareholders of the Funds for whom GMO provides asset allocation advice. Consequently, the Fund and those other shareholders for whom GMO provides asset allocation advice will tend to benefit from waivers of the Funds' purchase premiums and redemption fees to a greater extent than other prospective and existing shareholders of the other series of the Trust. All or a portion of the Fund's purchase premiums and/or redemption fees may be waived at the Manager's discretion when they are de minimis and/or the Manager deems it equitable to do so, including without limitation when the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premium and/or redemption fees, if any, imposed by the underlying funds are less than the purchase premiums and/or redemption fees imposed by the Fund. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of a Fund's shares if the Fund will not incur trans action costs or will incur/reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. References to investments include those held directly by the Fund and indirectly through the Fund's investments in the underlying funds. Some of the underlying funds are non-diversified investment companies under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by those funds may affect their performance more than if they were diversified. The principal risks of investing in the Fund are summarized below, including those risks to which the Fund is exposed as a result of its investments in the
12
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
underlying funds. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund and the underlying funds normally do not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund's investments.
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund or the underlying funds may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund or the underlying funds need to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund or the underlying funds to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund's investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund's investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of foreign currency holdings and investments denominated in foreign currencies.
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund or an underlying fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
• Derivatives Risk — The use of derivatives involves the risk that their value may not correlate with the value of the relevant underlying assets, rates or indices. Derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk.
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in the underlying funds, including the risk that the underlying funds in which it invests do not perform as expected. Because the Fund bears the fees and expenses of the underlying funds in which it invests, new investments in underlying funds with higher fees or expenses than those of the underlying funds in which the Fund is currently invested will increase the Fund's total expenses. The fees and expenses associated
13
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
with an investment in the Fund are less predictable and may be higher than fees and expenses associated with an investment in funds that charge a fixed management fee.
Other principal risks of an investment in the Fund include Market Risk — Fixed Income Securities (risk that the value of fixed income securities will decline during periods of rising interest rates and/or widening of credit spreads); Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Market Risk — Value Securities (risk that the price of investments held by the Fund will not increa se to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Market Risk — Growth Securities (greater price fluctuations resulting from dependence on future earnings expectations); Commodities Risk (value of an underlying fund's shares may be affected by factors particular to the commodities markets and may fluctuate more than the share value of a fund with a broader range of investments); Leveraging Risk (increased risk of loss from use of reverse repurchase agreements and other derivatives and securities lending); Credit and Counterparty Risk (risk of default of an issuer of a portfolio security, a derivatives counterparty, or a borrower of the Fund's securities); Short Sales Risk (risk that an underlying fund's loss on the short sale of securities that it does not own is unlimited); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations) ; Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
4. Derivative financial instruments
At August 31, 2010, the Fund held no derivative contracts.
5. Fees and other transactions with affiliates
The Manager decides how to allocate the assets of the Fund among underlying funds. The Manager does not charge the Fund a management fee or shareholder service fee, but it receives management and shareholder service fees from the underlying funds in which the Fund invests. Because those fees vary from fund to fund, the levels of indirect net expenses set forth below are affected by the Manager's asset allocation decisions.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.00% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and
14
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). This contractual expense limitation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $6,932 and $2,576, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees) | Indirect Shareholder Service Fees | Total Indirect Expenses | |||||||||
0.510 | % | 0.089 | % | 0.599 | % |
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments and class exchanges, for the period ended August 31, 2010 aggregated $63,288,574 and $35,607,269, respectively.
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
15
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
8. Principal shareholders and related parties
As of August 31, 2010, 34.42% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2010, less than 0.01% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and none of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 3,427,693 | $ | 43,903,085 | 14,821,451 | $ | 184,281,194 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 1,379,477 | 18,402,217 | |||||||||||||||
Shares repurchased | (1,616,356 | ) | (18,761,790 | ) | (8,617,216 | ) | (105,254,254 | ) | |||||||||||
Purchase premiums | — | — | — | 5,113 | |||||||||||||||
Redemption fees | — | — | — | — | |||||||||||||||
Net increase (decrease) | 1,811,337 | $ | 25,141,295 | 7,583,712 | $ | 97,434,270 |
16
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
10. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO Emerging Markets Fund, Class VI | $ | — | $ | 20,283,498 | $ | 170,000 | $ | — | $ | — | $ | 20,359,163 | |||||||||||||||
GMO Flexible Equities Fund, Class VI | 11,525,967 | — | 300,000 | — | — | 10,326,564 | |||||||||||||||||||||
GMO International Growth Equity Fund, Class IV | 318,862,849 | 22,386,711 | 11,917,903 | 1,084,361 | — | 323,007,449 | |||||||||||||||||||||
GMO International Intrinsic Value Fund, Class IV | 317,602,020 | 20,481,394 | 9,673,143 | 1,318,771 | — | 316,237,081 | |||||||||||||||||||||
GMO International Small Companies Fund, Class III | 13,125,912 | 136,971 | 13,546,223 | 136,971 | — | — | |||||||||||||||||||||
Totals | $ | 661,116,748 | $ | 63,288,574 | $ | 35,607,269 | $ | 2,540,103 | $ | — | $ | 669,930,257 |
17
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of a composite of accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one- and three-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications and experience of the
18
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fact that the Fund does not pay a management fee to the Manager under the Fund's investment management agreement, but that the Fund indirectly bears management and shareholder servicing fees paid to the Manager by other funds of the Trust in which it invests. The Trustees also considered so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees noted that they had approved renewal of the Manager's investment management agreements with the other funds of the Trust in which the Fund may invest and had concluded that the advisory fees charged to those funds were reasonable, after considering, among other things: possible economies of scale to the Manager in connection with its management of the other funds of the Trust; the Manager's profitability with respect to the other funds of the Trust and the Trust as a whole (including the effect of recent changes in assets under management); and information prepared by a third-party data service concerning fee s paid to managers of funds deemed by that service to have similar objectives to those of the other funds of the Trust.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
19
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
20
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including indirect management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1 | ) Actual | 0.60 | % | $ | 1,000.00 | $ | 979.50 | $ | 2.99 | ||||||||||
2 | ) Hypothetical | 0.60 | % | $ | 1,000.00 | $ | 1,022.18 | $ | 3.06 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
21
GMO International Small Companies Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO International Small Companies Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 93.9 | % | |||||
Short-Term Investments | 2.6 | ||||||
Preferred Stocks | 2.1 | ||||||
Forward Currency Contracts | 0.1 | ||||||
Rights and Warrants | 0.0 | ||||||
Futures Contracts | (0.1 | ) | |||||
Other | 1.4 | ||||||
100.0 | % | ||||||
Country Summary | % of Equity Investments* | ||||||
Japan | 29.2 | % | |||||
United Kingdom | 20.3 | ||||||
Germany | 6.7 | ||||||
Sweden | 4.9 | ||||||
Singapore | 4.8 | ||||||
Australia | 4.5 | ||||||
Ireland | 4.3 | ||||||
Canada | 3.6 | ||||||
Hong Kong | 3.3 | ||||||
Netherlands | 3.3 | ||||||
Italy | 2.7 | ||||||
Belgium | 2.6 | ||||||
Finland | 2.5 | ||||||
France | 2.4 | ||||||
Norway | 1.7 | ||||||
Denmark | 1.0 | ||||||
Austria | 0.6 | ||||||
Greece | 0.6 | ||||||
Switzerland | 0.6 | ||||||
Luxembourg | 0.3 | ||||||
Israel | 0.1 | ||||||
100.0 | % |
* Equity investments may consist of common stocks, preferred stocks and rights and warrants. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
1
GMO International Small Companies Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2010 (Unaudited)
Industry Group Summary | % of Equity Investments* | ||||||
Capital Goods | 19.8 | % | |||||
Materials | 11.4 | ||||||
Real Estate | 10.3 | ||||||
Retailing | 7.4 | ||||||
Food, Beverage & Tobacco | 6.6 | ||||||
Health Care Equipment & Services | 4.9 | ||||||
Automobiles & Components | 4.3 | ||||||
Media | 4.2 | ||||||
Transportation | 4.1 | ||||||
Energy | 3.6 | ||||||
Consumer Services | 3.3 | ||||||
Technology Hardware & Equipment | 3.2 | ||||||
Consumer Durables & Apparel | 3.0 | ||||||
Diversified Financials | 3.0 | ||||||
Software & Services | 2.2 | ||||||
Pharmaceuticals, Biotechnology & Life Sciences | 2.1 | ||||||
Semiconductors & Semiconductor Equipment | 1.6 | ||||||
Commercial & Professional Services | 1.3 | ||||||
Banks | 1.0 | ||||||
Food & Staples Retailing | 0.9 | ||||||
Utilities | 0.7 | ||||||
Household & Personal Products | 0.6 | ||||||
Telecommunication Services | 0.3 | ||||||
Insurance | 0.2 | ||||||
100.0 | % |
* Equity investments may consist of common stocks, preferred stocks and rights and warrants. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
2
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 93.9% | |||||||||||
Australia — 4.3% | |||||||||||
68,561 | Ansell Ltd | 824,262 | |||||||||
938,325 | Australian Infrastructure Fund | 1,524,618 | |||||||||
709,076 | Boart Longyear Group * | 1,840,935 | |||||||||
136,072 | Centennial Coal Co Ltd | 733,007 | |||||||||
11,116,030 | Charter Hall Office (REIT) | 2,435,712 | |||||||||
1,530,851 | Commonwealth Property Office Fund (REIT) | 1,290,215 | |||||||||
54,300 | Flight Centre Ltd | 951,888 | |||||||||
5,186,155 | ING Office Fund | 2,779,215 | |||||||||
3,560,752 | Macquarie CountryWide Trust | 1,894,414 | |||||||||
1,808,669 | Pacific Brands Ltd * | 1,686,255 | |||||||||
998,258 | PaperlinX Ltd * | 496,653 | |||||||||
Total Australia | 16,457,174 | ||||||||||
Austria — 0.5% | |||||||||||
19,153 | AI Airports International Ltd ADC * | 25,613 | |||||||||
15,092 | BWIN Interactive Entertainment AG | 721,982 | |||||||||
17,164 | Flughafen Wien AG | 1,002,100 | |||||||||
1,761,602 | Immofinanz AG (Entitlement Shares) * (a) | — | |||||||||
22,094 | Wienerberger AG * | 285,715 | |||||||||
Total Austria | 2,035,410 | ||||||||||
Belgium — 2.5% | |||||||||||
20,880 | Bekaert NV | 4,220,973 | |||||||||
40,699 | Euronav SA | 709,532 | |||||||||
10,782 | GIMV NV | 516,835 | |||||||||
78,916 | Nyrstar | 842,889 | |||||||||
31,180 | Omega Pharma SA | 1,131,948 | |||||||||
3,527 | SA D'Ieteren NV | 1,650,469 | |||||||||
17,069 | Tessenderlo Chemie | 481,390 | |||||||||
Total Belgium | 9,554,036 |
See accompanying notes to the financial statements.
3
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Canada — 3.4% | |||||||||||
26,557 | ACE Aviation Holdings Inc Class A * | 256,268 | |||||||||
210,300 | Advantage Oil & Gas Ltd * | 1,258,230 | |||||||||
22,700 | AltaGas Ltd | 431,073 | |||||||||
21,600 | Dorel Industries Inc Class B | 708,960 | |||||||||
46,400 | Linamar Corp | 804,119 | |||||||||
86,200 | Methanex Corp | 1,839,839 | |||||||||
214,600 | Precision Drilling Corp * | 1,344,332 | |||||||||
38,971 | Quebecor Inc Class B | 1,189,943 | |||||||||
105,800 | RONA Inc * | 1,255,095 | |||||||||
91,200 | SEMAFO Inc * | 747,492 | |||||||||
51,250 | Torstar Corp Class B | 456,581 | |||||||||
98,625 | Transcontinental Inc | 1,123,734 | |||||||||
157,600 | Trinidad Drilling Ltd | 738,969 | |||||||||
245,400 | Western Coal Corp * | 920,523 | |||||||||
Total Canada | 13,075,158 | ||||||||||
Denmark — 0.9% | |||||||||||
44,261 | D/S Norden A/S | 1,661,979 | |||||||||
20,745 | Danisco A/S | 1,492,601 | |||||||||
70,643 | GN Store Nord A/S * | 453,029 | |||||||||
Total Denmark | 3,607,609 | ||||||||||
Finland — 2.4% | |||||||||||
150,006 | Amer Sports Oyj Class A | 1,566,456 | |||||||||
40,751 | Cargotec Oyj Class B | 1,317,824 | |||||||||
70,150 | Kemira Oyj | 838,197 | |||||||||
239,126 | M-real Oyj B shares * | 840,855 | |||||||||
104,225 | Oriola-KD Oyj Class B | 507,351 | |||||||||
77,027 | Tieto Oyj | 1,263,649 | |||||||||
138,908 | YIT Oyj | 2,871,507 | |||||||||
Total Finland | 9,205,839 |
See accompanying notes to the financial statements.
4
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
France — 2.3% | |||||||||||
22,715 | Arkema | 945,981 | |||||||||
12,930 | Fonciere des Regions (REIT) | 1,200,374 | |||||||||
58,067 | Groupe Steria SCA | 1,427,008 | |||||||||
118,681 | Havas SA | 542,249 | |||||||||
13,566 | IMS International Metal Service * | 166,580 | |||||||||
42,795 | Rallye SA | 1,447,534 | |||||||||
125,335 | Rhodia SA | 2,342,739 | |||||||||
14,379 | Zodiac Aerospace | 864,284 | |||||||||
Total France | 8,936,749 | ||||||||||
Germany — 4.4% | |||||||||||
54,024 | Aareal Bank AG * | 994,112 | |||||||||
63,022 | Aixtron AG | 1,556,372 | |||||||||
76,804 | Arques Industries AG * | 207,983 | |||||||||
51,521 | Aurubis AG | 2,044,042 | |||||||||
21,718 | Bechtle AG | 614,540 | |||||||||
27,478 | Bilfinger & Berger AG | 1,635,127 | |||||||||
115,687 | Heidelberger Druckmaschinen AG * | 895,421 | |||||||||
217,573 | Infineon Technologies AG * | 1,206,515 | |||||||||
42,189 | Kloeckner & Co AG * | 824,639 | |||||||||
60,744 | Lanxess AG | 2,647,294 | |||||||||
14,723 | Leonische Drahtwerke AG * | 383,877 | |||||||||
8,182 | Software AG | 858,945 | |||||||||
52,323 | Stada Arzneimittel AG | 1,597,574 | |||||||||
65,213 | Tognum AG | 1,198,578 | |||||||||
Total Germany | 16,665,019 | ||||||||||
Greece — 0.6% | |||||||||||
157,405 | Alapis Holding Industrial and Commercial SA | 407,007 | |||||||||
176,856 | Intralot SA | 694,438 | |||||||||
62,344 | Jumbo SA | 397,227 | |||||||||
73,847 | Motor Oil (Hellas) Corinth Refineries SA | 739,103 | |||||||||
Total Greece | 2,237,775 |
See accompanying notes to the financial statements.
5
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Hong Kong — 3.2% | |||||||||||
555,432 | Allied Properties HK Ltd | 108,146 | |||||||||
1,244,000 | Brightoil Petroleum Holdings Ltd * | 505,019 | |||||||||
123,200 | Dah Sing Financial Group * | 774,664 | |||||||||
1,356,000 | First Pacific Co | 1,010,791 | |||||||||
728,000 | HKR International Ltd | 286,087 | |||||||||
4,028,000 | Johnson Electric Holdings Ltd | 1,790,864 | |||||||||
963,000 | Kowloon Development Co Ltd | 1,004,025 | |||||||||
1,036,000 | Pacific Basin Shipping Ltd | 711,610 | |||||||||
9,186,000 | Singmas Container Holdings Ltd * | 1,867,797 | |||||||||
247,000 | Sun Hung Kai & Co Ltd | 161,729 | |||||||||
1,428,000 | Texwinca Holdings Ltd | 1,414,434 | |||||||||
252,000 | VTech Holdings Ltd | 2,519,548 | |||||||||
Total Hong Kong | 12,154,714 | ||||||||||
Ireland — 4.1% | |||||||||||
1,861,516 | Allied Irish Banks Plc * | 1,787,497 | |||||||||
695,669 | C&C Group Plc | 2,709,322 | |||||||||
145,722 | DCC Plc | 3,646,410 | |||||||||
437,423 | Fyffes Plc | 191,192 | |||||||||
241,988 | Grafton Group Plc | 823,448 | |||||||||
192,168 | Kingspan Group Plc * | 1,322,929 | |||||||||
79,160 | Paddy Power Plc | 2,746,826 | |||||||||
258,640 | Smurfit Kappa Group Plc * | 2,209,220 | |||||||||
901,882 | Total Produce Ltd | 399,720 | |||||||||
Total Ireland | 15,836,564 | ||||||||||
Israel — 0.1% | |||||||||||
30,532 | Ceragon Networks Ltd * | 258,301 | |||||||||
Italy — 2.6% | |||||||||||
192,484 | Amplifon SPA | 844,880 | |||||||||
128,425 | Autostrada Torino-Milano SPA | 1,577,936 | |||||||||
52,184 | Banca Generali SPA | 564,179 | |||||||||
69,629 | Benetton Group SPA | 469,612 |
See accompanying notes to the financial statements.
6
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Italy — continued | |||||||||||
158,023 | Cementir SPA | 411,306 | |||||||||
454,607 | CIR-Compagnie Industriali Riunite SPA * | 785,033 | |||||||||
93,848 | Danieli & Co SPA-RSP | 935,109 | |||||||||
96,042 | Indesit Company SPA | 922,106 | |||||||||
119,661 | Italcementi SPA-Di RISP | 484,954 | |||||||||
15,926 | Italmobiliare SPA | 439,278 | |||||||||
19,589 | Italmobiliare SPA-RSP | 379,683 | |||||||||
315,604 | Milano Assicurazioni SPA | 546,040 | |||||||||
202,995 | Recordati SPA | 1,593,954 | |||||||||
Total Italy | 9,954,070 | ||||||||||
Japan — 28.0% | |||||||||||
49,200 | ADEKA Corp | 500,557 | |||||||||
1,934 | Advance Residence Investment Corp (REIT) * | 3,022,528 | |||||||||
523,500 | Aiful Corp * | 654,071 | |||||||||
51,300 | Alpen Co Ltd | 808,629 | |||||||||
236,200 | Alps Electric Co Ltd * | 1,632,165 | |||||||||
149,800 | AOC Holdings Inc * | 646,291 | |||||||||
83,100 | Aoyama Trading Co Ltd | 1,145,477 | |||||||||
120,800 | Arnest One Corp | 1,218,921 | |||||||||
23,000 | Asahi Diamond Industrial Co Ltd | 339,315 | |||||||||
20,800 | Autobacs Seven Co Ltd | 778,539 | |||||||||
76,100 | Cedyna Financial Corp * | 132,157 | |||||||||
113,700 | Century Tokyo Leasing Corp | 1,462,521 | |||||||||
19,400 | Chiba Kogyo Bank Ltd (The) * | 117,580 | |||||||||
191,000 | Clarion Co Ltd * | 357,425 | |||||||||
789 | CyberAgent Inc | 1,265,708 | |||||||||
190,650 | Daiei Inc * | 774,263 | |||||||||
62,200 | Daiichikosho Co Ltd | 955,044 | |||||||||
925,000 | Dainippon Ink and Chemicals Inc | 1,514,339 | |||||||||
262,000 | Dainippon Screen Manufacturing Co Ltd * | 1,149,459 | |||||||||
396 | DA Office Investment Corp (REIT) | 1,079,171 | |||||||||
133,300 | DCM Japan Holdings Co Ltd | 627,275 | |||||||||
14,300 | Disco Corp | 714,286 |
See accompanying notes to the financial statements.
7
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
18,700 | Don Quijote Co Ltd | 457,428 | |||||||||
123 | Dr Ci:Labo Co Ltd | 390,802 | |||||||||
211,500 | Edion Corp | 1,458,978 | |||||||||
67,400 | Foster Electric Co Ltd | 1,445,713 | |||||||||
138,400 | Fuji Oil Co Ltd | 2,132,143 | |||||||||
44,000 | Fuji Soft Inc | 667,310 | |||||||||
307,400 | Futaba Industrial Co Ltd * | 1,706,737 | |||||||||
47,000 | Fuyo General Lease Co Ltd | 1,234,606 | |||||||||
463,000 | Godo Steel | 990,082 | |||||||||
10,270 | Gulliver International Co Ltd | 400,290 | |||||||||
33,700 | Hamamatsu Photonics KK | 1,023,570 | |||||||||
536,000 | Hanwa Co Ltd | 1,939,744 | |||||||||
103,000 | Itochu Enex Co Ltd | 482,652 | |||||||||
206,000 | JACCS Co Ltd | 378,010 | |||||||||
190 | Japan Excellent Inc (REIT) | 908,581 | |||||||||
362,000 | JFE Shoji Holdings Inc | 1,248,520 | |||||||||
600,000 | Juki Corp * | 921,023 | |||||||||
169,000 | J–Oil Mills Inc | 468,228 | |||||||||
155,200 | K's Holdings Corp | 3,352,703 | |||||||||
27,700 | Kaga Electronics Co Ltd | 297,668 | |||||||||
141,000 | Kaken Pharmaceutical Co Ltd | 1,527,175 | |||||||||
290,000 | Kayaba Industry Co | 1,329,765 | |||||||||
39,400 | Keihin Corp | 754,138 | |||||||||
467 | Kenedix Realty Investment Corp (REIT) | 1,634,676 | |||||||||
79,500 | Kohnan Shoji Co Ltd | 846,161 | |||||||||
94,500 | Kojima Co Ltd | 463,654 | |||||||||
220,000 | Kurabo Industries Ltd | 345,801 | |||||||||
28,800 | Kyoei Steel Ltd | 395,904 | |||||||||
61,000 | Kyorin Co Ltd | 875,069 | |||||||||
32,000 | Kyudenko Corp | 163,759 | |||||||||
129,000 | Makino Milling Machine Co Ltd * | 717,830 | |||||||||
28,600 | Mandom Corp | 769,912 | |||||||||
87,400 | Miraca Holdings Inc | 2,922,077 | |||||||||
304,000 | Mitsubishi Steel Manufacturing Co Ltd | 596,882 |
See accompanying notes to the financial statements.
8
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
413,000 | Morinaga Milk Industry Co Ltd | 1,783,141 | |||||||||
179,000 | Nakayama Steel Works Ltd * | 242,970 | |||||||||
204,000 | Nichias Corp | 843,485 | |||||||||
277,000 | Nichirei Corp | 1,178,891 | |||||||||
96,400 | Nifco Inc | 2,141,716 | |||||||||
122,900 | Nihon Kohden Corp | 2,489,575 | |||||||||
630,000 | Nippon Coke & Engineering Co Ltd | 854,806 | |||||||||
37,000 | Nippon Corp | 242,330 | |||||||||
200,000 | Nippon Metal Industry Co Ltd | 257,010 | |||||||||
45,000 | Nippon Shokubai Co Ltd | 392,232 | |||||||||
230,000 | Nippon Synthetic Chemical Industry Co Ltd | 1,212,782 | |||||||||
85,400 | Nippon System Development Co Ltd | 918,325 | |||||||||
769 | Nippon Commercial Investment Corp (REIT) | 793,176 | |||||||||
166,000 | Nippon Flour Mills Co Ltd | 857,692 | |||||||||
1,154,000 | Nippon Light Metal * | 1,845,789 | |||||||||
89,300 | Nipro Corp | 1,758,429 | |||||||||
195,000 | Nissan Shatai Co Ltd | 1,333,792 | |||||||||
175,000 | Nisshin Oillio Group Ltd (The) | 830,051 | |||||||||
18,400 | Okinawa Electric Power Co | 973,168 | |||||||||
98,000 | OKUMA Corp * | 474,857 | |||||||||
654,000 | Orient Corp * | 443,396 | |||||||||
431 | ORIX JREIT Inc (REIT) | 2,032,960 | |||||||||
41,500 | Osaka Steel Co Ltd | 612,617 | |||||||||
10,100 | OSAKA Titanium Technologies Co | 463,741 | |||||||||
208,100 | Pioneer Corp * | 617,186 | |||||||||
39,100 | PLENUS Co Ltd | 606,873 | |||||||||
235 | Premier Investment Corp (REIT) | 1,018,310 | |||||||||
74,800 | QP Corp | 945,047 | |||||||||
112,900 | Round One Corp | 488,904 | |||||||||
362,000 | Ryobi Ltd * | 1,224,092 | |||||||||
15,100 | Ryosan Co | 384,514 | |||||||||
598,000 | Sankyo–Tateyama Holdings Inc * | 648,679 | |||||||||
225,000 | Sankyu Inc | 857,149 |
See accompanying notes to the financial statements.
9
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
12,300 | Sawai Pharmaceuticals Co Ltd | 1,260,092 | |||||||||
99,000 | Seino Holdings Co Ltd | 615,415 | |||||||||
178,000 | Shinwa Kaiun Kaisha Ltd | 442,215 | |||||||||
196,600 | Showa Corp * | 1,031,908 | |||||||||
300,000 | Taihei Kogyo Co Ltd | 1,056,064 | |||||||||
77,700 | Takata Corp | 1,662,889 | |||||||||
152,000 | TOA Corp | 150,255 | |||||||||
108,000 | Toho Zinc Co Ltd | 379,107 | |||||||||
43,400 | Tokai Rika Co Ltd | 675,686 | |||||||||
383,000 | Topy Industries Ltd | 801,366 | |||||||||
211 | Top REIT Inc (REIT) | 1,132,162 | |||||||||
583,000 | Toyo Tire & Rubber Co Ltd | 1,172,026 | |||||||||
75,200 | TS Tech Co Ltd | 1,085,056 | |||||||||
871 | T–Gaia Corp | 1,364,207 | |||||||||
74,000 | Uchida Yoko Co Ltd | 201,872 | |||||||||
289,000 | Uniden Corp * | 620,266 | |||||||||
111,800 | Unipres Corp | 1,728,551 | |||||||||
297 | United Urban Investment Corp (REIT) | 1,919,070 | |||||||||
300,000 | Zeon Corp | 2,020,962 | |||||||||
Total Japan | 107,230,166 | ||||||||||
Luxembourg — 0.3% | |||||||||||
31,742 | Ternium SA-ADR | 1,040,185 | |||||||||
Netherlands — 3.2% | |||||||||||
157,575 | Aalberts Industries NV | 2,222,440 | |||||||||
35,096 | Chicago Bridge & Iron Co NV (NY Shares) * | 764,391 | |||||||||
169,431 | CSM | 4,399,077 | |||||||||
222,583 | Koninklijke BAM Groep NV | 1,107,137 | |||||||||
78,894 | Mediq NV | 1,292,421 | |||||||||
22,159 | Nutreco Holding NV | 1,282,338 | |||||||||
21,749 | Vastned NV (REIT) | 1,176,364 | |||||||||
Total Netherlands | 12,244,168 |
See accompanying notes to the financial statements.
10
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Norway — 1.6% | |||||||||||
102,107 | Acergy SA | 1,557,914 | |||||||||
100,645 | Atea ASA | 641,802 | |||||||||
186,807 | Petroleum Geo–Services ASA * | 1,666,000 | |||||||||
41,513 | Schibsted ASA | 941,272 | |||||||||
94,422 | TGS Nopec Geophysical Co ASA | 1,262,031 | |||||||||
Total Norway | 6,069,019 | ||||||||||
Singapore — 4.6% | |||||||||||
2,105,000 | CapitaCommercial Trust (REIT) | 2,178,991 | |||||||||
597,000 | Ezra Holdings Ltd | 779,557 | |||||||||
1,323,000 | Ho Bee Investment Ltd | 1,420,662 | |||||||||
556,000 | Hong Leong Asia Ltd | 1,352,826 | |||||||||
2,753,000 | Jaya Holdings Ltd * | 1,374,719 | |||||||||
130,000 | Kim Eng Holdings Ltd | 158,453 | |||||||||
399,000 | KS Energy Services Ltd * | 313,427 | |||||||||
1,387,000 | Mapletree Logistics Trust (REIT) | 860,589 | |||||||||
755,000 | MobileOne Ltd | 1,211,015 | |||||||||
339,000 | Singapore Airport Terminal Services Ltd | 698,873 | |||||||||
2,963,000 | Suntec Real Estate Investment Trust (REIT) | 3,109,084 | |||||||||
626,000 | Swiber Holdings Ltd * | 445,096 | |||||||||
398,000 | Venture Corp Ltd | 2,556,755 | |||||||||
255,000 | Wheelock Properties Ltd | 337,696 | |||||||||
691,000 | Wing Tai Holdings Ltd | 827,857 | |||||||||
Total Singapore | 17,625,600 | ||||||||||
Sweden — 4.8% | |||||||||||
48,364 | Axfood AB | 1,375,125 | |||||||||
156,377 | Boliden AB | 1,765,307 | |||||||||
14,284 | Cardo AB | 438,897 | |||||||||
63,100 | D Carnegie AB * (a) | 6,403 | |||||||||
44,112 | Elekta AB Class B | 1,270,854 | |||||||||
205,505 | Fabege AB | 1,434,614 | |||||||||
19,251 | Hoganas AB Class B | 520,331 | |||||||||
239,471 | Kungsleden AB | 1,559,901 |
See accompanying notes to the financial statements.
11
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Sweden — continued | |||||||||||
15,916 | Modern Times Group AB Class B | 912,362 | |||||||||
202,871 | NCC Class B | 3,327,117 | |||||||||
121,880 | Peab AB | 725,177 | |||||||||
101,702 | SAAB AB Class B | 1,254,881 | |||||||||
538,035 | Trelleborg AB Class B | 3,561,344 | |||||||||
81,342 | Vostok Gas Ltd * (a) | 2,421 | |||||||||
Total Sweden | 18,154,734 | ||||||||||
Switzerland — 0.6% | |||||||||||
107,194 | Clariant AG (Registered) * | 1,374,368 | |||||||||
1,029 | Fischer (George) AG (Registered) * | 377,365 | |||||||||
4,703 | Sulzer AG | 465,041 | |||||||||
Total Switzerland | 2,216,774 | ||||||||||
United Kingdom — 19.5% | |||||||||||
65,701 | Aggreko Plc | 1,424,354 | |||||||||
242,218 | ARM Holdings Plc | 1,351,672 | |||||||||
48,532 | ASOS Plc * | 707,668 | |||||||||
518,051 | BBA Aviation Plc | 1,405,676 | |||||||||
294,959 | Britvic Plc | 2,182,200 | |||||||||
457,301 | Cape Plc * | 1,892,871 | |||||||||
59,386 | Catlin Group Ltd | 298,428 | |||||||||
76,274 | Chloride Group Plc | 438,522 | |||||||||
316,057 | Cookson Group Plc * | 2,022,499 | |||||||||
82,295 | Croda International Plc | 1,609,313 | |||||||||
355,887 | Daily Mail & General Trust Plc | 2,457,346 | |||||||||
194,472 | Dairy Crest Group Plc | 1,096,182 | |||||||||
696,562 | Debenhams Plc * | 613,810 | |||||||||
243,422 | Drax Group Plc | 1,475,755 | |||||||||
146,457 | DS Smith Plc | 303,088 | |||||||||
522,578 | Electrocomponents Plc | 1,683,720 | |||||||||
930,960 | Enterprise Inns Plc * | 1,246,900 | |||||||||
70,029 | Filtrona Plc | 251,761 |
See accompanying notes to the financial statements.
12
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
1,092,561 | Galiform Plc * | 1,049,951 | |||||||||
377,705 | Game Group Plc | 382,070 | |||||||||
83,155 | Go-Ahead Group Plc | 1,397,637 | |||||||||
59,913 | Greene King Plc | 377,921 | |||||||||
313,862 | Halfords Group Plc | 2,324,550 | |||||||||
484,356 | IMI Plc | 5,043,749 | |||||||||
999,894 | Inchcape Plc * | 3,913,119 | |||||||||
146,305 | Intermediate Capital Group Plc | 609,274 | |||||||||
1,121,807 | ITV Plc * | 959,803 | |||||||||
1,354,340 | Johnston Press Plc * | 325,693 | |||||||||
248,719 | Kesa Electricals Plc | 506,596 | |||||||||
181,563 | LG Group Holdings Plc | 1,446,983 | |||||||||
1,033,888 | Logica Plc | 1,714,116 | |||||||||
291,930 | Luminar Group Holdings Plc * | 42,879 | |||||||||
887,179 | Marston's Plc | 1,264,412 | |||||||||
421,619 | Mcbride Plc | 900,693 | |||||||||
995,512 | Melrose Plc | 3,924,257 | |||||||||
287,233 | Mondi Plc | 2,056,255 | |||||||||
119,993 | Morgan Crucible Co Plc | 356,541 | |||||||||
786,046 | National Express Group Plc * | 2,690,605 | |||||||||
776,884 | Northern Foods Plc | 539,739 | |||||||||
213,098 | Premier Farnell Plc | 729,729 | |||||||||
3,361,161 | Premier Foods Plc * | 821,997 | |||||||||
1,254,494 | Punch Taverns Plc * | 1,539,637 | |||||||||
137,230 | Rightmove Plc | 1,357,366 | |||||||||
112,945 | Savills Plc | 537,459 | |||||||||
246,621 | Senior Plc | 430,150 | |||||||||
756,883 | SIG Plc * | 1,076,216 | |||||||||
130,305 | Smith News Plc | 201,603 | |||||||||
118,407 | SSL International Plc | 2,100,024 | |||||||||
240,463 | Tate & Lyle Plc | 1,504,265 | |||||||||
93,627 | Travis Perkins Plc * | 1,091,240 | |||||||||
834,285 | Trinity Mirror Plc * | 1,404,933 |
See accompanying notes to the financial statements.
13
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
312,770 | Tullett Prebon Plc | 1,767,002 | |||||||||
198,891 | Weir Group Plc (The) | 3,672,438 | |||||||||
630,645 | William Hill Plc | 1,612,713 | |||||||||
1,462,186 | Yell Group Plc * | 323,447 | |||||||||
Total United Kingdom | 74,458,827 | ||||||||||
TOTAL COMMON STOCKS (COST $368,126,739) | 359,017,891 | ||||||||||
PREFERRED STOCKS — 2.1% | |||||||||||
Germany — 2.1% | |||||||||||
11,813 | Biotest AG 1.33% | 449,425 | |||||||||
31,142 | Draegerwerk AG & Co 0.65% | 2,440,717 | |||||||||
7,838 | Fuchs Petrolub AG 1.99% | 770,223 | |||||||||
47,808 | Hugo Boss AG 2.82% | 2,055,662 | |||||||||
125,961 | ProSiebenSat.1 Media AG 0.13% | 2,260,434 | |||||||||
Total Germany | 7,976,461 | ||||||||||
TOTAL PREFERRED STOCKS (COST $5,644,347) | 7,976,461 | ||||||||||
RIGHTS AND WARRANTS — 0.0% | |||||||||||
France — 0.0% | |||||||||||
22,813 | Fonciere Des Regions Warrants, Expires 12/31/10 * | 18,937 | |||||||||
Singapore — 0.0% | |||||||||||
61,000 | Tat Hong Holdings Ltd Warrants, Expires 08/02/13 * | 1,125 | |||||||||
TOTAL RIGHTS AND WARRANTS (COST $7,969) | 20,062 |
See accompanying notes to the financial statements.
14
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value | Description | Value ($) | |||||||||
SHORT-TERM INVESTMENTS — 2.6% | |||||||||||
Time Deposits — 2.6% | |||||||||||
AUD | 198,821 | Bank of America (Charlotte) Time Deposit, 4.44%, due 09/01/10 | 176,891 | ||||||||
GBP | 6,466 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.46%, due 09/01/10 | 9,916 | ||||||||
SEK | 70,949 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.20%, due 09/01/10 | 9,599 | ||||||||
NOK | 64,241 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 1.89%, due 09/01/10 | 10,185 | ||||||||
CHF | 10,449 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.02%, due 09/01/10 | 10,292 | ||||||||
CAD | 10,271 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.70%, due 09/01/10 | 9,632 | ||||||||
NZD | 14,142 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 3.07%, due 09/01/10 | 9,861 | ||||||||
HKD | 68,892 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.03%, due 09/01/10 | 8,857 | ||||||||
DKK | 310,177 | Citibank (New York) Time Deposit, 0.10%, due 09/01/10 | 52,800 | ||||||||
EUR | 167,764 | Citibank (New York) Time Deposit, 0.28%, due 09/01/10 | 212,599 | ||||||||
USD | 5,000,000 | DnB Nor Bank (Oslo) Time Deposit, 0.21%, due 09/01/10 | 5,000,000 | ||||||||
AUD | 162,693 | Deustche Bank (Frankfurt) Time Deposit, 4.44%, due 09/01/10 | 144,748 | ||||||||
SGD | 2,217,007 | HSBC Bank (Hong Kong) Time Deposit, 0.13%, due 09/01/10 | 1,635,564 | ||||||||
JPY | 9,462,880 | HSBC Bank (Hong Kong) Time Deposit, 0.04%, due 09/01/10 | 112,640 | ||||||||
USD | 2,431,868 | Nordea Bank Norge ASA (Oslo) Time Deposit, 0.21%, due 09/01/10 | 2,431,868 | ||||||||
Total Time Deposits | 9,835,452 | ||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $9,835,454) | 9,835,452 | ||||||||||
TOTAL INVESTMENTS — 98.6% (Cost $383,614,509) | 376,849,866 | ||||||||||
Other Assets and Liabilities (net) — 1.4% | 5,464,706 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 382,314,572 |
See accompanying notes to the financial statements.
15
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
A summary of outstanding financial instruments at August 31, 2010 is as follows:
Forward Currency Contracts
Settlement Date | Counterparty | Deliver/ Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||
Buys † | |||||||||||||||||||||||
10/22/10 | Bank of America | CHF | 751,917 | $ | 740,960 | $ | 17,452 | ||||||||||||||||
10/22/10 | Barclays Bank PLC | CHF | 1,608,665 | 1,585,223 | 35,897 | ||||||||||||||||||
10/22/10 | Brown Brothers Harriman & Co. | CHF | 5,394,373 | 5,315,764 | 115,365 | ||||||||||||||||||
10/22/10 | Deutsche Bank AG | CHF | 5,032,789 | 4,959,449 | 105,246 | ||||||||||||||||||
10/22/10 | Morgan Stanley | CHF | 923,421 | 909,964 | 19,898 | ||||||||||||||||||
10/22/10 | Bank of America | GBP | 3,449,673 | 5,288,768 | (116,179 | ) | |||||||||||||||||
10/22/10 | Deutsche Bank AG | GBP | 6,763,051 | 10,368,579 | (196,524 | ) | |||||||||||||||||
10/22/10 | Mellon Bank | GBP | 3,481,407 | 5,337,420 | (117,388 | ) | |||||||||||||||||
10/22/10 | Mellon Bank | HKD | 13,892,673 | 1,786,628 | (1,660 | ) | |||||||||||||||||
10/22/10 | Bank of America | SEK | 54,094,943 | 7,312,466 | (22,352 | ) | |||||||||||||||||
10/22/10 | JP Morgan Chase Bank | SEK | 7,677,649 | 1,037,852 | 380 | ||||||||||||||||||
10/22/10 | Mellon Bank | SEK | 13,373,283 | 1,807,779 | (6,729 | ) | |||||||||||||||||
10/22/10 | Royal Bank of Scotland PLC | SEK | 16,826,117 | 2,274,527 | (7,513 | ) | |||||||||||||||||
$ | 48,725,379 | $ | (174,107 | ) | |||||||||||||||||||
Sales # | |||||||||||||||||||||||
10/22/10 | Bank of America | CAD | 5,007,226 | $ | 4,691,915 | $ | 93,397 | ||||||||||||||||
10/22/10 | Deutsche Bank AG | CAD | 7,259,853 | 6,802,692 | 157,524 | ||||||||||||||||||
10/22/10 | Brown Brothers Harriman & Co. | EUR | 459,029 | 581,665 | 7,361 | ||||||||||||||||||
10/22/10 | JP Morgan Chase Bank | EUR | 6,424,527 | 8,140,928 | 94,552 | ||||||||||||||||||
10/22/10 | Morgan Stanley | EUR | 10,520,526 | 13,331,229 | 183,554 | ||||||||||||||||||
10/22/10 | Brown Brothers Harriman & Co. | SGD | 1,731,805 | 1,277,592 | (5,562 | ) | |||||||||||||||||
10/22/10 | Morgan Stanley | SGD | 911,443 | 672,392 | (2,821 | ) | |||||||||||||||||
10/22/10 | Royal Bank of Scotland PLC | SGD | 2,965,740 | 2,187,893 | (8,907 | ) | |||||||||||||||||
$ | 37,686,306 | $ | 519,098 |
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.
See accompanying notes to the financial statements.
16
GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
77 | FTSE 100 | September 2010 | $ | 6,111,201 | $ | (57,178 | ) | ||||||||||||
2 | TOPIX | September 2010 | 190,451 | (20,952 | ) | ||||||||||||||
113 | FTSE/MIB | September 2010 | 14,054,115 | (301,064 | ) | ||||||||||||||
59 | CAC 40 | September 2010 | 2,593,853 | (120,151 | ) | ||||||||||||||
56 | MSCI Singapore | September 2010 | 2,883,944 | 60,273 | |||||||||||||||
$ | 25,833,564 | $ | (439,072 | ) | |||||||||||||||
Sales | |||||||||||||||||||
94 | SPI 200 | September 2010 | $ | 9,209,896 | $ | 351,177 | |||||||||||||
71 | S&P Toronto 60 | September 2010 | 9,232,297 | (164,279 | ) | ||||||||||||||
$ | 18,442,193 | $ | 186,898 |
As of August 31, 2010, for futures contracts, swap agreements and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
Notes to Schedule of Investments:
ADR - American Depositary Receipt
MSCI - Morgan Stanley Capital International
REIT - Real Estate Investment Trust
* Non-income producing security.
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
Currency Abbreviations:
AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc DKK - Danish Krone EUR - Euro GBP - British Pound HKD - Hong Kong Dollar | JPY - Japanese Yen NOK - Norwegian Krone NZD - New Zealand Dollar SEK - Swedish Krona SGD - Singapore Dollar USD - United States Dollar | ||||||
See accompanying notes to the financial statements.
17
GMO International Small Companies Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments, at value (cost $383,614,509) (Note 2) | $ | 376,849,866 | |||||
Receivable for investments sold | 1,236,966 | ||||||
Dividends receivable | 407,845 | ||||||
Foreign taxes receivable | 162,208 | ||||||
Unrealized appreciation on open forward currency contracts (Note 4) | 830,626 | ||||||
Receivable for foreign currency sold | 2,822 | ||||||
Receivable for collateral on open futures contracts (Note 4) | 3,804,321 | ||||||
Receivable for variation margin on open futures contracts (Note 4) | 84,690 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 64,294 | ||||||
Total assets | 383,443,638 | ||||||
Liabilities: | |||||||
Foreign currency due to custodian (proceeds $153,566) | 147,054 | ||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 203,913 | ||||||
Shareholder service fee | 50,978 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 789 | ||||||
Unrealized depreciation on open forward currency contracts (Note 4) | 485,635 | ||||||
Accrued expenses | 240,697 | ||||||
Total liabilities | 1,129,066 | ||||||
Net assets | $ | 382,314,572 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 464,994,564 | |||||
Distributions in excess of net investment income | (6,680,290 | ) | |||||
Accumulated net realized loss | (69,325,866 | ) | |||||
Net unrealized depreciation | (6,673,836 | ) | |||||
$ | 382,314,572 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 382,314,572 | |||||
Shares outstanding: | |||||||
Class III | 59,193,471 | ||||||
Net asset value per share: | |||||||
Class III | $ | 6.46 |
See accompanying notes to the financial statements.
18
GMO International Small Companies Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $1,168,506) | $ | 11,737,610 | |||||
Interest | 8,764 | ||||||
Total investment income | 11,746,374 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 2,118,763 | ||||||
Shareholder service fee – Class III (Note 5) | 529,691 | ||||||
Custodian and fund accounting agent fees | 341,192 | ||||||
Audit and tax fees | 41,860 | ||||||
Legal fees | 25,362 | ||||||
Transfer agent fees | 20,516 | ||||||
Trustees fees and related expenses (Note 5) | 8,534 | ||||||
Registration fees | 2,668 | ||||||
Miscellaneous | 21,824 | ||||||
Total expenses | 3,110,410 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (440,886 | ) | |||||
Expense reductions (Note 2) | (29 | ) | |||||
Net expenses | 2,669,495 | ||||||
Net investment income (loss) | 9,076,879 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 70,745,387 | ||||||
Closed futures contracts | (2,068,794 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 123,737 | ||||||
Net realized gain (loss) | 68,800,330 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | (64,465,466 | ) | |||||
Open futures contracts | 2,228,145 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 1,946,636 | ||||||
Net unrealized gain (loss) | (60,290,685 | ) | |||||
Net realized and unrealized gain (loss) | 8,509,645 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 17,586,524 |
See accompanying notes to the financial statements.
19
GMO International Small Companies Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 9,076,879 | $ | 10,921,170 | |||||||
Net realized gain (loss) | 68,800,330 | (67,531,785 | ) | ||||||||
Change in net unrealized appreciation (depreciation) | (60,290,685 | ) | 354,415,388 | ||||||||
Net increase (decrease) in net assets from operations | 17,586,524 | 297,804,773 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (14,015,047 | ) | (23,982,418 | ) | |||||||
(14,015,047 | ) | (23,982,418 | ) | ||||||||
Net share transactions (Note 9): | |||||||||||
Class III | (785,685,862 | ) | 496,477,449 | ||||||||
Purchase premiums and redemption fees (Notes 2 and 9): | |||||||||||
Class III | 4,134,534 | 3,178,652 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees | (781,551,328 | ) | 499,656,101 | ||||||||
Total increase (decrease) in net assets | (777,979,851 | ) | 773,478,456 | ||||||||
Net assets: | |||||||||||
Beginning of period | 1,160,294,423 | 386,815,967 | |||||||||
End of period (including distributions in excess of net investment income of $6,680,290 and $1,742,122, respectively) | $ | 382,314,572 | $ | 1,160,294,423 |
See accompanying notes to the financial statements.
20
GMO International Small Companies Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 6.63 | $ | 4.20 | $ | 9.29 | $ | 12.22 | $ | 14.93 | $ | 17.84 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.09 | 0.08 | 0.20 | 0.24 | 0.25 | 0.34 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.13 | )(a) | 2.50 | (4.78 | ) | (0.34 | ) | 2.68 | 3.44 | ||||||||||||||||||
Total from investment operations | (0.04 | ) | 2.58 | (4.58 | ) | (0.10 | ) | 2.93 | 3.78 | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.13 | ) | (0.15 | ) | (0.13 | ) | (0.51 | ) | (0.33 | ) | (0.44 | ) | |||||||||||||||
From net realized gains | — | — | (0.38 | ) | (2.32 | ) | (5.31 | ) | (6.25 | ) | |||||||||||||||||
Total distributions | (0.13 | ) | (0.15 | ) | (0.51 | ) | (2.83 | ) | (5.64 | ) | (6.69 | ) | |||||||||||||||
Net asset value, end of period | $ | 6.46 | $ | 6.63 | $ | 4.20 | $ | 9.29 | $ | 12.22 | $ | 14.93 | |||||||||||||||
Total Return(b) | (0.66 | )%** | 61.64 | % | (51.47 | )% | (2.04 | )% | 23.35 | % | 25.77 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 382,315 | $ | 1,160,294 | $ | 386,816 | $ | 679,536 | $ | 856,471 | $ | 986,602 | |||||||||||||||
Net expenses to average daily net assets | 0.76 | %*(c) | 0.75 | %(c) | 0.75 | %(d) | 0.76 | %(d) | 0.75 | % | 0.75 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 2.57 | %* | 1.17 | % | 2.89 | % | 1.98 | % | 1.79 | % | 2.01 | % | |||||||||||||||
Portfolio turnover rate | 18 | %** | 58 | % | 64 | % | 72 | % | 48 | % | 49 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.12 | %* | 0.09 | % | 0.12 | % | 0.13 | % | 0.09 | % | 0.11 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.04 | $ | 0.02 | $ | 0.01 | $ | 0.04 | $ | 0.03 | $ | 0.07 |
(a) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain/loss for the period due to the timing of purchases and redemptions of Fund shares in relation to the fluctuating market values of the Fund.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(c) The net expense ratio does not include the effect of expense reductions (Note 2).
(d) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions. (Note 2)
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
21
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO International Small Companies Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks high total return. The Fund seeks to achieve its investment objective by outperforming its benchmark, the MSCI EAFE Small Cap Index (Europe, Australasia, and Far East). The Fund typically makes equity investments directly and indirectly (e.g., through the GMO Funds in which the Fund invests, collectively referred to as the "underlying funds" or derivatives) in non-U.S. small companies. Non-U.S. companies are companies tied economically to countries other than the U.S., and include both developed and emerging companies ("Non-U.S. Companies"). Non-U.S. Companies other than (i) the largest 500 companies in developed countries based on full, non-float adjusted market capitalization and (ii) any company in an emerging country with a full, non-float adjusted market capitalization that is greater than or equal to that of the smallest excluded developed country companies, are considered by the Manager to be "small compani es." A company's full, non-float adjusted market capitalization includes all of the company's outstanding equity securities.
Under normal circumstances, the Fund invests directly and indirectly at least 80% of its assets in securities of small companies. For purposes of the Fund's investments, the term "equity investments" refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts.
The Manager relies principally on proprietary quantitative models and also employs fundamental investment techniques to evaluate and select individual equity investments, countries, and currencies. The Manager selects equity investments it believes (i) are undervalued (e.g., equity investments trading at prices below what the Manager believes to be their fundamental value); (ii) have superior fundamentals (e.g., earnings stability); and/or (iii) have shown indications of improving investor sentiment (e.g., positive price movement or upgraded analyst ratings). In selecting countries in which to invest and determining the Fund's currency exposures, the Manager considers many factors, which may include aggregate stock market valuations, global competitiveness, and investor sentiment. The Manager also uses proprietary techniques to adjust the composition of the portfolio for other factors such as position size, country, industry and sector weights, and market capitalization. The factors considered and the models used by the Manager may change over time based on the Manager's assessment of what combination of models and factors are best positioned to achieve the Fund's investment objective.
22
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the-counter ("OTC") derivatives, including options, futures, and swap contracts, (i) as a substitute for direct investment; (ii) in an attempt to reduce investment exposures (which may result in a reduction below zero); (iii) to effect transactions intended as substitutes for securities lending; and/or (iv) in an attempt to adjust elements of its investment and/or foreign currency exposure. The Fund's foreign currency exposure may differ from the currency exposure represented by its equity investments. In addition, the Fund may take active overweighted and underweighted positions in particular currencies relative to its benchmark. In addition, the Fund may lend its portfolio securities.
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
The Fund currently limits subscriptions due to capacity considerations.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the OTC market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or who se values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of August 31, 2010,
23
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
the total value of securities held directly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented less than 0.1% of net assets. The Fund classifies such securities (as defined below) as Level 3. Additionally, because many foreign equity securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on local closing prices and adjustments supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2010, 92.0% of the net assets of the Fund were valued using fair value prices based on those adjustments and are classified as using Level 2 inputs in the table below. See note 4 for a further discussion on valuation of derivative financial instruments.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include: fair value adjustments applied to closing prices of foreign securities due to market events that have occurred since the local market close but before the Fund's daily NAV calculation.
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund used the following fair value techniques on Level 3 investments: With respect to certain securities for which no current market or bid prices were available, the Fund valued those securities at the most recent available market or bid price.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | |||||||||||||||||||
Australia | $ | — | $ | 16,457,174 | $ | — | $ | 16,457,174 | |||||||||||
Austria | — | 2,035,410 | — | 2,035,410 | |||||||||||||||
Belgium | — | 9,554,036 | — | 9,554,036 |
24
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
ASSET VALUATION INPUTS — continued
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Canada | $ | 13,075,158 | $ | — | $ | — | $ | 13,075,158 | |||||||||||
Denmark | — | 3,607,609 | — | 3,607,609 | |||||||||||||||
Finland | — | 9,205,839 | — | 9,205,839 | |||||||||||||||
France | — | 8,936,749 | — | 8,936,749 | |||||||||||||||
Germany | — | 16,665,019 | — | 16,665,019 | |||||||||||||||
Greece | — | 2,237,775 | — | 2,237,775 | |||||||||||||||
Hong Kong | — | 12,154,714 | — | 12,154,714 | |||||||||||||||
Ireland | — | 15,836,564 | — | 15,836,564 | |||||||||||||||
Israel | 258,301 | — | — | 258,301 | |||||||||||||||
Italy | — | 9,954,070 | — | 9,954,070 | |||||||||||||||
Japan | — | 107,230,166 | — | 107,230,166 | |||||||||||||||
Luxembourg | 1,040,185 | — | — | 1,040,185 | |||||||||||||||
Netherlands | 764,391 | 11,479,777 | — | 12,244,168 | |||||||||||||||
Norway | — | 6,069,019 | — | 6,069,019 | |||||||||||||||
Singapore | 779,557 | 16,846,043 | — | 17,625,600 | |||||||||||||||
Sweden | — | 18,145,910 | 8,824 | 18,154,734 | |||||||||||||||
Switzerland | — | 2,216,774 | — | 2,216,774 | |||||||||||||||
United Kingdom | — | 74,458,827 | — | 74,458,827 | |||||||||||||||
TOTAL COMMON STOCKS | 15,917,592 | 343,091,475 | 8,824 | 359,017,891 | |||||||||||||||
Preferred Stocks | |||||||||||||||||||
Germany | — | 7,976,461 | — | 7,976,461 | |||||||||||||||
TOTAL PREFERRED STOCKS | — | 7,976,461 | — | 7,976,461 | |||||||||||||||
Rights and Warrants | |||||||||||||||||||
France | — | 18,937 | — | 18,937 | |||||||||||||||
Singapore | — | 1,125 | — | 1,125 | |||||||||||||||
TOTAL RIGHTS AND WARRANTS | — | 20,062 | — | 20,062 | |||||||||||||||
Short-Term Investments | 9,835,452 | — | — | 9,835,452 | |||||||||||||||
Total Investments | 25,753,044 | 351,087,998 | 8,824 | 376,849,866 |
25
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
ASSET VALUATION INPUTS — continued
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts Foreign Exchange Risk | $ | — | $ | 830,626 | $ | — | $ | 830,626 | |||||||||||
Futures Contracts Equity Risk | — | 411,450 | — | 411,450 | |||||||||||||||
Total Derivatives | — | 1,242,076 | — | 1,242,076 | |||||||||||||||
Total | $ | 25,753,044 | $ | 352,330,074 | $ | 8,824 | $ | 378,091,942 |
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts Foreign Exchange Risk | $ | — | $ | (485,635 | ) | $ | — | $ | (485,635 | ) | |||||||||
Futures Contracts Equity Risk | (164,279 | ) | (499,345 | ) | — | (663,624 | ) | ||||||||||||
Total Derivatives | (164,279 | ) | (984,980 | ) | — | (1,149,259 | ) | ||||||||||||
Total | $ | (164,279 | ) | $ | (984,980 | ) | $ | — | $ | (1,149,259 | ) |
The aggregate net value of the Fund's direct investments in securities using Level 3 inputs was less than 0.1% of total net assets.
26
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2010 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Transfer in to Level 3* | Transfer out of Level 3* | Balances as of August 31, 2010 | ||||||||||||||||||||||||||||
Common Stocks | |||||||||||||||||||||||||||||||||||
Japan | $ | 4,311,461 | $ | (4,755,079 | ) | $ | — | $ | — | $ | 443,618 | $ | — | $ | — | $ | — | ||||||||||||||||||
Sweden | 9,148 | — | — | — | (324 | ) | — | — | 8,824 | ||||||||||||||||||||||||||
Total | $ | 4,320,609 | $ | (4,755,079 | ) | $ | — | $ | — | $ | 443,294 | $ | — | $ | — | $ | 8,824 |
* The Fund recognizes investments and derivatives transferred into Level 3 at the value at the beginnning of the period and transferred out of Level 3 at the value at the end of the period.
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are inclu ded with the net realized and unrealized gain or loss on investment securities.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country's tax treaty with the United States. The foreign withholding rates applicable to a Fund's investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
27
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if paid by the shareholders of the Fund.
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Transaction based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund elected to defer to March 1, 2010 post-October capital losses of $5,354,054.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (16,328,991 | ) | ||||
2/28/2018 | (100,330,406 | ) | |||||
Total | $ | (116,659,397 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 406,344,715 | $ | 30,018,710 | $ | (59,513,559 | ) | $ | (29,494,849 | ) |
28
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which co llection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds.
Brown Brothers Harriman & Co. ("BBH") serves as the Fund's custodian and fund accounting agent. State Street Bank and Trust Company ("State Street") serves as the Fund's transfer agent. BBH's and State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
29
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Purchases and redemptions of Fund shares
For the period ended August 31, 2010, the premium on cash purchases and fee on cash redemptions of Fund shares were each 0.50% of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by a Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase oc curring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions o f Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund's investments.
• Smaller Company Risk — The securities of small companies often are less widely held and trade less frequently and in lesser quantities, and their market prices often fluctuate more, than the securities of companies with larger market capitalizations.
30
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to rec eipt) may expose the Fund to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund's investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund's investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind. These risks are particularly pronounced for the Fund because it makes equity investments in small companies and may make investments in companies tied economically to emerging countries.
Other principal risks of an investment in the Fund include Market Risk — Value Securities (risk that the price of the Fund's investments will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Credit and Counterpar ty Risk (risk of default of a derivatives counterparty or a borrower of the Fund's securities); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
31
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index). The Funds also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default)
32
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be secured by collateral (e.g., foreign currency forwards; see "Currency Risk" above), that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
33
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. During the period ended August 31, 2010, the Fund used forward currency contracts to manage against anticipated currency exchange rate changes and adjust exposure to foreign currencies. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because regular trading on many foreign exchanges closes prior to the close of the NYSE, closing prices for foreign futures contracts on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a
34
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
result, the Fund generally values foreign futures contracts using fair value prices, which are based on adjustments to local closing prices, and supplied by a third party vendor based on that vendor's proprietary models. As of August 31, 2010, futures contracts representing (0.1)% of the net assets of the Fund were valued using fair value prices based on those adjustments and are classified using Level 2 inputs in the table above. During the period ended August 31, 2010, the Fund used futures contracts to adjust exposure to certain securities markets and maintain the diversity and liquidity of the portfolio. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an of fsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
35
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level
36
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. During the period ended August 31, 2010, the Fund held rights and warrants received as a result of a corporate action. Rights and warrants held by the Fun d at the end of the period are listed in the Fund's Schedule of Investments.
37
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair values of derivative instruments on the Statement of Assets and Liabilities as of August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (rights and warrants) | $ | — | $ | — | $ | — | $ | 20,062 | $ | — | $ | 20,062 | |||||||||||||||
Unrealized appreciation on futures contracts* | — | — | — | 411,450 | — | 411,450 | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | 830,626 | — | — | — | 830,626 | |||||||||||||||||||||
Total | $ | — | $ | 830,626 | $ | — | $ | 431,512 | $ | — | $ | 1,262,138 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Unrealized depreciation on futures contracts* | $ | — | $ | — | $ | — | $ | (663,624 | ) | $ | — | $ | (663,624 | ) | |||||||||||||
Unrealized depreciation on forward currency contracts | — | (485,635 | ) | — | — | — | (485,635 | ) | |||||||||||||||||||
Total | $ | — | $ | (485,635 | ) | $ | — | $ | (663,624 | ) | $ | — | $ | (1,149,259 | ) |
The Effect of Derivative Instruments on the Statement of Operations for the period ended August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Futures contracts | $ | — | $ | — | $ | — | $ | (2,068,794 | ) | $ | — | $ | (2,068,794 | ) | |||||||||||||
Forward currency contracts | — | 853,219 | — | — | — | 853,219 | |||||||||||||||||||||
Total | $ | — | $ | 853,219 | $ | — | $ | (2,068,794 | ) | $ | — | $ | (1,215,575 | ) | |||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (rights and warrants) | $ | — | $ | — | $ | — | $ | 2,640 | $ | — | $ | 2,640 | |||||||||||||||
Futures contracts | — | — | — | 2,228,145 | — | 2,228,145 | |||||||||||||||||||||
Forward currency contracts | — | 1,925,451 | — | — | — | 1,925,451 | |||||||||||||||||||||
Total | $ | — | $ | 1,925,451 | $ | — | $ | 2,230,785 | $ | — | $ | 4,156,236 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for
38
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments.
The volume of derivative activity, based on absolute values (forward currency contracts, futures contracts, and rights and warrants) outstanding at each month-end, was as follows for the period ended August 31, 2010:
Forward Currency Contracts | Futures Contracts | Rights/Warrants | |||||||||||||
Average amount outstanding | $ | 374,046,491 | 89,502,749 | 19,349 |
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.60% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.60% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investme nt company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund's Expense Reimbursement Amount. These contractual expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
39
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $8,534 and $3,152, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended August 31, 2010 aggregated $124,963,045 and $869,692,442, respectively.
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, 42.51% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2010, 2.62% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 3.00% of the Fund's shares were held by accounts for which the Manager had investment discretion.
40
GMO International Small Companies Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 2,295,180 | $ | 16,362,222 | 94,444,920 | $ | 574,278,622 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 1,953,845 | 12,948,676 | 3,299,206 | 21,330,532 | |||||||||||||||
Shares repurchased | (119,976,361 | ) | (814,996,760 | ) | (14,875,294 | ) | (99,131,705 | ) | |||||||||||
Purchase premiums | — | 70,902 | — | 2,786,254 | |||||||||||||||
Redemption fees | — | 4,063,632 | — | 392,398 | |||||||||||||||
Net increase (decrease) | (115,727,336 | ) | $ | (781,551,328 | ) | 82,868,832 | $ | 499,656,101 |
41
GMO International Small Companies Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three-, five-, seven- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received
42
GMO International Small Companies Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparis on to the Manager's separate account clients and the expenses and risks borne by the Manager as a result of the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by , for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating
43
GMO International Small Companies Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
44
GMO International Small Companies Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including management fees, shareholder service fees and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.76 | % | $ | 1,000.00 | $ | 993.40 | $ | 3.82 | |||||||||||
2) Hypothetical | 0.76 | % | $ | 1,000.00 | $ | 1,021.37 | $ | 3.87 |
* Expenses are calculated using the Class's annualized net expense ratio for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
45
GMO Quality Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Quality Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 95.3 | % | |||||
Short-Term Investments | 2.7 | ||||||
Mutual Funds | 0.3 | ||||||
Other | 1.7 | ||||||
100.0 | % | ||||||
Country Summary | % of Equity Investments* | ||||||
United States | 86.2 | % | |||||
Switzerland | 5.9 | ||||||
United Kingdom | 3.0 | ||||||
France | 2.7 | ||||||
Netherlands | 0.8 | ||||||
Belgium | 0.7 | ||||||
Japan | 0.7 | ||||||
100.0 | % | ||||||
Industry Group Summary | % of Equity Investments* | ||||||
Pharmaceuticals, Biotechnology & Life Sciences | 23.6 | % | |||||
Software & Services | 20.3 | ||||||
Food, Beverage & Tobacco | 17.2 | ||||||
Energy | 9.0 | ||||||
Technology Hardware & Equipment | 7.5 | ||||||
Food & Staples Retailing | 6.5 | ||||||
Household & Personal Products | 5.9 | ||||||
Health Care Equipment & Services | 5.0 | ||||||
Capital Goods | 1.7 | ||||||
Consumer Durables & Apparel | 1.1 | ||||||
Consumer Services | 1.1 | ||||||
Telecommunication Services | 0.7 | ||||||
Retailing | 0.4 | ||||||
100.0 | % |
* Equity investments may consist of common stocks, preferred stocks and rights and warrants. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
1
GMO Quality Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 95.3% | |||||||||||
Capital Goods — 1.6% | |||||||||||
1,666,200 | 3M Co. | 130,880,010 | |||||||||
3,420 | Lockheed Martin Corp. | 237,759 | |||||||||
1,331,100 | United Technologies Corp. | 86,801,031 | |||||||||
Total Capital Goods | 217,918,800 | ||||||||||
Consumer Durables & Apparel — 1.1% | |||||||||||
2,021,800 | Nike, Inc.-Class B | 141,526,000 | |||||||||
Consumer Services — 1.0% | |||||||||||
1,925,200 | McDonald's Corp. | 140,655,112 | |||||||||
Energy — 8.6% | |||||||||||
11,302,711 | BP Plc | 65,230,683 | |||||||||
3,111,300 | Chevron Corp. | 230,734,008 | |||||||||
8,297,800 | Exxon Mobil Corp. | 490,897,848 | |||||||||
5,815,469 | Royal Dutch Shell Group-Class A | 154,015,936 | |||||||||
5,055,602 | Total SA | 235,158,235 | |||||||||
Total Energy | 1,176,036,710 | ||||||||||
Food & Staples Retailing — 6.3% | |||||||||||
356,200 | Costco Wholesale Corp. | 20,143,110 | |||||||||
676,300 | CVS Caremark Corp. | 18,260,100 | |||||||||
65,200 | Kroger Co. (The) | 1,286,396 | |||||||||
2,324,100 | Sysco Corp. | 63,889,509 | |||||||||
4,492,100 | Walgreen Co. | 120,747,648 | |||||||||
12,509,800 | Wal-Mart Stores, Inc. | 627,241,372 | |||||||||
Total Food & Staples Retailing | 851,568,135 | ||||||||||
Food, Beverage & Tobacco — 16.4% | |||||||||||
6,118,600 | Altria Group, Inc. | 136,567,152 | |||||||||
1,706,725 | Anheuser-Busch InBev NV | 88,400,268 | |||||||||
206,100 | Brown-Forman Corp.-Class B | 12,631,869 |
See accompanying notes to the financial statements.
2
GMO Quality Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Food, Beverage & Tobacco — continued | |||||||||||
496,800 | Campbell Soup Co. | 18,510,768 | |||||||||
10,209,900 | Coca-Cola Co. (The) | 570,937,608 | |||||||||
1,324,400 | General Mills, Inc. | 47,890,304 | |||||||||
367,700 | Hansen Natural Corp. * | 16,561,208 | |||||||||
319,700 | Hershey Co. (The) | 14,856,459 | |||||||||
408,900 | HJ Heinz Co. | 18,907,536 | |||||||||
824,400 | Kellogg Co. | 40,956,192 | |||||||||
1,175,400 | Kraft Foods, Inc.-Class A | 35,203,230 | |||||||||
395,500 | Lorillard, Inc. | 30,061,955 | |||||||||
7,792,762 | Nestle SA | 402,852,767 | |||||||||
6,743,800 | PepsiCo, Inc. | 432,817,084 | |||||||||
4,655,600 | Philip Morris International, Inc. | 239,484,064 | |||||||||
324,200 | Reynolds American, Inc. | 17,681,868 | |||||||||
3,911,978 | Unilever NV | 104,393,293 | |||||||||
Total Food, Beverage & Tobacco | 2,228,713,625 | ||||||||||
Health Care Equipment & Services — 4.7% | |||||||||||
1,722,700 | Baxter International, Inc. | 73,318,112 | |||||||||
2,624,380 | Express Scripts, Inc. * | 111,798,588 | |||||||||
294,200 | Henry Schein, Inc. * | 15,533,760 | |||||||||
311,100 | Laboratory Corp. of America Holdings * | 22,592,082 | |||||||||
4,534,030 | Medtronic, Inc. | 142,731,264 | |||||||||
1,077,500 | Quest Diagnostics, Inc. | 46,871,250 | |||||||||
4,400 | Stryker Corp. | 190,036 | |||||||||
4,640,294 | UnitedHealth Group, Inc. | 147,190,126 | |||||||||
753,700 | WellPoint, Inc. * | 37,443,816 | |||||||||
1,002,200 | Zimmer Holdings, Inc. * | 47,273,774 | |||||||||
Total Health Care Equipment & Services | 644,942,808 | ||||||||||
Household & Personal Products — 5.6% | |||||||||||
854,500 | Avon Products, Inc. | 24,865,950 | |||||||||
293,000 | Church & Dwight Co., Inc. | 17,940,390 | |||||||||
392,100 | Clorox Co. | 25,415,922 | |||||||||
2,285,900 | Colgate-Palmolive Co. | 168,790,856 |
See accompanying notes to the financial statements.
3
GMO Quality Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Household & Personal Products — continued | |||||||||||
300,500 | Estee Lauder Cos. (The), Inc.-Class A | 16,849,035 | |||||||||
886,300 | Kimberly-Clark Corp. | 57,077,720 | |||||||||
7,565,300 | Procter & Gamble Co. (The) | 451,421,451 | |||||||||
Total Household & Personal Products | 762,361,324 | ||||||||||
Pharmaceuticals, Biotechnology & Life Sciences — 22.5% | |||||||||||
6,269,805 | Abbott Laboratories | 309,352,179 | |||||||||
3,350,360 | Amgen, Inc. * | 171,002,374 | |||||||||
2,245,800 | Bristol-Myers Squibb Co. | 58,570,464 | |||||||||
189,100 | Covance, Inc. * | 7,172,563 | |||||||||
2,470,800 | Gilead Sciences, Inc. * | 78,719,688 | |||||||||
9,291,694 | GlaxoSmithKline Plc | 173,396,010 | |||||||||
12,731,700 | Johnson & Johnson | 725,961,534 | |||||||||
11,196,500 | Merck & Co., Inc. | 393,668,940 | |||||||||
3,760,881 | Novartis AG (Registered) | 197,151,683 | |||||||||
39,690,648 | Pfizer, Inc. | 632,272,023 | |||||||||
1,250,635 | Roche Holding AG | 169,648,073 | |||||||||
1,892,692 | Sanofi-Aventis | 108,349,595 | |||||||||
1,011,500 | Thermo Fisher Scientific, Inc. * | 42,604,380 | |||||||||
Total Pharmaceuticals, Biotechnology & Life Sciences | 3,067,869,506 | ||||||||||
Retailing — 0.4% | |||||||||||
65,740 | AutoZone, Inc. * | 13,790,937 | |||||||||
1,417,400 | Home Depot, Inc. | 39,417,894 | |||||||||
Total Retailing | 53,208,831 | ||||||||||
Software & Services — 19.3% | |||||||||||
2,064,073 | eBay, Inc. * | 47,969,057 | |||||||||
939,710 | Google, Inc.-Class A * | 422,888,294 | |||||||||
2,290,040 | International Business Machines Corp. | 282,201,629 | |||||||||
640,850 | MasterCard, Inc.-Class A | 127,119,006 | |||||||||
32,286,900 | Microsoft Corp. | 758,096,412 | |||||||||
35,068,300 | Oracle Corp. | 767,294,404 | |||||||||
3,276,000 | Visa, Inc.-Class A | 225,978,480 | |||||||||
Total Software & Services | 2,631,547,282 |
See accompanying notes to the financial statements.
4
GMO Quality Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Technology Hardware & Equipment — 7.1% | |||||||||||
1,272,960 | Apple, Inc. * | 309,800,275 | |||||||||
16,794,900 | Cisco Systems, Inc. * | 336,737,745 | |||||||||
2,425,500 | Hewlett-Packard Co. | 93,333,240 | |||||||||
6,055,900 | Qualcomm, Inc. | 232,001,529 | |||||||||
Total Technology Hardware & Equipment | 971,872,789 | ||||||||||
Telecommunication Services — 0.7% | |||||||||||
59,721 | Frontier Communications Corp. | 461,643 | |||||||||
56,203 | NTT Docomo Inc | 95,237,351 | |||||||||
Total Telecommunication Services | 95,698,994 | ||||||||||
TOTAL COMMON STOCKS (COST $12,911,187,446) | 12,983,919,916 | ||||||||||
MUTUAL FUNDS — 0.3% | |||||||||||
Affiliated Issuers — 0.3% | |||||||||||
1,406,282 | GMO U.S. Treasury Fund | 35,157,039 | |||||||||
TOTAL MUTUAL FUNDS (COST $35,163,133) | 35,157,039 | ||||||||||
SHORT-TERM INVESTMENTS — 2.7% | |||||||||||
Money Market Funds — 0.7% | |||||||||||
25,563,974 | State Street Institutional Treasury Plus Money Market Fund-Institutional Class | 25,563,974 | |||||||||
71,015,169 | State Street Institutional Treasury Money Market Fund-Institutional Class | 71,015,169 | |||||||||
Total Money Market Funds (COST $96,579,143) | 96,579,143 |
See accompanying notes to the financial statements.
5
GMO Quality Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
U.S. Government — 2.0% | |||||||||||
5,000,000 | U.S. Treasury Bill, 0.19%, due 05/05/11 (a) | 4,993,680 | |||||||||
140,000,000 | U.S. Treasury Bill, 0.15%, due 01/13/11 (a) | 139,920,760 | |||||||||
129,000,000 | U.S. Treasury Bill, 0.13%, due 09/16/10 (a) | 128,992,493 | |||||||||
Total U.S. Government (COST $273,820,271) | 273,906,933 | ||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $370,399,414) | 370,486,076 | ||||||||||
TOTAL INVESTMENTS — 98.3% (Cost $13,316,749,993) | 13,389,563,031 | ||||||||||
Other Assets and Liabilities (net) — 1.7% | 228,825,558 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 13,618,388,589 |
Notes to Schedule of Investments:
* Non-income producing security.
(a) Rate shown represents yield-to-maturity.
See accompanying notes to the financial statements.
6
GMO Quality Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $13,281,586,860) (Note 2) | $ | 13,354,405,992 | |||||
Investments in affiliated issuers, at value (cost $35,163,133) (Notes 2 and 10) | 35,157,039 | ||||||
Foreign currency, at value (cost $39,291) (Note 2) | 39,655 | ||||||
Cash | 148,908,178 | ||||||
Receivable for Fund shares sold | 44,936,500 | ||||||
Dividends and interest receivable | 40,914,232 | ||||||
Foreign taxes receivable | 5,550,639 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 215,047 | ||||||
Total assets | 13,630,127,282 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 3,640 | ||||||
Payable for Fund shares repurchased | 6,035,392 | ||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 3,913,219 | ||||||
Shareholder service fee | 1,054,165 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 26,434 | ||||||
Accrued expenses | 705,843 | ||||||
Total liabilities | 11,738,693 | ||||||
Net assets | $ | 13,618,388,589 |
See accompanying notes to the financial statements.
7
GMO Quality Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited) — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 14,993,528,676 | |||||
Accumulated undistributed net investment income | 43,224,928 | ||||||
Accumulated net realized loss | (1,491,348,035 | ) | |||||
Net unrealized appreciation | 72,983,020 | ||||||
$ | 13,618,388,589 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 4,075,117,800 | |||||
Class IV shares | $ | 1,228,363,607 | |||||
Class V shares | $ | 459,640,132 | |||||
Class VI shares | $ | 7,855,267,050 | |||||
Shares outstanding: | |||||||
Class III | 231,926,933 | ||||||
Class IV | 69,854,759 | ||||||
Class V | 26,155,197 | ||||||
Class VI | 446,940,002 | ||||||
Net asset value per share: | |||||||
Class III | $ | 17.57 | |||||
Class IV | $ | 17.58 | |||||
Class V | $ | 17.57 | |||||
Class VI | $ | 17.58 |
See accompanying notes to the financial statements.
8
GMO Quality Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $6,683,433) | $ | 182,592,231 | |||||
Interest | 515,300 | ||||||
Dividends from affiliated issuers (Note 10) | 6,029 | ||||||
Total investment income | 183,113,560 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 23,837,607 | ||||||
Shareholder service fee – Class III (Note 5) | 3,133,521 | ||||||
Shareholder service fee – Class IV (Note 5) | 672,391 | ||||||
Shareholder service fee – Class V (Note 5) | 212,317 | ||||||
Shareholder service fee – Class VI (Note 5) | 2,334,390 | ||||||
Custodian, fund accounting agent and transfer agent fees | 777,768 | ||||||
Legal fees | 359,720 | ||||||
Trustees fees and related expenses (Note 5) | 158,711 | ||||||
Audit and tax fees | 28,704 | ||||||
Registration fees | 22,080 | ||||||
Miscellaneous | 123,740 | ||||||
Total expenses | 31,660,949 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (1,256,628 | ) | |||||
Expense reductions (Note 2) | (95,955 | ) | |||||
Net expenses | 30,308,366 | ||||||
Net investment income (loss) | 152,805,194 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | (68,190,620 | ) | |||||
Realized gains distributions from affiliated issuers (Note 10) | 2,105 | ||||||
Closed futures contracts | 5,961,804 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (227,774 | ) | |||||
Net realized gain (loss) | (62,454,485 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | (1,004,431,772 | ) | |||||
Investments in affiliated issuers | (6,094 | ) | |||||
Open futures contracts | (3,683,478 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 334,043 | ||||||
Net unrealized gain (loss) | (1,007,787,301 | ) | |||||
Net realized and unrealized gain (loss) | (1,070,241,786 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (917,436,592 | ) |
See accompanying notes to the financial statements.
9
GMO Quality Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 152,805,194 | $ | 239,488,127 | |||||||
Net realized gain (loss) | (62,454,485 | ) | (601,565,636 | ) | |||||||
Change in net unrealized appreciation (depreciation) | (1,007,787,301 | ) | 3,858,807,964 | ||||||||
Net increase (decrease) in net assets from operations | (917,436,592 | ) | 3,496,730,455 | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (43,690,838 | ) | (59,989,429 | ) | |||||||
Class IV | (13,106,179 | ) | (20,318,942 | ) | |||||||
Class V | (5,331,232 | ) | (15,664,829 | ) | |||||||
Class VI | (91,079,278 | ) | (144,439,979 | ) | |||||||
Total distributions from net investment income | (153,207,527 | ) | (240,413,179 | ) | |||||||
Net share transactions (Note 9): | |||||||||||
Class III | 257,333,598 | 1,362,907,650 | |||||||||
Class IV | 214,839,021 | 54,048,273 | |||||||||
Class V | (56,663,002 | ) | (308,484,902 | ) | |||||||
Class VI | (685,569,874 | ) | 1,942,824,568 | ||||||||
Increase (decrease) in net assets resulting from net share transactions | (270,060,257 | ) | 3,051,295,589 | ||||||||
Total increase (decrease) in net assets | (1,340,704,376 | ) | 6,307,612,865 | ||||||||
Net assets: | |||||||||||
Beginning of period | 14,959,092,965 | 8,651,480,100 | |||||||||
End of period (including accumulated undistributed net investment income of $43,224,928 and $43,627,261, respectively) | $ | 13,618,388,589 | $ | 14,959,092,965 |
See accompanying notes to the financial statements.
10
GMO Quality Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 18.99 | $ | 14.17 | $ | 20.56 | $ | 21.78 | $ | 20.81 | $ | 20.03 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.19 | 0.33 | 0.37 | 0.39 | 0.35 | 0.32 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (1.42 | ) | 4.83 | (6.30 | ) | (0.70 | ) | 1.12 | 0.72 | ||||||||||||||||||
Total from investment operations | (1.23 | ) | 5.16 | (5.93 | ) | (0.31 | ) | 1.47 | 1.04 | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.19 | ) | (0.34 | ) | (0.34 | ) | (0.36 | ) | (0.34 | ) | (0.22 | ) | |||||||||||||||
From net realized gains | — | — | (0.12 | ) | (0.55 | ) | (0.16 | ) | (0.04 | ) | |||||||||||||||||
Total distributions | (0.19 | ) | (0.34 | ) | (0.46 | ) | (0.91 | ) | (0.50 | ) | (0.26 | ) | |||||||||||||||
Net asset value, end of period | $ | 17.57 | $ | 18.99 | $ | 14.17 | $ | 20.56 | $ | 21.78 | $ | 20.81 | |||||||||||||||
Total Return(a) | (6.49 | )%** | 36.73 | % | (29.37 | )% | (1.76 | )% | 7.18 | % | 5.28 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 4,075,118 | $ | 4,119,119 | $ | 1,952,579 | $ | 2,003,758 | $ | 1,575,300 | $ | 1,108,088 | |||||||||||||||
Net expenses to average daily net assets | 0.48 | %(b)(c)* | 0.48 | %(b) | 0.48 | %(b) | 0.48 | %(b) | 0.48 | % | 0.48 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 2.04 | %* | 1.88 | % | 2.03 | % | 1.74 | % | 1.64 | % | 1.58 | % | |||||||||||||||
Portfolio turnover rate | 18 | %** | 28 | % | 36 | % | 46 | % | 50 | % | 52 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | %* | 0.02 | % | 0.02 | % | 0.02 | % | 0.02 | % | 0.02 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
11
GMO Quality Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 19.01 | $ | 14.19 | $ | 20.57 | $ | 21.80 | $ | 20.82 | $ | 20.03 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.20 | 0.34 | 0.39 | 0.40 | 0.37 | 0.32 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (1.43 | ) | 4.83 | (6.30 | ) | (0.71 | ) | 1.11 | 0.74 | ||||||||||||||||||
Total from investment operations | (1.23 | ) | 5.17 | (5.91 | ) | (0.31 | ) | 1.48 | 1.06 | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.20 | ) | (0.35 | ) | (0.35 | ) | (0.37 | ) | (0.34 | ) | (0.23 | ) | |||||||||||||||
From net realized gains | — | — | (0.12 | ) | (0.55 | ) | (0.16 | ) | (0.04 | ) | |||||||||||||||||
Total distributions | (0.20 | ) | (0.35 | ) | (0.47 | ) | (0.92 | ) | (0.50 | ) | (0.27 | ) | |||||||||||||||
Net asset value, end of period | $ | 17.58 | $ | 19.01 | $ | 14.19 | $ | 20.57 | $ | 21.80 | $ | 20.82 | |||||||||||||||
Total Return(a) | (6.52 | )%** | 36.73 | % | (29.27 | )% | (1.77 | )% | 7.19 | % | 5.37 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,228,364 | $ | 1,132,006 | $ | 787,276 | $ | 432,046 | $ | 800,458 | $ | 2,005,417 | |||||||||||||||
Net expenses to average daily net assets | 0.44 | %(b)(c)* | 0.44 | %(b) | 0.44 | %(b) | 0.44 | %(b) | 0.44 | % | 0.44 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 2.11 | %* | 1.97 | % | 2.11 | % | 1.78 | % | 1.79 | % | 1.62 | % | |||||||||||||||
Portfolio turnover rate | 18 | %** | 28 | % | 36 | % | 46 | % | 50 | % | 52 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | %* | 0.02 | % | 0.02 | % | 0.02 | % | 0.02 | % | 0.02 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
12
GMO Quality Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class V share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007(a) | |||||||||||||||||||
Net asset value, beginning of period | $ | 19.00 | $ | 14.17 | $ | 20.56 | $ | 21.79 | $ | 21.91 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)† | 0.20 | 0.34 | 0.39 | 0.41 | 0.07 | ||||||||||||||||||
Net realized and unrealized gain (loss) | (1.43 | ) | 4.84 | (6.30 | ) | (0.72 | ) | 0.04 | |||||||||||||||
Total from investment operations | (1.23 | ) | 5.18 | (5.91 | ) | (0.31 | ) | 0.11 | |||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.20 | ) | (0.35 | ) | (0.36 | ) | (0.37 | ) | (0.09 | ) | |||||||||||||
From net realized gains | — | — | (0.12 | ) | (0.55 | ) | (0.14 | ) | |||||||||||||||
Total distributions | (0.20 | ) | (0.35 | ) | (0.48 | ) | (0.92 | ) | (0.23 | ) | |||||||||||||
Net asset value, end of period | $ | 17.57 | $ | 19.00 | $ | 14.17 | $ | 20.56 | $ | 21.79 | |||||||||||||
Total Return(b) | (6.52 | )%** | 36.87 | % | (29.31 | )% | (1.75 | )% | 0.49 | %** | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 459,640 | $ | 551,272 | $ | 637,834 | $ | 663,616 | $ | 259,430 | |||||||||||||
Net expenses to average daily net assets | 0.42 | %(c)(d)* | 0.42 | %(c) | 0.42 | %(c) | 0.42 | %(c) | 0.42 | %* | |||||||||||||
Net investment income (loss) to average daily net assets | 2.11 | %* | 1.98 | % | 2.11 | % | 1.83 | % | 1.40 | %* | |||||||||||||
Portfolio turnover rate | 18 | %** | 28 | % | 36 | % | 46 | % | 50 | %†† | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | %* | 0.02 | % | 0.02 | % | 0.02 | % | 0.02 | %* |
(a) Period from December 8, 2006 (commencement of operations) through February 28, 2007.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(c) The net expense ratio does not include the effect of expense reductions (Note 2).
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the year ended February 28, 2007.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
13
GMO Quality Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class VI share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007(a) | |||||||||||||||||||
Net asset value, beginning of period | $ | 19.00 | $ | 14.18 | $ | 20.57 | $ | 21.79 | $ | 21.91 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)† | 0.20 | 0.35 | 0.40 | 0.41 | 0.07 | ||||||||||||||||||
Net realized and unrealized gain (loss) | (1.42 | ) | 4.82 | (6.31 | ) | (0.70 | ) | 0.04 | |||||||||||||||
Total from investment operations | (1.22 | ) | 5.17 | (5.91 | ) | (0.29 | ) | 0.11 | |||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.20 | ) | (0.35 | ) | (0.36 | ) | (0.38 | ) | (0.09 | ) | |||||||||||||
From net realized gains | — | — | (0.12 | ) | (0.55 | ) | (0.14 | ) | |||||||||||||||
Total distributions | (0.20 | ) | (0.35 | ) | (0.48 | ) | (0.93 | ) | (0.23 | ) | |||||||||||||
Net asset value, end of period | $ | 17.58 | $ | 19.00 | $ | 14.18 | $ | 20.57 | $ | 21.79 | |||||||||||||
Total Return(b) | (6.45 | )%** | 36.81 | % | (29.28 | )% | (1.67 | )% | 0.49 | %** | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 7,855,267 | $ | 9,156,696 | $ | 5,273,791 | $ | 5,237,363 | $ | 2,588,116 | |||||||||||||
Net expenses to average daily net assets | 0.39 | %(c)(d)* | 0.39 | %(c) | 0.39 | %(c) | 0.39 | %(c) | 0.39 | %* | |||||||||||||
Net investment income (loss) to average daily net assets | 2.15 | %* | 2.00 | % | 2.16 | % | 1.84 | % | 1.43 | %* | |||||||||||||
Portfolio turnover rate | 18 | %** | 28 | % | 36 | % | 46 | % | 50 | %†† | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.02 | %* | 0.02 | % | 0.02 | % | 0.02 | % | 0.02 | %* |
(a) Period from December 8, 2006 (commencement of operations) through February 28, 2007.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(c) The net expense ratio does not include the effect of expense reductions (Note 2).
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the year ended February 28, 2007.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
14
GMO Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO Quality Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks total return. The Fund seeks to achieve its investment objective through investment in equities the Manager believes to be of high quality. The Fund is permitted to make equity investments directly and indirectly (e.g., through the GMO Funds in which the Fund invests, collectively referred to as the "underlying funds" or derivatives) in companies tied economically to any country in the world, including emerging countries. The term "equity investments" refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts.
The Manager relies principally on proprietary quantitative models and fundamental investment analysis to evaluate a company's quality based on several factors, including, but not limited to, expected earnings volatility (as measured by the volatility of profitability), profits (return on equity), and operational and financial leverage (fixed operating costs and total outstanding debt, each in relation to equity and revenues). The Manager selects equity investments it believes are undervalued (e.g., equity investments trading at prices below what the Manager believes to be their fundamental value) and/or equity investments it believes have improving fundamentals. The Manager also uses proprietary techniques to adjust the Fund's portfolio for other factors such as position size, industry and sector weights, and market capitalization. The factors considered and models used by the Manager may change over time based on the Manager's assessment of what combination of models and factors are best positioned to achieve the Fund's investment objective.
The Fund may hold fewer than 100 stocks. The Fund does not seek to control risk relative to the S&P 500 Index, MSCI ACWI (All Country World Index) Index, or any other securities market index or benchmark. The Fund reserves the right to make tactical allocations of up to 20% of its net assets to investments in cash and high quality debt investments. To the extent the Fund takes temporary defensive positions or holds cash, cash equivalents, or high quality debt investments on a temporary basis, the Fund may not achieve its investment objective.
In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the-counter ("OTC") derivatives, including options, futures, and swap contracts, (i) as a substitute for direct investment; (ii) in an attempt to reduce investment exposures (which may
15
GMO Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
result in a reduction below zero); (iii) to effect transactions intended as substitutes for securities lending; and/or (iv) in an attempt to adjust elements of its investment and/or foreign currency exposure. In addition, the Fund may lend its portfolio securities.
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund.
Throughout the period ended August 31, 2010, the Fund had four classes of shares outstanding: Class III, Class IV, Class V and Class VI. Each class of shares bears a different shareholder service fee.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the OTC market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or who se values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. Additionally, because many foreign equity securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on local closing prices and adjustments supplied by a third party vendor using that v endor's proprietary models. As of
16
GMO Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
August 31, 2010, 13.2% of the net assets of the Fund were valued using fair value prices based on those adjustments and are classified as using Level 2 inputs in the table below. See note 4 for a further discussion on valuation of derivative financial instruments.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include: fair value adjustments applied to closing prices of foreign securities due to market events that have occurred since the local market close but before the Fund's daily NAV calculation.
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | |||||||||||||||||||
Belgium | $ | — | $ | 88,400,268 | $ | — | $ | 88,400,268 | |||||||||||
France | — | 343,507,830 | — | 343,507,830 | |||||||||||||||
Japan | — | 95,237,351 | — | 95,237,351 | |||||||||||||||
Netherlands | — | 104,393,293 | — | 104,393,293 | |||||||||||||||
Switzerland | — | 769,652,523 | — | 769,652,523 | |||||||||||||||
United Kingdom | — | 392,642,629 | — | 392,642,629 | |||||||||||||||
United States | 11,190,086,022 | — | — | 11,190,086,022 | |||||||||||||||
TOTAL COMMON STOCKS | 11,190,086,022 | 1,793,833,894 | — | 12,983,919,916 | |||||||||||||||
Mutual Funds | 35,157,039 | — | — | 35,157,039 | |||||||||||||||
Short-Term Investments | 241,493,583 | 128,992,493 | — | 370,486,076 | |||||||||||||||
Total Investments | 11,466,736,644 | 1,922,826,387 | — | 13,389,563,031 | |||||||||||||||
Total | $ | 11,466,736,644 | $ | 1,922,826,387 | $ | — | $ | 13,389,563,031 |
17
GMO Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements.
The Fund held no investments or other financial instruments at either August 31, 2010 or February 28, 2010, whose fair value was determined using Level 3 inputs.
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are inclu ded with the net realized and unrealized gain or loss on investment securities.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country's tax treaty with the United States. The foreign withholding rates applicable to a Fund's investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.
The Fund's policy is to declare and pay distributions from net investment income, if any, quarterly, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Transaction based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
18
GMO Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund elected to defer to March 1, 2010 post-October capital losses of $1,393,102.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (288,464,155 | ) | ||||
2/28/2018 | (768,120,457 | ) | |||||
Total | $ | (1,056,584,612 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 13,734,987,922 | $ | 179,986,858 | $ | (525,411,749 | ) | $ | (345,424,891 | ) |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in
19
GMO Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact its operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which co llection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. Investment income, common expenses and realized and unrealized gains and losses are allocated among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class's operations. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds (See Note 5).
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not
20
GMO Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Declines in stock market prices generally are likely to reduce the market value of the Fund's investments.
• Market Risk — Value Securities — The Fund purchases some equity investments at prices below what the Manager believes to be their fundamental value. The Fund runs the risk that the prices of these investments will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value.
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to rec eipt) may expose the Fund to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund's investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund's investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
• Focused Investment Risk — Focusing investments in a limited number of companies or in industries with high positive correlations to one another creates additional risk. This risk is particularly pronounced for the Fund, which invests its assets in the securities of a limited number of issuers, and a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund invested in the securities of a larger number of issuers.
Other principal risks of an investment in the Fund include Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk);
21
GMO Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund's securities); Market Risk — Growth Securities (greater price fluctuations resulting from dependence on future earnings expectations); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero).
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, indices and markets without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index). In addition, the Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
22
GMO Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedin gs. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be secured by collateral (e.g., foreign currency forwards; see "Currency Risk" above), that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value.
23
GMO Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. The Fund had no forward currency contracts outstanding at the end of the period.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able
24
GMO Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
to enter into a closing transaction due to an illiquid market. Because regular trading on many foreign exchanges closes prior to the close of the NYSE, closing prices for foreign futures contracts on those exchanges do not reflect events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures contracts using fair value prices, which are based on adjustments to local closing prices, and supplied by a third party vendor based on that vendor's proprietary models. During the period ended August 31, 2010, the Fund used futures contracts to adjust exposure to certain securities markets. The Fund had no futures contracts outstanding at the end of the period.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an of fsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
25
GMO Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying
26
GMO Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the stri ke price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
27
GMO Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
The Effect of Derivative Instruments on the Statement of Operations for the Period Ended August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Futures contracts | $ | — | $ | — | $ | — | $ | 5,961,804 | $ | — | $ | 5,961,804 | |||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 5,961,804 | $ | — | $ | 5,961,804 | |||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Futures contracts | $ | — | $ | — | $ | — | $ | (3,683,478 | ) | $ | — | $ | (3,683,478 | ) | |||||||||||||
Total | $ | — | $ | — | $ | — | $ | (3,683,478 | ) | $ | — | $ | (3,683,478 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
The volume of derivative activity, based on absolute values (futures contracts) outstanding at each month-end, was as follows for the period ended August 31, 2010:
Futures Contracts | |||||||
Average amount outstanding | $ | 79,849,139 |
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets of each class at the annual rate of 0.15% for Class III shares, 0.105% for Class IV shares, 0.085% for Class V shares and 0.055% for Class VI shares.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.33% of the Fund's average daily net assets (the "Expense Reimbursement
28
GMO Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition to the contractual expense reimbursement described above, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund's Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $158,711 and $55,384, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Total Indirect Expenses | |||||||||
< 0.001% | 0.000 | % | < 0.001% |
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended August 31, 2010 aggregated $2,565,254,975 and $2,448,376,060, respectively.
29
GMO Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, 14.50% of the outstanding shares of the Fund were held by one shareholder. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2010, 0.38% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 49.33% of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 45,762,283 | $ | 845,715,191 | 116,087,050 | $ | 2,035,385,872 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 1,937,716 | 35,372,228 | 2,495,465 | 42,683,158 | |||||||||||||||
Shares repurchased | (32,625,967 | ) | (623,753,821 | ) | (39,478,429 | ) | (715,161,380 | ) | |||||||||||
Net increase (decrease) | 15,074,032 | $ | 257,333,598 | 79,104,086 | $ | 1,362,907,650 |
30
GMO Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 22,528,252 | $ | 443,384,683 | 44,492,727 | $ | 807,256,064 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 359,203 | 6,514,294 | 740,360 | 12,567,875 | |||||||||||||||
Shares repurchased | (12,582,486 | ) | (235,059,956 | ) | (41,182,732 | ) | (765,775,666 | ) | |||||||||||
Net increase (decrease) | 10,304,969 | $ | 214,839,021 | 4,050,355 | $ | 54,048,273 | |||||||||||||
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class V: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 693,310 | $ | 12,775,624 | 30,547,955 | $ | 534,053,652 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 259,588 | 4,761,374 | 934,051 | 15,664,829 | |||||||||||||||
Shares repurchased | (3,817,401 | ) | (74,200,000 | ) | (47,461,206 | ) | (858,203,383 | ) | |||||||||||
Net increase (decrease) | (2,864,503 | ) | $ | (56,663,002 | ) | (15,979,200 | ) | $ | (308,484,902 | ) | |||||||||
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class VI: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 35,853,079 | $ | 645,519,486 | 164,246,691 | $ | 2,819,414,264 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 4,733,094 | 86,753,154 | 8,104,048 | 138,203,820 | |||||||||||||||
Shares repurchased | (75,584,325 | ) | (1,417,842,514 | ) | (62,414,874 | ) | (1,014,793,516 | ) | |||||||||||
Net increase (decrease) | (34,998,152 | ) | $ | (685,569,874 | ) | 109,935,865 | $ | 1,942,824,568 |
31
GMO Quality Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
10. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO U.S. Treasury Fund | $ | — | $ | 35,163,133 | $ | — | $ | 6,029 | $ | 2,105 | $ | 35,157,039 | |||||||||||||||
Totals | $ | — | $ | 35,163,133 | $ | — | $ | 6,029 | $ | 2,105 | $ | 35,157,039 |
32
GMO Quality Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of a composite of accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three- and five-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications and experience of the
33
GMO Quality Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparis on to the Manager's separate account clients and the expenses and risks borne by the Manager as a result of the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by , for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating
34
GMO Quality Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
35
GMO Quality Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
36
GMO Quality Fund
(A Series of GMO Trust)
Fund Expenses — (Continued)
August 31, 2010 (Unaudited)
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1 | ) Actual | 0.48 | % | $ | 1,000.00 | $ | 935.10 | $ | 2.34 | ||||||||||
2 | ) Hypothetical | 0.48 | % | $ | 1,000.00 | $ | 1,022.79 | $ | 2.45 | ||||||||||
Class IV | |||||||||||||||||||
1 | ) Actual | 0.44 | % | $ | 1,000.00 | $ | 934.80 | $ | 2.15 | ||||||||||
2 | ) Hypothetical | 0.44 | % | $ | 1,000.00 | $ | 1,022.99 | $ | 2.24 | ||||||||||
Class V | |||||||||||||||||||
1 | ) Actual | 0.42 | % | $ | 1,000.00 | $ | 934.80 | $ | 2.05 | ||||||||||
2 | ) Hypothetical | 0.42 | % | $ | 1,000.00 | $ | 1,023.09 | $ | 2.14 | ||||||||||
Class VI | |||||||||||||||||||
1 | ) Actual | 0.39 | % | $ | 1,000.00 | $ | 935.50 | $ | 1.90 | ||||||||||
2 | ) Hypothetical | 0.39 | % | $ | 1,000.00 | $ | 1,023.24 | $ | 1.99 |
* Expenses are calculated using each Class's annualized net expense ratio (including indirect expense incurred) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
37
GMO Real Estate Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Real Estate Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 98.7 | % | |||||
Mutual Funds | 1.0 | ||||||
Short-Term Investments | 0.5 | ||||||
Other | (0.2 | ) | |||||
100.0 | % | ||||||
Industry Summary | % of REIT Investments | ||||||
Specialized | 28.0 | % | |||||
Retail | 25.7 | ||||||
Residential | 16.9 | ||||||
Office | 16.7 | ||||||
Diversified | 8.3 | ||||||
Industrial | 4.4 | ||||||
100.0 | % |
1
GMO Real Estate Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
REAL ESTATE INVESTMENTS — 98.7% | |||||||||||||||
REAL ESTATE INVESTMENT TRUSTS — 98.7% | |||||||||||||||
Diversified — 8.2% | |||||||||||||||
2,500 | CapLease, Inc. | 12,850 | |||||||||||||
3,200 | Colonial Properties Trust | 50,752 | |||||||||||||
800 | Investors Real Estate Trust | 6,560 | |||||||||||||
4,600 | Liberty Property Trust | 139,702 | |||||||||||||
700 | PS Business Parks, Inc. | 39,389 | |||||||||||||
9,546 | Vornado Realty Trust | 773,799 | |||||||||||||
900 | Washington Real Estate Investment Trust | 27,576 | |||||||||||||
1,300 | Winthrop Realty Trust | 17,810 | |||||||||||||
Total Diversified | 1,068,438 | ||||||||||||||
Industrial — 4.4% | |||||||||||||||
8,200 | AMB Property Corp. | 195,078 | |||||||||||||
2,800 | DCT Industrial Trust, Inc. | 12,964 | |||||||||||||
2,400 | DuPont Fabros Technology, Inc. | 59,304 | |||||||||||||
1,500 | EastGroup Properties, Inc. | 52,875 | |||||||||||||
2,000 | First Industrial Realty Trust, Inc. * | 8,500 | |||||||||||||
22,538 | ProLogis | 244,537 | |||||||||||||
Total Industrial | 573,258 | ||||||||||||||
Office — 16.5% | |||||||||||||||
3,170 | Alexandria Real Estate Equities, Inc. | 219,903 | |||||||||||||
7,200 | BioMed Realty Trust, Inc. | 123,048 | |||||||||||||
8,400 | Boston Properties, Inc. | 683,760 | |||||||||||||
4,289 | Brandywine Realty Trust | 47,136 | |||||||||||||
4,225 | CommonWealth REIT | 101,907 | |||||||||||||
1,000 | Corporate Office Properties Trust | 36,100 | |||||||||||||
3,300 | Digital Realty Trust, Inc. | 195,591 | |||||||||||||
4,800 | Douglas Emmett, Inc. | 77,376 | |||||||||||||
2,200 | Duke Realty Corp. | 24,662 | |||||||||||||
2,900 | Franklin Street Properties Corp. | 34,017 | |||||||||||||
1,200 | Government Properties Income Trust | 30,804 | |||||||||||||
2,600 | Highwoods Properties, Inc. | 81,328 |
See accompanying notes to the financial statements.
2
GMO Real Estate Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Office — continued | |||||||||||||||
2,600 | Kilroy Realty Corp. | 80,886 | |||||||||||||
4,608 | Lexington Realty Trust | 30,735 | |||||||||||||
3,900 | Mack-Cali Realty Corp. | 120,315 | |||||||||||||
4,523 | SL Green Realty Corp. | 272,647 | |||||||||||||
Total Office | 2,160,215 | ||||||||||||||
Residential — 16.6% | |||||||||||||||
800 | American Campus Communities, Inc. | 23,832 | |||||||||||||
5,886 | Apartment Investment & Management Co.-Class A | 120,310 | |||||||||||||
5,283 | AvalonBay Communities, Inc. | 555,877 | |||||||||||||
4,000 | BRE Properties, Inc. | 163,520 | |||||||||||||
3,200 | Camden Property Trust | 146,432 | |||||||||||||
3,100 | Education Realty Trust, Inc. | 21,204 | |||||||||||||
1,000 | Equity Lifestyle Properties, Inc. | 51,730 | |||||||||||||
13,400 | Equity Residential | 614,122 | |||||||||||||
890 | Essex Property Trust, Inc. | 94,135 | |||||||||||||
1,200 | Home Properties, Inc. | 60,600 | |||||||||||||
1,600 | Mid-America Apartment Communities, Inc. | 90,352 | |||||||||||||
2,500 | Post Properties, Inc. | 63,500 | |||||||||||||
1,000 | Sun Communities, Inc. | 28,610 | |||||||||||||
6,781 | UDR, Inc. | 139,553 | |||||||||||||
Total Residential | 2,173,777 | ||||||||||||||
Retail — 25.3% | |||||||||||||||
3,184 | Acadia Realty Trust | 57,121 | |||||||||||||
70 | Alexander's, Inc. | 21,319 | |||||||||||||
7,731 | CBL & Associates Properties, Inc. | 94,318 | |||||||||||||
11,197 | Developers Diversified Realty Corp. | 116,001 | |||||||||||||
2,200 | Equity One, Inc. | 35,178 | |||||||||||||
2,300 | Federal Realty Investment Trust | 182,367 | |||||||||||||
1,300 | Getty Realty Corp. | 32,279 | |||||||||||||
18,258 | Kimco Realty Corp. | 272,227 | |||||||||||||
7,396 | Macerich Co. (The) | 306,342 | |||||||||||||
3,400 | National Retail Properties, Inc. | 82,824 | |||||||||||||
3,300 | Ramco-Gershenson Properties Trust | 34,452 |
See accompanying notes to the financial statements.
3
GMO Real Estate Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Retail — continued | |||||||||||||||
3,700 | Realty Income Corp. | 120,583 | |||||||||||||
1,200 | Regency Centers Corp. | 43,752 | |||||||||||||
900 | Saul Centers, Inc. | 37,206 | |||||||||||||
17,803 | Simon Property Group, Inc. | 1,610,281 | |||||||||||||
3,000 | Taubman Centers, Inc. | 124,470 | |||||||||||||
1,000 | Urstadt Biddle Properties, Inc. | 18,360 | |||||||||||||
5,900 | Weingarten Realty Investors | 119,062 | |||||||||||||
Total Retail | 3,308,142 | ||||||||||||||
Specialized — 27.7% | |||||||||||||||
6,611 | DiamondRock Hospitality Co. * | 57,912 | |||||||||||||
3,300 | Entertainment Properties Trust | 142,197 | |||||||||||||
4,300 | Extra Space Storage, Inc. | 65,747 | |||||||||||||
15,300 | HCP, Inc. | 538,866 | |||||||||||||
3,500 | Health Care, Inc. | 160,790 | |||||||||||||
1,200 | Healthcare Realty Trust, Inc. | 28,092 | |||||||||||||
8,300 | Hospitality Properties Trust | 162,265 | |||||||||||||
39,737 | Host Hotels & Resorts, Inc. | 521,747 | |||||||||||||
3,200 | LaSalle Hotel Properties | 67,424 | |||||||||||||
1,200 | LTC Properties, Inc. | 29,616 | |||||||||||||
8,900 | Medical Properties Trust, Inc. | 87,576 | |||||||||||||
1,400 | National Health Investors, Inc. | 58,688 | |||||||||||||
5,600 | Nationwide Health Properties, Inc. | 215,432 | |||||||||||||
4,100 | Omega Healthcare Investors, Inc. | 87,945 | |||||||||||||
5,554 | Public Storage | 544,403 | |||||||||||||
8,200 | Senior Housing Properties Trust | 192,700 | |||||||||||||
1,400 | Sovran Self Storage, Inc. | 52,878 | |||||||||||||
8,200 | Sunstone Hotel Investors, Inc. * | 70,274 | |||||||||||||
800 | Universal Health Realty Income Trust | 25,448 | |||||||||||||
10,000 | Ventas, Inc. | 505,100 | |||||||||||||
Total Specialized | 3,615,100 | ||||||||||||||
TOTAL REAL ESTATE INVESTMENT TRUSTS (COST $11,683,044) | 12,898,930 | ||||||||||||||
TOTAL REAL ESTATE INVESTMENTS (COST $11,683,044) | 12,898,930 |
See accompanying notes to the financial statements.
4
GMO Real Estate Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
MUTUAL FUNDS — 1.0% | |||||||||||||||
Affiliated Issuers — 1.0% | |||||||||||||||
5,282 | GMO U.S. Treasury Fund | 132,043 | |||||||||||||
TOTAL MUTUAL FUNDS (COST $132,080) | 132,043 | ||||||||||||||
SHORT-TERM INVESTMENTS — 0.5% | |||||||||||||||
Money Market Funds — 0.5% | |||||||||||||||
65,533 | State Street Institutional Treasury Money Market Fund-Institutional Class | 65,533 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $65,533) | 65,533 | ||||||||||||||
TOTAL INVESTMENTS — 100.2% (Cost $11,880,657) | 13,096,506 | ||||||||||||||
Other Assets and Liabilities (net) — (0.2%) | (22,017 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 13,074,489 |
Notes to Schedule of Investments:
REIT - Real Estate Investment Trust
* Non-income producing security.
See accompanying notes to the financial statements.
5
GMO Real Estate Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $11,748,577) (Note 2) | $ | 12,964,463 | |||||
Investments in affiliated issuers, at value (cost $132,080) (Notes 2 and 10) | 132,043 | ||||||
Dividends receivable | 8,843 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 5,859 | ||||||
Total assets | 13,111,208 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 15 | ||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 3,680 | ||||||
Shareholder service fee | 1,673 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 81 | ||||||
Accrued expenses | 31,270 | ||||||
Total liabilities | 36,719 | ||||||
Net assets | $ | 13,074,489 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 18,693,540 | |||||
Accumulated undistributed net investment income | 224,863 | ||||||
Accumulated net realized loss | (7,059,763 | ) | |||||
Net unrealized appreciation | 1,215,849 | ||||||
$ | 13,074,489 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 13,074,489 | |||||
Shares outstanding: | |||||||
Class III | 1,898,971 | ||||||
Net asset value per share: | |||||||
Class III | $ | 6.89 |
See accompanying notes to the financial statements.
6
GMO Real Estate Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends | $ | 268,373 | |||||
Interest | 60 | ||||||
Dividends from affiliated issuers (Note 10) | 30 | ||||||
Total investment income | 268,463 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 23,223 | ||||||
Shareholder service fee – Class III (Note 5) | 10,556 | ||||||
Audit and tax fees | 28,704 | ||||||
Custodian, fund accounting agent and transfer agent fees | 3,220 | ||||||
Registration fees | 1,380 | ||||||
Legal fees | 368 | ||||||
Trustees fees and related expenses (Note 5) | 163 | ||||||
Miscellaneous | 630 | ||||||
Total expenses | 68,244 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (34,253 | ) | |||||
Net expenses | 33,991 | ||||||
Net investment income (loss) | 234,472 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | (1,873,572 | ) | |||||
Investments in affiliated issuers | 40 | ||||||
Realized gains distributions from affiliated issuers (Note 10) | 10 | ||||||
Net realized gain (loss) | (1,873,522 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | 3,538,912 | ||||||
Investments in affiliated issuers | (37 | ) | |||||
Net unrealized gain (loss) | 3,538,875 | ||||||
Net realized and unrealized gain (loss) | 1,665,353 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 1,899,825 |
See accompanying notes to the financial statements.
7
GMO Real Estate Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 234,472 | $ | 507,169 | |||||||
Net realized gain (loss) | (1,873,522 | ) | (3,620,251 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 3,538,875 | 10,298,815 | |||||||||
Net increase (decrease) in net assets from operations | 1,899,825 | 7,185,733 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (231,694 | ) | (341,015 | ) | |||||||
Net share transactions (Note 9): | |||||||||||
Class III | (2,705,926 | ) | (1,031,843 | ) | |||||||
Total increase (decrease) in net assets | (1,037,795 | ) | 5,812,875 | ||||||||
Net assets: | |||||||||||
Beginning of period | 14,112,284 | 8,299,409 | |||||||||
End of period (including accumulated undistributed net investment income of $224,863 and $222,085, respectively) | $ | 13,074,489 | $ | 14,112,284 |
See accompanying notes to the financial statements.
8
GMO Real Estate Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 6.16 | $ | 3.34 | $ | 7.85 | $ | 12.87 | $ | 12.27 | $ | 14.54 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.11 | 0.21 | 0.31 | 0.40 | 0.38 | 0.61 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.74 | 2.76 | (4.40 | ) | (3.29 | ) | 2.72 | 3.24 | |||||||||||||||||||
Total from investment operations | 0.85 | 2.97 | (4.09 | ) | (2.89 | ) | 3.10 | 3.85 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.12 | ) | (0.15 | ) | (0.29 | ) | (0.14 | ) | (0.31 | ) | (0.40 | ) | |||||||||||||||
From net realized gains | — | — | (0.13 | ) | (1.99 | ) | (2.19 | ) | (5.72 | ) | |||||||||||||||||
Total distributions | (0.12 | ) | (0.15 | ) | (0.42 | ) | (2.13 | ) | (2.50 | ) | (6.12 | ) | |||||||||||||||
Net asset value, end of period | $ | 6.89 | $ | 6.16 | $ | 3.34 | $ | 7.85 | $ | 12.87 | $ | 12.27 | |||||||||||||||
Total Return(a) | 14.10 | %** | 89.86 | % | (54.45 | )% | (24.04 | )% | 29.76 | % | 28.89 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 13,074 | $ | 14,112 | $ | 8,299 | $ | 19,465 | $ | 37,650 | $ | 41,391 | |||||||||||||||
Net expenses to average daily net assets | 0.48 | %*(c) | 0.48 | %(b) | 0.48 | %(b) | 0.48 | % | 0.48 | % | 0.48 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 3.33 | %* | 4.18 | % | 4.44 | % | 3.78 | % | 3.24 | % | 3.91 | % | |||||||||||||||
Portfolio turnover rate | 20 | %** | 34 | % | 29 | % | 49 | % | 43 | % | 52 | % | |||||||||||||||
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets: | 0.49 | %* | 0.55 | % | 0.41 | % | 0.22 | % | 0.28 | % | 0.25 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
9
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO Real Estate Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks high total return. The Fund seeks to achieve its investment objective by outperforming its benchmark, the MSCI U.S. REIT Index. The Fund has a fundamental policy to concentrate its investments in real estate-related investments. Under normal circumstances, the Fund invests directly and indirectly (e.g., through the GMO Funds in which the Fund invests, collectively referred to as the "underlying funds" or derivatives) at least 80% of its assets in real estate investment trusts ("REITs") and other real estate-related investments. REITs are managed vehicles that invest (including both equity and fixed income investments) in real estate or real estate-related investments. The term "real estate-related investment" includes REITs and companies that derive at least 50% of their revenues and profits from, or have at least 50% of their assets invested in, (i) the development, construction, management, or sale of real estat e or (ii) real estate holdings.
The Manager relies principally on proprietary quantitative models and also employs fundamental investment techniques to evaluate and select investments for the Fund. The Manager selects investments it believes (i) are undervalued (e.g., investments trading at prices below what the Manager believes to be their fundamental value); (ii) have superior fundamentals (e.g., earnings stability); and/or (iii) have shown indications of improving investor sentiment (e.g., positive price movement or upgraded analyst ratings). The Manager also uses proprietary techniques to adjust the portfolio for other factors such as position size, industry and sector weights, and market capitalization. The factors considered and models used by the Manager may change over time based on the Manager's assessment of what combination of models and factors are best positioned to achieve the Fund's investment objective.
In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the-counter ("OTC") derivatives, including options, futures, and swap contracts, (i) as a substitute for direct investment; (ii) in an attempt to reduce investment exposures (which may result in a reduction below zero); (iii) to effect transactions intended as substitutes for securities lending; and/or (iv) in an attempt to adjust elements of its investment exposure. In addition, the Fund may lend its portfolio securities.
10
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the OTC market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or who se values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
11
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | $ | 12,898,930 | $ | — | $ | — | $ | 12,898,930 | |||||||||||
Mutual Funds | 132,043 | — | — | 132,043 | |||||||||||||||
Short-Term Investments | 65,533 | — | — | 65,533 | |||||||||||||||
Total Investments | 13,096,506 | — | — | 13,096,506 | |||||||||||||||
Total | $ | 13,096,506 | $ | — | $ | — | $ | 13,096,506 |
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements.
All of the Fund's common stocks held at period end are classified as Level 1. Please refer to the Schedule of Investments for a more detailed categorization of common stocks.
The Fund held no investments or other financial instruments at either August 31, 2010 or February 28, 2010, whose fair value was determined using Level 3 inputs.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
12
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund elected to defer to March 1, 2010, post-October capital losses of $740,915.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (517,045 | ) | ||||
2/28/2018 | (3,096,414 | ) | |||||
Total | $ | (3,613,459 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 12,909,385 | $ | 880,422 | $ | (693,301 | ) | $ | 187,121 |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in
13
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact its operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which co llection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. Distributions paid by real estate investment trusts ("REITs") in excess of their income are recorded as reductions of the cost of the related investments which increases/decreases the unrealized/realized gains/losses as applicable. If the Fund no longer owns the applicable securities, any distributions received in excess of income are recorded as realized gains. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for the purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds (See Note 5).
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment
14
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
company under the Investment Company Act of 1940, as amended (the "1940 Act"), and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Real Estate Risk — Real estate-related investments may decline in value as a result of factors affecting the real estate industry, such as the supply of real property in particular markets, changes in zoning laws, delays in completion of construction, changes in real estate values, changes in property taxes, levels of occupancy, adequacy of rent to cover operating expenses, and local and regional market conditions. The value of real estate-related investments also may be affected by changes in interest rates and social and economic trends. REITs are subject to the risk of fluctuations in income from underlying real estate assets, the inability of the REIT to effectively manage the cash flows generated by those assets, prepayments and defaults by borrowers, and failing to qualify for the special tax treatment granted to REITs under the Internal Revenue Code of 1986 and/or to maintain exempt status under the 1940 Act.
• Focused Investment Risk — Focusing investments in sectors and industries with high positive correlations to one another creates additional risk. This risk is particularly pronounced for the Fund, which concentrates its investments in real estate-related investments, making the Fund's net asset value more susceptible to economic, market, political, and other developments affecting the real estate industry.
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund's investments.
Other principal risks of an investment in the Fund include Market Risk — Value Securities (risk that the price of the Fund's investments will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Liquidity Risk (difficulty in selling Fund investments and/o r increased likelihood of honoring redemption requests in-kind); Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, and credit and counterparty risk); Market Risk — Fixed Income Securities (risk that the value of fixed income securities will decline during periods of rising interest rates and/or widening of credit spreads on asset backed and other fixed income securities); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund's securities); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses
15
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero).
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, indices and markets without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index).
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative
16
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be secured by collateral, that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and even ts affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
17
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. The Fund had no futures contracts outstanding at the end of the period.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of
18
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the
19
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
20
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.33% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investme nt company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition to the contractual expense reimbursement described above, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund's Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $163 and $50, respectively. The compensation and
21
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Total Indirect Expenses | |||||||||
< 0.001% | 0.000 | % | < 0.001% |
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended August 31, 2010 aggregated $2,777,516 and $5,222,591, respectively.
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, 96.27% of the outstanding shares of the Fund were held by two shareholders, each holding more than 10% of the Fund's outstanding shares.
As of August 31, 2010, 1.02% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 75.96% of the Fund's shares were held by accounts for which the Manager had investment discretion.
22
GMO Real Estate Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 1,585 | $ | 11,119 | 51,911 | $ | 233,590 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 1,396 | 8,484 | 9,026 | 43,675 | |||||||||||||||
Shares repurchased | (395,905 | ) | (2,725,529 | ) | (252,985 | ) | (1,309,108 | ) | |||||||||||
Net increase (decrease) | (392,924 | ) | $ | (2,705,926 | ) | (192,048 | ) | $ | (1,031,843 | ) |
10. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO U.S. Treasury Fund | $ | — | $ | 332,040 | $ | 200,000 | $ | 30 | $ | 10 | $ | 132,043 | |||||||||||||||
Totals | $ | — | $ | 332,040 | $ | 200,000 | $ | 30 | $ | 10 | $ | 132,043 |
23
GMO Real Estate Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three-, five-, seven- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the
24
GMO Real Estate Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparis on to the Manager's separate account clients and the expenses and risks borne by the Manager as a result of the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by , for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating
25
GMO Real Estate Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
26
GMO Real Estate Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.48 | % | $ | 1,000.00 | $ | 1,141.00 | $ | 2.59 | |||||||||||
2) Hypothetical | 0.48 | % | $ | 1,000.00 | $ | 1,022.79 | $ | 2.45 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
27
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a private placement memorandum, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The private placement memorandum can be obtained by calling 1-617-346-7646 (collect).
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Debt Obligations | 98.9 | % | |||||
Short-Term Investments | 1.1 | ||||||
Swaps | 0.0 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Other | 0.0 | ||||||
100.0 | % | ||||||
Industry Sector Summary | % of Debt Obligations | ||||||
Credit Cards | 19.7 | % | |||||
Residential Asset-Backed Securities (United States) | 15.2 | ||||||
Auto Financing | 11.6 | ||||||
CMBS | 10.3 | ||||||
Insured Auto Financing | 7.3 | ||||||
Residential Mortgage-Backed Securities (European) | 7.2 | ||||||
Student Loans | 5.3 | ||||||
Insured Other | 4.2 | ||||||
Residential Mortgage-Backed Securities (Australian) | 4.0 | ||||||
Business Loans | 3.6 | ||||||
Corporate Collateralized Debt Obligations | 2.3 | ||||||
CMBS Collateralized Debt Obligations | 1.9 | ||||||
U.S. Government Agency | 1.4 | ||||||
Rate Reduction Bonds | 1.4 | ||||||
Insured High Yield Collateralized Debt Obligations | 0.8 | ||||||
Insured Time Share | 0.7 | ||||||
Insured Residential Asset-Backed Securities (United States) | 0.7 | ||||||
Equipment Leases | 0.6 | ||||||
Insured Residential Mortgage-Backed Securities (United States) | 0.6 | ||||||
Airlines | 0.6 | ||||||
Insured Transportation | 0.2 | ||||||
Bank Loan Collateralized Debt Obligations | 0.1 | ||||||
Time Share | 0.1 | ||||||
Residential Mortgage-Backed Securities (United States) | 0.1 | ||||||
Insured Business Loans | 0.1 | ||||||
Collateralized Loan Obligations | 0.0 | ||||||
ABS Collateralized Debt Obligations | 0.0 | ||||||
100.0 | % |
1
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
DEBT OBLIGATIONS — 98.9% | |||||||||||||||
Asset-Backed Securities — 97.5% | |||||||||||||||
ABS Collateralized Debt Obligations — 0.0% | |||||||||||||||
11,200,000 | Paragon CDO Ltd., Series 04-1A, Class A, 144A, 3 mo. LIBOR + .65%, 1.17%, due 10/20/44 | 112,000 | |||||||||||||
Airlines — 0.6% | |||||||||||||||
18,288,397 | Aircraft Finance Trust, Series 99-1A, Class A1, 144A, 1 mo. LIBOR + .48%, 0.76%, due 05/15/24 | 8,229,779 | |||||||||||||
5,792,442 | Continental Airlines, Inc., Series 99-1A, 6.55%, due 02/02/19 | 5,879,328 | |||||||||||||
Total Airlines | 14,109,107 | ||||||||||||||
Auto Financing — 11.5% | |||||||||||||||
26,006,947 | Capital Auto Receivable Asset Trust, Series 07-2, Class A4B, 1 mo. LIBOR + .40%, 0.68%, due 02/18/14 | 26,059,741 | |||||||||||||
5,100,000 | Capital Auto Receivable Asset Trust, Series 08-1, Class A4B, 1 mo. LIBOR + 1.35%, 1.63%, due 07/15/14 | 5,162,169 | |||||||||||||
24,500,000 | Carmax Auto Owner Trust, Series 08-2, Class A4B, 1 mo. LIBOR + 1.65%, 1.93%, due 08/15/13 | 25,009,110 | |||||||||||||
22,300,000 | Daimler Chrysler Auto Trust, Series 08-B, Class A4A, 5.32%, due 11/10/14 | 23,421,690 | |||||||||||||
17,400,000 | Daimler Chrysler Auto Trust, Series 08-B, Class A4B, 1 mo. LIBOR + 1.85%, 2.14%, due 11/10/14 | 17,738,430 | |||||||||||||
9,845,964 | Ford Credit Auto Owner Trust, Series 06-C, Class A4B, 1 mo. LIBOR + .04%, 0.32%, due 02/15/12 | 9,842,419 | |||||||||||||
13,700,000 | Ford Credit Auto Owner Trust, Series 07-B, Class A4B, 1 mo. LIBOR + .38%, 0.66%, due 07/15/12 | 13,732,469 | |||||||||||||
31,800,000 | Ford Credit Auto Owner Trust, Series 08-B, Class A4B, 1 mo. LIBOR + 2.00%, 2.28%, due 03/15/13 | 32,453,808 | |||||||||||||
61,000,000 | Ford Credit Floorplan Master Owner Trust, Series 06-4, Class A, 1 mo. LIBOR + .25%, 0.53%, due 06/15/13 | 60,390,000 | |||||||||||||
8,400,000 | Franklin Auto Trust, Series 08-A, Class A4B, 1 mo. LIBOR + 1.95%, 2.22%, due 05/20/16 | 8,484,000 | |||||||||||||
7,540,886 | Nissan Auto Lease Trust, Series 08-A, Class A3B, 1 mo. LIBOR + 2.20%, 2.48%, due 07/15/11 | 7,555,214 | |||||||||||||
15,869,635 | Nissan Auto Receivables Owner Trust, Series 07-A, Class A4, 1 mo. LIBOR, 0.28%, due 06/17/13 | 15,850,591 |
See accompanying notes to the financial statements.
2
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Auto Financing — continued | |||||||||||||||
17,100,000 | Swift Master Auto Receivables Trust, Series 07-2, Class A, 1 mo. LIBOR + .65%, 0.93%, due 10/15/12 | 17,101,881 | |||||||||||||
12,000,000 | Wachovia Auto Owner Trust, Series 08-A, Class A4B, 1 mo. LIBOR + 1.15%, 1.42%, due 03/20/14 | 12,141,120 | |||||||||||||
9,430,864 | World Omni Auto Receivables Trust, Series 07-A, Class A4, 1 mo. LIBOR, 0.28%, due 11/15/12 | 9,413,757 | |||||||||||||
Total Auto Financing | 284,356,399 | ||||||||||||||
Bank Loan Collateralized Debt Obligations — 0.2% | |||||||||||||||
3,756,520 | Arran Corp. Loans No. 1 B.V., Series 06-1A, Class A3, 144A, 3 mo. LIBOR + .17%, 0.71%, due 06/20/25 | 3,744,781 | |||||||||||||
Business Loans — 3.6% | |||||||||||||||
11,925,566 | ACAS Business Loan Trust, Series 07-1A, Class A, 144A, 3 mo. LIBOR + .14%, 0.52%, due 08/16/19 | 10,494,498 | |||||||||||||
2,924,886 | Bayview Commercial Asset Trust, Series 04-1, Class A, 144A, 1 mo. LIBOR + .36%, 0.62%, due 04/25/34 | 2,310,660 | |||||||||||||
2,312,000 | Bayview Commercial Asset Trust, Series 04-3, Class A1, 144A, 1 mo. LIBOR + .37%, 0.63%, due 01/25/35 | 1,803,360 | |||||||||||||
9,816,027 | Bayview Commercial Asset Trust, Series 05-4A, Class A2, 144A, 1 mo. LIBOR + .39%, 0.65%, due 01/25/36 | 6,282,258 | |||||||||||||
8,654,291 | Bayview Commercial Asset Trust, Series 07-3, Class A1, 144A, 1 mo. LIBOR + .24%, 0.50%, due 07/25/37 | 6,382,539 | |||||||||||||
31,200,000 | Bayview Commercial Asset Trust, Series 07-6A, Class A2, 144A, 1 mo. LIBOR + 1.30%, 1.56%, due 12/25/37 | 25,584,000 | |||||||||||||
2,943,557 | Capitalsource Commercial Loan Trust, Series 07-1A, Class A, 144A, 1 mo. LIBOR + .13%, 0.40%, due 03/20/17 | 2,722,790 | |||||||||||||
2,949,512 | GE Business Loan Trust, Series 04-1, Class A, 144A, 1 mo. LIBOR + .29%, 0.57%, due 05/15/32 | 2,595,571 | |||||||||||||
5,484,475 | GE Business Loan Trust, Series 05-2A, Class A, 144A, 1 mo. LIBOR + .24%, 0.52%, due 11/15/33 | 4,552,114 | |||||||||||||
7,318,003 | Lehman Brothers Small Balance Commercial, Series 05-1A, Class A, 144A, 1 mo. LIBOR + .25%, 0.51%, due 02/25/30 | 5,415,322 | |||||||||||||
4,399,742 | Lehman Brothers Small Balance Commercial, Series 05-2A, Class 1A, 144A, 1 mo. LIBOR + .25%, 0.51%, due 09/25/30 | 3,167,814 | |||||||||||||
22,320,013 | Lehman Brothers Small Balance Commercial, Series 07-3A, Class 1A2, 144A, 1 mo. LIBOR + .85%, 1.11%, due 10/25/37 | 17,856,011 |
See accompanying notes to the financial statements.
3
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Business Loans — continued | |||||||||||||||
134,534 | The Money Store Business Loan Backed Trust, Series 99-1, Class AN, 1 mo. LIBOR + .50%, 0.78%, due 09/15/17 | 117,717 | |||||||||||||
Total Business Loans | 89,284,654 | ||||||||||||||
CMBS — 10.1% | |||||||||||||||
11,500,000 | Banc of America Commercial Mortgage, Inc., Series 06-3, Class A2, 5.81%, due 07/10/44 | 12,060,050 | |||||||||||||
18,771,104 | Citigroup/Deutsche Bank Commercial Mortgage, Series 05-CD1, Class A2FL, 1 mo. LIBOR + .12%, 0.39%, due 07/15/44 | 18,543,973 | |||||||||||||
32,300,000 | Commercial Mortgage Pass-Through Certificates, Series 06-FL12, Class AJ, 144A, 1 mo. LIBOR + .13%, 0.41%, due 12/15/20 | 23,256,000 | |||||||||||||
23,878,737 | GE Capital Commercial Mortgage Corp., Series 05-C4, Class A2, 5.31%, due 11/10/45 | 23,945,597 | |||||||||||||
16,950,000 | GE Capital Commercial Mortgage Corp., Series 06-C1, Class A2, 5.51%, due 03/10/44 | 17,034,750 | |||||||||||||
1,642,515 | Greenwich Capital Commercial Funding Corp., Series 06-FL4A, Class A1, 144A, 1 mo. LIBOR + .09%, 0.39%, due 11/05/21 | 1,552,177 | |||||||||||||
24,391,522 | GS Mortgage Securities Corp., Series 06-GG6, Class A2, 5.51%, due 04/10/38 | 24,730,717 | |||||||||||||
5,898,988 | GS Mortgage Securities Corp., Series 07-EOP, Class A1, 144A, 1 mo. LIBOR + .09%, 0.39%, due 03/06/20 | 5,727,328 | |||||||||||||
6,300,000 | GS Mortgage Securities Corp., Series 07-EOP, Class A2, 144A, 1 mo. LIBOR + .13%, 0.43%, due 03/06/20 | 5,985,000 | |||||||||||||
6,826,699 | J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 06-FL1A, Class A1B, 144A, 1 mo. LIBOR + .12%, 0.40%, due 02/15/20 | 6,519,497 | |||||||||||||
42,219,139 | J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 06-LDP7, Class A2, 6.05%, due 04/15/45 | 43,126,851 | |||||||||||||
27,000,000 | Merrill Lynch Mortgage Trust, Series 06-C1, Class A2, 5.79%, due 05/12/39 | 28,128,600 | |||||||||||||
10,260,597 | Morgan Stanley Capital I, Series 06-IQ11, Class A2, 5.69%, due 10/15/42 | 10,433,796 | |||||||||||||
11,000,000 | Morgan Stanley Capital I, Series 06-IQ11, Class A3, 5.90%, due 10/15/42 | 11,601,590 | |||||||||||||
1,044,053 | Morgan Stanley Dean Witter Capital I, Series 03-TOP9, Class A1, 3.98%, due 11/13/36 | 1,051,560 | |||||||||||||
20,093,399 | Wachovia Bank Commercial Mortgage Trust, Series 06-WL7A, Class A1, 144A, 1 mo. LIBOR + .09%, 0.36%, due 09/15/21 | 17,883,125 | |||||||||||||
Total CMBS | 251,580,611 |
See accompanying notes to the financial statements.
4
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
CMBS Collateralized Debt Obligations — 1.9% | |||||||||||||||
4,398,348 | American Capital Strategies Ltd. Commercial Real Estate CDO Trust, Series 07-1A, Class A, 144A, 3 mo. LIBOR + .80%, 1.14%, due 11/23/52 | 197,926 | |||||||||||||
9,843,659 | Crest Exeter Street Solar, Series 04-1A, Class A1, 144A, 3 mo. LIBOR + .35%, 0.89%, due 06/28/19 | 8,367,110 | |||||||||||||
12,842,969 | G-Force LLC, Series 05-RR2, Class A2, 144A, 5.16%, due 12/25/39 | 8,733,219 | |||||||||||||
16,110,633 | Guggenheim Structured Real Estate Funding, Series 05-2A, Class A, 144A, 1 mo. LIBOR + .32%, 0.58%, due 08/26/30 | 11,760,762 | |||||||||||||
27,100,000 | Marathon Real Estate CDO, Series 06-1A, Class A1, 144A, 1 mo. LIBOR + .33%, 0.59%, due 05/25/46 | 18,157,000 | |||||||||||||
Total CMBS Collateralized Debt Obligations | 47,216,017 | ||||||||||||||
Collateralized Loan Obligations — 0.0% | |||||||||||||||
174,497 | Archimedes Funding IV (Cayman) Ltd., Series 4A, Class A1, 144A, 3 mo. LIBOR + .48%, 0.80%, due 02/25/13 | 168,826 | |||||||||||||
Corporate Collateralized Debt Obligations — 2.3% | |||||||||||||||
34,200,000 | Morgan Stanley ACES SPC, Series 06-13A, Class A, 144A, 3 mo. LIBOR + .29%, 0.83%, due 06/20/13 | 27,886,680 | |||||||||||||
22,300,000 | Morgan Stanley ACES SPC, Series 05-15, Class A, 144A, 3 mo. LIBOR + .40%, 0.94%, due 12/20/10 | 22,072,540 | |||||||||||||
8,400,000 | Prism Orso Trust, Series 04-MAPL, Class CERT, 144A, 3 mo. LIBOR + .70%, 1.24%, due 08/01/11 | 7,483,560 | |||||||||||||
Total Corporate Collateralized Debt Obligations | 57,442,780 | ||||||||||||||
Credit Cards — 19.5% | |||||||||||||||
1,255,986 | Advanta Business Card Master Trust, Series 05-A2, Class A2, 1 mo. LIBOR + .13%, 0.40%, due 05/20/13 | 1,250,334 | |||||||||||||
1,819,277 | Advanta Business Card Master Trust, Series 07-A4, Class A4, 1 mo. LIBOR + .03%, 0.30%, due 04/22/13 | 1,801,084 | |||||||||||||
20,700,000 | American Express Credit Account Master Trust, Series 06-1, Class A, 1 mo. LIBOR + .03%, 0.31%, due 12/15/13 | 20,685,510 | |||||||||||||
10,300,000 | American Express Issuance Trust, Series 07-1, Class A, 1 mo. LIBOR + .20%, 0.48%, due 09/15/11 | 10,301,751 | |||||||||||||
4,200,000 | Bank of America Credit Card Trust, Series 06-A12, Class A12, 1 mo. LIBOR + .02%, 0.30%, due 03/15/14 | 4,193,280 |
See accompanying notes to the financial statements.
5
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Credit Cards — continued | |||||||||||||||
33,750,000 | Cabela's Master Credit Card Trust, Series 08-4A, Class A2, 144A, 1 mo. LIBOR + 3.00%, 3.28%, due 09/15/14 | 34,616,700 | |||||||||||||
17,875,000 | Capital One Multi-Asset Execution Trust, Series 04-A7, Class A7, 3 mo. LIBOR + .15%, 0.53%, due 06/16/14 | 17,855,695 | |||||||||||||
24,800,000 | Capital One Multi-Asset Execution Trust, Series 06-A14, Class A, 1 mo. LIBOR + .01%, 0.29%, due 08/15/13 | 24,791,072 | |||||||||||||
7,700,000 | Capital One Multi-Asset Execution Trust, Series 07-A4, Class A4, 1 mo. LIBOR + .03%, 0.31%, due 03/16/15 | 7,663,656 | |||||||||||||
17,500,000 | Capital One Multi-Asset Execution Trust, Series 08-A6, Class A6, 1 mo. LIBOR + 1.10%, 1.38%, due 03/17/14 | 17,609,375 | |||||||||||||
39,000,000 | Charming Shoppes Master Trust, Series 07-1A, Class A1, 144A, 1 mo. LIBOR + 1.25%, 1.53%, due 09/15/17 | 38,081,940 | |||||||||||||
46,600,000 | Chase Issuance Trust, Series 05-A6, Class A6, 1 mo. LIBOR + .07%, 0.35%, due 07/15/14 | 46,505,344 | |||||||||||||
22,900,000 | Chase Issuance Trust, Series 06-A7, Class A, 1 mo. LIBOR + .01%, 0.29%, due 02/15/13 | 22,890,840 | |||||||||||||
4,000,000 | Chase Issuance Trust, Series 07-A1, Class A1, 1 mo. LIBOR + .02%, 0.30%, due 03/15/13 | 3,999,560 | |||||||||||||
11,200,000 | Citibank Credit Card Issuance Trust, Series 01-A7, Class A7, 3 mo. LIBOR + .14%, 0.51%, due 08/15/13 | 11,191,264 | |||||||||||||
EUR | 33,200,000 | Citibank Credit Card Issuance Trust, Series 04-A2, Class A, 3 mo. EUR LIBOR + .10%, 0.99%, due 05/24/13 | 41,896,010 | ||||||||||||
8,100,000 | Citibank Credit Card Issuance Trust, Series 05-A3, Class A3, 1 mo. LIBOR + .07%, 0.33%, due 04/24/14 | 8,079,831 | |||||||||||||
11,000,000 | Discover Card Master Trust I, Series 05-4, Class A1, 1 mo. LIBOR + .06%, 0.34%, due 06/18/13 | 10,996,590 | |||||||||||||
16,400,000 | Discover Card Master Trust I, Series 05-4, Class A2, 1 mo. LIBOR + .09%, 0.37%, due 06/16/15 | 16,310,313 | |||||||||||||
52,700,000 | Discover Card Master Trust I, Series 06-2, Class A2, 1 mo. LIBOR + .03%, 0.31%, due 01/16/14 | 52,573,520 | |||||||||||||
10,600,000 | Discover Card Master Trust I, Series 96-4, Class A, 1 mo. LIBOR + .38%, 0.65%, due 10/16/13 | 10,606,360 | |||||||||||||
17,500,000 | Household Credit Card Master Note Trust I, Series 07-2, Class A, 1 mo. LIBOR + .55%, 0.83%, due 07/15/13 | 17,508,203 | |||||||||||||
11,500,000 | MBNA Credit Card Master Note Trust, Series 04-A8, Class A8, 1 mo. LIBOR + .15%, 0.43%, due 01/15/14 | 11,494,480 |
See accompanying notes to the financial statements.
6
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Credit Cards — continued | |||||||||||||||
40,300,000 | National City Credit Card Master Trust, Series 08-3, Class A, 1 mo. LIBOR + 1.80%, 2.08%, due 05/15/13 | 40,665,118 | |||||||||||||
10,600,000 | World Financial Network Credit Card Master Trust, Series 06-A, Class A, 144A, 1 mo. LIBOR + .13%, 0.41%, due 02/15/17 | 10,250,836 | |||||||||||||
Total Credit Cards | 483,818,666 | ||||||||||||||
Equipment Leases — 0.6% | |||||||||||||||
14,600,000 | CNH Equipment Trust, Series 08-A, Class A4B, 1 mo. LIBOR + 1.95%, 2.23%, due 08/15/14 | 14,830,680 | |||||||||||||
Insured Auto Financing — 7.2% | |||||||||||||||
14,941,168 | AmeriCredit Automobile Receivables Trust, Series 07-AX, Class A4, XL, 1 mo. LIBOR + .04%, 0.34%, due 10/06/13 | 14,791,756 | |||||||||||||
14,222,167 | AmeriCredit Automobile Receivables Trust, Series 07-BF, Class A4, FSA, 1 mo. LIBOR + .05%, 0.35%, due 12/06/13 | 14,049,652 | |||||||||||||
744,592 | AmeriCredit Automobile Receivables Trust, Series 07-CM, Class A3B, MBIA, 1 mo. LIBOR + .03%, 0.33%, due 05/07/12 | 742,932 | |||||||||||||
12,937,819 | AmeriCredit Automobile Receivables Trust, Series 07-DF, Class A4B, FSA, 1 mo. LIBOR + .80%, 1.10%, due 06/06/14 | 12,880,297 | |||||||||||||
25,400,000 | AmeriCredit Prime Automobile Receivable Trust, Series 07-2M, Class A4B, MBIA, 1 mo. LIBOR + .50%, 0.79%, due 03/08/16 | 25,311,100 | |||||||||||||
11,918,228 | Capital One Auto Finance Trust, Series 06-B, Class A4, MBIA, 1 mo. LIBOR + .02%, 0.29%, due 07/15/13 | 11,849,792 | |||||||||||||
4,585,809 | Capital One Auto Finance Trust, Series 07-A, Class A4, AMBAC, 1 mo. LIBOR + .02%, 0.30%, due 11/15/13 | 4,563,797 | |||||||||||||
4,083,614 | Capital One Auto Finance Trust, Series 07-C, Class A3B, FGIC, 1 mo. LIBOR + .51%, 0.79%, due 04/16/12 | 4,083,695 | |||||||||||||
3,900,000 | Hertz Vehicle Financing LLC, Series 05-2A, Class A5, 144A, AMBAC, 1 mo. LIBOR + .25%, 0.51%, due 11/25/11 | 3,895,430 | |||||||||||||
17,957,023 | Santander Drive Auto Receivables Trust, Series 07-1, Class A4, FGIC, 1 mo. LIBOR + .05%, 0.33%, due 09/15/14 | 17,714,782 | |||||||||||||
17,993,846 | Santander Drive Auto Receivables Trust, Series 07-3, Class A4B, FGIC, 1 mo. LIBOR + .65%, 0.93%, due 10/15/14 | 17,914,673 | |||||||||||||
51,300,000 | Triad Auto Receivables Owner Trust, Series 07-B, Class A4B, FSA, 1 mo. LIBOR + 1.20%, 1.49%, due 07/14/14 | 51,385,158 | |||||||||||||
Total Insured Auto Financing | 179,183,064 |
See accompanying notes to the financial statements.
7
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Insured Business Loans — 0.1% | |||||||||||||||
2,710,924 | CNL Commercial Mortgage Loan Trust, Series 03-2A, Class A1, 144A, AMBAC, 1 mo. LIBOR + .44%, 0.70%, due 10/25/30 | 1,626,555 | |||||||||||||
Insured High Yield Collateralized Debt Obligations — 0.8% | |||||||||||||||
16,530,769 | Augusta Funding Ltd., Series 10A, Class F-1, 144A, CapMAC, 3mo. LIBOR +.25%, 0.78%, due 06/30/17 (a) | 14,129,283 | |||||||||||||
3,899,681 | GSC Partners CDO Fund Ltd., Series 03-4A, Class A3, 144A, AMBAC, 3 mo. LIBOR + .46%, 0.98%, due 12/16/15 | 3,529,211 | |||||||||||||
2,790,332 | GSC Partners CDO Fund Ltd., Series 2A, Class A, 144A, FSA, 6 mo. LIBOR + .52%, 1.20%, due 05/22/13 | 2,399,686 | |||||||||||||
Total Insured High Yield Collateralized Debt Obligations | 20,058,180 | ||||||||||||||
Insured Other — 4.1% | |||||||||||||||
24,700,000 | DB Master Finance LLC, Series 06-1, Class A2, 144A, AMBAC, 5.78%, due 06/20/31 | 24,483,875 | |||||||||||||
45,300,000 | Dominos Pizza Master Issuer LLC, Series 07-1, Class A2, 144A, MBIA, 5.26%, due 04/25/37 | 44,280,750 | |||||||||||||
11,235,963 | Henderson Receivables LLC, Series 06-3A, Class A1, 144A, MBIA, 1 mo. LIBOR + .20%, 0.48%, due 09/15/41 | 9,893,353 | |||||||||||||
10,731,004 | Henderson Receivables LLC, Series 06-4A, Class A1, 144A, MBIA, 1 mo. LIBOR + .20%, 0.48%, due 12/15/41 | 9,490,651 | |||||||||||||
15,114,168 | TIB Card Receivables Fund, 144A, FGIC, 3 mo. LIBOR + .25%, 0.78%, due 01/05/14 | 12,393,618 | |||||||||||||
2,988,000 | Toll Road Investment Part II, Series B, 144A, MBIA, Zero Coupon, due 02/15/30 | 452,413 | |||||||||||||
26,300,000 | Toll Road Investment Part II, Series C, 144A, MBIA, Zero Coupon, due 02/15/37 | 1,943,833 | |||||||||||||
Total Insured Other | 102,938,493 | ||||||||||||||
Insured Residential Asset-Backed Securities (United States) — 0.6% | |||||||||||||||
2,546,402 | Ameriquest Mortgage Securities, Inc., Series 04-R6, Class A1, XL, 1 mo. LIBOR + .21%, 0.47%, due 07/25/34 | 1,868,117 | |||||||||||||
2,947,426 | Citigroup Mortgage Loan Trust, Inc., Series 03-HE3, Class A, AMBAC, 1 mo. LIBOR + .38%, 0.64%, due 12/25/33 | 2,269,518 | |||||||||||||
785,083 | Quest Trust, Series 04-X1, Class A, 144A, AMBAC, 1 mo. LIBOR + .33%, 0.59%, due 03/25/34 | 612,365 |
See accompanying notes to the financial statements.
8
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Insured Residential Asset-Backed Securities (United States) — continued | |||||||||||||||
16,828,690 | Residential Asset Mortgage Products, Inc., Series 05-RS9, Class AI3, FGIC, 1 mo. LIBOR + .22%, 0.48%, due 11/25/35 | 11,277,915 | |||||||||||||
Total Insured Residential Asset-Backed Securities (United States) | 16,027,915 | ||||||||||||||
Insured Residential Mortgage-Backed Securities (United States) — 0.6% | |||||||||||||||
514,262 | Chevy Chase Mortgage Funding Corp., Series 03-4A, Class A1, 144A, AMBAC, 1 mo. LIBOR + .34%, 0.60%, due 10/25/34 | 308,557 | |||||||||||||
1,030,495 | Chevy Chase Mortgage Funding Corp., Series 04-1A, Class A2, 144A, AMBAC, 1 mo. LIBOR + .33%, 0.59%, due 01/25/35 | 628,602 | |||||||||||||
11,822,909 | Countrywide Home Equity Loan Trust, Series 07-E, Class A, MBIA, 1 mo. LIBOR + .15%, 0.43%, due 06/15/37 | 5,190,257 | |||||||||||||
6,039,846 | GMAC Mortgage Corp. Loan Trust, Series 04-HE3, Class A3, FSA, 1 mo. LIBOR + .23%, 0.49%, due 10/25/34 | 3,071,866 | |||||||||||||
363,690 | GreenPoint Home Equity Loan Trust, Series 04-1, Class A, AMBAC, 1 mo. LIBOR + .23%, 0.72%, due 07/25/29 | 181,310 | |||||||||||||
386,722 | GreenPoint Home Equity Loan Trust, Series 04-4, Class A, AMBAC, 1 mo. LIBOR + .28%, 0.84%, due 08/15/30 | 192,561 | |||||||||||||
853,827 | Lehman ABS Corp., Series 04-2, Class A, AMBAC, 1 mo. LIBOR + .22%, 0.70%, due 06/25/34 | 486,681 | |||||||||||||
190,184 | Residential Funding Mortgage Securities II, Series 03-HS1, Class AII, FGIC, 1 mo. LIBOR + .29%, 0.55%, due 12/25/32 | 80,771 | |||||||||||||
4,773,669 | SBI Heloc Trust, Series 05-HE1, Class 1A, 144A, FSA, 1 mo. LIBOR + .19%, 0.45%, due 11/25/35 | 2,887,592 | |||||||||||||
1,418,527 | Wachovia Asset Securitization, Inc., Series 04-HE1, Class A, MBIA, 1 mo. LIBOR + .22%, 0.48%, due 06/25/34 | 1,214,841 | |||||||||||||
Total Insured Residential Mortgage-Backed Securities (United States) | 14,243,038 | ||||||||||||||
Insured Time Share — 0.7% | |||||||||||||||
1,556,717 | Cendant Timeshare Receivables Funding LLC, Series 05-1A, Class A2, 144A, FGIC, 1 mo. LIBOR + .18%, 0.45%, due 05/20/17 | 1,489,583 | |||||||||||||
2,924,897 | Sierra Receivables Funding Co., Series 06-1A, Class A2, 144A, MBIA, 1 mo. LIBOR + .15%, 0.42%, due 05/20/18 | 2,746,110 | |||||||||||||
3,170,017 | Sierra Receivables Funding Co., Series 07-1A, Class A2, 144A, FGIC, 1 mo. LIBOR + .15%, 0.42%, due 03/20/19 | 2,948,116 | |||||||||||||
10,333,585 | Sierra Receivables Funding Co., Series 07-2A, Class A2, 144A, MBIA, 1 mo. LIBOR + 1.00%, 1.27%, due 09/20/19 | 9,747,237 | |||||||||||||
Total Insured Time Share | 16,931,046 |
See accompanying notes to the financial statements.
9
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Insured Transportation — 0.2% | |||||||||||||||
4,730,000 | GE Seaco Finance SRL, Series 04-1A, Class A, 144A, AMBAC, 1 mo. LIBOR + .30%, 0.57%, due 04/17/19 | 4,481,675 | |||||||||||||
Rate Reduction Bonds — 1.3% | |||||||||||||||
7,955,896 | Massachusetts RRB Special Purpose Trust, Series 05-1, Class A3, 4.13%, due 09/15/13 | 8,076,826 | |||||||||||||
24,500,000 | PG&E Energy Recovery Funding LLC, Series 05-1, Class A4, 4.37%, due 06/25/14 | 25,342,310 | |||||||||||||
Total Rate Reduction Bonds | 33,419,136 | ||||||||||||||
Residential Asset-Backed Securities (United States) — 15.1% | |||||||||||||||
977,554 | Accredited Mortgage Loan Trust, Series 04-4, Class A1B, 1 mo. LIBOR + .39%, 0.65%, due 01/25/35 | 700,173 | |||||||||||||
392,511 | Accredited Mortgage Loan Trust, Series 07-1, Class A1, 1 mo. LIBOR + .05%, 0.31%, due 02/25/37 | 389,174 | |||||||||||||
2,859,395 | ACE Securities Corp., Series 06-ASL1, Class A, 1 mo. LIBOR + .14%, 0.40%, due 02/25/36 | 365,145 | |||||||||||||
232,427 | ACE Securities Corp., Series 06-ASP2, Class A2B, 1 mo. LIBOR + .14%, 0.40%, due 03/25/36 | 229,243 | |||||||||||||
8,500,000 | ACE Securities Corp., Series 06-ASP2, Class A2C, 1 mo. LIBOR + .18%, 0.44%, due 03/25/36 | 5,958,500 | |||||||||||||
6,146,827 | ACE Securities Corp., Series 06-ASP4, Class A2B, 1 mo. LIBOR + .10%, 0.36%, due 08/25/36 | 4,625,487 | |||||||||||||
20,300,000 | ACE Securities Corp., Series 06-ASP5, Class A2C, 1 mo. LIBOR + .18%, 0.44%, due 10/25/36 | 7,663,250 | |||||||||||||
11,128,848 | ACE Securities Corp., Series 06-CW1, Class A2B, 1 mo. LIBOR + .10%, 0.36%, due 07/25/36 | 9,542,988 | |||||||||||||
5,900,000 | ACE Securities Corp., Series 06-HE2, Class A2C, 1 mo. LIBOR + .16%, 0.42%, due 05/25/36 | 3,111,070 | |||||||||||||
4,673,167 | ACE Securities Corp., Series 06-HE3, Class A2B, 1 mo. LIBOR + .09%, 0.35%, due 06/25/36 | 4,392,777 | |||||||||||||
11,100,000 | ACE Securities Corp., Series 06-OP1, Class A2C, 1 mo. LIBOR + .15%, 0.41%, due 04/25/36 | 5,522,250 | |||||||||||||
3,944,677 | ACE Securities Corp., Series 06-SL1, Class A, 1 mo. LIBOR + .16%, 0.42%, due 09/25/35 | 972,363 | |||||||||||||
8,043,020 | ACE Securities Corp., Series 06-SL3, Class A1, 1 mo. LIBOR + .10%, 0.36%, due 06/25/36 | 977,227 |
See accompanying notes to the financial statements.
10
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||||||
9,349,201 | ACE Securities Corp., Series 06-SL3, Class A2, 1 mo. LIBOR + .17%, 0.43%, due 06/25/36 | 909,677 | |||||||||||||
6,797,273 | ACE Securities Corp., Series 07-HE1, Class A2A, 1 mo. LIBOR + .09%, 0.35%, due 01/25/37 | 3,449,616 | |||||||||||||
4,745,840 | ACE Securities Corp., Series 07-WM1, Class A2A, 1 mo. LIBOR + .07%, 0.33%, due 11/25/36 | 2,574,618 | |||||||||||||
12,135,140 | Alliance Bancorp Trust, Series 07-S1, Class A1, 144A, 1 mo. LIBOR + .20%, 0.46%, due 05/25/37 | 1,259,628 | |||||||||||||
3,448,275 | Argent Securities, Inc., Series 04-W8, Class A5, 1 mo. LIBOR + .52%, 0.78%, due 05/25/34 | 2,896,551 | |||||||||||||
54,258,087 | Argent Securities, Inc., Series 06-M1, Class A2C, 1 mo. LIBOR + .15%, 0.41%, due 07/25/36 | 22,279,727 | |||||||||||||
8,219,499 | Argent Securities, Inc., Series 06-M2, Class A2B, 1 mo. LIBOR + .11%, 0.37%, due 09/25/36 | 3,185,056 | |||||||||||||
11,122,972 | Argent Securities, Inc., Series 06-W2, Class A2B, 1 mo. LIBOR + .19%, 0.45%, due 03/25/36 | 4,449,189 | |||||||||||||
311,207 | Argent Securities, Inc., Series 06-W4, Class A2B, 1 mo. LIBOR + .11%, 0.37%, due 05/25/36 | 111,256 | |||||||||||||
8,803,415 | Argent Securities, Inc., Series 06-W5, Class A2C, 1 mo. LIBOR + .15%, 0.41%, due 06/25/36 | 3,345,298 | |||||||||||||
4,837,461 | Asset Backed Funding Certificates, Series 06-OPT2, Class A3B, 1 mo. LIBOR + .11%, 0.37%, due 10/25/36 | 4,791,506 | |||||||||||||
10,100,000 | Asset Backed Funding Certificates, Series 06-OPT2, Class A3C, 1 mo. LIBOR + .15%, 0.41%, due 10/25/36 | 6,691,250 | |||||||||||||
21,080,092 | Asset Backed Funding Certificates, Series 07-NC1, Class A1, 144A, 1 mo. LIBOR + .22%, 0.48%, due 05/25/37 | 17,496,476 | |||||||||||||
5,583,937 | Bayview Financial Acquisition Trust, Series 04-B, Class A1, 144A, 1 mo. LIBOR + .50%, 1.26%, due 05/28/39 | 2,819,888 | |||||||||||||
5,821,552 | Bayview Financial Acquisition Trust, Series 04-B, Class A2, 144A, 1 mo. LIBOR + .65%, 1.56%, due 05/28/39 | 2,168,528 | |||||||||||||
10,580,152 | Bayview Financial Acquisition Trust, Series 05-A, Class A1, 144A, 1 mo. LIBOR + .50%, 1.26%, due 02/28/40 | 6,713,106 | |||||||||||||
3,949,391 | Bear Stearns Asset Backed Securities, Inc., Series 07-AQ1, Class A1, 1 mo. LIBOR + .11%, 0.37%, due 11/25/36 | 2,828,159 | |||||||||||||
8,500,000 | Bear Stearns Asset Backed Securities, Inc., Series 07-AQ1, Class A2, 1 mo. LIBOR + .20%, 0.46%, due 11/25/36 | 1,755,250 | |||||||||||||
4,028,201 | Bear Stearns Mortgage Funding Trust, Series 07-SL2, Class 1A, 1 mo. LIBOR + .16%, 0.42%, due 02/25/37 | 422,558 |
See accompanying notes to the financial statements.
11
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||||||
4,065,334 | Carrington Mortgage Loan Trust, Series 06-NC1, Class A2, 1 mo. LIBOR + .16%, 0.42%, due 01/25/36 | 3,986,629 | |||||||||||||
2,686,060 | Carrington Mortgage Loan Trust, Series 07-FRE1, Class A1, 1 mo. LIBOR + .12%, 0.38%, due 02/25/37 | 2,459,625 | |||||||||||||
38,100,000 | Carrington Mortgage Loan Trust, Series 07-FRE1, Class A2, 1 mo. LIBOR + .20%, 0.46%, due 02/25/37 | 20,722,590 | |||||||||||||
11,200,147 | Centex Home Equity, Series 06-A, Class AV3, 1 mo. LIBOR + .16%, 0.42%, due 06/25/36 | 9,026,311 | |||||||||||||
195,760 | Chase Funding Mortgage Loan Trust, Series 03-3, Class 2A2, 1 mo. LIBOR + .27%, 0.80%, due 04/25/33 | 156,608 | |||||||||||||
146,194 | Citigroup Mortgage Loan Trust, Inc., Series 04-OPT1, Class A1B, 1 mo. LIBOR + .41%, 0.67%, due 10/25/34 | 141,421 | |||||||||||||
12,100,000 | Citigroup Mortgage Loan Trust, Inc., Series 06-HE3, Class A2C, 1 mo. LIBOR + .16%, 0.42%, due 12/25/36 | 4,416,500 | |||||||||||||
36,200,000 | Countrywide Asset-Backed Certificates, Series 06-BC3, Class 2A2, 1 mo. LIBOR + .14%, 0.40%, due 02/25/37 | 27,265,840 | |||||||||||||
3,647,066 | Countrywide Asset-Backed Certificates, Series 06-BC5, Class 2A1, 1 mo. LIBOR + .08%, 0.34%, due 03/25/37 | 3,608,772 | |||||||||||||
420,784 | Equity One ABS, Inc., Series 04-1, Class AV2, 1 mo. LIBOR + .30%, 0.56%, due 04/25/34 | 273,509 | |||||||||||||
13,078,298 | First Franklin Mortgage Loan Asset Backed Certificates, Series 06-FF5, Class 2A3, 1 mo. LIBOR + .16%, 0.42%, due 04/25/36 | 7,920,544 | |||||||||||||
3,950,215 | Fremont Home Loan Trust, Series 06-A, Class 1A2, 1 mo. LIBOR + .20%, 0.46%, due 05/25/36 | 2,449,133 | |||||||||||||
1,590,305 | Fremont Home Loan Trust, Series 06-B, Class 2A2, 1 mo. LIBOR + .10%, 0.36%, due 08/25/36 | 922,377 | |||||||||||||
19,925,000 | Fremont Home Loan Trust, Series 06-B, Class 2A3, 1 mo. LIBOR + .16%, 0.42%, due 08/25/36 | 7,073,375 | |||||||||||||
13,902,246 | GE-WMC Mortgage Securities, Series 06-1, Class A2B, 1 mo. LIBOR + .15%, 0.41%, due 08/25/36 | 4,859,808 | |||||||||||||
3,326,576 | Household Home Equity Loan Trust, Series 05-2, Class A2, 1 mo. LIBOR + .31%, 0.58%, due 01/20/35 | 2,819,273 | |||||||||||||
2,875,862 | Household Home Equity Loan Trust, Series 05-3, Class A2, 1 mo. LIBOR + .29%, 0.56%, due 01/20/35 | 2,495,709 | |||||||||||||
9,993,422 | Household Home Equity Loan Trust, Series 06-1, Class A1, 1 mo. LIBOR + .16%, 0.43%, due 01/20/36 | 8,725,506 | |||||||||||||
29,203,573 | J.P. Morgan Mortgage Acquisition Corp., Series 06-WMC4, Class A3, 1 mo. LIBOR + .12%, 0.38%, due 12/25/36 | 11,068,154 |
See accompanying notes to the financial statements.
12
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||||||
2,649,764 | Master Asset-Backed Securities Trust, Series 05-FRE1, Class A4, 1 mo. LIBOR + .25%, 0.51%, due 10/25/35 | 2,513,963 | |||||||||||||
4,190,886 | Master Asset-Backed Securities Trust, Series 06-AM3, Class A2, 1 mo. LIBOR + .13%, 0.39%, due 10/25/36 | 4,033,728 | |||||||||||||
20,440,251 | Master Asset-Backed Securities Trust, Series 06-FRE2, Class A4, 1 mo. LIBOR + .15%, 0.41%, due 03/25/36 | 10,220,126 | |||||||||||||
11,300,000 | Master Asset-Backed Securities Trust, Series 06-HE2, Class A3, 1 mo. LIBOR + .15%, 0.41%, due 06/25/36 | 3,983,250 | |||||||||||||
21,960,000 | Master Asset-Backed Securities Trust, Series 06-HE3, Class A3, 1 mo. LIBOR + .15%, 0.41%, due 08/25/36 | 7,686,000 | |||||||||||||
14,400,000 | Master Asset-Backed Securities Trust, Series 06-NC3, Class A4, 1 mo. LIBOR + .16%, 0.42%, due 10/25/36 | 5,184,000 | |||||||||||||
6,223,305 | Master Second Lien Trust, Series 06-1, Class A, 1 mo. LIBOR + .16%, 0.42%, due 03/25/36 | 801,251 | |||||||||||||
7,003,134 | Merrill Lynch Mortgage Investors, Series 07-HE2, Class A2A, 1 mo. LIBOR + .12%, 0.38%, due 02/25/37 | 4,589,154 | |||||||||||||
2,761,735 | Morgan Stanley Capital, Inc., Series 04-SD1, Class A, 1 mo. LIBOR + .40%, 0.66%, due 08/25/34 | 2,140,345 | |||||||||||||
32,500,000 | Morgan Stanley Capital, Inc., Series 07-HE4, Class A2C, 1 mo. LIBOR + .23%, 0.49%, due 02/25/37 | 12,918,750 | |||||||||||||
16,777,808 | Morgan Stanley Home Equity Loans, Series 06-3, Class A3, 1 mo. LIBOR + .16%, 0.42%, due 04/25/36 | 10,318,352 | |||||||||||||
6,007,644 | Morgan Stanley Home Equity Loans, Series 07-2, Class A1, 1 mo. LIBOR + .10%, 0.36%, due 04/25/37 | 5,542,052 | |||||||||||||
9,500,000 | Morgan Stanley IXIS Real Estate Capital Trust, Series 06-2, Class A3, 1 mo. LIBOR + .15%, 0.41%, due 11/25/36 | 4,013,750 | |||||||||||||
6,540,007 | People's Choice Home Loan Securities Trust, Series 05-4, Class 1A2, 1 mo. LIBOR + .26%, 0.52%, due 12/25/35 | 3,825,250 | |||||||||||||
7,657,519 | RAAC Series Trust, Series 06-SP1, Class A2, 1 mo. LIBOR + .19%, 0.45%, due 09/25/45 | 6,645,195 | |||||||||||||
2,176,522 | Residential Asset Mortgage Products, Inc., Series 05-RS8, Class A2, 1 mo. LIBOR + .29%, 0.55%, due 10/25/33 | 1,910,333 | |||||||||||||
5,294,627 | Residential Asset Securities Corp., Series 05-KS12, Class A2, 1 mo. LIBOR + .25%, 0.51%, due 01/25/36 | 5,068,441 | |||||||||||||
2,930,831 | Residential Asset Securities Corp., Series 07-KS3, Class AI1, 1 mo. LIBOR + .11%, 0.37%, due 04/25/37 | 2,855,215 | |||||||||||||
236,691 | Saxon Asset Securities Trust, Series 04-1, Class A, 1 mo. LIBOR + .27%, 0.80%, due 03/25/35 | 130,180 |
See accompanying notes to the financial statements.
13
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||||||
2,590,503 | Securitized Asset Backed Receivables LLC, Series 06-NC1, Class A2, 1 mo. LIBOR + .16%, 0.42%, due 03/25/36 | 2,214,880 | |||||||||||||
1,437,990 | Security National Mortgage Loan Trust, Series 06-2A, Class A1, 144A, 1 mo. LIBOR + .29%, 0.55%, due 10/25/36 | 1,409,230 | |||||||||||||
1,643,958 | SG Mortgage Securities Trust, Series 05-OPT1, Class A2, 1 mo. LIBOR + .26%, 0.52%, due 10/25/35 | 1,495,344 | |||||||||||||
1,732,570 | Soundview Home Equity Loan Trust, Series 07-NS1, Class A1, 1 mo. LIBOR + .12%, 0.38%, due 01/25/37 | 1,652,439 | |||||||||||||
17,100,000 | Specialty Underwriting & Residential Finance, Series 06-BC3, Class A2C, 1 mo. LIBOR + .15%, 0.41%, due 06/25/37 | 7,715,520 | |||||||||||||
7,484,375 | Structured Asset Investment Loan Trust, Series 06-1, Class A3, 1 mo. LIBOR + .20%, 0.46%, due 01/25/36 | 5,594,570 | |||||||||||||
4,464,366 | Structured Asset Securities Corp., Series 05-S6, Class A2, 1 mo. LIBOR + .29%, 0.55%, due 11/25/35 | 2,031,287 | |||||||||||||
15,341,449 | Yale Mortgage Loan Trust, Series 07-1, Class A, 144A, 1 mo. LIBOR + .40%, 0.66%, due 06/25/37 | 1,840,974 | |||||||||||||
Total Residential Asset-Backed Securities (United States) | 373,322,247 | ||||||||||||||
Residential Mortgage-Backed Securities (Australian) — 3.9% | |||||||||||||||
3,162,270 | Crusade Global Trust, Series 04-2, Class A1, 3 mo. LIBOR + .13%, 0.48%, due 11/19/37 | 3,062,073 | |||||||||||||
6,985,941 | Crusade Global Trust, Series 06-1, Class A1, 144A, 3 mo. LIBOR + .06%, 0.58%, due 07/20/38 | 6,722,949 | |||||||||||||
11,292,981 | Crusade Global Trust, Series 07-1, Class A1, 3 mo. LIBOR + .06%, 0.58%, due 04/19/38 | 10,868,150 | |||||||||||||
1,881,494 | Interstar Millennium Trust, Series 03-3G, Class A2, 3 mo. LIBOR + .25%, 1.04%, due 09/27/35 | 1,772,367 | |||||||||||||
18,220,871 | Interstar Millennium Trust, Series 04-2G, Class A, 3 mo. LIBOR + .20%, 0.94%, due 03/14/36 | 16,659,343 | |||||||||||||
1,216,847 | Interstar Millennium Trust, Series 05-1G, Class A, 3 mo. LIBOR + .12%, 0.94%, due 12/08/36 | 1,173,212 | |||||||||||||
2,008,104 | Interstar Millennium Trust, Series 06-2GA, Class A2, 144A, 3 mo. LIBOR + .08%, 0.38%, due 05/27/38 | 1,822,355 | |||||||||||||
1,499,192 | Medallion Trust, Series 05-1G, Class A1, 3 mo. LIBOR + .08%, 0.49%, due 05/10/36 | 1,452,394 | |||||||||||||
7,448,707 | Medallion Trust, Series 06-1G, Class A1, 3 mo. LIBOR + .05%, 0.59%, due 06/14/37 | 7,097,753 |
See accompanying notes to the financial statements.
14
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Mortgage-Backed Securities (Australian) — continued | |||||||||||||||
4,076,231 | Medallion Trust, Series 07-1G, Class A1, 3 mo. LIBOR + .04%, 0.34%, due 02/27/39 | 3,937,431 | |||||||||||||
9,203,537 | National RMBS Trust, Series 06-3, Class A1, 144A, 3 mo. LIBOR + .07%, 0.59%, due 10/20/37 | 8,940,014 | |||||||||||||
11,392,116 | Puma Finance Ltd., Series G5, Class A1, 144A, 3 mo. LIBOR + .07%, 0.41%, due 02/21/38 | 10,854,408 | |||||||||||||
12,496,212 | Superannuation Members Home Loans Global Fund, Series 07-1, Class A1, 3 mo. LIBOR + .06%, 0.60%, due 06/12/40 | 11,963,423 | |||||||||||||
615,717 | Superannuation Members Home Loans Global Fund, Series 6, Class A, 3 mo. LIBOR + .16%, 0.74%, due 11/09/35 | 609,560 | |||||||||||||
1,220,428 | Superannuation Members Home Loans Global Fund, Series 7, Class A1, 3 mo. LIBOR + .14%, 0.68%, due 03/09/36 | 1,194,587 | |||||||||||||
1,050,071 | Superannuation Members Home Loans Global Fund, Series 8, Class A1, 3 mo. LIBOR + .07%, 0.60%, due 01/12/37 | 1,010,693 | |||||||||||||
8,808,215 | Westpac Securitization Trust, Series 07-1G, Class A2A, 3 mo. LIBOR + .05%, 0.39%, due 05/21/38 | 8,455,886 | |||||||||||||
Total Residential Mortgage-Backed Securities (Australian) | 97,596,598 | ||||||||||||||
Residential Mortgage-Backed Securities (European) — 7.2% | |||||||||||||||
11,452,791 | Aire Valley Mortgages, Series 06-1A, Class 1A, 144A, 3 mo. LIBOR + .11%, 0.65%, due 09/20/66 | 9,481,766 | |||||||||||||
4,541,197 | Aire Valley Mortgages, Series 07-1A, Class 1A2, 144A, 3 mo. LIBOR + .09%, 0.63%, due 03/20/30 | 4,511,680 | |||||||||||||
12,300,000 | Arkle Master Issuer Plc, Series 06-1A, Class 4A1, 144A, 3 mo. LIBOR + .09%, 0.46%, due 02/17/52 | 12,197,910 | |||||||||||||
30,085,828 | Brunel Residential Mortgages, Series 07-1A, Class A4C, 144A, 3 mo. LIBOR + .10%, 0.63%, due 01/13/39 | 26,926,816 | |||||||||||||
2,109,041 | Gracechurch Mortgage Funding Plc, Series 1A, Class A2B, 144A, 3 mo. LIBOR + .07%, 0.60%, due 10/11/41 | 2,098,496 | |||||||||||||
4,812,644 | Granite Master Issuer Plc, Series 06-2, Class A4, 1 mo. LIBOR + .04%, 0.31%, due 12/20/54 | 4,470,946 | |||||||||||||
2,733,824 | Granite Mortgages Plc, Series 04-3, Class 2A1, 3 mo. LIBOR + .14%, 0.68%, due 09/20/44 | 2,558,859 | |||||||||||||
38,600,000 | Holmes Financing Plc, Series 10A, Class 4A1, 144A, 3 mo. LIBOR + .08%, 0.61%, due 07/15/40 | 38,538,240 | |||||||||||||
10,000,000 | Holmes Master Issuer Plc, Series 07-2A, Class 3A1, 3 mo. LIBOR + .08%, 0.61%, due 07/15/21 | 9,879,000 |
See accompanying notes to the financial statements.
15
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Mortgage-Backed Securities (European) — continued | |||||||||||||||
12,596,822 | Kildare Securities Ltd., Series 07-1A, Class A2, 144A, 3 mo. LIBOR + .06%, 0.60%, due 12/10/43 | 12,045,081 | |||||||||||||
3,508,505 | Leek Finance Plc, Series 17A, Class A2B, 144A, 3 mo. LIBOR + .14%, 0.68%, due 12/21/37 | 3,372,550 | |||||||||||||
6,355,690 | Paragon Mortgages Plc, Series 7A, Class A1A, 144A, 3 mo. LIBOR + .21%, 0.80%, due 05/15/34 | 5,437,929 | |||||||||||||
10,929,539 | Paragon Mortgages Plc, Series 12A, Class A2C, 144A, 3 mo. LIBOR + .11%, 0.49%, due 11/15/38 | 8,852,926 | |||||||||||||
6,358,526 | Paragon Mortgages Plc, Series 14A, Class A2C, 144A, 3 mo. LIBOR + .10%, 0.64%, due 09/15/39 | 5,244,512 | |||||||||||||
26,600,000 | Permanent Master Issuer Plc, Series 06-1, Class 5A, 3 mo. LIBOR + .11%, 0.64%, due 07/15/33 | 25,812,640 | |||||||||||||
6,400,000 | Permanent Master Issuer Plc, Series 07-1, Class 4A, 3 mo. LIBOR + .08%, 0.61%, due 10/15/33 | 6,256,640 | |||||||||||||
Total Residential Mortgage-Backed Securities (European) | 177,685,991 | ||||||||||||||
Residential Mortgage-Backed Securities (United States) — 0.1% | |||||||||||||||
582,496 | Chevy Chase Mortgage Funding Corp., Series 04-3A, Class A2, 144A, 1 mo. LIBOR + .30%, 0.56%, due 08/25/35 | 355,322 | |||||||||||||
548,078 | GreenPoint Mortgage Funding Trust, Series 05-HE4, Class 2A3C, 1 mo. LIBOR + .25%, 0.51%, due 07/25/30 | 532,577 | |||||||||||||
3,019,309 | Mellon Residential Funding Corp., Series 04-TBC1, Class A, 144A, 1 mo. LIBOR + .25%, 0.51%, due 02/26/34 | 2,165,883 | |||||||||||||
Total Residential Mortgage-Backed Securities (United States) | 3,053,782 | ||||||||||||||
Student Loans — 5.2% | |||||||||||||||
2,663,563 | College Loan Corp. Trust, Series 07-1, Class A1, 3 mo. LIBOR + .01%, 0.51%, due 01/25/23 | 2,636,927 | |||||||||||||
20,300,000 | College Loan Corp. Trust, Series 07-2, Class A1, 3 mo. LIBOR + .25%, 0.75%, due 01/25/24 | 20,302,436 | |||||||||||||
884,031 | Goal Capital Funding Trust, Series 06-1, Class A1, 3 mo. LIBOR, 0.32%, due 08/25/20 | 881,821 | |||||||||||||
2,294,197 | Goal Capital Funding Trust, Series 07-1, Class A1, 3 mo. LIBOR + .02%, 0.56%, due 06/25/21 | 2,290,755 | |||||||||||||
1,120,697 | Montana Higher Education Student Assistance Corp., Series 05-1, Class A, 3 mo. LIBOR + .04%, 0.58%, due 06/20/15 | 1,119,812 |
See accompanying notes to the financial statements.
16
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Student Loans — continued | |||||||||||||||
6,325,475 | National Collegiate Student Loan Trust, Series 06-1, Class A2, 1 mo. LIBOR + .14%, 0.40%, due 08/25/23 | 6,167,339 | |||||||||||||
9,600,000 | Nelnet Student Loan Trust, Series 05-2, Class A4, 3 mo. LIBOR + .08%, 0.62%, due 12/23/19 | 9,413,184 | |||||||||||||
12,830,971 | SLM Student Loan Trust, Series 05-1, Class A2, 3 mo. LIBOR + .08%, 0.58%, due 04/27/20 | 12,707,294 | |||||||||||||
24,600,000 | SLM Student Loan Trust, Series 05-3, Class A4, 3 mo. LIBOR + .07%, 0.57%, due 04/27/20 | 24,354,000 | |||||||||||||
23,353,033 | SLM Student Loan Trust, Series 07-2, Class A2, 3 mo. LIBOR, 0.50%, due 07/25/17 | 23,192,364 | |||||||||||||
5,500,000 | SLM Student Loan Trust, Series 07-6, Class A2, 3 mo. LIBOR + .25%, 0.75%, due 01/25/19 | 5,490,980 | |||||||||||||
9,983,876 | SLM Student Loan Trust, Series 07-A, Class A1, 3 mo. LIBOR + .03%, 0.57%, due 09/15/22 | 9,572,042 | |||||||||||||
10,800,000 | SLM Student Loan Trust, Series 08-6, Class A3, 3 mo. LIBOR + .75%, 1.25%, due 01/25/19 | 10,767,937 | |||||||||||||
Total Student Loans | 128,896,891 | ||||||||||||||
Time Share — 0.1% | |||||||||||||||
3,019,527 | Sierra Receivables Funding Co., Series 08-1A, Class A2, 144A, 1 mo. LIBOR + 4.00%, 4.27%, due 02/20/20 | 3,147,857 | |||||||||||||
Total Asset-Backed Securities | 2,419,276,989 | ||||||||||||||
U.S. Government Agency — 1.4% | |||||||||||||||
14,318,750 | Agency for International Development Floater (Support of Morocco), 6 mo. LIBOR -0.02%, 0.49%, due 02/01/25 (a) | 13,253,166 | |||||||||||||
12,375,000 | Agency for International Development Floater (Support of Morocco), 6 mo. LIBOR + .15%, 0.65%, due 10/29/26 (a) | 11,524,763 | |||||||||||||
506,733 | Agency for International Development Floater (Support of Peru), Series A, 6 mo. U.S. Treasury Bill + .35%, 0.54%, due 05/01/14 (a) | 497,041 | |||||||||||||
9,165,000 | Agency for International Development Floater (Support of Tunisia), 6 mo. LIBOR, 0.50%, due 07/01/23 (a) | 8,564,341 | |||||||||||||
Total U.S. Government Agency | 33,839,311 | ||||||||||||||
TOTAL DEBT OBLIGATIONS (COST $2,929,785,771) | 2,453,116,300 |
See accompanying notes to the financial statements.
17
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
SHORT-TERM INVESTMENTS — 1.1% | |||||||||||||||
Money Market Funds — 1.1% | |||||||||||||||
2,287,686 | State Street Institutional Liquid Reserves Fund-Institutional Class | 2,287,686 | |||||||||||||
25,563,975 | State Street Institutional Treasury Plus Money Market Fund-Institutional Class | 25,563,975 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $27,851,661) | 27,851,661 | ||||||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $2,957,637,432) | 2,480,967,961 | ||||||||||||||
Other Assets and Liabilities (net) — (0.0%) | (1,055,730 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 2,479,912,231 |
See accompanying notes to the financial statements.
18
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
A summary of outstanding financial instruments at August 31, 2010 is as follows:
Forward Currency Contracts
Settlement Date | Counterparty | Deliver/Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||
Sales # | |||||||||||||||||||||||
10/12/10 | Deutsche Bank AG | EUR | 30,000,000 | $ | 38,015,600 | $ | (1,226,000 | ) |
# Fund sells foreign currency; buys USD.
Swap Agreements
Credit Default Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay)^ | Annual Premium | Implied Credit Spread (1) | Deliverable on Default | Maximum Potential Amount of Future Payments by the Fund Under the Contract (2) | Market Value | |||||||||||||||||||||||||||||||||||
60,000,000 | USD | 9/20/2010 | Morgan Stanley | Receive | 0.40 | % | 0.16 | % | Eagle | 60,000,000 | USD | $ | 55,560 | ||||||||||||||||||||||||||||||
Creek | |||||||||||||||||||||||||||||||||||||||||||
CDO | |||||||||||||||||||||||||||||||||||||||||||
31,000,000 | USD | 3/20/2013 | Morgan Stanley | Receive | 0.25 | % | 1.90 | % | MS Synthetic 2006-1 | 31,000,000 | USD | (1,285,251 | ) | ||||||||||||||||||||||||||||||
$ | (1,229,691 | ) | |||||||||||||||||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
^ Receive - Fund receives premium and sells credit protection.
(Pay) - Fund pays premium and buys credit protection.
(1) Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on the reference security, as of August 31, 2010, serve as an indicator of the current status of the payment/performance risk and reflect the likelihood or risk of default for the reference entity. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection. Wider (i.e.. higher) credit spreads represent a deterioration of the referenced entity's credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.
See accompanying notes to the financial statements.
19
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
(2) The maximum potential amount the Fund could be required to pay as a seller of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.
As of August 31, 2010, for forward currency contracts, futures contracts, swap agreements and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
Notes to Schedule of Investments:
144A - Securities 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.
AMBAC - Insured as to the payment of principal and interest by AMBAC Assurance Corporation.
CapMAC - Insured as to the payment of principal and interest by Capital Markets Assurance Corporation.
CDO - Collateralized Debt Obligation
CMBS - Commercial Mortgage Backed Security
EUR LIBOR - London Interbank Offered Rate denominated in Euros.
FGIC - Insured as to the payment of principal and interest by Financial Guaranty Insurance Corporation.
FSA - Insured as to the payment of principal and interest by Financial Security Assurance.
LIBOR - London Interbank Offered Rate
MBIA - Insured as to the payment of principal and interest by MBIA Insurance Corp.
RMBS - Residential Mortgage Backed Security
XL - Insured as to the payment of principal and interest by XL Capital Assurance.
The rates shown on variable rate notes are the current interest rates at August 31, 2010, which are subject to change based on the terms of the security.
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
Currency Abbreviations:
EUR - Euro
USD - United States Dollar
See accompanying notes to the financial statements.
20
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments, at value (cost $2,957,637,432) (Note 2) | $ | 2,480,967,961 | |||||
Dividends and interest receivable | 2,780,965 | ||||||
Receivable for collateral on open swap contracts (Note 4) | 2,412,000 | ||||||
Receivable for open swap contracts (Note 4) | 55,560 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 49,198 | ||||||
Total assets | 2,486,265,684 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 5): | |||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 5,550 | ||||||
Unrealized depreciation on open forward currency contracts (Note 4) | 1,226,000 | ||||||
Payable for open swap contracts (Note 4) | 1,285,251 | ||||||
Miscellaneous payable (Note 4) | 3,531,183 | ||||||
Accrued expenses | 305,469 | ||||||
Total liabilities | 6,353,453 | ||||||
Net assets | $ | 2,479,912,231 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 3,068,673,555 | |||||
Distributions in excess of net investment income | (1,714,162 | ) | |||||
Accumulated net realized loss | (107,921,983 | ) | |||||
Net unrealized depreciation | (479,125,179 | ) | |||||
$ | 2,479,912,231 | ||||||
Net assets | $ | 2,479,912,231 | |||||
Shares outstanding | 212,279,989 | ||||||
Net asset value per share | $ | 11.68 |
See accompanying notes to the financial statements.
21
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Interest | $ | 21,442,670 | |||||
Dividends | 51,528 | ||||||
Total investment income | 21,494,198 | ||||||
Expenses: | |||||||
Custodian, fund accounting agent and transfer agent fees | 181,884 | ||||||
Interest expense (Note 2) | 118,389 | ||||||
Legal fees | 87,032 | ||||||
Audit and tax fees | 40,112 | ||||||
Trustees fees and related expenses (Note 5) | 32,092 | ||||||
Registration fees | 1,840 | ||||||
Miscellaneous | 18,124 | ||||||
Total expenses | 479,473 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (304,888 | ) | |||||
Expense reductions (Note 2) | (2,181 | ) | |||||
Net expenses | 172,404 | ||||||
Net investment income (loss) | 21,321,794 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | (345,241 | ) | |||||
Closed swap contracts | (539,486 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 4,082,218 | ||||||
Net realized gain (loss) | 3,197,491 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 102,023,434 | ||||||
Open swap contracts | 588,917 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (1,234,861 | ) | |||||
Net unrealized gain (loss) | 101,377,490 | ||||||
Net realized and unrealized gain (loss) | 104,574,981 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 125,896,775 |
See accompanying notes to the financial statements.
22
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 21,321,794 | $ | 55,044,211 | |||||||
Net realized gain (loss) | 3,197,491 | (9,426,626 | ) | ||||||||
Change in net unrealized appreciation (depreciation) | 101,377,490 | 740,804,361 | |||||||||
Net increase (decrease) in net assets from operations | 125,896,775 | 786,421,946 | |||||||||
Distributions to shareholders from (Note 2): | |||||||||||
Net investment income | (23,307,300 | ) | (52,523,479 | ) | |||||||
Return of capital | (803,192,708 | ) | (1,186,476,530 | ) | |||||||
(826,500,008 | ) | (1,239,000,009 | ) | ||||||||
Net share transactions (Note 9): | (8,898,501 | ) | (34,755,764 | ) | |||||||
Total increase (decrease) in net assets resulting from net share transactions | (709,501,734 | ) | (487,333,827 | ) | |||||||
Net assets: | |||||||||||
Beginning of period | 3,189,413,965 | 3,676,747,792 | |||||||||
End of period (including distributions in excess of net investment income of $1,714,162 and accumulated undistributed net investment income of $271,344, respectively) | $ | 2,479,912,231 | $ | 3,189,413,965 |
See accompanying notes to the financial statements.
23
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Financial Highlights
(For a share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 14.98 | $ | 17.10 | $ | 24.03 | $ | 25.66 | $ | 25.60 | $ | 25.33 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.10 | 0.26 | 0.76 | 1.38 | 1.43 | 1.01 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.49 | 3.40 | (4.41 | ) | (1.64 | ) | 0.00 | (a) | (0.03 | ) | |||||||||||||||||
Total from investment operations | 0.59 | 3.66 | (3.65 | ) | (0.26 | ) | 1.43 | 0.98 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.11 | ) | (0.24 | ) | (1.06 | ) | (1.37 | ) | (1.37 | ) | (0.71 | ) | |||||||||||||||
From return on capital | (3.78 | ) | (5.54 | ) | (2.22 | ) | — | — | — | ||||||||||||||||||
Total distributions | (3.89 | ) | (5.78 | ) | (3.28 | ) | (1.37 | ) | (1.37 | ) | (0.71 | ) | |||||||||||||||
Net asset value, end of period | $ | 11.68 | $ | 14.98 | $ | 17.10 | $ | 24.03 | $ | 25.66 | $ | 25.60 | |||||||||||||||
Total Return(b) | 4.52 | %** | 25.58 | % | (15.97 | )% | (1.14 | )% | 5.68 | % | 3.89 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 2,479,912 | $ | 3,189,414 | $ | 3,676,748 | $ | 7,671,415 | $ | 6,603,600 | $ | 4,480,312 | |||||||||||||||
Net operating expenses to average daily net assets(c) | 0.00 | %(d)* | 0.01 | %(d) | 0.00 | %(d) | 0.00 | %(d) | 0.00 | % | 0.00 | % | |||||||||||||||
Interest expense to average daily net assets | 0.01 | %(e)* | 0.01 | %(e) | — | — | 0.01 | % | 0.02 | % | |||||||||||||||||
Total net expenses to average daily net assets | 0.01 | %(d)* | 0.01 | %(d) | 0.00 | %(d)(f) | 0.00 | %(d)(f) | 0.01 | % | 0.02 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 1.48 | %* | 1.61 | % | 3.46 | % | 5.41 | % | 5.50 | % | 3.96 | % | |||||||||||||||
Portfolio turnover rate | 0 | %** | 0 | % | 16 | % | 27 | % | 68 | % | 45 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets | 0.02 | %* | 0.02 | % | 0.02 | % | 0.01 | % | 0.02 | % | 0.02 | % | |||||||||||||||
Redemption fees consisted of the following per share amounts:† | $ | 0.00 | (g) | $ | 0.00 | (g) | $ | 0.02 | $ | — | $ | — | $ | — |
(a) Net realized and unrealized gain (loss) was less than $0.01 per share.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(c) Net operating expenses were less than 0.01% to average daily net assets.
(d) The net expense ratio does not include the effect of expense reductions (Note 2).
(e) Interest expense incurred as a result of entering into reverse repurchase agreements and/or payables owed to Lehman Brothers in connection with the termination of derivative contracts in 2008 is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income.
(f) Total net expenses were less than 0.01% to average daily net assets.
(g) There were no redemption fees during the period.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
24
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO Short-Duration Collateral Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks total return comparable to that of its benchmark, the J.P. Morgan U.S. 3 Month Cash Index. The Fund is not currently pursuing an active investment program.
Historically, the Fund primarily has invested in and primarily holds asset-backed securities of any credit quality, including, but not limited to, securities backed by pools of residential and commercial mortgages, credit-card receivables, home equity loans, automobile loans, educational loans, corporate and sovereign bonds, and bank loans made to corporations. In addition, the Fund has invested in government securities, corporate debt securities, money market instruments and commercial paper and has entered into credit default swaps, reverse repurchase agreements, and repurchase agreements. The Fund has also used other exchange-traded and over-the-counter ("OTC") derivatives. Because of the deterioration in credit markets that became acute in 2008, the Fund currently has and may continue to have material exposure to below investment grade securities. The Manager does not seek to maintain a specified interest rate duration for t he Fund.
Since October 2008, the Fund has declared and paid distributions when it has acquired a meaningful cash position rather than reinvesting that cash in portfolio securities. The Fund currently intends to continue this practice. A substantial portion of any such distributions could constitute a return of capital to shareholders for tax purposes.
The Fund currently limits subscriptions.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
25
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the OTC market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or who se values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of August 31, 2010, the total value of securities held directly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 1.9% of net assets. The Fund classifies such securities (as defined below) as Level 3. During the period ended August 31, 2010, the Manager has evaluated the Fund's OTC derivatives contracts and determined that no reduction in value was warranted on account of the creditworthiness of a counterpart y. See note 4 for a further discussion on valuation of derivative financial instruments.
Typically the Fund values debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. Although alternative prices are available for securities held by the Fund, those alternative sources are not typically part of the valuation process and would not necessarily confirm the security price used by the Fund. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fund. As of August 31, 2010, the total value of securities held for which no alternative pricing source was available represented 9.2% of the net assets of the Fund.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The
26
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data.
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund used the following fair value techniques on Level 3 investments: The Fund valued certain debt securities using indicative bids received from primary pricing sources. The Fund valued certain debt securities using a specified spread above the LIBOR Rate. The Fund also used third party valuation services to value credit default swaps using unobservable inputs.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Debt Obligations | |||||||||||||||||||
Asset-Backed Securities | $ | — | $ | 821,387,314 | $ | 1,597,889,675 | $ | 2,419,276,989 | |||||||||||
U.S. Government Agency | — | — | 33,839,311 | 33,839,311 | |||||||||||||||
TOTAL DEBT OBLIGATIONS | — | 821,387,314 | 1,631,728,986 | 2,453,116,300 | |||||||||||||||
Short-Term Investment | 27,851,661 | — | — | 27,851,661 | |||||||||||||||
Total Investments | 27,851,661 | 821,387,314 | 1,631,728,986 | 2,480,967,961 | |||||||||||||||
Derivatives | |||||||||||||||||||
Swap Agreements | |||||||||||||||||||
Credit risk | — | — | 55,560 | 55,560 | |||||||||||||||
Total | $ | 27,851,661 | $ | 821,387,314 | $ | 1,631,784,546 | $ | 2,481,023,521 |
27
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Swap Agreements | |||||||||||||||||||
Credit risk | $ | — | $ | — | $ | (1,285,251 | ) | $ | (1,285,251 | ) | |||||||||
Forward Currency Contracts | |||||||||||||||||||
Foreign exchange risk | — | (1,226,000 | ) | — | (1,226,000 | ) | |||||||||||||
Total | $ | — | $ | (1,226,000 | ) | $ | (1,285,251 | ) | $ | (2,511,251 | ) |
The aggregate net values of the Fund's direct investments in securities and other financial instruments using Level 3 inputs were 65.8% and (0.1)% of total net assets, respectively.
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2010 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Transfers into Level 3* | Transfers out of Level 3* | Balances as of August 31, 2010 | ||||||||||||||||||||||||||||
Debt Obligations | |||||||||||||||||||||||||||||||||||
Asset-Backed Securities | $ | 1,982,715,415 | $ | (459,587,897 | ) | $ | 356,824 | $ | (155,990 | ) | $ | 104,437,573 | $ | — | $ | (29,876,250 | )** | $ | 1,597,889,675 | ||||||||||||||||
U.S. Government Agency | 34,766,016 | (1,284,592 | ) | 14,022 | 15,462 | 328,403 | — | — | 33,839,311 | ||||||||||||||||||||||||||
Swaps | (1,818,609 | ) | (160,514 | ) | — | 160,514 | 588,918 | — | — | (1,229,691 | ) | ||||||||||||||||||||||||
Total | $ | 2,015,662,822 | $ | (461,033,003 | ) | �� | $ | 370,846 | $ | 19,986 | $ | 105,354,894 | $ | — | $ | (29,876,250 | ) | $ | 1,630,499,295 |
* The fund recognizes investments and derivatives transferred into Level 3 at the value at the beginning of the period and transferred out of Level 3 at the value at the end of the period.
** Financial assets transferred between Level 2 and Level 3 were due to a change in observable and/or unobservable inputs.
28
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are inclu ded with the net realized and unrealized gain or loss on investment securities.
Repurchase agreements
The Fund may enter into repurchase agreements. Under a repurchase agreement the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities it acquired under the repurchase agreement. The value of the securities acquired is required by contract to be marked to market daily so that their market value is at least equal to the amount owed to the Fund by the seller. If the seller of a repurchase agreement defaults or enters into insolvency proceedings and/or the value of the securities subject to the repurchase agreement is insufficient, the Fund's recovery of cash from the seller may be delayed and the Fund may incur a loss equal to the difference between the cash it paid and the value of the securities. The Fund had no repurchase agreements outstanding at the end of the period.
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at an agreed upon price and date. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which generally causes the Fund's portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the even t of a buyer's bankruptcy or insolvency, the Fund's use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund's right to repurchase the securities. The Fund had no reverse repurchase agreements outstanding at the end of the period.
29
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Inflation-indexed bonds
The Fund may invest in inflation indexed bonds. Inflation indexed bonds are fixed income securities whose principal value is adjusted periodically according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that reflects inflation in the principal value of the bond. Most other issuers pay out any inflation related accruals as part of a semiannual coupon.
The value of inflation indexed bonds is expected to change in response to changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal interest rates (i.e., stated interest rates) and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate than nominal interest rates, real interest rates (i.e. nominal interest rate minus inflation) might decline, leading to an increase in value of inflation indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation indexed bonds. There can be no assurance, however, that the value of inflation indexed bonds will be directly correlated to changes in nominal interest rates, and short term increases in inflation may lead to a decline in their value. Coupon payments received by the Fund from inflation indexed bonds are included in the Fund's gross income for the period in which they accrue. In addition, any increase or decrease in the principal amount of an inflation indexed bond will increase or decrease taxable ordinary income to the Fund, even though principal is not paid until maturity. The Fund had no inflation-indexed bonds outstanding at the end of the period.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. The Fund is permitted to, and will from time to time, declare and pay distributions more frequently (e.g. monthly). All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and
30
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes. Such amounts are estimated for the six months ended August 31, 2010.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2011 | $ | (29,576,884 | ) | ||||
2/29/2012 | (142,552 | ) | |||||
2/28/2014 | (614,650 | ) | |||||
2/28/2015 | (5,952,458 | ) | |||||
2/29/2016 | (1,158,601 | ) | |||||
2/28/2017 | (32,360,541 | ) | |||||
2/28/2018 | (41,313,788 | ) | |||||
Total | $ | (111,119,474 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 2,957,121,570 | $ | 19,855,878 | $ | (496,009,487 | ) | $ | (476,153,609 | ) |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in
31
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact its operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which co llection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds.
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
For the period ended August 31, 2010, the Fund did not charge a premium on cash purchases or fee on cash redemptions of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by a Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines
32
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantia l portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Fixed Income Securities — Typically, the value of the Fund's fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
• Focused Investment Risk — Focusing investments in countries, regions, sectors or companies with high positive correlations to one another creates additional risk. This risk may be particularly pronounced for the Fund because of its exposure to asset-backed securities secured by different types of consumer debt (e.g., credit-card receivables, automobile loans and home equity loans).
33
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
• Credit and Counterparty Risk — The Fund runs the risk that the issuer or guarantor of a fixed income security, the counterparty to an over-the-counter derivatives contract, a borrower of the Fund's securities or the obligor of an obligation underlying an asset-backed security will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise honor its obligations. The risk of counterparty default is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions.
Other principal risks of an investment in the Fund include Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, and credit and counterparty risk); Market Disruption and Geopolitical Risk (the risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by redeeming Fund shares in large amounts and/or on a frequent basis); and Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations).
The most significant market risk for Funds investing in fixed income securities is that the securities in which they invest experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. These risks apply to the Fund because it invests in asset-backed securities. Asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as "collateralized debt obligations" or "collateralized loan obligations") and by the fees earned by service providers. Payment of interest on asset-backed securities and repayment of principal largely depend on t he cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. Many asset-backed securities owned by the Fund that were once rated investment grade are now rated below investment grade as of the date of this Report.
34
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e .g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and a Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.
The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution's business may have a material impact on multiple investments.
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
35
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund may use derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps or other derivatives on an index, a single security or a basket of securities to gain investment exposures (e.g., by selling protection under a credit default swap). The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). For example, the Fund may use credit default swaps to take a short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund's exposure to the credit of an issuer through the debt instrument, but adjust the Fund's interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed versus variable rates and shorter duration versus longer duration exposure. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedin gs. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be secured by collateral (e.g., foreign currency forwards; see "Currency Risk" above), that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be
36
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value. At August 31, 2010, amounts reported as a miscellaneous payable include amounts that were ca lculated by the Fund as being owed to Lehman Brothers upon the termination of the contracts pursuant to the terms of those contracts. The amounts reported as payable are subject to settlement discussions with Lehman Brothers' bankruptcy estate and may vary significantly upon final settlement with the estate.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates.
37
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. During the period ended August 31, 2010, the Fund used forward currency contracts to adjust exposure to foreign currencies and otherwise adjust currency exchange rate risk. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. The Fund had no futures contracts outstanding at the end of the period.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
38
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an of fsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset
39
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual
40
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the period ended August 31, 2010, the Fund used swap agreements to achieve exposure to a reference entity's credit. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Unrealized appreciation on swap agreements | $ | — | $ | — | $ | 55,560 | $ | — | $ | — | $ | 55,560 | |||||||||||||||
Total | $ | — | $ | — | $ | 55,560 | $ | — | $ | — | $ | 55,560 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Unrealized depreciation on forward currency contracts | $ | — | $ | (1,226,000 | ) | $ | — | $ | — | $ | — | $ | (1,226,000 | ) | |||||||||||||
Unrealized depreciation on swap agreements | — | — | (1,285,251 | ) | — | — | (1,285,251 | ) | |||||||||||||||||||
Total | $ | — | $ | (1,226,000 | ) | $ | (1,285,251 | ) | $ | — | $ | — | $ | (2,511,251 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
41
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the Period Ended August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Forward currency contracts | $ | — | $ | 4,088,640 | $ | — | $ | — | $ | — | $ | 4,088,640 | |||||||||||||||
Swap agreements | — | — | (539,486 | ) | — | — | (539,486 | ) | |||||||||||||||||||
Total | $ | — | $ | 4,088,640 | $ | (539,486 | ) | $ | — | $ | — | $ | 3,549,154 | ||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Forward currency contracts | $ | — | $ | (1,234,817 | ) | $ | — | $ | — | $ | — | $ | (1,234,817 | ) | |||||||||||||
Swap agreements | — | — | 588,917 | — | — | 588,917 | |||||||||||||||||||||
Total | $ | — | $ | (1,234,817 | ) | $ | 588,917 | $ | — | $ | — | $ | (645,900 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
The volume of derivative activity, based on absolute values (forward currency contracts), or notional amounts (swap agreements) outstanding at each month-end, was as follows for the period ended August 31, 2010:
The derivative financial instruments outstanding as of period end (as disclosed in the Notes to Schedules of Investments) and the amounts of realized and changes in unrealized gains and losses on derivative financial instruments during the period (as disclosed in the Statements of Operations) serve as indicators of the volume of derivative activity for the Fund during the period.
5. Fees and other transactions with affiliates
GMO does not charge the Fund any management or service fees for its services. The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.00% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses
42
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). This expense limitation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $32,092 and $11,592, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended August 31, 2010 aggregated $0 and $698,846,209, respectively.
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, 67.87% of the outstanding shares of the Fund were held by two shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholders owned more than 10% of the outstanding shares of the Fund. Each of the shareholders are other funds of the Trust.
As of August 31, 2010, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and 100% of the Fund's shares were held by accounts for which the Manager had investment discretion.
43
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||
Shares sold | 796,051 | $ | 10,339,000 | 662,838 | $ | 10,389,000 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 2,532 | 32,499 | 2,248 | 35,267 | |||||||||||||||
Shares repurchased | (1,369,674 | ) | (19,270,000 | ) | (2,890,527 | ) | (45,180,031 | ) | |||||||||||
Net increase (decrease) | (571,091 | ) | $ | (8,898,501 | ) | (2,225,441 | ) | $ | (34,755,764 | ) |
44
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of a composite of accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three-, five- and seven-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees gave substantial consideration to the fact that the Fund does not pay a management fee to the Manager under the Fund's investment management agreement. The Trustees also considered so-called "fallout benefits" to the Manager, primarily the possible reputational value derived from serving as
45
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
46
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including redemption fees; and (2) ongoing costs. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
1) Actual | 0.01 | % | $ | 1,000.00 | $ | 1,045.20 | $ | 0.05 | |||||||||||
2) Hypothetical | 0.01 | % | $ | 1,000.00 | $ | 1,025.16 | $ | 0.05 |
* Expenses are calculated using the annualized expense ratio (including interest expense) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
47
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Note Concerning Distributions
August 31, 2010 (Unaudited)
The Fund previously reported the estimated sources of any dividends, short-term capital gains, long-term capital gains, and return of capital distributions paid on a per share basis. Pursuant to Rule 19a-1(e) of the Investment Company Act of 1940, the table below serves as an update to the previously reported estimated sources of the distributions paid to shareholders. The Statement of Changes in Net Assets includes the updated amounts on a dollar basis.
Updated Estimated Sources | |||||||||||||||||||||||||||
Record Date | Ex-Date | Payable Date | Dividend Paid from Current and/or Prior Years Accumulated Undistributed Net Income* | Net Short-Term Capital Gains from Sale of Securities & Other Property^ | Net Long-Term Capital Gains from Sale of Securities & Other Property^ | Distribution from Return of Capital | |||||||||||||||||||||
February 26, 2010 | March 1, 2010 | March 2, 2010 | $ | 0.00980404 | $ | 0.00000000 | $ | 0.00000000 | $ | 0.33785687 | |||||||||||||||||
March 26, 2010 | March 29, 2010 | March 30, 2010 | $ | 0.02340647 | $ | 0.00000000 | $ | 0.00000000 | $ | 0.80661006 | |||||||||||||||||
April 27, 2010 | April 28, 2010 | April 29, 2010 | $ | 0.00496781 | $ | 0.00000000 | $ | 0.00000000 | $ | 0.17119583 | |||||||||||||||||
May 26, 2010 | May 27, 2010 | May 28, 2010 | $ | 0.01049369 | $ | 0.00000000 | $ | 0.00000000 | $ | 0.36162296 | |||||||||||||||||
June 25, 2010 | June 28, 2010 | June 29, 2010 | $ | 0.02422953 | $ | 0.00000000 | $ | 0.00000000 | $ | 0.83497358 | |||||||||||||||||
July 27, 2010 | July 28, 2010 | July 29, 2010 | $ | 0.02979791 | $ | 0.00000000 | $ | 0.00000000 | $ | 1.02686552 | |||||||||||||||||
August 26, 2010 | August 27, 2010 | August 30, 2010 | $ | 0.00713574 | $ | 0.00000000 | $ | 0.00000000 | $ | 0.24590485 |
Notes:
* Net investment income may include amounts derived from dividends, interest, net foreign currency gains and net amounts from transacting in certain derivative contracts.
^ Short-term and long-term capital gains may include amounts derived from the sale of securities/other property and net amounts from transacting in certain derivative contracts.
48
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 98.9 | % | |||||
Short-Term Investments | 1.3 | ||||||
Forward Currency Contracts | (0.0 | ) | |||||
Swaps | (0.0 | ) | |||||
Other | (0.2 | ) | |||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in GMO Short-Duration Collateral Fund.
Industry Sector Summary** | % of Debt Obligations | ||||||
Credit Cards | 19.7 | % | |||||
Residential Asset-Backed Securities (United States) | 15.2 | ||||||
Auto Financing | 11.6 | ||||||
CMBS | 10.3 | ||||||
Insured Auto Financing | 7.3 | ||||||
Residential Mortgage-Backed Securities (European) | 7.2 | ||||||
Student Loans | 5.3 | ||||||
Insured Other | 4.2 | ||||||
Residential Mortgage-Backed Securities (Australian) | 4.0 | ||||||
Business Loans | 3.6 | ||||||
Corporate Collateralized Debt Obligations | 2.3 | ||||||
CMBS Collateralized Debt Obligations | 1.9 | ||||||
U.S. Government Agency | 1.4 | ||||||
Rate Reduction Bonds | 1.4 | ||||||
Insured High Yield Collateralized Debt Obligations | 0.8 | ||||||
Insured Time Share | 0.7 | ||||||
Insured Residential Asset-Backed Securities (United States) | 0.7 | ||||||
Equipment Leases | 0.6 | ||||||
Insured Residential Mortgage-Backed Securities (United States) | 0.6 | ||||||
Airlines | 0.6 | ||||||
Insured Transportation | 0.2 | ||||||
Bank Loan Collateralized Debt Obligations | 0.1 | ||||||
Time Share | 0.1 | ||||||
Residential Mortgage-Backed Securities (United States) | 0.1 | ||||||
Insured Business Loans | 0.1 | ||||||
Collateralized Loan Obligations | 0.0 | ||||||
ABS Collateralized Debt Obligations | 0.0 | ||||||
100.0 | % |
** The table above incorporate aggregate indirect industry sector exposure associated with investments in GMO
Short-Duration Collateral Fund.
1
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
MUTUAL FUNDS — 100.0% | |||||||||||
Affiliated Issuers — 100.0% | |||||||||||
2,900,069 | GMO Short-Duration Collateral Fund | 33,872,807 | |||||||||
TOTAL MUTUAL FUNDS (COST $32,673,941) | 33,872,807 | ||||||||||
SHORT-TERM INVESTMENTS — 0.1% | |||||||||||
Money Market Funds — 0.1% | |||||||||||
49,209 | State Street Institutional Treasury Plus Money Market Fund-Institutional Class | 49,209 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $49,209) | 49,209 | ||||||||||
TOTAL INVESTMENTS — 100.1% (Cost $32,723,150) | 33,922,016 | ||||||||||
Other Assets and Liabilities (net) — (0.1%) | (39,770 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 33,882,246 |
See accompanying notes to the financial statements.
2
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $49,209) (Note 2) | $ | 49,209 | |||||
Investments in affiliated issuers, at value (cost $32,673,941) (Notes 2 and 10) | 33,872,807 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 3,317 | ||||||
Total assets | 33,925,333 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 1,430 | ||||||
Shareholder service fee | 4,294 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 70 | ||||||
Accrued expenses | 37,293 | ||||||
Total liabilities | 43,087 | ||||||
Net assets | $ | 33,882,246 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 37,715,159 | |||||
Accumulated undistributed net investment income | 233,418 | ||||||
Accumulated net realized loss | (5,265,197 | ) | |||||
Net unrealized appreciation | 1,198,866 | ||||||
$ | 33,882,246 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 33,882,246 | |||||
Shares outstanding: | |||||||
Class III | 1,878,960 | ||||||
Net asset value per share: | |||||||
Class III | $ | 18.03 |
See accompanying notes to the financial statements.
3
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 10) | $ | 267,588 | |||||
Dividends | 8 | ||||||
Total investment income | 267,596 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 8,413 | ||||||
Shareholder service fee – Class III (Note 5) | 25,238 | ||||||
Audit and tax fees | 16,008 | ||||||
Custodian, fund accounting agent and transfer agent fees | 2,116 | ||||||
Registration fees | 1,656 | ||||||
Legal fees | 828 | ||||||
Trustees fees and related expenses (Note 5) | 343 | ||||||
Miscellaneous | 460 | ||||||
Total expenses | 55,062 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (20,884 | ) | |||||
Net expenses | 34,178 | ||||||
Net investment income (loss) | 233,418 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | (268,518 | ) | |||||
Net realized gain (loss) | (268,518 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in affiliated issuers | 1,476,568 | ||||||
Net realized and unrealized gain (loss) | 1,208,050 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 1,441,468 |
See accompanying notes to the financial statements.
4
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 233,418 | $ | 381,682 | |||||||
Net realized gain (loss) | (268,518 | ) | (136,691 | ) | |||||||
Change in net unrealized appreciation (depreciation) | 1,476,568 | 6,367,227 | |||||||||
Net increase (decrease) in net assets from operations | 1,441,468 | 6,612,218 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | — | (381,682 | ) | ||||||||
Return of capital | |||||||||||
Class III | — | (5,563,318 | ) | ||||||||
— | (5,945,000 | ) | |||||||||
Net share transactions (Note 9): | |||||||||||
Class III | (1,302,873 | ) | 6,196,931 | ||||||||
Redemption fees (Notes 2 and 9): | |||||||||||
Class III | — | 1,523 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and redemption fees | (1,302,873 | ) | 6,198,454 | ||||||||
Total increase (decrease) in net assets | 138,595 | 6,865,672 | |||||||||
Net assets: | |||||||||||
Beginning of period | 33,743,651 | 26,877,979 | |||||||||
End of period (including accumulated undistributed net investment income of $233,418 and $0, respectively) | $ | 33,882,246 | $ | 33,743,651 |
See accompanying notes to the financial statements.
5
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007(a) | |||||||||||||||||||
Net asset value, beginning of period | $ | 17.27 | $ | 17.08 | $ | 23.39 | $ | 25.05 | $ | 24.82 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)(b)† | 0.12 | 0.21 | 1.17 | 1.07 | (0.01 | ) | |||||||||||||||||
Net realized and unrealized gain (loss) | 0.64 | 3.47 | (4.92 | ) | (1.38 | ) | 0.24 | ||||||||||||||||
Total from investment operations | 0.76 | 3.68 | (3.75 | ) | (0.31 | ) | 0.23 | ||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | — | (0.22 | ) | (0.81 | ) | (1.35 | ) | — | |||||||||||||||
Return of capital | — | (3.27 | ) | (1.75 | ) | — | — | ||||||||||||||||
Total distributions | — | (3.49 | ) | (2.56 | ) | (1.35 | ) | — | |||||||||||||||
Net asset value, end of period | $ | 18.03 | $ | 17.27 | $ | 17.08 | $ | 23.39 | $ | 25.05 | |||||||||||||
Total Return(c) | 4.40 | %** | 25.13 | % | (15.90 | )% | (1.33 | )% | 0.93 | %** | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 33,882 | $ | 33,744 | $ | 26,878 | $ | 10,637 | $ | 40,563 | |||||||||||||
Net expenses to average daily net assets(e) | 0.20 | %* | 0.20 | %(d) | 0.20 | % | 0.20 | % | 0.21 | %* | |||||||||||||
Net investment income (loss) to average daily net assets(b) | 1.39 | %* | 1.28 | % | 5.47 | % | 4.25 | % | (0.21 | )%* | |||||||||||||
Portfolio turnover rate | 4 | %** | 2 | % | 18 | % | 127 | % | 125 | %**†† | |||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.12 | %* | 0.20 | % | 0.17 | % | 0.15 | % | 0.06 | %* | |||||||||||||
Redemption fees consisted of the following per share amounts:† | — | $ | 0.00 | (f) | $ | 0.01 | — | — |
(a) Period from December 28, 2006 (commencement of operations) through February 28, 2007.
(b) Net investment income is affected by the timing of the declaration of dividends by GMO Short-Duration Collateral Fund.
(c) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(d) The net expense ratio does not include the effect of expense reductions (Note 2).
(e) Net expenses exclude expenses incurred indirectly through investment in Short-Duration Collateral Fund.
(f) Redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the period from March 1, 2006 (commencement of operations) through February 28, 2007.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
6
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO Short-Duration Collateral Share Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks total return comparable to that of its benchmark, the J.P. Morgan U.S. 3 Month Cash Index. The Fund invests substantially all of its assets in GMO Short-Duration Collateral Fund ("SDCF") and, to a limited extent, in cash and cash equivalents. Its investment objective and principal investment strategies, therefore, are substantially similar to those of SDCF. SDCF is not currently pursuing an active investment program.
Historically, SDCF has invested primarily in U.S. and foreign adjustable rate asset-backed securities and primarily holds asset-backed securities, including, but not limited to, securities backed by pools of residential and commercial mortgages, credit-card receivables, home equity loans, automobile loans, educational loans, corporate and sovereign bonds, and bank loans made to corporations. In addition, SDCF has invested in government securities, corporate debt securities, money market instruments, and commercial paper, and has entered into credit default swaps, reverse repurchase agreements, and repurchase agreements. SDCF has also used exchange-traded and over-the-counter ("OTC") derivatives. Because of the deterioration in credit markets that became acute in 2008, the Fund, through its holdings of SDCF, currently has and may continue to have material exposure to below investment grade securities. In addition, the Fund may in vest in unaffiliated money market funds. The Manager does not seek to maintain a specified interest rate duration for SDCF.
Since October of 2008, SDCF has declared and paid distributions when it has acquired a meaningful cash position rather than reinvesting that cash in portfolio securities. SDCF currently intends to continue this practice. A substantial portion of any such distributions could constitute a return of capital to SDCF shareholders, including the Fund, for tax purposes. Therefore, if the Fund, in turn, distributes these amounts to its shareholders, the Fund's distributions similarly could constitute a return of capital to Fund shareholders for tax purposes.
The financial statements of SDCF should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect). As of August 31, 2010, shares of SDCF were not publicly available for direct purchase.
The Fund currently limits subscriptions,
7
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Shares of SDCF are generally valued at their net asset value. Investments held by SDCF are valued as follows. Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the OTC market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Derivatives and other securities for which quotations are not r eadily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of August 31, 2010, the total value of securities held indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of GMO trust represented 1.9% of net assets. SDCF classifies such securities (as defined below) as Level 3. During the period ended August 31, 2010, the Manager has evaluated the Fund's OTC derivatives contracts and determined that no reduction in value was warranted on account of the creditworthi ness of a counterparty.
Typically SDCF values debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. In addition, although alternative prices are available for other securities held by SDCF, those alternative sources are not typically part of the valuation process and would not necessarily confirm the security price used by SDCF. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the price s used
8
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
by the Fund. As of August 31, 2010, the total value of securities held indirectly for which no alternative pricing source was available represented 9.2% of the net assets of the Fund.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund and SDCF disclose the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Mutual Funds | $ | 33,872,807 | $ | — | $ | — | $ | 33,872,807 | |||||||||||
Short-Term Investments | 49,209 | — | — | 49,209 | |||||||||||||||
Total Investments | 33,922,016 | — | — | 33,922,016 | |||||||||||||||
Total | $ | 33,922,016 | $ | — | $ | — | $ | 33,922,016 |
SDCF is classified as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of SDCF, please refer to the portfolio valuation notes in SDCF's financial statements. The aggregate net value of the Fund's indirect investments in securities and other financial instruments using Level 3 inputs were 66.05% and (0.05)% of total net assets, respectively.
The Fund held no direct investments or other financial instruments at either August 31, 2010 or February 28, 2010, whose fair value was determined using Level 3 inputs.
9
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/29/2016 | $ | (3,400,357 | ) | ||||
2/28/2017 | (862,175 | ) | |||||
Total | $ | (4,262,532 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 33,759,503 | $ | 162,513 | $ | — | $ | 162,513 |
10
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Income dividends and capital gain distributions from SDCF are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for the purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in SDCF (See Note 5).
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
For the period ended August 31, 2010, the Fund did not charge a premium on cash purchases or fee on cash redemptions of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by a Fund to help offset non-de minimis estimated portfolio transaction costs and other
11
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs o r will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. Because the Fund invests substantially all of its assets in SDCF, the most significant risks of investing in the Fund are the risks to which the Fund is exposed through SDCF, which include those outlined in the following brief summary of principal risks. The Fund and SDCF are non-diversified investment companies under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund or SDCF may affect the Fund's performance more than if the Fund or SDCF were diversified. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Fixed Income Securities — Typically, the value of SDCF's fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent SDCF from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
12
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
• Focused Investment Risk — Focusing investments in countries, regions, sectors or companies with high positive correlations to one another creates additional risk. This risk may be particularly pronounced for SDCF because of its exposure to asset-backed securities secured by different types of consumer debt (e.g., credit-card receivables, automobile loans and home equity loans).
• Credit and Counterparty Risk — The Fund runs the risk that the issuer or guarantor of a fixed income security, the counterparty to an over-the-counter derivatives contract, a borrower of SDCF's securities or the obligor of an obligation underlying an asset-backed security will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise honor its obligations. The risk of counterparty default is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions.
Other principal risks of an investment in the Fund include Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, and credit and counterparty risk); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such inves tments).
The most significant market risk for Funds investing in fixed income securities is that the securities in which they invest experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. These risks apply to the Fund because it invests in asset-backed securities. Asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as "collateralized debt obligations" or "collateralized loan obligations") and by the fees earned by service providers. Payment of interest on asset-backed securities and repayment of principal largely depend on t he cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit
13
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. Many asset-backed securities owned by SDCF that were once rated investment grade are now rated below investment grade as of the date of this Report.
With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e .g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and a Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.
The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution's business may have a material impact on multiple investments.
14
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
4. Derivative financial instruments
At August 31, 2010, the Fund held no derivative contracts.
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.05% of average daily net assets. The Fund has adopted a Shareholder service Plan under which the Fund pays GMO a shareholder service fee for client and shareholders service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.05% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investme nt company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition to the contractual expense reimbursement described above, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in other GMO Funds (excluding those Funds' Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund's Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $343 and $184, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
15
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund incurs fees and expenses indirectly as a shareholder in SDCF. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Indirect Interest Expense | Total Indirect Expenses | ||||||||||||
0.004 | % | 0.000 | % | 0.008 | % | 0.012 | % |
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended August 31, 2010 aggregated $10,339,000 and $1,270,000, respectively.
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, 84.18% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2010, 88.09% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and none of the Fund's shares were held by accounts for which the Manager had investment discretion.
16
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 2,881 | $ | 49,884 | 131,522 | $ | 2,240,650 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 308,224 | 4,940,983 | |||||||||||||||
Shares repurchased | (77,873 | ) | (1,352,757 | ) | (59,040 | ) | (984,702 | ) | |||||||||||
Redemption fees | — | — | — | 1,523 | |||||||||||||||
Net increase (decrease) | (74,992 | ) | $ | (1,302,873 | ) | 380,706 | $ | 6,198,454 |
10. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income* | Return of Capital* | Distributions of Realized Gains* | Value, end of period | ||||||||||||||||||||||||
GMO Short- Duration Collateral Fund | $ | 32,817,084 | $ | 10,339,000 | $ | 1,270,000 | $ | 267,588 | $ | 9,221,327 | $ | — | $ | 33,872,807 | |||||||||||||||||
Totals | $ | 32,817,084 | $ | 10,339,000 | $ | 1,270,000 | $ | 267,588 | $ | 9,221,327 | $ | — | $ | 33,872,807 |
* The table above includes estimated sources of all distributions paid by SDCF during the period March 1, 2010 through August 31, 2010. The actual tax characterization of distributions paid by SDCF will be determined through fiscal year ending February 28, 2011.
17
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various statistical methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information fro m the Manager, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees noted that the Fund invests substantially all of its assets in another series of the Trust, GMO Short-Duration Collateral Fund ("SDCF"), and, therefore, that the Fund's investment objective and principal investment strategies are identical to those of SDCF. The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing SDCF's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior managem ent to the Fund and SDCF. The Trustees considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's and SDCF's investment performance, including information as to performance in relation to risk, relative to their performance benchmark, and as compared to funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance over various periods, including one- and three-year periods and for the life of the Fund and SDCF's performance over various periods, including one-, three-, five- and seven-year periods and for the life of SDCF, information prepared by the third-party data services, various statistical measures of the Fund's and SDCF's performance, as well as factors identified by the Manager as contributing to the Fund's and SDCF's performance. The Trustees also considered the qualifications and
18
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
experience of the personnel responsible for managing the Fund and SDCF, the support those personnel received from the Manager, the investment techniques used to manage SDCF, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements, and noted that SDCF does not pay an advisory fee to the Manager. The Trustees also noted that the Fund's expense ratio reflects total expenses payable by the Fund and SDCF. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage SDCF. The Trustees also reviewed information provided by the Manager regarding the combined profits it realized on the services (excluding distribution servic es) it provided to the Fund and SDCF, and profits it realized on the management and shareholder services (excluding distribution services) it provided to the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's i nvestment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of SDCF (which does not pay an advisory fee to the Manager) and other funds in which it invests. The Trustees also considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the Fund's agreement appropriately reflected any economies of scale associated with managing the Fund and SDCF. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the Fund's investment management agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and SDCF and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund, SDCF, and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund and SDCF with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading of its officers and employees), the procedures by
19
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund and SDCF, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
20
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including redemption fees; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.21 | % | $ | 1,000.00 | $ | 1,044.00 | $ | 1.08 | |||||||||||
2) Hypothetical | 0.21 | % | $ | 1,000.00 | $ | 1,024.15 | $ | 1.07 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
21
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 56.2 | % | |||||
Short-Term Investments | 44.0 | ||||||
Forward Currency Contracts | (0.0 | ) | |||||
Swap Agreements | (0.0 | ) | |||||
Other | (0.2 | ) | |||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
1
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) / Shares | Description | Value ($) | |||||||||
DEBT OBLIGATIONS — 14.3% | |||||||||||
U.S. Government Agency — 14.3% | |||||||||||
58,333 | Agency for International Development Floater (Support of Botswana), 6 mo. U.S. Treasury Bill + .40%, 0.59%, due 10/01/12 (a) | 57,545 | |||||||||
376,875 | Agency for International Development Floater (Support of C.A.B.E.I), 6 mo. U.S. Treasury Bill + .40%, 0.59%, due 10/01/12 (a) | 372,956 | |||||||||
254,455 | Agency for International Development Floater (Support of Honduras), 3 mo. U.S. Treasury Bill x 117%, 0.17%, due 10/01/11 (a) | 252,330 | |||||||||
23,961 | Agency for International Development Floater (Support of Peru), Series B, 6 mo. U.S. Treasury Bill +.35%, 0.54%, due 05/01/14 (a) | 23,503 | |||||||||
206,688 | Small Business Administration Pool #502320, Prime - 2.19%, 1.06%, due 08/25/18 | 206,942 | |||||||||
Total U.S. Government Agency | 913,276 | ||||||||||
TOTAL DEBT OBLIGATIONS (COST $920,157) | 913,276 | ||||||||||
MUTUAL FUNDS — 85.6% | |||||||||||
Affiliated Issuers — 85.6% | |||||||||||
231,576 | GMO Short-Duration Collateral Fund | 2,704,809 | |||||||||
9,192 | GMO Special Purpose Holding Fund (b) | 4,964 | |||||||||
110,521 | GMO U.S. Treasury Fund | 2,763,028 | |||||||||
TOTAL MUTUAL FUNDS (COST $6,035,701) | 5,472,801 |
See accompanying notes to the financial statements.
2
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
SHORT-TERM INVESTMENTS — 0.3% | |||||||||||
Money Market Funds — 0.3% | |||||||||||
2,269 | State Street Institutional Liquid Reserves Fund-Institutional Class | 2,269 | |||||||||
15,303 | State Street Institutional Treasury Plus Money Market Fund-Institutional Class | 15,303 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $17,572) | 17,572 | ||||||||||
TOTAL INVESTMENTS — 100.2% (Cost $6,973,430) | 6,403,649 | ||||||||||
Other Assets and Liabilities (net) — (0.2%) | (14,972 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 6,388,677 |
Notes to Schedule of Investments:
C.A.B.E.I. - Central American Bank for Economic Integration
The rates shown on variable rate notes are the current interest rates at August 31, 2010, which are subject to change based on the terms of the security.
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust. (Note 2)
(b) Underlying investment represents interests in defaulted claims.
See accompanying notes to the financial statements.
3
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $937,729) (Note 2) | $ | 930,848 | |||||
Investments in affiliated issuers, at value (cost $6,035,701) (Notes 2 and 10) | 5,472,801 | ||||||
Receivable for investments sold | 2,084 | ||||||
Dividends and interest receivable | 2,137 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 4,061 | ||||||
Total assets | 6,411,931 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 332 | ||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 270 | ||||||
Shareholder service fee | 812 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 75 | ||||||
Accrued expenses | 21,765 | ||||||
Total liabilities | 23,254 | ||||||
Net assets | $ | 6,388,677 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 9,643,449 | |||||
Accumulated undistributed net investment income | 2,973 | ||||||
Accumulated net realized loss | (2,687,964 | ) | |||||
Net unrealized depreciation | (569,781 | ) | |||||
$ | 6,388,677 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 6,388,677 | |||||
Shares outstanding: | |||||||
Class III | 776,823 | ||||||
Net asset value per share: | |||||||
Class III | $ | 8.22 |
See accompanying notes to the financial statements.
4
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 10) | $ | 27,093 | |||||
Interest | 2,759 | ||||||
Dividends | 4 | ||||||
Total investment income | 29,856 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 1,651 | ||||||
Shareholder service fee – Class III (Note 5) | 4,954 | ||||||
Audit and tax fees | 19,412 | ||||||
Registration fees | 2,116 | ||||||
Custodian, fund accounting agent and transfer agent fees | 920 | ||||||
Legal fees | 184 | ||||||
Trustees fees and related expenses (Note 5) | 125 | ||||||
Miscellaneous | 207 | ||||||
Total expenses | 29,569 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (22,816 | ) | |||||
Net expenses | 6,753 | ||||||
Net investment income (loss) | 23,103 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 33 | ||||||
Realized gains distributions from affiliated issuers (Note 10) | 255 | ||||||
Net realized gain (loss) | 288 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | 5,069 | ||||||
Investments in affiliated issuers | 112,149 | ||||||
Net unrealized gain (loss) | 117,218 | ||||||
Net realized and unrealized gain (loss) | 117,506 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 140,609 |
See accompanying notes to the financial statements.
5
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 23,103 | $ | 54,487 | |||||||
Net realized gain (loss) | 288 | 981 | |||||||||
Change in net unrealized appreciation (depreciation) | 117,218 | 822,565 | |||||||||
Net increase (decrease) in net assets from operations | 140,609 | 878,033 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (17,511 | ) | (60,280 | ) | |||||||
Return of capital | |||||||||||
Class III | — | (28,753 | ) | ||||||||
(17,511 | ) | (89,033 | ) | ||||||||
Net share transactions (Note 9): | |||||||||||
Class III | (361,724 | ) | (391,353 | ) | |||||||
Purchase premiums and redemption fees (Notes 2 and 9): | |||||||||||
Class III | — | 1,555 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and redemption fees | (361,724 | ) | (389,798 | ) | |||||||
Total increase (decrease) in net assets | (238,626 | ) | 399,202 | ||||||||
Net assets: | |||||||||||
Beginning of period | 6,627,303 | 6,228,101 | |||||||||
End of period (including accumulated undistributed net investment income of $2,973 and distributions in excess of net investment income of $2,619, respectively) | $ | 6,388,677 | $ | 6,627,303 |
See accompanying notes to the financial statements.
6
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 8.07 | $ | 7.15 | $ | 8.45 | $ | 8.93 | $ | 8.82 | $ | 8.77 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.03 | 0.06 | 0.30 | 0.32 | 0.47 | 0.27 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.14 | 0.96 | (1.29 | ) | (0.28 | ) | 0.11 | 0.07 | |||||||||||||||||||
Total from investment operations | 0.17 | 1.02 | (0.99 | ) | 0.04 | 0.58 | 0.34 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.02 | ) | (0.07 | ) | (0.31 | ) | (0.52 | ) | (0.47 | ) | (0.29 | ) | |||||||||||||||
Return of capital | — | (0.03 | ) | — | — | — | — | ||||||||||||||||||||
Total distributions | (0.02 | ) | (0.10 | ) | (0.31 | ) | (0.52 | ) | (0.47 | ) | (0.29 | ) | |||||||||||||||
Net asset value, end of period | $ | 8.22 | $ | 8.07 | $ | 7.15 | $ | 8.45 | $ | 8.93 | $ | 8.82 | |||||||||||||||
Total Return(b) | 2.14 | %** | 14.40 | % | (11.78 | )% | 0.40 | % | 6.62 | % | 3.83 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 6,389 | $ | 6,627 | $ | 6,228 | $ | 7,375 | $ | 31,315 | $ | 29,454 | |||||||||||||||
Net expenses to average daily net assets(c) | 0.20 | %* | 0.20 | % | 0.20 | % | 0.20 | % | 0.20 | % | 0.20 | % | |||||||||||||||
Net investment income (loss) to average daily net assets(a) | 0.70 | %* | 0.83 | % | 3.81 | % | 3.59 | % | 5.21 | % | 3.01 | % | |||||||||||||||
Portfolio turnover rate | 9 | %** | 11 | % | 4 | % | 5 | % | 12 | % | 17 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.69 | %* | 0.90 | % | 0.79 | % | 0.60 | % | 0.14 | % | 0.13 | % | |||||||||||||||
Redemption fees consisted of the following per share amounts:† | — | $ | 0.00 | (d) | $ | 0.00 | (d) | — | — | — |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(d) Redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
7
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO Short-Duration Investment Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks to provide current income. The Fund is not currently pursuing an active investment program.
Historically, the Fund has sought to provide current income to the extent consistent with the preservation of capital and liquidity. To implement its investment strategies, the Fund has invested in asset-backed securities issued by private issuers, U.S. government and agency securities (including securities neither guaranteed nor insured by the U.S. government), corporate debt securities, money market instruments, prime commercial paper and master demand notes, and certificates of deposit, bankers' acceptances, and other bank obligations. The Fund has invested a substantial portion of its assets in GMO Short-Duration Collateral Fund ("SDCF") (which invests primarily in asset-backed securities).
Because of the deterioration in credit markets that became acute in 2008, the Fund, in particular through its investment in SDCF, currently has and may continue to have material exposure to below investment grade securities. The Manager does not seek to maintain a specified interest rate duration for the Fund. The Fund is not a money market fund and is not subject to the duration, quality, diversification, and other requirements applicable to money market funds.
The financial statements of the GMO Funds in which the Fund invests, collectively referred to as the "underlying funds" should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect). As of August 31, 2010, shares of GMO Special Purpose Holding Fund ("SPHF") and SDCF were not publicly available for direct purchase.
The Fund currently limits subscriptions.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in
8
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the over-the-counter ("OTC") market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not rea dily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of August 31, 2010, the total value of securities held directly and indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 11.9% of net assets. The Fund and the underlying funds classify such securities (as defined below) as Level 3.
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. Although alternative prices are available for securities held by the Fund and the underlying funds, those alternative sources are not typically part of the valuation process and would not necessarily confirm the security price used by the Fund and the underlying funds. Therefore, the existence of those alternative sou rces does not necessarily provide greater certainty about the prices used by the Fund and the underlying funds. As of August 31, 2010, the total value of securities held directly and indirectly for which no alternative pricing source was available represented 7.1% of the net assets of the Fund.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation
9
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data.
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund used the following fair value techniques on Level 3 investments: The Fund valued certain debt securities using indicative bids received from primary pricing sources. The Fund valued certain debt securities using a specified spread above the LIBOR Rate.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Debt Obligations | |||||||||||||||||||
U.S. Government Agency | $ | — | $ | — | $ | 913,276 | $ | 913,276 | |||||||||||
TOTAL DEBT OBLIGATIONS | — | — | 913,276 | 913,276 | |||||||||||||||
Mutual Funds | 5,467,837 | 4,964 | — | 5,472,801 | |||||||||||||||
Short-Term Investments | 17,572 | — | — | 17,572 | |||||||||||||||
Total Investments | 5,485,409 | 4,964 | 913,276 | 6,403,649 | |||||||||||||||
Total | $ | 5,485,409 | $ | 4,964 | $ | 913,276 | $ | 6,403,649 |
The underlying funds held at period end are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements. The aggregate net values of the Fund's investments (both direct and indirect) in securities and other financial instruments using Level 3 inputs were 42.15% and (0.02)% of total net assets, respectively.
10
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2010 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Transfers into Level 3* | Transfers out of Level 3* | Balances as of August 31, 2010 | ||||||||||||||||||||||||||||
Debt Obligations | |||||||||||||||||||||||||||||||||||
U.S. Government Agency | $ | 1,093,387 | $ | (185,235 | ) | $ | 22 | $ | 33 | $ | 5,069 | $ | — | $ | — | $ | 913,276 | ||||||||||||||||||
Total | $ | 1,093,387 | $ | (185,235 | ) | $ | 22 | $ | 33 | $ | 5,069 | $ | — | $ | — | $ | 913,276 |
* The Fund recognizes investments and derivatives transferred into Level 3 at the value at the beginning of the period and transferred out of Level 3 at the value at the end of the period.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, quarterly, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund elected to defer to March 1, 2010 post-October capital losses of $1,084.
11
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/29/2012 | $ | (470,143 | ) | ||||
2/28/2013 | (708 | ) | |||||
2/28/2014 | (1,377,141 | ) | |||||
2/29/2016 | (226,383 | ) | |||||
Total | $ | (2,074,375 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 7,588,842 | $ | 6,948 | $ | (1,192,141 | ) | $ | (1,185,193 | ) |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts.
12
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds (See Note 5).
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
For the period ended August 31, 2010, the Fund did not charge a premium on cash purchases or fee on cash redemptions of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by a Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund sha res executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to
13
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
Other matters
SPHF, an investment of the Fund, has litigation pending against various entities related to the 2002 fraud and related default of securities previously held by SPHF. The outcome of the lawsuits against the remaining defendants is not known and any potential recoveries are not reflected in the net asset value of SPHF. For the period ended August 31, 2010, the Fund received no distributions from SPHF in connection with settlement agreements related to litigation.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund and SDCF are non-diversified investment companies under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund or SDCF may affect the Fund's performance more than if the Fund or SDCF were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Fixed Income Securities — Typically, the value of the Fund's fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset backed and other fixed income securities.
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
• Focused Investment Risk — Focusing investments in countries, regions, sectors or companies with high positive correlations to one another creates additional risk. This risk may be particularly pronounced for the Fund because of its exposure to asset-backed securities secured by different types of consumer debt (e.g., credit-card receivables, automobile loans and home equity loans).
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in underlying funds, including the risk that the underlying funds in which it invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments.
Other principal risks of an investment in the Fund include Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk);
14
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Credit and Counterparty Risk (risk of default of an issuer of a portfolio security, a derivatives counterparty, or a borrower of an underlying fund's securities); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse lon g-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by redeeming Fund shares in large amounts and/or on a frequent basis).
The most significant market risk for Funds investing in fixed income securities is that the securities in which they invest experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. These risks apply to the Fund because it invests in asset-backed securities indirectly through the underlying funds. Asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as "collateralized debt obligations" or "collateralized loan obligations") and by the fees earned by service providers. Payment of interest on asset-backed securities and re payment of principal largely depend on the cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. Many asset-backed securities owned (directly or indirectly) by the Fund that were once rated investment grade are now rated below investment grade as of the d ate of this Report.
With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for
15
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and a Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.
The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution's business may have a material impact on multiple investments.
4. Derivative financial instruments
At August 31, 2010, the Fund held no derivative contracts.
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.05% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.05% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including
16
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in other GMO Funds (excluding those Funds' Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund's Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Boar d of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $125 and $23, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Indirect Interest Expense | Total Indirect Expenses | ||||||||||||
0.011 | % | 0.000 | % | 0.004 | % | 0.015 | % |
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended August 31, 2010 aggregated $1,109,913 and $580,235, respectively.
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss
17
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, 62.27% of the outstanding shares of the Fund were held by two shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund. One of the shareholders is another fund of the Trust.
As of August 31, 2010, 16.21% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 82.14% of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | — | $ | — | — | $ | — | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 1,901 | 15,516 | 6,294 | 47,784 | |||||||||||||||
Shares repurchased | (46,118 | ) | (377,240 | ) | (56,062 | ) | (439,137 | ) | |||||||||||
Redemption fees | — | — | — | 1,555 | |||||||||||||||
Net increase (decrease) | (44,217 | ) | $ | (361,724 | ) | (49,768 | ) | $ | (389,798 | ) |
18
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
10. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income* | Distributions of Realized Gains* | Return of Capital* | Value, end of period | ||||||||||||||||||||||||
GMO Short-Duration Collateral Fund | $ | 3,469,010 | $ | — | $ | — | $ | 25,436 | $ | — | $ | 876,522 | $ | 2,704,809 | |||||||||||||||||
GMO Special Purpose Holding Fund | 5,056 | — | — | — | — | — | 4,964 | ||||||||||||||||||||||||
GMO U.S. Treasury Fund | 2,048,195 | 1,109,913 | 395,000 | 1,657 | 255 | — | 2,763,028 | ||||||||||||||||||||||||
Totals | $ | 5,522,261 | $ | 1,109,913 | $ | 395,000 | $ | 27,093 | $ | 255 | $ | 876,522 | $ | 5,472,801 |
* The table above includes estimated sources of all distributions paid by the underlying funds during the period March 1, 2010 through August 31, 2010. The actual tax characterization of distributions paid by the underlying funds will be determined through the fiscal year ending February 28, 2011.
19
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three-, five-, seven- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
20
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took in to account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also con sidered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of other funds of the Trust in which it invests. The Trustees noted in particular that certain underlying funds do not charge any advisory fees, and that with respect to all other underlying funds, pursuant to a contractual expense reimbursement arrangement in place with the Fund, the Manager effectively reimburses the Fund for management fees, shareholder servicing fees and most other expenses of the underlying funds that the Fund would otherwise bear as a result of its investments in those other funds. In addition, the Trustees considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economie s of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating
21
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
22
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including redemption fees; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.22 | % | $ | 1,000.00 | $ | 1,021.40 | $ | 1.12 | |||||||||||
2) Hypothetical | 0.22 | % | $ | 1,000.00 | $ | 1,024.10 | $ | 1.12 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
23
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a private placement memorandum, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The private placement memorandum can be obtained by calling 1-617-346-7646 (collect).
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Investments Concentration Summary (a)
August 31, 2010 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Debt Obligations | 0.0 | % | |||||
Short-term Investments | 9.8 | ||||||
Other | 90.2 | ||||||
100.0 | % |
(a) GMO SPV I, LLC is a 74.9% owned subsidiary of GMO Special Purpose Holding Fund.
1
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
DEBT OBLIGATIONS — 0.0% (a) | |||||||||||||||
Asset-Backed Securities — 0.0% | |||||||||||||||
Health Care Receivables — 0.0% | |||||||||||||||
Interest related to the Bankruptcy Estate of NPF VI Inc. Series 02-1 Class A (b) (c) | — | ||||||||||||||
Interest related to the Bankruptcy Estate of NPF XII Inc. Series 00-3 Class A (b) (c) | — | ||||||||||||||
Interest related to the Bankruptcy Estate of NPF XII Inc. Series 02-1 Class A (b) (c) | — | ||||||||||||||
— | |||||||||||||||
Total Asset-Backed Securities | — | ||||||||||||||
TOTAL DEBT OBLIGATIONS (COST $0) | — | ||||||||||||||
SHORT-TERM INVESTMENTS — 9.8% | |||||||||||||||
Money Market Funds — 9.8% | |||||||||||||||
14,564 | State Street Institutional Liquid Reserves Fund-Institutional Class | 14,564 | |||||||||||||
14,563 | State Street Institutional Treasury Plus Money Market Fund-Institutional Class | 14,563 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $29,127) | 29,127 | ||||||||||||||
TOTAL INVESTMENTS — 9.8% (Cost $29,127) | 29,127 | ||||||||||||||
Other Assets and Liabilities (net) — 90.2% | 268,088 | ||||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 297,215 |
Notes to Consolidated Schedule of Investments:
(a) Owned by GMO SPV I, LLC. GMO SPV I, LLC is a 74.9% subsidiary of GMO Special Purpose Holding Fund.
(b) Security in default.
(c) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
See accompanying notes to the financial statements.
2
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidating Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
GMO Special Purpose Holding Fund | GMO SPV I, LLC | Noncontrolling Interest | Eliminations | Consolidated Totals | |||||||||||||||||||
Assets: | |||||||||||||||||||||||
Investments in affiliated issuers, at value (cost $0) (Note 2) | $ | 168,095 | $ | — | $ | — | $ | (168,095 | ) | $ | — | ||||||||||||
Investments in unaffiliated issuers, at value (cost $29,127) (Note 2) | 29,127 | — | — | — | 29,127 | ||||||||||||||||||
Cash | 160,270 | 338,041 | — | — | 498,311 | ||||||||||||||||||
Dividends receivable | 4 | — | — | — | 4 | ||||||||||||||||||
Receivable for expenses reimbursed by Manager (Note 5) | 5,053 | 3,658 | — | — | 8,711 | ||||||||||||||||||
Total assets | 362,549 | 341,699 | — | (168,095 | ) | 536,153 | |||||||||||||||||
Liabilities: | |||||||||||||||||||||||
Accrued expenses | 65,334 | 123,233 | — | — | 188,567 | ||||||||||||||||||
Non controlling interest in subsidiary | — | — | 50,371 | — | 50,371 | ||||||||||||||||||
Total liabilities | 65,334 | 123,233 | 50,371 | — | 238,938 | ||||||||||||||||||
Net assets | $ | 297,215 | $ | 218,466 | $ | (50,371 | ) | $ | (168,095 | ) | $ | 297,215 | |||||||||||
Shares outstanding | 554,071 | 554,071 | |||||||||||||||||||||
Net asset value per share | $ | 0.54 | $ | 0.54 |
See accompanying notes to the financial statements.
3
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidating Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
GMO Special Purpose Holding Fund | GMO SPV I, LLC | Noncontrolling Interest | Eliminations | Consolidated Totals | |||||||||||||||||||
Investment Income: | |||||||||||||||||||||||
Interest | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||
Dividends | 17 | — | — | — | 17 | ||||||||||||||||||
Total income | 17 | — | — | — | 17 | ||||||||||||||||||
Expenses: | |||||||||||||||||||||||
Custodian and transfer agent fees | 552 | 13,156 | — | — | 13,708 | ||||||||||||||||||
Audit and tax fees | 28,888 | 6,808 | — | — | 35,696 | ||||||||||||||||||
Legal fees | 184 | 21,160 | — | — | 21,344 | ||||||||||||||||||
Trustees fees and related expenses (Note 5) | 5 | — | — | — | 5 | ||||||||||||||||||
Miscellaneous | 16 | 848 | — | — | 864 | ||||||||||||||||||
Total expenses | 29,645 | 41,972 | — | — | 71,617 | ||||||||||||||||||
Fees and expenses reimbursed by Manager (Note 5) | (29,454 | ) | (20,811 | ) | — | — | (50,265 | ) | |||||||||||||||
Expense Reduction (Note 2) | (62 | ) | (111 | ) | (173 | ) | |||||||||||||||||
Net expenses | 129 | 21,050 | — | — | 21,179 | ||||||||||||||||||
Net income (loss) | (112 | ) | (21,050 | ) | — | — | (21,162 | ) | |||||||||||||||
Noncontrolling interest in subsidiary net income (loss) | — | — | 11,162 | — | 11,162 | ||||||||||||||||||
Net investment income (loss) after noncontrolling interest | (112 | ) | (21,050 | ) | 11,162 | — | (10,000 | ) | |||||||||||||||
Realized and unrealized gain (loss): | |||||||||||||||||||||||
Net realized gain (loss) on: | |||||||||||||||||||||||
Investments in unaffiliated issuers | — | — | — | — | — | ||||||||||||||||||
Realized gains distributions from affiliated issuers | — | — | — | — | — | ||||||||||||||||||
Net realized gain (loss) | — | — | — | — | — | ||||||||||||||||||
Change in net unrealized appreciation (depreciation) on: | |||||||||||||||||||||||
Investments in affiliated issuers | (9,888 | ) | — | — | 9,888 | — | |||||||||||||||||
Net unrealized gain (loss) | (9,888 | ) | — | — | 9,888 | — | |||||||||||||||||
Net realized and unrealized gain (loss) | (9,888 | ) | — | — | 9,888 | — | |||||||||||||||||
Noncontrolling interest in subsidiary's realized and unrealized gain (loss) | — | — | — | — | — | ||||||||||||||||||
Net increase (decrease) in net assets resulting from operations | $ | (10,000 | ) | $ | (21,050 | ) | $ | 11,162 | $ | 9,888 | $ | (10,000 | ) |
See accompanying notes to the financial statements.
4
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) after noncontrolling interest | $ | (10,000 | ) | $ | (99,620 | ) | |||||
Net realized gain (loss) | — | — | |||||||||
Change in net unrealized appreciation (depreciation) | — | — | |||||||||
(10,000 | ) | (99,620 | ) | ||||||||
Noncontrolling interest in realized and unrealized gain (loss) | — | — | |||||||||
Net increase (decrease) in net assets from operations | (10,000 | ) | (99,620 | ) | |||||||
Cash distributions to shareholders | — | — | |||||||||
— | — | ||||||||||
Fund share transactions: (Note 9) | |||||||||||
Proceeds from sale of shares | — | — | |||||||||
Cost of shares repurchased | — | — | |||||||||
Net increase (decrease) from Fund share transactions | — | — | |||||||||
Total increase (decrease) in net assets | (10,000 | ) | (99,620 | ) | |||||||
Net assets: | |||||||||||
Beginning of period | 307,215 | 406,835 | |||||||||
End of period | $ | 297,215 | $ | 307,215 |
See accompanying notes to the financial statements.
5
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Financial Highlights
(For a share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29 | ||||||||||||||||||||||||||
(Unaudited) | 2010(a) | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 0.55 | $ | 0.73 | $ | 1.26 | $ | 1.41 | $ | 8.22 | $ | 15.51 | |||||||||||||||
Income from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | (0.01 | ) | (0.18 | ) | 0.00 | (b) | 0.06 | 0.02 | (0.08 | ) | |||||||||||||||||
Net realized and unrealized gain (loss) | 0.00 | — | 1.73 | 6.28 | 41.16 | 8.57 | |||||||||||||||||||||
Total from investment operations | (0.01 | ) | (0.18 | ) | 1.73 | 6.34 | 41.18 | 8.49 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From cash distributions | — | — | (2.26 | ) | (6.49 | ) | (47.99 | ) | (15.78 | ) | |||||||||||||||||
Total distributions | — | — | (2.26 | ) | (6.49 | ) | (47.99 | ) | (15.78 | ) | |||||||||||||||||
Net asset value, end of period | $ | 0.54 | $ | 0.55 | $ | 0.73 | $ | 1.26 | $ | 1.41 | $ | 8.22 | |||||||||||||||
Total Return(c)(d) | (1.82 | )%** | (24.66 | )% | 137.67 | % | 517.54 | % | 3613.95 | % | 124.75 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 297 | $ | 307 | $ | 407 | $ | 697 | $ | 780 | $ | 4,553 | |||||||||||||||
Net expenses to average daily net assets | 10.79 | %(e)* | 27.55 | %(e) | 0.81 | % | 0.00 | %(f) | 0.85 | % | 1.26 | % | |||||||||||||||
Net investment income to average daily net assets | (6.63 | )%* | (27.38 | )% | 0.25 | % | 3.91 | % | 1.05 | % | (0.65 | )% | |||||||||||||||
Portfolio turnover rate | 0 | %** | 0 | % | 0 | % | 0 | % | 0 | % | 0 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 30.01 | %* | 25.66 | % | 15.56 | % | 8.84 | % | 3.74 | % | 1.39 | % |
(a) For the year ended February 28, 2010, the Fund's financial results are reflective of a legal expense adjustment related to pending litigation against various entities related to the default of the NPF Securities. See Note 1.
(b) Net investment income (loss) was less than $0.01 per share.
(c) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(d) Had the effect of reinvested distributions not been assumed and income from investment operations been retained, the total returns would have been (0.01)% for the six months ended August 31, 2010, and (0.20)%, 1.93%, 7.61%, 97.84%, and 25.27% for the fiscal years ended 2010, 2009, 2008, 2007, and 2006, respectively.
(e) The net expense ratio does not include the effect of expense reductions (Note 2).
(f) Net expenses as a percentage of average daily net assets was less than 0.01%.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
6
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO Special Purpose Holding Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund's investments consist primarily of: (i) units of GMO SPV I, LLC ("SPV"), a special purpose vehicle that holds an interest in liquidating trusts (described below) related to certain defaulted asset-backed securities (the "NPF Securities") issued by NPF VI, Inc. and NPF XII, Inc. (the "Issuers"), and (ii) cash and cash items. The Fund expects that any new investments will be made primarily in cash, cash items, and high quality debt securities.
As noted above, one of the Fund's principal investments are units of SPV, which in turn holds an interest in liquidating trusts related to the NPF Securities. In November 2002, National Century Financial Enterprises ("NCFE"), which organized and administered the Issuers and the NPF Securities, defaulted on its obligations with respect to the NPF Securities (health care asset-backed receivables). The NPF Securities had been acquired by the Fund prior to this default. NCFE and its affiliates are alleged to have violated the terms of the bonds' indentures by, among other things, purportedly spending cash collateral, accepting collateral other than permitted receivables, moving receivables between trusts to meet compliance tests and reimbursing health care providers for more than the value of receivables purchased. NCFE, its affiliated operations (including the Issuers), and many of the health care providers declared bankruptcy.
In November 2002, the NPF Securities were transferred to SPV to facilitate the redemption of the NPF Securities in-kind, if necessary, to protect the interests of non-redeeming shareholders. In connection with the Fund's placement of the NPF Securities in SPV, the Fund assigned to SPV the right to any proceeds received in connection with any claims or actions against various parties arising out of the Fund's purchase of the NPF Securities (including those described below). The Fund's pro rata portion of the costs associated with the Fund's attempted recovery of losses associated with the NPF Securities will be borne by the Fund, subject to a priority reimbursement of such costs by SPV in the event SPV receives any proceeds in connection with any claims or actions.
In 2003, the Fund joined with certain other holders of the NPF Securities in filing a lawsuit against certain parties related to the NCFE offerings, including the indenture trustees, underwriters, and certain other parties. In April 2004, a plan of liquidation was approved by the bankruptcy court with respect to NCFE
7
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
and its affiliated operations (including the Issuers). Pursuant to such plan, SPV received cash distributions, which were distributed, less expenses, to holders of SPV, including the Fund. SPV also received interests in liquidating trusts, which it continues to hold. In July 2005 and April 2006, the Fund entered into settlement agreements with two of the defendants in the lawsuit and received (through its investment in SPV) cash settlements in connection therewith. Litigation against the remaining defendants continues at this time.
The cash items and high quality debt securities in which the Fund may invest may include securities issued by the U.S. government and agencies thereof (including securities neither guaranteed nor insured by the U.S. government), bankers' acceptances, commercial paper, bank certificates of deposit, and money market mutual funds. The Fund is also permitted to invest in debt securities of any quality or type, including governmental and corporate and other private issuers.
The Fund is presently closed to new subscriptions and additional investments from existing shareholders. The Fund's shares are held by other GMO Funds and certain other accredited investors.
The Fund has litigation pending against various entities related to the default of certain of the NPF Securities. For the period ended August 31, 2010, the Fund received no distributions in conjunction with settlement agreements related to the default of those securities. The outcome of the lawsuits against the remaining defendants is not known and any potential recoveries are not reflected in the net asset value of the Fund. To the extent additional recoveries are realized, such recoveries may be material to the net asset value of the Fund.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Basis of presentation and principles of consolidation
The accompanying consolidated financial statements include the accounts of the Fund and its majority owned investment in SPV. The consolidated financial statements include 100% of the assets and liabilities of SPV and the ownership interests of participants in SPV other than the Fund are recorded as a "Noncontrolling Interest". All significant interfund accounts and transactions have been eliminated in consolidation.
8
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the over-the-counter ("OTC") market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not rea dily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of August 31, 2010, 0.00% of the net assets of the Fund were valued using fair value prices. The Fund classifies such securities as Level 3.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund used the following fair value techniques on Level 3 investments: The Fund considered interests related to bankruptcy proceedings to be worthless.
9
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSETS VALUATION INPUT
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3)* | Total | |||||||||||||||
Debt Obligations | $ | — | $ | — | $ | 0 | * | $ | — | ||||||||||
Short-Term Investments | 29,127 | — | — | 29,127 | |||||||||||||||
Total Investments | $ | 29,127 | $ | — | $ | — | $ | 29,127 |
* Represents the interest in securities that are defaulted and have no value at August 31, 2010 or February 28, 2010.
Taxes
The Fund has elected to be treated as a partnership for U.S. federal income tax purposes. As a partnership, the Fund is not itself subject to federal income tax. Instead, each shareholder is required to take into account in determining its tax liability, its distributive share of items of Fund income, gain, loss, deduction, credit, and tax preference for each taxable year substantially as though such items have been realized directly by the shareholder and without regard to whether any distribution by the Fund has been or will be received. Accordingly, no provision (benefit) for U.S. federal and state income taxes is reflected in the accompanying financial statements. SPV is also treated as a partnership for U.S. federal income tax purposes and is subject to the same rules as the Fund with respect to the U.S. federal taxation of partnerships.
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation and depreciation in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 29,127 | $ | — | $ | — | $ | — |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with
10
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact its operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Distributions
Because the Fund has elected to be treated as a partnership for U.S. federal income tax purposes, it is not required to make distributions to its shareholders.
The Fund will distribute proceeds and other cash receipts received from its underlying investments. Distributions made by the Fund, other than distributions made in partial or complete redemption of shareholders interests in the Fund, are reported in the Fund's financial statements as cash distributions to shareholders.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Coupon income is not recognized on securities for which collection is not expected. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds.
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment
11
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Litigation-Related Risk — The ultimate amount of the Fund's recovery (through its investment in SPV) of losses on the defaulted NPF Securities and the total costs the Fund may incur with respect to its funding of litigation related to the NPF Securities is unknown at this time. Therefore, the Fund is subject to the risk that SPV may ultimately be unable to recover certain losses related to the NPF Securities.
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Liquidity risk is particularly pronounced for the Fund due to the nature and size of its investment in the NPF Securities (through the SPV). The Fund may be exposed (through the SPV) to the NPF Securities for an indefinite period of time and may experience a substantial loss in the event the SPV sells the NPF Securities.
• Market Risk — Fixed Income Securities — Typically, the value of fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.
• Credit Risk — This is the risk that the issuer or guarantor of a fixed income security will be unable or unwilling to make timely principal, interest, or settlement payments or otherwise honor its obligations. This risk is particularly acute in environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions.
Other principal risks of an investment in the Fund include Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally) and Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations).
4. Derivative financial instruments
At August 31, 2010, the Fund held no derivative contracts.
12
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
5. Fees and other transactions with affiliates
GMO does not charge the Fund any management or service fees for its services. The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's total annual operating expenses that exceed 0.00% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities-lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an invest ment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). The Fund's contractual expense limitation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $5 and $1, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
6. Purchases and sales of securities
There were no purchases or sales of securities, excluding short-term investments, for the period ended August 31, 2010.
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
13
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
8. Principal shareholders and related parties
As of August 31, 2010, 61.72% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund. One of the shareholders is another fund of the Trust.
As of August 31, 2010, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and 99.95% of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Shares sold | — | — | |||||||||
Shares repurchased | — | — | |||||||||
Net (decrease)/increase | — | — | |||||||||
Fund shares: | |||||||||||
Beginning of period | 554,071 | 554,071 | |||||||||
End of period | 554,071 | 554,071 |
14
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various statistical methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information fro m the Manager, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees took note of the fact that the Fund serves as a limited purpose holding vehicle. The Trustees also took into account the time and attention devoted by the Manager and the experience of the personnel responsible for managing the Fund. The Trustees considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees noted that, because of the limited nature of the Fund's investment program, no comparable accounts managed by the Manager or other funds managed by other managers existed to which the Fund could be compared for purposes of evaluating the Fund's performance.
The Trustees also gave substantial consideration to the fact that the Fund does not pay a management fee to the Manager under the Fund's investment management agreement.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the extent and quality of the resources, including human resources, brought to bear by the Manager, the Manager's record with respect to regulatory compliance and compliance with the investment policies of the funds of the Trust and the
15
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading of its officers and employees).
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
16
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
1) Actual | 10.79 | % | $ | 1,000.00 | $ | 981.80 | $ | 53.90 | |||||||||||
2) Hypothetical | 10.79 | % | $ | 1,000.00 | $ | 970.81 | $ | 53.60 |
* Expenses are calculated using the annualized expense ratio for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
17
GMO Special Situations Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a private placement memorandum, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The private placement memorandum can be obtained by calling 1-617-346-7646 (collect).
GMO Special Situations Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Mutual Funds | 86.9 | % | |||||
Short-Term Investments | 8.6 | ||||||
Debt Obligations | 5.9 | ||||||
Swaps | 1.0 | ||||||
Common Stocks | 0.5 | ||||||
Forward Currency Contracts | (1.4 | ) | |||||
Other | (1.5 | ) | |||||
100.0 | % |
1
GMO Special Situations Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||||||
COMMON STOCKS — 0.5% | |||||||||||||||
Canada — 0.3% | |||||||||||||||
689,896 | Timberwest Forest Corp * | 2,562,000 | |||||||||||||
China — 0.2% | |||||||||||||||
27,700 | China Mobile Ltd Sponsored ADR | 1,421,564 | |||||||||||||
TOTAL COMMON STOCKS (COST $4,238,055) | 3,983,564 | ||||||||||||||
DEBT OBLIGATIONS — 5.9% | |||||||||||||||
Convertible Debt — 0.3% | |||||||||||||||
CAD | 2,001,147 | Timberwest Forest Corp, 9.00%, due 02/11/14 | 2,345,791 | ||||||||||||
Corporate Debt — 5.6% | |||||||||||||||
26,350,000 | CIT Group, Inc., 7.00%, due 05/01/13 | 26,052,245 | |||||||||||||
16,780,000 | CIT Group, Inc., 7.00%, due 05/01/14 | 16,348,754 | |||||||||||||
Total Corporate Debt | 42,400,999 | ||||||||||||||
TOTAL DEBT OBLIGATIONS (COST $45,036,607) | 44,746,790 | ||||||||||||||
MUTUAL FUNDS — 86.9% | |||||||||||||||
Affiliated Issuers — 86.9% | |||||||||||||||
26,359,923 | GMO U.S. Treasury Fund | 658,998,079 | |||||||||||||
TOTAL MUTUAL FUNDS (COST $659,091,733) | 658,998,079 |
See accompanying notes to the financial statements.
2
GMO Special Situations Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
SHORT-TERM INVESTMENTS — 8.6% | |||||||||||||||
Money Market Funds — 8.6% | |||||||||||||||
65,269,846 | State Street Institutional Treasury Money Market Fund-Institutional Class | 65,269,846 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $65,269,846) | 65,269,846 | ||||||||||||||
TOTAL INVESTMENTS — 101.9% (Cost $773,636,241) | 772,998,279 | ||||||||||||||
Other Assets and Liabilities (net) — (1.9%) | (14,780,778 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 758,217,501 |
See accompanying notes to the financial statements.
3
GMO Special Situations Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Reverse Repurchase Agreements
Average balance outstanding | $ | (98,056,788 | ) | ||||
Average interest rate | 0.24 | % | |||||
Maximum balance outstanding | $ | (114,905,000 | ) |
Average balance outstanding was calculated based on daily face value balances outstanding during the period that the Fund has entered into reverse repurchase agreements.
A summary of outstanding financial instruments at August 31, 2010 is as follows:
Forward Currency Contracts
Settlement Date | Counterparty | Deliver/ Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||
Buys † | |||||||||||||||||||||||
11/12/10 | Deutsche Bank AG | KRW | 44,702,010,000 | $ | 37,142,826 | $ | (740,234 | ) | |||||||||||||||
11/12/10 | Barclays | KRW | 89,932,635,000 | 74,724,877 | (1,023,921 | ) | |||||||||||||||||
11/12/10 | Bank of New York Mellon | KRW | 45,230,625,000 | 37,582,051 | (315,414 | ) | |||||||||||||||||
10/22/10 | Brown Brothers Harriman & Co. | SGD | 103,603,950 | 76,430,721 | (42,740 | ) | |||||||||||||||||
10/22/10 | Deutsche Bank AG | SGD | 104,131,800 | 76,820,126 | 418,911 | ||||||||||||||||||
$ | 302,700,601 | $ | (1,703,398 | ) | |||||||||||||||||||
Sales # | |||||||||||||||||||||||
10/22/10 | Bank of New York Mellon | AUD | 3,375,022 | $ | 2,985,028 | $ | 15,860 | ||||||||||||||||
10/22/10 | Barclays | AUD | 3,375,000 | 2,985,008 | 17,122 | ||||||||||||||||||
10/22/10 | Deutsche Bank AG | JPY | 8,583,840,000 | 102,231,611 | (2,231,611 | ) | |||||||||||||||||
10/22/10 | Morgan Stanley | JPY | 3,292,047,450 | 39,207,547 | (957,547 | ) | |||||||||||||||||
10/22/10 | Brown Brothers Harriman & Co. | JPY | 3,293,248,500 | 39,221,852 | (971,852 | ) | |||||||||||||||||
10/22/10 | Bank of New York Mellon | JPY | 6,537,384,000 | 77,858,778 | (1,358,778 | ) | |||||||||||||||||
10/22/10 | Royal Bank Of Scotland PLC | JPY | 3,248,228,250 | 38,685,670 | (435,670 | ) | |||||||||||||||||
10/22/10 | Bank Of America | JPY | 4,549,308,000 | 54,181,239 | (1,181,239 | ) | |||||||||||||||||
10/22/10 | Barclays | JPY | 6,557,541,750 | 78,098,853 | (1,598,853 | ) | |||||||||||||||||
10/22/10 | State Street Bank & Trust Co. | JPY | 3,245,895,000 | 38,657,882 | (407,882 | ) | |||||||||||||||||
$ | 474,113,468 | $ | (9,110,450 | ) |
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.
See accompanying notes to the financial statements.
4
GMO Special Situations Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Swap Agreements
Future Swaps
Notional Amount | Expiration Date | Counterparty | Fund Pays | Fund Receives | Market Value | ||||||||||||||||||||||
4,400,000 | EUR | 12/18/2015 | Deutsche Bank AG | Depreciation of | Appreciation of | $ | 411,856 | ||||||||||||||||||||
EURO STOXX 50 | EURO STOXX 50 | ||||||||||||||||||||||||||
December 2015 | December 2015 | ||||||||||||||||||||||||||
Dividend Future | Dividend Future | ||||||||||||||||||||||||||
8,880,000 | EUR | 12/16/2016 | Morgan Stanley | Depreciation of EURO STOXX 50 December 2016 Dividend Future | Appreciation of EURO STOXX 50 December 2016 Dividend Future | 937,765 | |||||||||||||||||||||
9,125,000 | EUR | 12/15/2017 | Morgan Stanley | Depreciation of EURO STOXX 50 December 2017 Dividend Future | Appreciation of EURO STOXX 50 December 2017 Dividend Future | 893,412 | |||||||||||||||||||||
2,585,250 | EUR | 12/15/2017 | Deutsche Bank AG | Depreciation of EURO STOXX 50 December 2017 Dividend Future | Appreciation of EURO STOXX 50 December 2017 Dividend Future | 87,250 | |||||||||||||||||||||
2,663,701 | EUR | 12/21/2018 | Morgan Stanley | Depreciation of EURO STOXX 50 December 2018 Dividend Future | Appreciation of EURO STOXX 50 December 2018 Dividend Future | 32,314 | |||||||||||||||||||||
547,500 | EUR | 12/21/2018 | Deutsche Bank AG | Depreciation of EURO STOXX 50 December 2018 Dividend Future | Appreciation of EURO STOXX 50 December 2018 Dividend Future | (62,729 | ) | ||||||||||||||||||||
789,000 | EUR | 12/21/2018 | Morgan Stanley | Depreciation of EURO STOXX 50 December 2018 Dividend Future | Appreciation of EURO STOXX 50 December 2018 Dividend Future | (53,225 | ) | ||||||||||||||||||||
275,860 | EUR | 12/21/2018 | Morgan Stanley | Depreciation of EURO STOXX 50 December 2018 Dividend Future | Appreciation of EURO STOXX 50 December 2018 Dividend Future | (21,417 | ) |
See accompanying notes to the financial statements.
5
GMO Special Situations Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Notional Amount | Expiration Date | Counterparty | Fund Pays | Fund Receives | Market Value | ||||||||||||||||||||||
904,250 | EUR | 12/21/2018 | Morgan Stanley | Depreciation of | Appreciation of | $ | (35,192 | ) | |||||||||||||||||||
EURO STOXX 50 | EURO STOXX 50 | ||||||||||||||||||||||||||
December 2018 | December 2018 | ||||||||||||||||||||||||||
Dividend Future | Dividend Future | ||||||||||||||||||||||||||
3,037,500 | EUR | 12/20/2019 | Deutsche Bank AG | Depreciation of EURO STOXX 50 December 2019 Dividend Future | Appreciation of EURO STOXX 50 December 2019 Dividend Future | 24,712 | |||||||||||||||||||||
2,937,000 | EUR | 12/20/2019 | Deutsche Bank AG | Depreciation of EURO STOXX 50 December 2019 Dividend Future | Appreciation of EURO STOXX 50 December 2019 Dividend Future | 152,071 | |||||||||||||||||||||
5,587,500 | EUR | 12/20/2019 | Deutsche Bank AG | Depreciation of EURO STOXX 50 December 2019 Dividend Future | Appreciation of EURO STOXX 50 December 2019 Dividend Future | 667,208 | |||||||||||||||||||||
881,250 | EUR | 12/20/2019 | Morgan Stanley | Depreciation of EURO STOXX 50 December 2019 Dividend Future | Appreciation of EURO STOXX 50 December 2019 Dividend Future | (148,268 | ) | ||||||||||||||||||||
552,500 | EUR | 12/20/2019 | Deutsche Bank AG | Depreciation of EURO STOXX 50 December 2019 Dividend Future | Appreciation of EURO STOXX 50 December 2019 Dividend Future | (54,492 | ) | ||||||||||||||||||||
$ | 2,831,265 | ||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
Forward Starting Dividend Swaps
Notional Amount | Starting Date | Expiration Date | Counterparty | Fund Pays | Fund Receives | Market Value | |||||||||||||||||||||||||
1,862,500 | EUR | 12/20/2013 | 12/19/2014 | Barclays | 25,000 EUR for | 25,000 EUR for | |||||||||||||||||||||||||
every 1 dividend | every 1 dividend | ||||||||||||||||||||||||||||||
EURO STOXX | EURO STOXX | ||||||||||||||||||||||||||||||
50 Index point | 50 Index point | ||||||||||||||||||||||||||||||
decrease in the | increase in the | ||||||||||||||||||||||||||||||
actual dividends | actual dividends | ||||||||||||||||||||||||||||||
from the | from the | ||||||||||||||||||||||||||||||
Fixed Strike | Fixed Strike | $ | 571,150 |
See accompanying notes to the financial statements.
6
GMO Special Situations Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Notional Amount | Starting Date | Expiration Date | Counterparty | Fund Pays | Fund Receives | Market Value | |||||||||||||||||||||||||
3,787,500 | EUR | 12/20/2013 | 12/19/2014 | Barclays | 50,000 EUR for | 50,000 EUR for | |||||||||||||||||||||||||
every 1 dividend | every 1 dividend | ||||||||||||||||||||||||||||||
EURO STOXX | EURO STOXX | ||||||||||||||||||||||||||||||
50 Index point | 50 Index point | ||||||||||||||||||||||||||||||
decrease in the | increase in the | ||||||||||||||||||||||||||||||
actual dividends | actual dividends | ||||||||||||||||||||||||||||||
from the | from the | ||||||||||||||||||||||||||||||
Fixed Strike | Fixed Strike | $ | 1,068,317 | ||||||||||||||||||||||||||||
3,910,000 | EUR | 12/20/2013 | 12/19/2014 | BNP Paribas | 50,000 EUR for every 1 dividend EURO STOXX 50 Index point decrease in the actual dividends from the Fixed Strike | 50,000 EUR for every 1 dividend EURO STOXX 50 Index point increase in the actual dividends from the Fixed Strike | 923,310 | ||||||||||||||||||||||||
1,987,500 | EUR | 12/19/2014 | 12/18/2015 | Barclays | 25,000 EUR for every 1 dividend EURO STOXX 50 Index point decrease in the actual dividends from the Fixed Strike | 25,000 EUR for every 1 dividend EURO STOXX 50 Index point increase in the actual dividends from the Fixed Strike | 432,848 | ||||||||||||||||||||||||
2,020,000 | EUR | 12/18/2015 | 12/16/2016 | Barclays | 25,000 EUR for every 1 dividend EURO STOXX 50 Index point decrease in the actual dividends from the Fixed Strike | 25,000 EUR for every 1 dividend EURO STOXX 50 Index point increase in the actual dividends from the Fixed Strike | 432,344 | ||||||||||||||||||||||||
5,436,000 | EUR | 12/16/2016 | 12/15/2017 | BNP Paribas | 60,000 EUR for every 1 dividend EURO STOXX 50 Index point decrease in the actual dividends from the Fixed Strike | 60,000 EUR for every 1 dividend EURO STOXX 50 Index point increase in the actual dividends from the Fixed Strike | 503,714 |
See accompanying notes to the financial statements.
7
GMO Special Situations Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Notional Amount | Starting Date | Expiration Date | Counterparty | Fund Pays | Fund Receives | Market Value | |||||||||||||||||||||||||
2,072,500 | EUR | 12/15/2017 | 12/21/2018 | Barclays | 25,000 EUR for | 25,000 EUR for | |||||||||||||||||||||||||
every 1 dividend | every 1 dividend | ||||||||||||||||||||||||||||||
EURO STOXX | EURO STOXX | ||||||||||||||||||||||||||||||
50 Index point | 50 Index point | ||||||||||||||||||||||||||||||
decrease in the | increase in the | ||||||||||||||||||||||||||||||
actual dividends | actual dividends | ||||||||||||||||||||||||||||||
from the | from the | ||||||||||||||||||||||||||||||
Fixed Strike | Fixed Strike | $ | 441,230 | ||||||||||||||||||||||||||||
2,065,000 | EUR | 12/15/2017 | 12/21/2018 | Barclays | 25,000 EUR for every 1 dividend EURO STOXX 50 Index point decrease in the actual dividends from the Fixed Strike | 25,000 EUR for every 1 dividend EURO STOXX 50 Index point increase in the actual dividends from the Fixed Strike | 449,156 | ||||||||||||||||||||||||
2,062,500 | EUR | 12/15/2017 | 12/21/2018 | BNP Paribas | 25,000 EUR for every 1 dividend EURO STOXX 50 Index point decrease in the actual dividends from the Fixed Strike | 25,000 EUR for every 1 dividend EURO STOXX 50 Index point increase in the actual dividends from the Fixed Strike | 451,798 | ||||||||||||||||||||||||
1,007,000 | EUR | 12/15/2017 | 12/21/2018 | BNP Paribas | 10,000 EUR for every 1 dividend EURO STOXX 50 Index point decrease in the actual dividends from the Fixed Strike | 10,000 EUR for every 1 dividend EURO STOXX 50 Index point increase in the actual dividends from the Fixed Strike | (11,625 | ) | |||||||||||||||||||||||
3,039,000 | EUR | 12/21/2018 | 12/20/2019 | BNP Paribas | 30,000 EUR for every 1 dividend EURO STOXX 50 Index point decrease in the actual dividends from the Fixed Strike | 30,000 EUR for every 1 dividend EURO STOXX 50 Index point increase in the actual dividends from the Fixed Strike | 18,432 |
See accompanying notes to the financial statements.
8
GMO Special Situations Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Notional Amount | Starting Date | Expiration Date | Counterparty | Fund Pays | Fund Receives | Market Value | |||||||||||||||||||||||||
1,815,000 | EUR | 12/21/2018 | 12/20/2019 | BNP Paribas | 15,000 EUR for | 15,000 EUR for | |||||||||||||||||||||||||
every 1 dividend | every 1 dividend | ||||||||||||||||||||||||||||||
EURO STOXX | EURO STOXX | ||||||||||||||||||||||||||||||
50 Index point | 50 Index point | ||||||||||||||||||||||||||||||
decrease in the | increase in the | ||||||||||||||||||||||||||||||
actual dividends | actual dividends | ||||||||||||||||||||||||||||||
from the | from the | ||||||||||||||||||||||||||||||
Fixed Strike | Fixed Strike | $ | (293,374 | ) | |||||||||||||||||||||||||||
2,754,000 | EUR | 12/21/2018 | 12/20/2019 | BNP Paribas | 22,500 EUR for every 1 dividend EURO STOXX 50 Index point decrease in the actual dividends from the Fixed Strike | 22,500 EUR for every 1 dividend EURO STOXX 50 Index point increase in the actual dividends from the Fixed Strike | (472,317 | ) | |||||||||||||||||||||||
1,289,600 | EUR | 12/21/2018 | 12/20/2019 | BNP Paribas | 10,400 EUR for every 1 dividend EURO STOXX 50 Index point decrease in the actual dividends from the Fixed Strike | 10,400 EUR for every 1 dividend EURO STOXX 50 Index point increase in the actual dividends from the Fixed Strike | (235,355 | ) | |||||||||||||||||||||||
$ | 4,279,628 | ||||||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
See accompanying notes to the financial statements.
9
GMO Special Situations Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Total Return Swaps
Notional Amount | Expiration Date | Counterparty | Fund Pays | Fund Receives | Market Value | ||||||||||||||||||||||
29,468,941 | USD | 8/22/2011 | BNP Paribas | MSCI Daily Total | 3 Month LIBOR | $ | 702,562 | ||||||||||||||||||||
Return Net | |||||||||||||||||||||||||||
Emerging Markets | |||||||||||||||||||||||||||
China USD | |||||||||||||||||||||||||||
$ | 702,562 | ||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
As of August 31, 2010, for futures contracts, swap agreements and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
Notes to Schedule of Investments:
ADR - American Depositary Receipt
LIBOR - London Interbank Offered Rate
MSCI - Morgan Stanley Capital International
* Non-income producing security.
Currency Abbreviations:
AUD - Australian Dollar
CAD - Canadian Dollar
EUR - Euro
JPY - Japanese Yen
KRW - South Korean Won
SGD - Singapore Dollar
USD - United States Dollar
See accompanying notes to the financial statements.
10
GMO Special Situations Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $114,544,508) (Note 2) | $ | 114,000,200 | |||||
Investments in affiliated issuers, at value (cost $659,091,733) (Notes 2 and 10) | 658,998,079 | ||||||
Foreign currency, at value (cost $1,125,269) (Note 2) | 1,110,337 | ||||||
Receivable for Fund shares sold | 2,874,932 | ||||||
Dividends and interest receivable | 503,118 | ||||||
Unrealized appreciation on open forward currency contracts (Note 4) | 451,893 | ||||||
Receivable for open swap contracts (Note 4) | 9,201,449 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 14,012 | ||||||
Total assets | 787,154,020 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 15,930,953 | ||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 241,298 | ||||||
Shareholder service fee | 38,049 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 659 | ||||||
Unrealized depreciation on open forward currency contracts (Note 4) | 11,265,741 | ||||||
Payable for open swap contracts (Note 4) | 1,387,994 | ||||||
Accrued expenses | 71,825 | ||||||
Total liabilities | 28,936,519 | ||||||
Net assets | $ | 758,217,501 |
See accompanying notes to the financial statements.
11
GMO Special Situations Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited) — (Continued)
Net assets attributable to: | |||||||
Class III shares | $ | 26,596,536 | |||||
Class VI shares | $ | 731,620,965 | |||||
Shares outstanding: | |||||||
Class III | 1,000,562 | ||||||
Class VI | 27,434,354 | ||||||
Net asset value per share: | |||||||
Class III | $ | 26.58 | |||||
Class VI | $ | 26.67 |
See accompanying notes to the financial statements.
12
GMO Special Situations Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Interest | $ | 1,951,872 | |||||
Dividends from affiliated issuers (Note 10) | 254,402 | ||||||
Dividends (net of withholding taxes of $3,928) | 40,841 | ||||||
Total investment income | 2,247,115 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 1,042,638 | ||||||
Shareholder service fee – Class III (Note 5) | 16,463 | ||||||
Shareholder service fee – Class VI (Note 5) | 148,951 | ||||||
Interest expense (Note 2) | 88,513 | ||||||
Audit and tax fees | 39,100 | ||||||
Custodian, fund accounting agent and transfer agent fees | 25,576 | ||||||
Legal fees | 22,540 | ||||||
Trustees fees and related expenses (Note 5) | 4,530 | ||||||
Miscellaneous | 3,495 | ||||||
Total expenses | 1,391,806 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (77,004 | ) | |||||
Net expenses | 1,314,802 | ||||||
Net investment income (loss) | 932,313 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 9,732,893 | ||||||
Realized gains distributions from affiliated issuers (Note 10) | 42,519 | ||||||
Closed swap contracts | (2,603,317 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | (142,617 | ) | |||||
Net realized gain (loss) | 7,029,478 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | (2,268,369 | ) | |||||
Investments in affiliated issuers | (17 | ) | |||||
Open swap contracts | (11,486,238 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | (10,829,413 | ) | |||||
Net unrealized gain (loss) | (24,584,037 | ) | |||||
Net realized and unrealized gain (loss) | (17,554,559 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (16,622,246 | ) |
See accompanying notes to the financial statements.
13
GMO Special Situations Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 932,313 | $ | 4,475,304 | |||||||
Net realized gain (loss) | 7,029,478 | (989,540 | ) | ||||||||
Change in net unrealized appreciation (depreciation) | (24,584,037 | ) | 21,204,039 | ||||||||
Net increase (decrease) in net assets from operations | (16,622,246 | ) | 24,689,803 | ||||||||
Net share transactions (Note 9): | |||||||||||
Class III | 9,951,647 | (4,534,110 | ) | ||||||||
Class VI | 399,598,411 | (1,379,981 | ) | ||||||||
Increase (decrease) in net assets resulting from net share transactions | 409,550,058 | (5,914,091 | ) | ||||||||
Total increase (decrease) in net assets | 392,927,812 | 18,775,712 | |||||||||
Net assets: | |||||||||||
Beginning of period | 365,289,689 | 346,513,977 | |||||||||
End of period | $ | 758,217,501 | $ | 365,289,689 |
See accompanying notes to the financial statements.
14
GMO Special Situations Fund
(A Series of GMO Trust)
Statement of Cash Flows — Year Ended August 31, 2010
Cash flows from operating activities: | |||||||
Net increase (decrease) in net assets resulting from operations | $ | (16,622,246 | ) | ||||
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities: | |||||||
Net change in unrealized (appreciation) depreciation | 24,584,037 | ||||||
Net realized (gain) loss | (7,029,478 | ) | |||||
Net amortization of discount and premium | (1,706,099 | ) | |||||
Investments purchased | (639,919,042 | ) | |||||
Proceeds from sale of investments | 335,531,767 | ||||||
Short term investments, net | (943,344 | ) | |||||
Realized gain distributions from affiliated issuers | 42,519 | ||||||
Other proceeds (cost): | |||||||
Swap contracts | (2,603,317 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | (158,182 | ) | |||||
Changes in assets and liabilities: | |||||||
(Increase) decrease in receivable for expenses reimbursed by Manager | 7,156 | ||||||
(Increase) decrease in dividends and interest receivable | (392,030 | ) | |||||
Increase (decrease) in payable to affiliate for: | |||||||
Management fee | 140,412 | ||||||
Shareholder service fee payable | 21,784 | ||||||
Trustee and Chief Compliance Officer of GMO Trust fees | 12 | ||||||
Increase (decrease) in accrued expenses | (12,663 | ) | |||||
Net cash provided by (used in) operating activities | (309,058,714 | ) | |||||
Cash flows from financing activities: | |||||||
Proceeds from shares sold | 422,079,657 | ||||||
Shares repurchased | (4,404,531 | ) | |||||
Increase (decrease) in payable for reverse repurchase agreements | (107,506,075 | ) | |||||
Net cash provided by (used in) financing activities | 310,169,051 | ||||||
Net increase in cash | 1,110,337 | ||||||
Cash and cash equivalents, beginning of period | — | ||||||
Cash and cash equivalents, end of period | $ | 1,110,337 |
See accompanying notes to the financial statements.
15
GMO Special Situations Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29 | ||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008(a) | ||||||||||||||||
Net asset value, beginning of period | $ | 27.47 | $ | 25.47 | $ | 21.32 | $ | 20.09 | |||||||||||
Income (loss) from investment operations: | |||||||||||||||||||
Net investment income (loss)† | 0.04 | 0.33 | 0.26 | 0.31 | |||||||||||||||
Net realized and unrealized gain (loss) | (0.93 | ) | 1.67 | 3.89 | 0.92 | ||||||||||||||
Total from investment operations | (0.89 | ) | 2.00 | 4.15 | 1.23 | ||||||||||||||
Net asset value, end of period | $ | 26.58 | $ | 27.47 | $ | 25.47 | $ | 21.32 | |||||||||||
Total Return(b) | (3.24 | )%** | 7.85 | % | 19.47 | % | 6.12 | %** | |||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||
Net assets, end of period (000's) | $ | 26,597 | $ | 17,332 | $ | 20,366 | $ | 88,204 | |||||||||||
Net operating expenses to average daily net assets | 0.53 | %(c)* | 0.53 | % | 0.52 | % | 0.53 | %* | |||||||||||
Interest expense to average daily net assets | 0.03 | %* | 0.03 | % | — | — | |||||||||||||
Total net expenses to average daily net assets | 0.56 | %(c)* | 0.56 | % | 0.52 | % | 0.53 | %* | |||||||||||
Net investment income (loss) to average daily net assets | 0.32 | %* | 1.24 | % | 1.20 | % | 2.71 | %* | |||||||||||
Portfolio turnover rate | 71 | %** | 15 | % | 62 | % | 0 | %††** | |||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.03 | %* | 0.04 | % | 0.03 | % | 0.05 | %* |
(a) Period from August 13, 2007 (commencement of operations) through February 29, 2008.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover rate of the Fund for the period from July 31, 2007 (commencement of operations) through February 29, 2008.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
16
GMO Special Situations Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class VI share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29 | ||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008(a) | ||||||||||||||||
Net asset value, beginning of period | $ | 27.55 | $ | 25.51 | $ | 21.33 | $ | 20.00 | |||||||||||
Income (loss) from investment operations: | |||||||||||||||||||
Net investment income (loss)† | 0.05 | 0.36 | 0.23 | 0.34 | |||||||||||||||
Net realized and unrealized gain (loss) | (0.93 | ) | 1.68 | 3.95 | 0.99 | ||||||||||||||
Total from investment operations | (0.88 | ) | 2.04 | 4.18 | 1.33 | ||||||||||||||
Net asset value, end of period | $ | 26.67 | $ | 27.55 | $ | 25.51 | $ | 21.33 | |||||||||||
Total Return(b) | (3.19 | )%** | 8.00 | % | 19.60 | % | 6.65 | %** | |||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||
Net assets, end of period (000's) | $ | 731,621 | $ | 347,957 | $ | 326,148 | $ | 593,131 | |||||||||||
Net operating expenses to average daily net assets | 0.43 | %(c)* | 0.44 | % | 0.43 | % | 0.43 | %* | |||||||||||
Interest expense to average daily net assets | 0.03 | %* | 0.03 | % | — | — | |||||||||||||
Total net expenses to average daily net assets | 0.46 | %(c)* | 0.47 | % | 0.43 | % | 0.43 | %* | |||||||||||
Net investment income (loss) to average daily net assets | 0.33 | %* | 1.35 | % | 1.03 | % | 2.84 | %* | |||||||||||
Portfolio turnover rate | 71 | %** | 15 | % | 62 | % | 0 | %††** | |||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.03 | %* | 0.05 | % | 0.03 | % | 0.05 | %* |
(a) Period from July 31, 2007 (commencement of operations) through February 29, 2008.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover rate of the Fund for the period from July 31, 2007 (commencement of operations) through February 29, 2008.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
17
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO Special Situations Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The investment objectives of the Fund are capital appreciation and capital preservation. The Fund is not intended to serve as a standalone investment product and is available only for investment by other GMO Funds and other GMO asset allocation clients.
The Manager plans to pursue the Fund's investment objectives by implementing investment strategies that complement long-only investments in global equities and fixed income instruments. The Fund may have long or short exposure to foreign and U.S. equity securities (including both growth and value style equities and equities of any market capitalization), foreign and U.S. fixed income securities (including fixed income securities of any credit quality and having any maturity or duration), currencies, and, from time to time, other alternative asset classes (e.g., instruments that seek exposure to or reduce risks of market volatility). The Fund is not restricted in its exposure to any particular asset class, and at times may be substantially exposed (long or short) to a single asset class (e.g., equity securities or fixed income securities). In addition, the Fund is not restricted in its exposure (long or short) to any particular m arket. The Fund may have substantial exposure (long or short) to a particular country or type of country (e.g., emerging countries). The Fund could be subject to material losses from a single investment.
In managing the Fund's strategy, the Manager employs proprietary quantitative investment models and fundamental judgment for the selection of derivatives and other investments and portfolio construction. The models use one or more independent, though possibly concentrated or focused, strategies for selection of investments. The Manager also may eliminate strategies or add new strategies in response to additional research, changing market conditions, or other factors.
In pursuing its investment objectives, the Fund is permitted to use a wide variety of exchange-traded and over-the-counter ("OTC") derivatives, including reverse repurchase agreements, options, futures, swap contracts, swaptions, and foreign currency derivative transactions. The Fund is not limited in the extent to which it may use derivatives or in the absolute face value of its derivative positions, and, as a result, it may be leveraged in relation to its assets. The Fund may elect to make some or all of its investments through one or more wholly-owned, non-U.S. subsidiaries. GMO may serve as the investment manager to these companies but will not receive any additional management or other fees for such services. The Fund does
18
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
not seek to control risk relative to a particular securities market index or benchmark. In addition, the Fund does not seek to outperform a particular securities market index or blend of market indices (i.e., the Fund does not seek "relative" return).
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund ("underlying funds"). The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
Throughout the year ended August 31, 2010, the Fund had two classes of shares outstanding: Class III and Class VI. Each class of shares bears a different shareholder service fee.
Currently, shares of the Fund are not publicly offered and are principally available for purchase by other GMO Funds and certain other accredited investors.
The Fund currently limits subscriptions.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the over-the-counter ("OTC") market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not rea dily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the
19
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. During the period ended August 31, 2010, the Manager has evaluated the Fund's OTC derivatives contracts and determined that no reduction in value was warranted on account of the creditworthiness of a counterparty. See note 4 for a further discussion on valuation of derivative financial instruments.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data.
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | |||||||||||||||||||
Canada | $ | 2,562,000 | $ | — | $ | — | $ | 2,562,000 | |||||||||||
China | 1,421,564 | — | — | 1,421,564 | |||||||||||||||
TOTAL COMMON STOCKS | 3,983,564 | — | — | 3,983,564 | |||||||||||||||
Debt Obligations | |||||||||||||||||||
Convertible Debt | — | 2,345,791 | — | 2,345,791 | |||||||||||||||
Corporate Debt | — | 42,400,999 | — | 42,400,999 | |||||||||||||||
TOTAL DEBT OBLIGATIONS | — | 44,746,790 | — | 44,746,790 |
20
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
ASSET VALUATION INPUTS — continued
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Mutual Funds | $ | 658,998,079 | $ | — | $ | — | $ | 658,998,079 | |||||||||||
Short-Term Investments | 65,269,846 | — | — | 65,269,846 | |||||||||||||||
Total Investments | 728,251,489 | 44,746,790 | — | 772,998,279 | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts Foreign Exchange risk | — | 451,893 | — | 451,893 | |||||||||||||||
Swap Agreements Equity risk | — | 9,201,449 | — | 9,201,449 | |||||||||||||||
Total | $ | 728,251,489 | $ | 54,400,132 | $ | — | $ | 782,651,621 |
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts Foreign Exchange risk | $ | — | $ | (11,265,741 | ) | $ | — | $ | (11,265,741 | ) | |||||||||
Swap Agreements Equity risk | — | (1,387,994 | ) | — | (1,387,994 | ) | |||||||||||||
Total | $ | — | $ | (12,653,735 | ) | $ | — | $ | (12,653,735 | ) |
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements.
The Fund held no investments or other financial instruments at either August 31, 2010 or February 28, 2010, whose fair value was determined using Level 3 inputs.
21
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are inclu ded with the net realized and unrealized gain or loss on investment securities.
Repurchase agreements
The Fund may enter into repurchase agreements. Under a repurchase agreement the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities it acquired under the repurchase agreement. The value of the securities acquired is required by contract to be marked to market daily so that their market value is at least equal to the amount owed to the Fund by the seller. If the seller of a repurchase agreement defaults or enters into insolvency proceedings and/or the value of the securities subject to the repurchase agreement is insufficient, the Fund's recovery of cash from the seller may be delayed and the Fund may incur a loss equal to the difference between the cash it paid and the value of the securities. The Fund had no repurchase agreements outstanding at the end of the period.
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at an agreed upon price and date. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which generally causes the Fund's portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the even t of a buyer's bankruptcy or insolvency, the Fund's use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund's right to repurchase the securities. The Fund had no reverse repurchase agreements outstanding at the end of the period.
22
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Inflation-indexed bonds
The Fund may invest in inflation indexed bonds. Inflation indexed bonds are fixed income securities whose principal value is adjusted periodically according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that reflects inflation in the principal value of the bond. Most other issuers pay out any inflation related accruals as part of a semiannual coupon.
The value of inflation indexed bonds is expected to change in response to changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal interest rates (i.e., stated interest rates) and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate than nominal interest rates, real interest rates (i.e. nominal interest rate minus inflation) might decline, leading to an increase in value of inflation indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation indexed bonds. There can be no assurance, however, that the value of inflation indexed bonds will be directly correlated to changes in nominal interest rates, and short term increases in inflation may lead to a decline in their value. Coupon payments received by the Fund from inflation indexed bonds are included in the Fund's gross income for the period in which they accrue. In addition, any increase or decrease in the principal amount of an inflation indexed bond will increase or decrease taxable ordinary income to the Fund, even though principal is not paid until maturity. The Fund had no inflation-indexed bonds outstanding at the end of the period.
Taxes
The Fund has elected to be treated as a partnership for U.S. federal income tax purposes. As a partnership, the Fund is not itself subject to federal income tax. Instead, each shareholder is required to take into account in determining its tax liability, its distributive share of items of Fund income, gain, loss, deduction, credit, and tax preference for each taxable year substantially as though such items have been realized directly by the shareholder and without regard to whether any distribution by the Fund has been or will be received. Accordingly, no provision (benefit) for U.S. federal and state income taxes is reflected in the accompanying financial statements. Effective on March 1, 2009, the Fund was required to maintain a tax year-end of December 31.
Taxes on foreign interest and dividend income are generally withheld at the statutory rate. The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Transaction based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
23
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 773,636,241 | $ | 73,347 | $ | (711,309 | ) | $ | (637,962 | ) |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the periods ended February 28, 2008 through the current year.
Distributions
Because the Fund has elected to be treated as a partnership for U.S. federal income tax purposes, it is not required to make distributions to its shareholders. It is the policy of the Fund to declare and pay distributions as determined by the Trustees (or their delegates).
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which co llection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
24
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. Investment income, common expenses and realized and unrealized gains and losses are allocated among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class's operations. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds (See Note 5).
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Customized Investment Program Risk — Because the Fund is intended to complement the Manager's asset allocation strategies, the risks associated with the Fund's investments often will be far greater (and investment returns may be far more volatile) than if the Fund served as a stand-alone investment vehicle.
• Management and Operational Risk — The Fund runs the risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations. In addition, management risk may be particularly pronounced for the Fund because the Fund does not seek to control risk relative to a particular securities market index or benchmark.
• Derivatives Risk — The use of derivatives involves the risk that their value may not correlate with the value of the relevant underlying assets, rates or indices. Derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The risks of derivatives are particularly pronounced for Fund because it uses a variety of exchange-traded and over-the-counter derivatives to implement its investment program.
25
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
• Leveraging Risk — The use of reverse repurchase agreements and other derivatives and securities lending may cause the Fund's portfolio to be leveraged. The Fund is not limited in the extent to which it uses derivatives. Leverage increases the Fund's portfolio losses when the value of its investments decline.
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
• Credit and Counterparty Risk — The Fund runs the risk that the issuer or guarantor of a fixed income security, the counterparty to an over-the-counter derivatives contract, a borrower of the Fund's securities or the obligor of an obligation underlying an asset-backed security will be unable or unwilling to make timely principal, interest, or settlement payments or otherwise honor its obligations. This risk is particularly pronounced for the Fund because it typically uses over-the-counter derivatives, including swap contracts with longer-term maturities, and may have significant exposure to a single counterparty. The risk of counterparty default is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evi denced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions.
• Focused Investment Risk — Focusing investments in countries, regions, sectors or companies with high positive correlations to one another creates additional risk.
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to rec eipt) may expose the Fund to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund's investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund's investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
26
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
• Market Risk — Fixed Income Securities — Typically, the value of fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund's investments.
Other principal risks of an investment in the Fund include Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps or other derivatives on an index, a single security or a basket of securities to gain investment exposures (e.g., by selling protection under a credit default swap). The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). For example, the Fund may use credit default swaps to take a short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
27
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund's exposure to the credit of an issuer through the debt instrument, but adjust the Fund's interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed versus variable rates and shorter duration versus longer duration exposure. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedin gs. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be secured by collateral (e.g., foreign currency forwards; see "Currency Risk" above), that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
28
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. During the period ended August 31, 2010, the Fund used forward currency contracts to adjust exposure to foreign currencies and manage against anticipated currency exchange rate changes. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
29
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. The Fund had no futures contracts outstanding at the end of the period.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an of fsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the
30
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
31
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
Forward starting dividend swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive the changes in a dividend index point. The Fund gains exposure by either paying or receiving an amount in respect of an increase or decrease in the change of the relevant dividend index point based on a notional amount. For example, if the Fund took a long position on a dividend index swap, the Fund would receive payments if the relevant index point increased in value and would be obligated to pay if that index point decreased in value.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type
32
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the period ended August 31, 2010, the Fund used swap agreements to adjust exposure to certain securities markets, hedge some or all of the broad market exposure of the assets in which the Fund invests and manage the duration of the portfolio. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair values of derivative instruments on the Statement of Assets and Liabilities as of August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Unrealized appreciation on forward currency contracts | $ | — | $ | 451,893 | $ | — | $ | — | $ | — | $ | 451,893 | |||||||||||||||
Unrealized appreciation on swap agreements | — | — | — | 9,201,449 | — | 9,201,449 | |||||||||||||||||||||
Total | $ | — | $ | 451,893 | $ | — | $ | 9,201,449 | $ | — | $ | 9,653,342 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Unrealized depreciation on forward currency contracts | $ | — | $ | (11,265,741 | ) | $ | — | $ | — | $ | — | $ | (11,265,741 | ) | |||||||||||||
Unrealized depreciation on swap agreements | — | — | — | (1,387,994 | ) | — | (1,387,994 | ) | |||||||||||||||||||
Total | $ | — | $ | (11,265,741 | ) | $ | — | $ | (1,387,994 | ) | $ | — | $ | (12,653,735 | ) |
33
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the period ended August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Forward currency contracts | $ | — | $ | (57,163 | ) | $ | — | $ | — | $ | — | $ | (57,163 | ) | |||||||||||||
Swap contracts | (790,000 | ) | — | — | (1,813,317 | ) | — | (2,603,317 | ) | ||||||||||||||||||
Total | $ | (790,000 | ) | $ | (57,163 | ) | $ | — | $ | (1,813,317 | ) | $ | — | $ | (2,660,480 | ) | |||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Forward currency contracts | $ | — | $ | (10,813,848 | ) | $ | — | $ | — | $ | — | $ | (10,813,848 | ) | |||||||||||||
Swap contracts | (9,752,826 | ) | — | — | (1,733,412 | ) | — | (11,486,238 | ) | ||||||||||||||||||
Total | $ | (9,752,826 | ) | $ | (10,813,848 | ) | $ | — | $ | (1,733,412 | ) | $ | — | $ | (22,300,086 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
The volume of derivative activity, based on absolute values (forward currency contracts), or notional amounts (swap agreements) outstanding at each month-end, was as follows for the period ended August 31, 2010:
Forward Currency Contracts | Swap Agreements | ||||||||||
Average amount outstanding | $ | 113,466,875 | $ | 231,142,540 |
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.37% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares and 0.055% for Class VI shares.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's total annual operating expenses that exceed 0.37% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means
34
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities-lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition to the contractu al expense reimbursement described above, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Expense Reimbursement Amount. These contractual expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $4,530 and $1,564, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees) | Indirect Shareholder Service Fees | Total Indirect Expenses | |||||||||
0.002 | % | 0.000 | % | 0.002 | % |
6. Purchases and sales of securities
For the period ended August 31, 2010, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | 183,111,312 | $ | 326,734,640 | |||||||
Investments (non-U.S. Government securities) | 472,720,254 | 8,840,185 |
35
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, 95.69% of the outstanding shares of the Fund were held by four shareholders, each holding more than 10% of the Fund's outstanding shares. Three of the shareholders are other funds of the Trust.
As of August 31, 2010, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and all of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 397,083 | $ | 10,701,664 | 396,101 | $ | 10,547,554 | |||||||||||||
Shares repurchased | (27,403 | ) | (750,017 | ) | (564,948 | ) | (15,081,664 | ) | |||||||||||
Net increase (decrease) | 369,680 | $ | 9,951,647 | (168,847 | ) | $ | (4,534,110 | ) | |||||||||||
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class VI: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 14,936,403 | $ | 403,252,925 | 2,263,532 | $ | 61,077,132 | |||||||||||||
Shares repurchased | (134,244 | ) | (3,654,514 | ) | (2,417,320 | ) | (62,457,113 | ) | |||||||||||
Net increase (decrease) | 14,802,159 | $ | 399,598,411 | (153,788 | ) | $ | (1,379,981 | ) |
36
GMO Special Situations Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
10. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO U.S. Treasury Fund | $ | 234,092,480 | $ | 424,905,616 | $ | — | $ | 254,402 | $ | 42,519 | $ | 658,998,079 | |||||||||||||||
Totals | $ | 234,092,480 | $ | 424,905,616 | $ | — | $ | 254,402 | $ | 42,519 | $ | 658,998,079 |
37
GMO Special Situations Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including a one-year period and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered that the Fund's performance is intended to complement other strategies offered by the Manager and noted that the Fund does not seek to control risk relative to a particular securities market index or benchmark, and that the Fund does not seek to outperform a particular securities market index or blend of market
38
GMO Special Situations Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
indices. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparison to the Manager's separate account clients and the expenses and risks borne by the Manager as a result of the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client rela tionships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating
39
GMO Special Situations Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
40
GMO Special Situations Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.56 | % | $ | 1,000.00 | $ | 967.60 | $ | 2.78 | |||||||||||
2) Hypothetical | 0.56 | % | $ | 1,000.00 | $ | 1,022.38 | $ | 2.85 | |||||||||||
Class VI | |||||||||||||||||||
1) Actual | 0.46 | % | $ | 1,000.00 | $ | 968.10 | $ | 2.28 | |||||||||||
2) Hypothetical | 0.46 | % | $ | 1,000.00 | $ | 1,022.89 | $ | 2.35 |
* Expenses are calculated using each Class's annualized expense ratio (including interest expense and indirect expenses incurred) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
41
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Debt Obligations | 86.7 | % | |||||
Short-Term Investments | 14.9 | ||||||
Options Purchased | 5.7 | ||||||
Loan Participations | 0.2 | ||||||
Loan Assignments | 0.1 | ||||||
Rights and Warrants | 0.0 | ||||||
Promissory Notes | 0.0 | ||||||
Forward Currency Contracts | (0.0 | ) | |||||
Futures Contracts | (0.4 | ) | |||||
Swap Agreements | (0.4 | ) | |||||
Reverse Repurchase Agreements | (1.6 | ) | |||||
Written Options | (5.3 | ) | |||||
Other | 0.1 | ||||||
100.0 | % | ||||||
Country / Region Summary** | % of Investments | ||||||
Australia | 48.9 | % | |||||
United States | 43.9 | ||||||
New Zealand | 7.7 | ||||||
Emerging*** | 1.8 | ||||||
Euro Region**** | 0.6 | ||||||
Norway | 0.0 | ||||||
Sweden | 0.0 | ||||||
Japan | 0.0 | ||||||
Canada | 0.0 | ||||||
Denmark | 0.0 | ||||||
South Africa | 0.0 | ||||||
United Kingdom | (0.2 | ) | |||||
Switzerland | (2.7 | ) | |||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds. The table excludes short-term investments. The table includes exposure through the use of derivative contracts. The table is based on duration adjusted exposures, taking into account the market value of securities and the notional amounts of swaps and other derivative contracts. Duration is based on the Manager's models. The greater the duration of a bond, the greater its contribution to the concentration percentage. Credit default swap exposures (both positive and negative) are factored into the duration-adjusted exposure using the reference security and applying the same methodology to that security.
*** The "Emerging" exposure is associated only with investments in the GMO Emerging Country Debt Fund, which is exposed to emerging countries primarily comprised of Russia, Argentina, Brazil, Philippines, Mexico, Venezuela, Colombia, Ukraine, Turkey, and Indonesia. Additional information about the fund's emerging country exposure is available in the financial statements of the GMO Emerging Country Debt Fund.
**** The "Euro Region" is comprised of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
1
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) / Shares / Contracts | Description | Value ($) | |||||||||
DEBT OBLIGATIONS — 5.4% | |||||||||||
United States — 5.4% | |||||||||||
U.S. Government | |||||||||||
78,244,613 | U.S. Treasury Inflation Indexed Note, 2.38%, due 04/15/11 (a) (b) | 79,216,567 | |||||||||
33,000,000 | U.S. Treasury Note, 1.38%, due 01/15/13 | 33,618,750 | |||||||||
Total United States | 112,835,317 | ||||||||||
TOTAL DEBT OBLIGATIONS (COST $112,574,973) | 112,835,317 | ||||||||||
MUTUAL FUNDS — 92.7% | |||||||||||
United States — 92.7% | |||||||||||
Affiliated Issuers | |||||||||||
7,397,456 | GMO Emerging Country Debt Fund, Class IV | 70,201,857 | |||||||||
96,859,391 | GMO Short-Duration Collateral Fund | 1,131,317,683 | |||||||||
8,324,633 | GMO U.S. Treasury Fund | 208,115,835 | |||||||||
23,773,633 | GMO World Opportunity Overlay Fund | 527,061,451 | |||||||||
Total United States | 1,936,696,826 | ||||||||||
TOTAL MUTUAL FUNDS (COST $2,092,151,303) | 1,936,696,826 | ||||||||||
OPTIONS PURCHASED — 3.4% | |||||||||||
Options on Futures — 3.4% | |||||||||||
20,000 | Euro Dollar Futures Options Call, Expires 09/10/10, Strike 98.38 | 47,750,000 | |||||||||
20,000 | Euro Dollar Futures Options Call, Expires 09/10/10, Strike 98.88 | 22,750,000 | |||||||||
Total Options on Futures | 70,500,000 | ||||||||||
TOTAL OPTIONS PURCHASED (COST $13,080,000) | 70,500,000 |
See accompanying notes to the financial statements.
2
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
SHORT-TERM INVESTMENTS — 1.1% | |||||||||||
Money Market Funds — 0.2% | |||||||||||
4,906,616 | State Street Institutional Treasury Plus Money Market Fund-Institutional Class | 4,906,616 | |||||||||
U.S. Government — 0.9% | |||||||||||
13,400,000 | U.S. Treasury Bill, 0.21%, due 06/30/11 (a) (c) | 13,376,389 | |||||||||
6,100,000 | U.S. Treasury Bill, 0.23%, due 07/28/11 (a) (c) | 6,087,587 | |||||||||
Total U.S. Government | 19,463,976 | ||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $24,365,380) | 24,370,592 | ||||||||||
TOTAL INVESTMENTS — 102.6% (Cost $2,242,171,656) | 2,144,402,735 | ||||||||||
Other Assets and Liabilities (net) — (2.6%) | (53,937,103 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 2,090,465,632 |
A summary of outstanding financial instruments at August 31, 2010 is as follows:
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
8,445 | Australian Government Bond 10 Yr. | September 2010 | $ | 825,126,378 | $ | 18,941,398 | |||||||||||||
17,300 | Euro Dollar 90 Day | March 2011 | 4,304,456,250 | 21,353,100 | |||||||||||||||
850 | Federal Funds 30 Day | September 2010 | 353,539,739 | (1,853 | ) | ||||||||||||||
$ | 5,483,122,367 | $ | 40,292,645 | ||||||||||||||||
Sales | |||||||||||||||||||
17,300 | Euro Dollar 90 Day | March 2012 | $ | 4,282,615,000 | $ | (39,331,988 | ) |
See accompanying notes to the financial statements.
3
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Written Options
A summary of open written option contracts for the Fund at August 31, 2010 is as follows:
Contract Amounts | Expiration Date | Description | Premiums | Market Value | |||||||||||||||||||||||
Call | 40,000 | 9/10/2010 | USD | Euro Dollar Future Option Call, Strike 98.63 | $ | (10,420,000 | ) | $ | (70,500,000 | ) |
Swap Agreements
Interest Rate Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay)# | Fixed Rate | Variable Rate | Market Value | |||||||||||||||||||||||||
100,000,000 | AUD | 8/25/2020 | Barclays | Receive | 5.27 | % | 6 Month AUD | $ | 581,876 | ||||||||||||||||||||||
Bank Bill Rate | |||||||||||||||||||||||||||||||
200,000,000 | AUD | 8/26/2020 | Morgan Stanley | Receive | 5.26 | % | 6 Month AUD Bank Bill Rate | 1,022,593 | |||||||||||||||||||||||
200,000,000 | AUD | 8/30/2020 | Morgan Stanley | Receive | 5.25 | % | 6 Month AUD Bank Bill Rate | 855,536 | |||||||||||||||||||||||
100,000,000 | NZD | 7/14/2015 | Barclays | Receive | 4.87 | % | 3 Month NZD Bank Bill Rate | 2,035,570 | |||||||||||||||||||||||
100,000,000 | NZD | 7/15/2015 | Barclays | Receive | 4.86 | % | 3 Month NZD Bank Bill Rate | 1,999,392 | |||||||||||||||||||||||
100,000,000 | NZD | 7/15/2015 | Citigroup | Receive | 4.85 | % | 3 Month NZD Bank Bill Rate | 1,976,441 | |||||||||||||||||||||||
125,000,000 | NZD | 7/16/2015 | Merrill Lynch | Receive | 4.86 | % | 3 Month NZD Bank Bill Rate | 2,514,066 | |||||||||||||||||||||||
900,000,000 | USD | 9/22/2012 | Citigroup | (Pay) | 1.23 | % | 3 Month USD LIBOR | (9,682,478 | ) | ||||||||||||||||||||||
1,510,000,000 | USD | 11/13/2012 | Merrill Lynch | (Pay) | 0.78 | % | 3 Month USD LIBOR | (877,955 | ) | ||||||||||||||||||||||
381,000,000 | USD | 9/22/2015 | Citigroup | Receive | 2.43 | % | 3 Month USD LIBOR | 15,314,146 | |||||||||||||||||||||||
630,000,000 | USD | 11/13/2015 | Merrill Lynch | Receive | 1.75 | % | 3 Month USD LIBOR | 2,273,153 | |||||||||||||||||||||||
$ | 18,012,340 | ||||||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
# Receive - Fund receives fixed rate and pays variable rate.
(Pay) - Fund pays fixed rate and receives variable rate.
See accompanying notes to the financial statements.
4
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
As of August 31, 2010, for forward currency contracts, futures contracts, swap agreements and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
Notes to Schedule of Investments:
USD LIBOR - London Interbank Offered Rate denominated in United States Dollars.
(a) All or a portion of this security has been pledged to cover margin requirements on open financial futures contracts (Note 4).
(b) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic (Note 2).
(c) Rate shown represents yield-to-maturity.
Currency Abbreviations:
AUD - Australian Dollar
NZD - New Zealand Dollar
USD - United States Dollar
See accompanying notes to the financial statements.
5
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $150,020,353) (Note 2) | $ | 207,705,909 | |||||
Investments in affiliated issuers, at value (cost $2,092,151,303) (Notes 2 and 10) | 1,936,696,826 | ||||||
Receivable for investments sold | 9,500,000 | ||||||
Dividends and interest receivable | 787,346 | ||||||
Receivable for variation margin on open futures contracts (Note 4) | 2,346,824 | ||||||
Interest receivable for open swap contracts | 630,341 | ||||||
Receivable for open swap contracts (Note 4) | 28,572,773 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 67,852 | ||||||
Total assets | 2,186,307,871 | ||||||
Liabilities: | |||||||
Payable for Fund shares repurchased | 14,000,000 | ||||||
Payable for open swap contracts | 10,560,433 | ||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 441,554 | ||||||
Shareholder service fee | 107,764 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 3,792 | ||||||
Payable to broker for futures contracts | 26,297 | ||||||
Written options outstanding, at value (premiums $10,420,000) (Note 4) | 70,500,000 | ||||||
Accrued expenses | 202,399 | ||||||
Total liabilities | 95,842,239 | ||||||
Net assets | $ | 2,090,465,632 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 2,511,414,232 | |||||
Distributions in excess of net investment income | (151,157,242 | ) | |||||
Accumulated net realized loss | (130,915,278 | ) | |||||
Net unrealized depreciation | (138,876,080 | ) | |||||
$ | 2,090,465,632 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 119,205,621 | |||||
Class VI shares | $ | 1,971,260,011 | |||||
Shares outstanding: | |||||||
Class III | 7,547,631 | ||||||
Class VI | 124,910,006 | ||||||
Net asset value per share: | |||||||
Class III | $ | 15.79 | |||||
Class VI | $ | 15.78 |
See accompanying notes to the financial statements.
6
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 10) | $ | 13,496,106 | |||||
Interest | 762,804 | ||||||
Dividends | 3,593 | ||||||
Total investment income | 14,262,503 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 2,635,244 | ||||||
Shareholder service fee – Class III (Note 5) | 98,812 | ||||||
Shareholder service fee – Class VI (Note 5) | 543,523 | ||||||
Custodian, fund accounting agent and transfer agent fees | 125,212 | ||||||
Legal fees | 58,604 | ||||||
Audit and tax fees | 31,464 | ||||||
Trustees fees and related expenses (Note 5) | 22,267 | ||||||
Registration fees | 920 | ||||||
Miscellaneous | 18,768 | ||||||
Total expenses | 3,534,814 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (220,156 | ) | |||||
Expense reductions (Note 2) | (11 | ) | |||||
Indirectly incurred fees waived or borne by Manager (Note 3) | (143,059 | ) | |||||
Shareholder service fee waived (Note 5) | (33,618 | ) | |||||
Net expenses | 3,137,970 | ||||||
Net investment income (loss) | 11,124,533 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | (7,781 | ) | |||||
Realized gains distributions from affiliated issuers (Note 10) | 2,134 | ||||||
Closed swap contracts | 43,319,133 | ||||||
Net realized gain (loss) | 43,313,486 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | 57,318,705 | ||||||
Investments in affiliated issuers | 75,215,329 | ||||||
Open futures contracts | 960,657 | ||||||
Written options | (60,080,000 | ) | |||||
Open swap contracts | 24,124,747 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (156 | ) | |||||
Net unrealized gain (loss) | 97,539,282 | ||||||
Net realized and unrealized gain (loss) | 140,852,768 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 151,977,301 |
See accompanying notes to the financial statements.
7
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 11,124,533 | $ | 23,534,148 | |||||||
Net realized gain (loss) | 43,313,486 | (43,860,027 | ) | ||||||||
Change in net unrealized appreciation (depreciation) | 97,539,282 | 575,749,844 | |||||||||
Net increase (decrease) in net assets from operations | 151,977,301 | 555,423,965 | |||||||||
Distributions to shareholders from (Note 2): | |||||||||||
Net investment income | |||||||||||
Class III | (4,758,739 | ) | (2,903,587 | ) | |||||||
Class VI | (71,699,672 | ) | (37,134,486 | ) | |||||||
Total distributions from net investment income | (76,458,411 | ) | (40,038,073 | ) | |||||||
Return of capital | |||||||||||
Class III | (2,342,796 | ) | (59,096,731 | ) | |||||||
Class VI | (35,298,794 | ) | (719,865,203 | ) | |||||||
Total distributions from return of capital | (37,641,590 | ) | (778,961,934 | ) | |||||||
(114,100,001 | ) | (819,000,007 | ) | ||||||||
Net share transactions (Note 9): | |||||||||||
Class III | (22,731,666 | ) | (65,616,763 | ) | |||||||
Class VI | (70,140,000 | ) | 401,982 | ||||||||
Increase (decrease) in net assets resulting from net share transactions | (92,871,666 | ) | (65,214,781 | ) | |||||||
Redemption fees (Notes 2 and 9): | |||||||||||
Class III | — | 42,480 | |||||||||
Class VI | — | 558,877 | |||||||||
Increase in net assets resulting from redemption fees | — | 601,357 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and redemption fees | (92,871,666 | ) | (64,613,424 | ) | |||||||
Total increase (decrease) in net assets | (54,994,366 | ) | (328,189,466 | ) | |||||||
Net assets: | |||||||||||
Beginning of period | 2,145,459,998 | 2,473,649,464 | |||||||||
End of period (including distributions in excess of net investment income of $151,157,242 and $85,823,364, respectively) | $ | 2,090,465,632 | $ | 2,145,459,998 |
See accompanying notes to the financial statements.
8
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007(a) | |||||||||||||||||||
Net asset value, beginning of period | $ | 15.51 | $ | 17.37 | $ | 23.60 | $ | 25.22 | $ | 25.06 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)(b)† | 0.08 | 0.16 | 0.71 | 0.78 | 0.96 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 1.02 | 3.78 | (5.70 | ) | (1.37 | ) | 0.34 | ||||||||||||||||
Total from investment operations | 1.10 | 3.94 | (4.99 | ) | (0.59 | ) | 1.30 | ||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.55 | ) | (0.27 | ) | (1.24 | ) | (0.97 | ) | (1.14 | ) | |||||||||||||
From net realized gains | — | — | — | (0.06 | ) | — | |||||||||||||||||
Return of capital | (0.27 | ) | (5.53 | ) | — | — | — | ||||||||||||||||
Total distributions | (0.82 | ) | (5.80 | ) | (1.24 | ) | (1.03 | ) | (1.14 | ) | |||||||||||||
Net asset value, end of period | $ | 15.79 | $ | 15.51 | $ | 17.37 | $ | 23.60 | $ | 25.22 | |||||||||||||
Total Return(c) | 7.48 | %** | 27.97 | % | (21.20 | )% | (2.39 | )% | 5.23 | %** | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 119,206 | $ | 139,571 | $ | 227,453 | $ | 277,879 | $ | 226,917 | |||||||||||||
Net expenses to average daily net assets(d) | 0.39 | %(e)* | 0.39 | % | 0.40 | %(e) | 0.38 | %(e) | 0.39 | %* | |||||||||||||
Net investment income (loss) to average daily net assets(b) | 0.97 | %* | 1.01 | % | 3.32 | % | 3.12 | % | 5.96 | %* | |||||||||||||
Portfolio turnover rate | 4 | %** | 35 | % | 70 | % | 67 | % | 7 | %††** | |||||||||||||
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets: | 0.04 | %* | 0.03 | % | 0.03 | % | 0.04 | % | 0.06 | %* | |||||||||||||
Redemption fees consisted of the following per share amounts:† | — | $ | 0.00 | (f) | $ | 0.02 | — | — |
(a) Period from July 13, 2006 (commencement of operations) through February 28, 2007.
(b) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(c) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes redemption fees if any, which are borne by the shareholder.
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(e) The net expense ratio does not include the effect of expense reductions (Note 2).
(f) Redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the period from May 31, 2006 through February 28, 2007.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
9
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class VI share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007(a) | |||||||||||||||||||
Net asset value, beginning of period | $ | 15.49 | $ | 17.35 | $ | 23.57 | $ | 25.22 | $ | 25.00 | |||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||
Net investment income (loss)(b)† | 0.08 | 0.17 | 0.68 | 0.97 | 0.76 | ||||||||||||||||||
Net realized and unrealized gain (loss) | 1.03 | 3.77 | (5.64 | ) | (1.55 | ) | 0.61 | ||||||||||||||||
Total from investment operations | 1.11 | 3.94 | (4.96 | ) | (0.58 | ) | 1.37 | ||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||
From net investment income | (0.55 | ) | (0.29 | ) | (1.26 | ) | (1.01 | ) | (1.15 | ) | |||||||||||||
From net realized gains | — | — | — | (0.06 | ) | — | |||||||||||||||||
Return of capital | (0.27 | ) | (5.51 | ) | — | — | — | ||||||||||||||||
Total distributions | (0.82 | ) | (5.80 | ) | (1.26 | ) | (1.07 | ) | (1.15 | ) | |||||||||||||
Net asset value, end of period | $ | 15.78 | $ | 15.49 | $ | 17.35 | $ | 23.57 | $ | 25.22 | |||||||||||||
Total Return(c) | 7.57 | %** | 28.00 | % | (21.09 | )% | (2.35 | )% | 5.52 | %** | |||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,971,260 | $ | 2,005,889 | $ | 2,246,197 | $ | 5,121,698 | $ | 2,224,310 | |||||||||||||
Net expenses to average daily net assets(d) | 0.29 | %(e)* | 0.30 | % | 0.30 | %(e) | 0.29 | %(e) | 0.29 | %* | |||||||||||||
Net investment income (loss) to average daily net assets(b) | 1.06 | %* | 1.05 | % | 3.14 | % | 3.87 | % | 4.01 | %* | |||||||||||||
Portfolio turnover rate | 4 | %** | 35 | % | 70 | % | 67 | % | 7 | %** | |||||||||||||
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets: | 0.04 | %* | 0.03 | % | 0.03 | % | 0.04 | % | 0.06 | %* | |||||||||||||
Redemption fees consisted of the following per share amounts:† | — | $ | 0.00 | (f) | $ | 0.02 | — | — |
(a) Period from May 31, 2006 (commencement of operations) through February 28, 2007.
(b) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(c) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes redemption fees if any, which are borne by the shareholder.
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(e) The net expense ratio does not include the effect of expense reductions (Note 2).
(f) Redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
10
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO Strategic Fixed Income Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks total return in excess of that of its benchmark, the J.P. Morgan U.S. 3 Month Cash Index. The Fund's investment program has two principal components. One component of the investment program is designed to approximate the return of the Fund's benchmark. The second component seeks to add value relative to that benchmark by exploiting misvaluations in global markets (e.g., global interest rates, sectors, currencies, credit and emerging country debt markets) beyond those represented in the Fund's benchmark. As a result, the Fund's interest rate, sector, credit and currency exposures will differ from those of its benchmark.
The Manager uses fundamental investment techniques and quantitative models to determine the relative values of the interest rate and currency markets, to determine currency and interest rate exposures, and to identify investments the Manager believes are undervalued or are likely to provide downside protection. The Manager selects investments based on an evaluation of various factors including, but not limited to, fundamental factors such as inflation and current account positions, as well as price-based factors such as interest and exchange rates.
Under normal circumstances, the Fund invests directly and indirectly (e.g., through the GMO Funds in which the Fund invests, collectively referred to as the "underlying funds" or derivatives) at least 80% of its assets in fixed income securities. The term "fixed income security" refers to any fixed income security, which includes (i) obligations of an issuer to make payments of principal and/or interest on future dates and (ii) synthetic debt instruments created by the Manager by using derivatives (e.g., a futures contract, swap contract, currency forward or option).
The Fund implements its investment program by investing in or holding: exchange-traded and over-the-counter ("OTC") derivatives, including without limitation, futures contracts, currency options, interest rate options, currency forwards, reverse repurchase agreements, credit default swaps, and other swap contracts; bonds denominated in various currencies, including foreign and U.S. government securities, asset-backed securities issued by foreign governments and U.S. government agencies (including securities neither guaranteed nor insured by the U.S. government), corporate bonds, and mortgage-backed and other asset-backed securities issued by private issuers; shares of GMO Short-Duration Collateral Fund ("SDCF") (a fund that invests primarily in asset-backed securities); shares of GMO World Opportunity
11
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Overlay Fund ("Overlay Fund") (to attempt to exploit misvaluations in world interest rates, currencies and credit markets); shares of GMO Emerging Country Debt Fund ("ECDF") (to gain exposure to emerging country debt markets); shares of GMO High Quality Short-Duration Bond Fund (to seek to generate a return in excess of that of the J.P. Morgan U.S. 3 Month Cash Index by investing in a wide variety of high quality U.S. and foreign debt investments); shares of GMO Debt Opportunities Fund (to seek to generate a positive return by investing in a wide variety of U.S. and foreign debt investments without regard to the credit quality of the investment); and shares of GMO U.S. Treasury Fund (for liquidity management purposes). In addition, the Fund may invest in unaffiliated money market funds.
Historically, the Fund has used derivatives and investments in other GMO Funds as the principal means to gain investment exposure. As a result, the Fund has substantial holdings of SDCF (a fund that invests primarily in asset-backed securities) and Overlay Fund (a fund that invests in asset-backed securities and uses derivatives to attempt to exploit misvaluations in world interest rates, currencies and credit markets). Because of the deterioration in credit markets that became acute in 2008, the Fund, including through its investment in SDCF and Overlay Fund, currently has and may continue to have material exposure to below investment grade securities. This is in addition to the Fund's below investment grade emerging country debt investments. The Fund is not limited in its use of derivatives or in the absolute face value of its derivatives positions, and, as a result, the Fund may be leveraged in relation to its assets.
The Manager does not seek to maintain a specified interest rate duration for the Fund, and the Fund's interest rate duration will change depending on the Fund's investments and the Manager's current outlook on different sectors of the bond market. The Fund, if deemed prudent by the Manager, will take temporary defensive measures until the Manager has determined that normal conditions have returned or that it is otherwise prudent to resume investing in accordance with the Fund's normal investment strategies. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
The Fund is not intended to serve as a standalone investment product and is available for investment only by other GMO Funds and other GMO asset allocation clients.
As of August 31, 2010, the Fund had two classes of shares outstanding: Class III and Class VI. Each class of shares bears a different shareholder service fee.
Since April 2009, the Fund has declared and paid distributions when it has acquired a meaningful cash position rather than reinvesting that cash in portfolio securities. The Fund currently intends to continue this practice. A substantial portion of any such distributions could constitute a return of capital to shareholders for tax purposes.
The financial statements of the underlying funds should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request by calling (617) 346-7646 (collect). As of August 31, 2010, shares of Overlay Fund and SDCF were not publicly available for direct purchase.
12
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the OTC market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or who se values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale.
As of August 31, 2010, the total value of securities held indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 1.2% of net assets. The underlying funds classify such securities (as defined below) as Level 3. During the period ended August 31, 2010, the Manager has evaluated the Fund's OTC derivatives contracts and determined that no reduction in value was warranted on account of the creditworthiness of a counterparty. See note 4 for a further discussion on valuation of derivative financial instruments.
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. Although alternative prices are available for securities held by the Fund and the underlying funds, those alternative sources are not typically part of the valuation process and would not necessarily confirm the security price used by the Fund and the underlying funds. Therefore, the existence of those alternative
13
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
sources does not necessarily provide greater certainty about the prices used by the Fund and the underlying funds. As of August 31, 2010, the total value of securities held directly and indirectly for which no alternative pricing source was available represented 7.2% of the net assets of the Fund.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data.
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Debt Obligations | |||||||||||||||||||
U.S. Government | $ | 33,618,750 | $ | 79,216,567 | $ | — | $ | 112,835,317 | |||||||||||
TOTAL DEBT OBLIGATIONS | 33,618,750 | 79,216,567 | — | 112,835,317 | |||||||||||||||
Mutual Funds | 1,936,696,826 | — | — | 1,936,696,826 | |||||||||||||||
Options Purchased | 70,500,000 | — | — | 70,500,000 | |||||||||||||||
Short-Term Investments | 24,370,592 | — | — | 24,370,592 | |||||||||||||||
Total Investments | 2,065,186,168 | 79,216,567 | — | 2,144,402,735 | |||||||||||||||
Derivatives | |||||||||||||||||||
Swap Agreements Interest Rate Risk | — | 28,572,773 | — | 28,572,773 | |||||||||||||||
Futures Contracts Interest Rate Risk | 40,294,498 | — | — | 40,294,498 | |||||||||||||||
Total | $ | 2,105,480,666 | $ | 107,789,340 | $ | — | $ | 2,213,270,006 |
14
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Written Options Interest Rate Risk | $ | (70,500,000 | ) | $ | — | $ | — | $ | (70,500,000 | ) | |||||||||
Swap Agreements Interest Rate Risk | — | (10,560,433 | ) | — | (10,560,433 | ) | |||||||||||||
Futures Contracts Interest Rate Risk | (39,333,841 | ) | — | — | (39,333,841 | ) | |||||||||||||
Total | $ | (109,833,841 | ) | $ | (10,560,433 | ) | $ | — | $ | (120,394,274 | ) |
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in its financial statements. The aggregate net values of the Fund's indirect investments in securities and other financial instruments using Level 3 inputs were 46.7% and (0.1%) of total net assets, respectively.
The Fund held no investments or other financial instruments at either August 31, 2010 or February 28, 2010, whose fair value was determined using Level 3 inputs.
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are inclu ded with the net realized and unrealized gain or loss on investment securities.
15
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Inflation-indexed bonds
The Fund may invest in inflation indexed bonds. Inflation indexed bonds are fixed income securities whose principal value is adjusted periodically according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that reflects inflation in the principal value of the bond. Most other issuers pay out any inflation related accruals as part of a semiannual coupon.
The value of inflation indexed bonds is expected to change in response to changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal interest rates (i.e., stated interest rates) and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate than nominal interest rates, real interest rates (i.e. nominal interest rate minus inflation) might decline, leading to an increase in value of inflation indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation indexed bonds. There can be no assurance, however, that the value of inflation indexed bonds will be directly correlated to changes in nominal interest rates, and short term increases in inflation may lead to a decline in their value. Coupon payments received by the Fund from inflation indexed bonds are included in the Fund's gross income for the period in which they accrue. In addition, any increase or decrease in the principal amount of an inflation indexed bond will increase or decrease taxable ordinary income to the Fund, even though principal is not paid until maturity. Inflation-indexed bonds outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. The Fund is permitted to, and will from time to time, declare and pay distributions more frequently (e.g. monthly). As of August 31, 2010, all distributions have been paid in cash. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
16
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes. Such amounts are estimated for the six months ended August 31, 2010.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (137,475,668 | ) | ||||
2/28/2018 | (123,451,454 | ) | |||||
Total | $ | (260,927,122 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 2,241,303,723 | $ | 19,855,878 | $ | (116,756,866 | ) | $ | (96,900,988 | ) |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is
17
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. Investment income, common expenses and realized and unrealized gains and losses are allocated among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class's operations. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 5).
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
For the period ended August 31, 2010, the Fund did not charge a premium on cash purchases or fee on cash redemptions of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by a Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing
18
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions the day after those orders are received by the broker or agent.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Fixed Income Securities — Typically, the value of the Fund's fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.
• Credit and Counterparty Risk — The Fund runs the risk that the issuer or guarantor of a fixed income security, the counterparty to an over-the-counter derivatives contract, a borrower of the Fund's securities or the obligor of an obligation underlying an asset-backed security will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise honor its obligations. This risk is particularly pronounced for the Fund because it typically uses over-the-counter derivatives, including swap contracts with longer-term maturities, and may have significant exposure to a single counterparty. The risk of counterparty default is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type ev idenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions.
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in underlying funds, including the risk that the underlying funds in which it invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments.
19
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Other principal risks of an investment in the Fund include Foreign Investment Risk (risk that the market prices of foreign securities will fluctuate more rapidly and to a greater extent than those of U.S. securities); Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Leveraging Risk (increased risk of loss from use of reverse repurchase agreements and other derivatives and securities lending); Currency Risk (risk that fluctuations in exchange rates will adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies); Focused Investment Risk (increased risk from the Fund's focus on investments in countries, regions, sectors or companies with high positive correlations to one another); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produ ce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
The most significant market risk for funds investing in fixed income securities is that the securities in which they invest experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. These risks apply to the Fund because it invests in asset-backed securities. Asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as "collateralized debt obligations" or "collateralized loan obligations") and by the fees earned by service providers. Payment of interest on asset-backed securities and repayment of principal largely depend on t he cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. Many asset-backed securities owned (directly or indirectly) by the Fund that were once rated investment grade are now rated below investment grade as of the date of this Report.
With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness
20
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on as set-backed securities.
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and a Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.
The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution's business may have a material impact on multiple investments.
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps or other derivatives on an index, a single security or a basket of securities to gain investment exposures (e.g., by selling protection under a credit default swap). The Fund
21
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). For example, the Fund may use credit default swaps to take a short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund's exposure to the credit of an issuer through the debt instrument, but adjust the Fund's interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed versus variable rates and shorter duration versus longer duration exposure. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedin gs. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be secured by collateral (e.g., foreign currency forwards; see "Currency Risk" above), that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to
22
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
23
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. The Fund had no forward currency contracts outstanding at the end of the period.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. During the period ended August 31, 2010, the Fund used futures contracts to adjust interest-rate exposure and enhance the diversity and liquidity of the portfolio. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. During the period ended August 31, 2010, the Fund used purchased option contracts to adjust interest rate exposure. Option contracts purchased by the Fund and outstanding at the end o f the period are listed in the Fund's Schedule of Investments.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying
24
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid marke t. During the period ended August 31, 2010, the Fund used written option contracts to adjust interest rate exposure. Written options outstanding at the end of the period are listed in the Fund's Schedule of Investments.
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
For the period ended August 31, 2010, investment activity in options contracts written by the Fund was as follows:
Puts | Calls | ||||||||||||||||||||||||||
Principal Amount of Contracts | Number of Futures Contracts | Premiums | Principal Amount of Contracts | Number of Futures Contracts | Premiums | ||||||||||||||||||||||
Outstanding, beginning of period | $ | — | — | $ | — | $ | — | — | $ | — | |||||||||||||||||
Options written | — | — | — | — | (40,000 | ) | (10,420,000 | ) | |||||||||||||||||||
Options exercised | — | — | — | — | — | — | |||||||||||||||||||||
Options expired | — | — | — | — | — | — | |||||||||||||||||||||
Options sold | — | — | — | — | — | — | |||||||||||||||||||||
Outstanding, end of period | $ | — | — | $ | — | $ | — | (40,000 | ) | $ | (10,420,000 | ) |
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
25
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price
26
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the pe riod ended August 31, 2010, the Fund used swap agreements to adjust interest rate exposure and adjust its exposure to certain markets. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
27
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair values of derivative instruments on the Statement of Assets and Liabilities as of August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (purchased options) | $ | 70,500,000 | $ | — | $ | — | $ | — | $ | — | $ | 70,500,000 | |||||||||||||||
Unrealized appreciation on futures contracts* | 40,294,498 | — | — | — | — | 40,294,498 | |||||||||||||||||||||
Unrealized appreciation on swap agreements | 28,572,773 | — | — | — | — | 28,572,773 | |||||||||||||||||||||
Total | $ | 139,367,271 | $ | — | $ | — | $ | — | $ | — | $ | 139,367,271 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | (70,500,000 | ) | $ | — | $ | — | $ | — | $ | — | $ | (70,500,000 | ) | |||||||||||||
Unrealized depreciation on futures contracts* | (39,333,841 | ) | — | — | — | — | (39,333,841 | ) | |||||||||||||||||||
Unrealized depreciation on swap agreements | (10,560,433 | ) | — | — | — | — | (10,560,433 | ) | |||||||||||||||||||
Total | $ | (120,394,274 | ) | $ | — | $ | — | $ | — | $ | — | $ | (120,394,274 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments.
28
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the period ended August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | 57,961,117 | $ | — | $ | — | $ | — | $ | — | $ | 57,961,117 | |||||||||||||||
Swap contracts | 43,319,133 | — | — | — | — | 43,319,133 | |||||||||||||||||||||
Total | $ | 101,280,250 | $ | — | $ | — | $ | — | $ | — | $ | 101,280,250 | |||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | 6,647,662 | $ | — | $ | — | $ | — | $ | — | $ | 6,647,662 | |||||||||||||||
Written options | (60,080,000 | ) | — | — | — | — | (60,080,000 | ) | |||||||||||||||||||
Futures contracts | 960,657 | — | — | — | — | 960,657 | |||||||||||||||||||||
Swap contracts | 24,124,747 | — | — | — | — | 24,124,747 | |||||||||||||||||||||
Total | $ | (28,346,934 | ) | $ | — | $ | — | $ | — | $ | — | $ | (28,346,934 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
The volume of derivative activity, based on absolute values (futures contracts), principal amounts (options) or notional amounts (swap agreements) outstanding at each month-end, was as follows for the period ended August 31, 2010:
Futures Contracts | Options | Swap Agreements | |||||||||||||
Average amount outstanding | $ | 4,680,130,389 | $ | 114,285,714 | $ | 2,333,771,602 |
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.25% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares and 0.055% for Class VI shares. The Manager has contractually agreed through at least June 30, 2011 to waive the Fund's shareholder
29
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
service fee to the extent that the aggregate of any direct and indirect shareholder service fees borne by a class of shares of the Fund exceeds 0.15% for Class III shares and 0.055% for Class VI shares; provided, however, that the amount of this waiver will not exceed the respective Class's shareholder service fee.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.25% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investme nt company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in other GMO Funds (excluding those Funds' Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund's Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $22,267 and $8,004, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Indirect Interest Expense | Total Indirect Expenses | ||||||||||||
0.017 | % | 0.003 | % | 0.015 | % | 0.035 | % |
30
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
6. Purchases and sales of securities
For the period ended August 31, 2010, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | — | $ | — | |||||||
Investments (non-U.S. Government securities) | 265,185,276 | 61,946,000 |
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, 78.19% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund's outstanding shares. Two of the shareholders are other funds of the Trust.
As of August 31, 2010, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and 99.11% of the Fund's shares were held by accounts for which the Manager had investment discretion.
31
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | — | $ | — | 3,466,715 | $ | 53,825,069 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | — | — | |||||||||||||||
Shares repurchased | (1,452,152 | ) | (22,731,666 | ) | (7,561,300 | ) | (119,441,832 | ) | |||||||||||
Redemption fees | — | — | — | 42,480 | |||||||||||||||
Net increase (decrease) | (1,452,152 | ) | $ | (22,731,666 | ) | (4,094,585 | ) | $ | (65,574,283 | ) | |||||||||
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class VI: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | — | $ | — | 5,893,661 | $ | 93,069,578 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | — | — | |||||||||||||||
Shares repurchased | (4,572,789 | ) | (70,140,000 | ) | (5,884,990 | ) | (92,667,596 | ) | |||||||||||
Redemption fees | — | — | — | 558,877 | |||||||||||||||
Net increase (decrease) | (4,572,789 | ) | $ | (70,140,000 | ) | 8,671 | $ | 960,859 |
32
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
10. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income* | Distributions of Realized Gains* | Return of Capital* | Value, end of period | ||||||||||||||||||||||||
GMO Emerging Country Debt Fund, Class IV | $ | 62,656,452 | $ | — | $ | — | $ | 2,817,692 | $ | — | $ | — | $ | 70,201,857 | |||||||||||||||||
GMO Short-Duration Collateral Fund | 1,450,953,671 | — | — | 10,638,569 | — | 366,615,667 | 1,131,317,683 | ||||||||||||||||||||||||
GMO U.S. Treasury Fund | 17,957,159 | 252,105,276 | 61,946,000 | 39,845 | 2,134 | — | 208,115,835 | ||||||||||||||||||||||||
GMO World Opportunity Overlay Fund | 506,378,390 | — | — | — | — | — | 527,061,451 | ||||||||||||||||||||||||
Totals | $ | 2,037,945,672 | $ | 252,105,276 | $ | 61,946,000 | $ | 13,496,106 | $ | 2,134 | $ | 366,615,667 | $ | 1,936,696,826 |
* The table above includes estimated sources of all distributions paid by the underlying funds during the period March 1, 2010 through August 31, 2010. The actual tax characterization of distributions paid by the underlying funds will be determined through fiscal year ending February 28, 2011.
33
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one- and three-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications and experience of the
34
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took in to account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also con sidered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of other funds of the Trust in which it invests. The Trustees noted in particular that certain underlying funds do not charge any advisory fees, and that with respect to all other underlying funds, pursuant to a contractual expense reimbursement arrangement in place with the Fund, the Manager effectively reimburses the Fund for management fees, shareholder servicing fees and most other expenses of the underlying funds that the Fund would otherwise bear as a result of its investments in those other funds. In addition, the Trustees considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economie s of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The
35
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
36
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including redemption fees; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.43 | % | $ | 1,000.00 | $ | 1,074.80 | $ | 2.25 | |||||||||||
2) Hypothetical | 0.43 | % | $ | 1,000.00 | $ | 1,023.04 | $ | 2.19 | |||||||||||
Class VI | |||||||||||||||||||
1) Actual | 0.33 | % | $ | 1,000.00 | $ | 1,075.70 | $ | 1.73 | |||||||||||
2) Hypothetical | 0.33 | % | $ | 1,000.00 | $ | 1,023.54 | $ | 1.68 |
* Expenses are calculated using each Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
37
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Note Concerning Distributions
August 31, 2010 (Unaudited)
The Fund previously reported the estimated sources of any dividends, short-term capital gains, long-term capital gains, and return of capital distributions paid on a per share basis. Pursuant to Rule 19a-1(e) of the Investment Company Act of 1940, the table below serves as an update to the previously reported estimated sources of the distributions paid to shareholders. The Statement of Changes in Net Assets includes the updated amounts on a dollar basis.
Updated Estimated Sources | |||||||||||||||||||||||||||||||
Class | Record Date | Ex-Date | Payable Date | Dividend Paid from Current and/or Prior Years Accumulated Undistributed Net Income* | Net Short-Term Capital Gains from Sale of Securities & Other Property ^ | Net Long-Term Capital Gains from Sale of Securities & Other Property ^ | Distribution from Return of Capital | ||||||||||||||||||||||||
III | March 2, 2010 | March 3, 2010 | March 4, 2010 | $ | 0.16299631 | $ | 0.00000000 | $ | 0.00000000 | $ | 0.08028180 | ||||||||||||||||||||
III | April 1, 2010 | April 5, 2010 | April 6, 2010 | $ | 0.38941482 | $ | 0.00000000 | $ | 0.00000000 | $ | 0.19230451 | ||||||||||||||||||||
VI | March 2, 2010 | March 3, 2010 | March 4, 2010 | $ | 0.16307525 | $ | 0.00000000 | $ | 0.00000000 | $ | 0.08028180 | ||||||||||||||||||||
VI | April 1, 2010 | April 5, 2010 | April 6, 2010 | $ | 0.39069121 | $ | 0.00000000 | $ | 0.00000000 | $ | 0.19230451 |
Notes:
* Net investment income may include amounts derived from dividends, interest, net foreign currency gains and net amounts from transacting in certain derivative contracts.
^ Short-term and long-term capital gains may include amounts derived from the sale of securities/other property and net amounts from transacting in certain derivative contracts.
38
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 77.8 | % | |||||
Debt Obligations | 11.7 | ||||||
Short-Term Investments | 9.3 | ||||||
Cash and Cash Equivalents | 4.8 | ||||||
Preferred Stocks | 0.6 | ||||||
Options Purchased | 0.5 | ||||||
Investment Funds | 0.1 | ||||||
Loan Participations | 0.0 | ||||||
Loan Assignments | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Promissory Notes | 0.0 | ||||||
Forward Currency Contracts | (0.1 | ) | |||||
Written Options | (0.4 | ) | |||||
Reverse Repurchase Agreements | (0.6 | ) | |||||
Swap Agreements | (1.1 | ) | |||||
Futures Contracts | (3.7 | ) | |||||
Other | 1.1 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
1
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2010 (Unaudited)
Country / Region Summary** | % of Investments | ||||||
United States | 46.2 | % | |||||
Euro Region*** | 12.1 | ||||||
Japan | 11.5 | ||||||
United Kingdom | 9.9 | ||||||
Switzerland | 5.2 | ||||||
Australia | 3.0 | ||||||
Sweden | 1.7 | ||||||
Singapore | 1.6 | ||||||
South Korea | 1.1 | ||||||
Denmark | 0.9 | ||||||
Russia | 0.9 | ||||||
Brazil | 0.7 | ||||||
Hong Kong | 0.7 | ||||||
Norway | 0.5 | ||||||
China | 0.4 | ||||||
India | 0.4 | ||||||
New Zealand | 0.4 | ||||||
Taiwan | 0.4 | ||||||
Thailand | 0.4 | ||||||
Turkey | 0.4 | ||||||
Canada | 0.3 | ||||||
South Africa | 0.2 | ||||||
Argentina | 0.1 | ||||||
Czech Republic | 0.1 | ||||||
Egypt | 0.1 | ||||||
Emerging**** | 0.1 | ||||||
Hungary | 0.1 | ||||||
Indonesia | 0.1 | ||||||
Israel | 0.1 | ||||||
Malaysia | 0.1 | ||||||
Mexico | 0.1 | ||||||
Philippines | 0.1 | ||||||
Poland | 0.1 | ||||||
100.0 | % |
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds except for GMO Alpha Only Fund. The table excludes short-term investments. The table includes exposure through the use of derivative contracts.
*** The "Euro Region" is comprised of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
**** The "Emerging" exposure is associated only with investments in the GMO Emerging Country Debt Fund, which is exposed to emerging countries primarily comprised of Russia, Argentina, Brazil, Philippines, Mexico, Venezuela, Colombia, Ukraine, Turkey, and Indonesia. Additional information about the fund's emerging country exposure is available in the financial statements of the GMO Emerging Country Debt Fund.
2
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||||||
MUTUAL FUNDS — 98.7% | |||||||||||||||
Affiliated Issuers — 98.7% | |||||||||||||||
21,612,197 | GMO Alpha Only Fund, Class IV | 105,251,400 | |||||||||||||
1,640,148 | GMO Asset Allocation Bond Fund, Class VI | 43,923,177 | |||||||||||||
6,317,337 | GMO Domestic Bond Fund, Class VI | 30,449,565 | |||||||||||||
1,092,999 | GMO Emerging Country Debt Fund, Class IV | 10,372,563 | |||||||||||||
8,221,711 | GMO Emerging Markets Fund, Class VI | 101,291,483 | |||||||||||||
2,484,519 | GMO Flexible Equities Fund, Class VI | 42,435,583 | |||||||||||||
1,807,597 | GMO Inflation Indexed Plus Bond Fund, Class VI | 36,332,694 | |||||||||||||
18,943,551 | GMO International Growth Equity Fund, Class IV | 367,504,881 | |||||||||||||
19,232,083 | GMO International Intrinsic Value Fund, Class IV | 362,909,401 | |||||||||||||
34,230,720 | GMO Quality Fund, Class VI | 601,776,064 | |||||||||||||
4,422,546 | GMO Special Situations Fund, Class VI | 117,949,304 | |||||||||||||
5,075,569 | GMO Strategic Fixed Income Fund, Class VI | 80,092,481 | |||||||||||||
7,335,801 | GMO U.S. Core Equity Fund, Class VI | 72,330,996 | |||||||||||||
393,696 | GMO World Opportunity Overlay Fund | 8,728,241 | |||||||||||||
TOTAL MUTUAL FUNDS (COST $2,082,819,258) | 1,981,347,833 | ||||||||||||||
DEBT OBLIGATIONS — 1.3% | |||||||||||||||
Asset-Backed Securities — 1.3% | |||||||||||||||
Auto Financing — 0.1% | |||||||||||||||
600,000 | Capital Auto Receivable Asset Trust, Series 08-1, Class A4B, 1 mo. LIBOR + 1.35%, 1.63%, due 07/15/14 | 607,314 | |||||||||||||
500,000 | Daimler Chrysler Auto Trust, Series 08-B, Class A4B, 1 mo. LIBOR + 1.85%, 2.14%, due 11/10/14 | 509,725 | |||||||||||||
700,000 | Ford Credit Floorplan Master Owner Trust, Series 06-4, Class A, 1 mo. LIBOR + .25%, 0.53%, due 06/15/13 | 693,000 | |||||||||||||
Total Auto Financing | 1,810,039 | ||||||||||||||
Bank Loan Collateralized Debt Obligations — 0.0% | |||||||||||||||
190,548 | Arran Corp. Loans No. 1 B.V., Series 06-1A, Class A3, 144A, 3 mo. LIBOR + .17%, 0.71%, due 06/20/25 | 189,953 |
See accompanying notes to the financial statements.
3
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Business Loans — 0.1% | |||||||||||||||
960,264 | Bayview Commercial Asset Trust, Series 05-4A, Class A2, 144A, 1 mo. LIBOR + .39%, 0.65%, due 01/25/36 | 614,568 | |||||||||||||
341,972 | GE Business Loan Trust, Series 04-1, Class A, 144A, 1 mo. LIBOR + .29%, 0.57%, due 05/15/32 | 300,936 | |||||||||||||
644,790 | Lehman Brothers Small Balance Commercial, Series 05-2A, Class 1A, 144A, 1 mo. LIBOR + .25%, 0.51%, due 09/25/30 | 464,249 | |||||||||||||
Total Business Loans | 1,379,753 | ||||||||||||||
CMBS — 0.2% | |||||||||||||||
600,000 | Commercial Mortgage Pass-Through Certificates, Series 06-FL12, Class AJ, 144A, 1 mo. LIBOR + .13%, 0.41%, due 12/15/20 | 432,000 | |||||||||||||
462,766 | GE Capital Commercial Mortgage Corp., Series 05-C4, Class A2, 5.31%, due 11/10/45 | 464,062 | |||||||||||||
600,000 | GS Mortgage Securities Corp., Series 07-EOP, Class A2, 144A, 1 mo. LIBOR + .13%, 0.43%, due 03/06/20 | 570,000 | |||||||||||||
590,477 | J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 06-LDP7, Class A2, 6.05%, due 04/15/45 | 603,173 | |||||||||||||
400,000 | Merrill Lynch Mortgage Trust, Series 06-C1, Class A2, 5.79%, due 05/12/39 | 416,720 | |||||||||||||
306,769 | Wachovia Bank Commercial Mortgage Trust, Series 06-WL7A, Class A1, 144A, 1 mo. LIBOR + .09%, 0.36%, due 09/15/21 | 273,024 | |||||||||||||
Total CMBS | 2,758,979 | ||||||||||||||
Corporate Collateralized Debt Obligations — 0.2% | |||||||||||||||
1,100,000 | Morgan Stanley ACES SPC, Series 06-13A, Class A, 144A, 3 mo. LIBOR + .29%, 0.83%, due 06/20/13 | 896,940 | |||||||||||||
2,000,000 | Morgan Stanley ACES SPC, Series 05-15, Class A, 144A, 3 mo. LIBOR + .40%, 0.94%, due 12/20/10 | 1,979,600 | |||||||||||||
Total Corporate Collateralized Debt Obligations | 2,876,540 | ||||||||||||||
Credit Cards — 0.2% | |||||||||||||||
800,000 | Cabela's Master Credit Card Trust, Series 08-4A, Class A2, 144A, 1 mo. LIBOR + 3.00%, 3.28%, due 09/15/14 | 820,544 | |||||||||||||
1,000,000 | Capital One Multi-Asset Execution Trust, Series 04-A7, Class A7, 3 mo. LIBOR + .15%, 0.53%, due 06/16/14 | 998,920 | |||||||||||||
700,000 | Charming Shoppes Master Trust, Series 07-1A, Class A1, 144A, 1 mo. LIBOR + 1.25%, 1.53%, due 09/15/17 | 683,522 | |||||||||||||
EUR | 600,000 | Citibank Credit Card Issuance Trust, Series 04-A2, Class A, 3 mo. EUR LIBOR + .10%, 0.99%, due 05/24/13 | 757,157 |
See accompanying notes to the financial statements.
4
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Credit Cards — continued | |||||||||||||||
600,000 | Household Credit Card Master Note Trust I, Series 07-2, Class A, 1 mo. LIBOR + .55%, 0.83%, due 07/15/13 | 600,281 | |||||||||||||
100,000 | MBNA Credit Card Master Note Trust, Series 04-A8, Class A8, 1 mo. LIBOR + .15%, 0.43%, due 01/15/14 | 99,952 | |||||||||||||
500,000 | National City Credit Card Master Trust, Series 08-3, Class A, 1 mo. LIBOR + 1.80%, 2.08%, due 05/15/13 | 504,530 | |||||||||||||
Total Credit Cards | 4,464,906 | ||||||||||||||
Insured Auto Financing — 0.1% | |||||||||||||||
972,768 | AmeriCredit Automobile Receivables Trust, Series 07-DF, Class A4B, FSA, 1 mo. LIBOR + .80%, 1.10%, due 06/06/14 | 968,443 | |||||||||||||
625,873 | Santander Drive Auto Receivables Trust, Series 07-3, Class A4B, FGIC, 1 mo. LIBOR + .65%, 0.93%, due 10/15/14 | 623,119 | |||||||||||||
700,000 | Triad Auto Receivables Owner Trust, Series 07-B, Class A4B, FSA, 1 mo. LIBOR + 1.20%, 1.49%, due 07/14/14 | 701,162 | |||||||||||||
Total Insured Auto Financing | 2,292,724 | ||||||||||||||
Insured Other — 0.1% | |||||||||||||||
1,100,000 | DB Master Finance LLC, Series 06-1, Class A2, 144A, AMBAC, 5.78%, due 06/20/31 | 1,090,375 | |||||||||||||
900,000 | Dominos Pizza Master Issuer LLC, Series 07-1, Class A2, 144A, MBIA, 5.26%, due 04/25/37 | 879,750 | |||||||||||||
Total Insured Other | 1,970,125 | ||||||||||||||
Insured Residential Asset-Backed Securities (United States) — 0.0% | |||||||||||||||
173,940 | Residential Asset Mortgage Products, Inc., Series 05-RS9, Class AI3, FGIC, 1 mo. LIBOR + .22%, 0.48%, due 11/25/35 | 116,568 | |||||||||||||
Insured Residential Mortgage-Backed Securities (United States) — 0.0% | |||||||||||||||
531,367 | Countrywide Home Equity Loan Trust, Series 07-E, Class A, MBIA, 1 mo. LIBOR + .15%, 0.43%, due 06/15/37 | 233,270 | |||||||||||||
Insured Time Share — 0.0% | |||||||||||||||
257,535 | Sierra Receivables Funding Co., Series 07-2A, Class A2, 144A, MBIA, 1 mo. LIBOR + 1.00%, 1.27%, due 09/20/19 | 242,922 |
See accompanying notes to the financial statements.
5
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Asset-Backed Securities (United States) — 0.2% | |||||||||||||||
450,687 | ACE Securities Corp., Series 06-SL3, Class A1, 1 mo. LIBOR + .10%, 0.36%, due 06/25/36 | 54,759 | |||||||||||||
434,260 | ACE Securities Corp., Series 07-WM1, Class A2A, 1 mo. LIBOR + .07%, 0.33%, due 11/25/36 | 235,586 | |||||||||||||
164,390 | Argent Securities, Inc., Series 06-M2, Class A2B, 1 mo. LIBOR + .11%, 0.37%, due 09/25/36 | 63,701 | |||||||||||||
203,718 | Argent Securities, Inc., Series 06-W2, Class A2B, 1 mo. LIBOR + .19%, 0.45%, due 03/25/36 | 81,487 | |||||||||||||
304,456 | Asset Backed Funding Certificates, Series 06-OPT2, Class A3B, 1 mo. LIBOR + .11%, 0.37%, due 10/25/36 | 301,563 | |||||||||||||
207,481 | Asset Backed Funding Certificates, Series 07-NC1, Class A1, 144A, 1 mo. LIBOR + .22%, 0.48%, due 05/25/37 | 172,210 | |||||||||||||
633,638 | Bayview Financial Acquisition Trust, Series 04-B, Class A2, 144A, 1 mo. LIBOR + .65%, 1.56%, due 05/28/39 | 236,030 | |||||||||||||
1,200,000 | Carrington Mortgage Loan Trust, Series 07-FRE1, Class A2, 1 mo. LIBOR + .20%, 0.46%, due 02/25/37 | 652,680 | |||||||||||||
22,162 | Chase Funding Mortgage Loan Trust, Series 03-3, Class 2A2, 1 mo. LIBOR + .27%, 0.80%, due 04/25/33 | 17,729 | |||||||||||||
1,600,000 | Countrywide Asset-Backed Certificates, Series 06-BC3, Class 2A2, 1 mo. LIBOR + .14%, 0.40%, due 02/25/37 | 1,205,120 | |||||||||||||
1,092,651 | J.P. Morgan Mortgage Acquisition Corp., Series 06-WMC4, Class A3, 1 mo. LIBOR + .12%, 0.38%, due 12/25/36 | 414,115 | |||||||||||||
391,014 | Master Asset-Backed Securities Trust, Series 06-FRE2, Class A4, 1 mo. LIBOR + .15%, 0.41%, due 03/25/36 | 195,507 | |||||||||||||
468,486 | Morgan Stanley Home Equity Loans, Series 07-2, Class A1, 1 mo. LIBOR + .10%, 0.36%, due 04/25/37 | 432,178 | |||||||||||||
443,143 | Residential Asset Securities Corp., Series 05-KS12, Class A2, 1 mo. LIBOR + .25%, 0.51%, due 01/25/36 | 424,212 | |||||||||||||
Total Residential Asset-Backed Securities (United States) | 4,486,877 | ||||||||||||||
Residential Mortgage-Backed Securities (Australian) — 0.0% | |||||||||||||||
158,719 | Interstar Millennium Trust, Series 05-1G, Class A, 3 mo. LIBOR + .12%, 0.94%, due 12/08/36 | 153,027 | |||||||||||||
142,647 | Superannuation Members Home Loans Global Fund, Series 7, Class A1, 3 mo. LIBOR + .14%, 0.68%, due 03/09/36 | 139,627 |
See accompanying notes to the financial statements.
6
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||||||
Residential Mortgage-Backed Securities (Australian) — continued | |||||||||||||||
409,684 | Westpac Securitization Trust, Series 07-1G, Class A2A, 3 mo. LIBOR + .05%, 0.39%, due 05/21/38 | 393,297 | |||||||||||||
Total Residential Mortgage-Backed Securities (Australian) | 685,951 | ||||||||||||||
Residential Mortgage-Backed Securities (European) — 0.1% | |||||||||||||||
85,683 | Aire Valley Mortgages, Series 07-1A, Class 1A2, 144A, 3 mo. LIBOR + .09%, 0.63%, due 03/20/30 | 85,126 | |||||||||||||
586,088 | Brunel Residential Mortgages, Series 07-1A, Class A4C, 144A, 3 mo. LIBOR + .10%, 0.63%, due 01/13/39 | 524,549 | |||||||||||||
482,711 | Paragon Mortgages Plc, Series 7A, Class A1A, 144A, 3 mo. LIBOR + .42%, 0.80%, due 05/15/34 | 413,007 | |||||||||||||
Total Residential Mortgage-Backed Securities (European) | 1,022,682 | ||||||||||||||
Student Loans — 0.0% | |||||||||||||||
73,982 | National Collegiate Student Loan Trust, Series 06-1, Class A2, 1 mo. LIBOR + .14%, 0.40%, due 08/25/23 | 72,132 | |||||||||||||
600,000 | Nelnet Student Loan Trust, Series 05-2, Class A4, 3 mo. LIBOR + .08%, 0.62%, due 12/23/19 | 588,324 | |||||||||||||
Total Student Loans | 660,456 | ||||||||||||||
Total Asset-Backed Securities | 25,191,745 | ||||||||||||||
Corporate Debt — 0.0% | |||||||||||||||
147,000 | Health Care Property Investors, Inc., Series G, MTN, 5.63%, due 02/28/13 | 156,188 | |||||||||||||
U.S. Government Agency — 0.0% | |||||||||||||||
225,000 | Agency for International Development Floater (Support of Morocco), 6 mo. U.S. Treasury Bill + .45%, 0.64%, due 11/15/14 (a) | 220,552 | |||||||||||||
100,000 | Agency for International Development Floater (Support of Zimbabwe), 3 mo. U.S. Treasury Bill x 115%, 0.17%, due 01/01/12 (a) | 98,822 | |||||||||||||
Total U.S. Government Agency | 319,374 | ||||||||||||||
TOTAL DEBT OBLIGATIONS (COST $23,174,704) | 25,667,307 |
See accompanying notes to the financial statements.
7
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
SHORT-TERM INVESTMENTS — 0.0% | |||||||||||||||
Money Market Funds — 0.0% | |||||||||||||||
50,786 | State Street Institutional U.S. Government Money Market Fund- Institutional Class | 50,786 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $50,786) | 50,786 | ||||||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $2,106,044,748) | 2,007,065,926 | ||||||||||||||
Other Assets and Liabilities (net) — (0.0%) | (21,044 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 2,007,044,882 |
Notes to Schedule of Investments:
144A - Securities 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.
AMBAC - Insured as to the payment of principal and interest by AMBAC Assurance Corporation.
CMBS - Commercial Mortgage Backed Security
EUR LIBOR - London Interbank Offered Rate denominated in Euros.
FGIC - Insured as to the payment of principal and interest by Financial Guaranty Insurance Corporation.
FSA - Insured as to the payment of principal and interest by Financial Security Assurance.
LIBOR - London Interbank Offered Rate
MBIA - Insured as to the payment of principal and interest by MBIA Insurance Corp.
MTN - Medium Term Note
The rates shown on variable rate notes are the current interest rates at August 31, 2010, which are subject to change based on the terms of the security.
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
Currency Abbreviations
EUR - Euro
See accompanying notes to the financial statements.
8
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $23,225,490) (Note 2) | $ | 25,718,093 | |||||
Investments in affiliated issuers, at value (cost $2,082,819,258) (Notes 2 and 10) | 1,981,347,833 | ||||||
Receivable for Fund shares sold | 43,386,390 | ||||||
Interest receivable | 29,264 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 21,731 | ||||||
Total assets | 2,050,503,311 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 42,666,271 | ||||||
Payable for Fund shares repurchased | 720,119 | ||||||
Payable to affiliate for (Note 5): | |||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 2,954 | ||||||
Accrued expenses | 69,085 | ||||||
Total liabilities | 43,458,429 | ||||||
Net assets | $ | 2,007,044,882 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 2,228,457,052 | |||||
Accumulated undistributed net investment income | 4,556,366 | ||||||
Accumulated net realized loss | (126,989,714 | ) | |||||
Net unrealized depreciation | (98,978,822 | ) | |||||
$ | 2,007,044,882 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 2,007,044,882 | |||||
Shares outstanding: | |||||||
Class III | 110,980,445 | ||||||
Net asset value per share: | |||||||
Class III | $ | 18.08 |
See accompanying notes to the financial statements.
9
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 10) | $ | 14,396,890 | |||||
Interest | 1,347,955 | ||||||
Dividends | 45 | ||||||
Total investment income | 15,744,890 | ||||||
Expenses: | |||||||
Legal fees | 43,884 | ||||||
Custodian, fund accounting agent and transfer agent fees | 30,912 | ||||||
Audit and tax fees | 27,048 | ||||||
Trustees fees and related expenses (Note 5) | 19,049 | ||||||
Registration fees | 3,128 | ||||||
Miscellaneous | 15,548 | ||||||
Total expenses | 139,569 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (113,804 | ) | |||||
Expense reductions (Note 2) | (2,012 | ) | |||||
Net expenses | 23,753 | ||||||
Net investment income (loss) | 15,721,137 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | 582,041 | ||||||
Investments in affiliated issuers | (34,359,178 | ) | |||||
Realized gains distributions from affiliated issuers (Note 10) | 317,146 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (42 | ) | |||||
Net realized gain (loss) | (33,460,033 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | (718,855 | ) | |||||
Investments in affiliated issuers | (27,596,674 | ) | |||||
Net unrealized gain (loss) | (28,315,529 | ) | |||||
Net realized and unrealized gain (loss) | (61,775,562 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (46,054,425 | ) |
See accompanying notes to the financial statements.
10
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 15,721,137 | $ | 43,854,182 | |||||||
Net realized gain (loss) | (33,460,033 | ) | (85,631,922 | ) | |||||||
Change in net unrealized appreciation (depreciation) | (28,315,529 | ) | 420,152,022 | ||||||||
Net increase (decrease) in net assets from operations | (46,054,425 | ) | 378,374,282 | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (185,500 | ) | (52,808,585 | ) | |||||||
Net share transactions (Note 9): | |||||||||||
Class III | 202,071,721 | 418,367,821 | |||||||||
Purchase premiums and redemption fees (Notes 2 and 9): | |||||||||||
Class III | — | 21,819 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and redemption fees | 202,071,721 | 418,389,640 | |||||||||
Total increase (decrease) in net assets | 155,831,796 | 743,955,337 | |||||||||
Net assets: | |||||||||||
Beginning of period | 1,851,213,086 | 1,107,257,749 | |||||||||
End of period (including accumulated undistributed net investment income of $4,556,366 and distributions in excess of net investment income of $10,979,271, respectively) | $ | 2,007,044,882 | $ | 1,851,213,086 |
See accompanying notes to the financial statements.
11
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006(a) | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 18.54 | $ | 14.37 | $ | 22.70 | $ | 23.71 | $ | 22.37 | $ | 20.00 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(b)† | 0.15 | 0.54 | 1.57 | 0.99 | 0.69 | 0.52 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.61 | ) | 4.26 | (7.23 | ) | (0.15 | ) | 2.17 | 2.34 | ||||||||||||||||||
Total from investment operations | (0.46 | ) | 4.80 | (5.66 | ) | 0.84 | 2.86 | 2.86 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.00 | )(c) | (0.63 | ) | (1.61 | ) | (1.02 | ) | (0.90 | ) | (0.47 | ) | |||||||||||||||
From net realized gains | — | — | (1.06 | ) | (0.83 | ) | (0.62 | ) | (0.02 | ) | |||||||||||||||||
Total distributions | — | (0.63 | ) | (2.67 | ) | (1.85 | ) | (1.52 | ) | (0.49 | ) | ||||||||||||||||
Net asset value, end of period | $ | 18.08 | $ | 18.54 | $ | 14.37 | $ | 22.70 | $ | 23.71 | $ | 22.37 | |||||||||||||||
Total Return(d) | (2.47 | )%** | 33.44 | % | (26.75 | )% | 3.15 | % | 12.98 | % | 14.42 | %** | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 2,007,045 | $ | 1,851,213 | $ | 1,107,258 | $ | 1,100,116 | $ | 529,374 | $ | 366,622 | |||||||||||||||
Net expenses to average daily net assets(e)(f) | 0.00 | %(g)* | 0.00 | %(g) | 0.00 | %(g) | 0.00 | %(g) | 0.00 | % | 0.00 | %* | |||||||||||||||
Net investment income (loss) to average daily net assets(b) | 1.64 | %* | 3.04 | % | 8.05 | % | 4.05 | % | 2.98 | % | 3.22 | %* | |||||||||||||||
Portfolio turnover rate | 15 | %** | 14 | % | 34 | % | 47 | % | 23 | % | 10 | %** | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.01 | %* | 0.02 | % | 0.01 | % | 0.01 | % | 0.02 | % | 0.06 | %* | |||||||||||||||
Redemption fees consisted of the following per share amounts:† | $ | — | $ | 0.00 | (h) | $ | 0.01 | $ | 0.01 | $ | 0.00 | (h) | $ | 0.02 |
(a) Period from May 31, 2005 (commencement of operations) through February 28, 2006.
(b) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(c) Distributions from net investment income were less than $0.01 per share.
(d) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(e) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(f) Net expenses to average daily net assets were less than 0.01%.
(g) The net expense ratio does not include the effect of expense reductions (Note 2).
(h) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
12
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO Strategic Opportunities Allocation Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks total return greater than that of its benchmark, the GMO Strategic Opportunities Allocation Index. The GMO Strategic Opportunities Allocation Index is a composite benchmark computed by the Manager for the Fund consisting of (i) the MSCI World Index and (ii) the Barclays Capital U.S. Aggregate Index, in the following proportions: 75% (MSCI World Index) and 25% (Barclays Capital U.S. Aggregate Index). The Fund is a fund of funds and invests primarily in shares of other GMO Funds, which may include the GMO International Equity Funds, the GMO U.S. Equity Funds, the GMO Fixed Income Funds, GMO Alpha Only Fund, GMO Alternative Asset Opportunity Fund, GMO Debt Opportunities Fund, GMO High Quality Short-Duration Bond Fund, GMO Special Situations Fund, and GMO World Opportunity Overlay Fund (GMO Funds in which the Fund invests are collectively referred to as "underlying funds"). In addition, the Fund may hold securities (p articularly asset-backed securities) directly or through one or more subsidiaries or other entities. The Fund may have exposure to foreign and U.S. equity investments (including emerging country equities, both growth and value style equities, and equities of any market capitalization), U.S. and foreign fixed income securities (including fixed income securities of any credit quality and having any maturity or duration), the investment returns of commodities and, from time to time, other alternative asset classes.
The Manager uses proprietary quantitative models and fundamental investment techniques to select the underlying funds in which the Fund invests and to decide how much to invest in each. The models use multi-year forecasts of relative value and risk among asset classes (e.g., foreign equity, U.S. equity, emerging country equity, emerging country debt, U.S. fixed income, foreign fixed income, and commodities). The Manager changes the Fund's holdings of underlying funds in response to changes in its investment outlook and market valuations and may use redemption/purchase activity to rebalance the Fund's investments.
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
13
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The financial statements of the underlying funds in which the Fund invests should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect) or by visiting GMO's website at www.gmo.com. As of August 31, 2010, shares of GMO Special Situations Fund, and GMO World Opportunity Overlay Fund were not publicly available for direct purchase.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Shares of the underlying funds and other investment funds are generally valued at their net asset value. Investments held by the Fund and the underlying funds are valued as follows. Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the over-the-counter ("OTC") market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, whi ch approximates market value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of August 31, 2010, the total value of securities held directly and indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 0.5% of net assets. The Fund and the underlying funds classify such securities (as defined below) as Level 3. Additionally, because many foreign equity securities mark ets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund and the underlying funds generally value foreign equity securities as of the NYSE close using fair value prices,
14
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
which are based on local closing prices and adjustments supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2010, equity securities and futures contracts representing 45.9% and 0.1%, respectively, of the net assets of the Fund, through investments in the underlying funds, were valued using fair value prices based on those adjustments. Those underlying funds classify such securities (as defined below) as Level 2.
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. Although alternative prices are available for securities held by the Fund and the underlying funds, those alternative sources are not typically part of the valuation process and would not necessarily confirm the security price used by the Fund and the underlying funds. Therefore, the existence of those alternative sou rces does not necessarily provide greater certainty about the prices used by the Fund and the underlying funds. As of August 31, 2010, the total value of securities held directly and indirectly for which no alternative pricing source was available represented 0.9% of the net assets of the Fund.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data.
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund used the following fair value techniques on Level 3 investments: The Fund valued certain debt securities using indicative bids received from primary pricing sources. The Fund valued certain debt securities using a specified spread above the LIBOR Rate.
15
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Mutual Funds | $ | 1,981,347,833 | $ | — | $ | — | $ | 1,981,347,833 | |||||||||||
Debt Obligations | |||||||||||||||||||
Asset-Backed Securities | — | 5,847,479 | 19,344,266 | 25,191,745 | |||||||||||||||
Corporate Debt | — | 156,188 | — | 156,188 | |||||||||||||||
U.S. Government Agency | — | — | 319,374 | 319,374 | |||||||||||||||
TOTAL DEBT OBLIGATIONS | — | 6,003,667 | 19,663,640 | 25,667,307 | |||||||||||||||
Short-Term Investments | 50,786 | — | — | 50,786 | |||||||||||||||
Total Investments | 1,981,398,619 | 6,003,667 | 19,663,640 | 2,007,065,926 | |||||||||||||||
Total | $ | 1,981,398,619 | $ | 6,003,667 | $ | 19,663,640 | $ | 2,007,065,926 |
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements. The aggregate net values of the Fund's investments (both direct and indirect) in securities and other financial instruments using Level 3 inputs were 5.3% and (0.1)% of total net assets, respectively.
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2010 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Transfers into Level 3* | Transfers out of Level 3* | Balances as of August 31, 2010 | ||||||||||||||||||||||||||||
Debt Obligations | |||||||||||||||||||||||||||||||||||
Asset-Backed Securities | $ | 22,589,158 | $ | (4,070,521 | ) | $ | 584,470 | $ | 526,644 | $ | (285,485 | ) | $ | — | $ | — | $ | 19,344,266 | |||||||||||||||||
U.S. Government Agency | 376,034 | (58,333 | ) | 1,972 | 1,814 | (2,113 | ) | — | — | 319,374 | |||||||||||||||||||||||||
Total Debt Obligations | 22,965,192 | (4,128,854 | ) | 586,442 | 528,458 | (287,598 | ) | — | — | 19,663,640 | |||||||||||||||||||||||||
Total | $ | 22,965,192 | $ | (4,128,854 | ) | $ | 586,442 | $ | 528,458 | $ | (287,598 | ) | $ | — | $ | — | $ | 19,663,640 |
* The Fund recognizes investments and derivatives transferred into Level 3 at the value at the beginning of the period and transferred out of Level 3 at the value at the end of the period.
16
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are inclu ded with the net realized and unrealized gain or loss on investment securities.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
17
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2018 | $ | (49,481,317 | ) | ||||
Total | $ | (49,481,317 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 2,167,416,319 | $ | 23,334,091 | $ | (183,684,484 | ) | $ | (160,350,393 | ) |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Income dividends and capital gain distributions from the underlying funds are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for the purposes of determining the cost basis.
18
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 5).
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
For the period ended August 31, 2010, the Fund did not charge a premium on cash purchases or fee on cash redemptions of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by a Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. The Fund charges purchase premiums and redemption fees based on the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premiums and/or redemption fees, if any, imposed by the underlying Funds in which it invests, provided that, if that weighted average is less than 0.05%, the Fund generally will not charge a purchase premium or redemption fee. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee at any time. Purch ase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager may consider known cash flows out of or into other series of the Trust when placing orders for the cash purchase or redemption of shares by the Fund shareholders or other prospective or existing shareholders of the Funds for whom GMO provides asset allocation advice. Consequently, the Fund and those other shareholders for whom GMO provides asset allocation advice will tend to benefit from waivers of the Funds' purchase premiums and redemption fees to a greater extent than other prospective and existing shareholders of the other series of the Trust. All or a portion of the Fund's purchase premiums and/or redemption fees may be waived at the Manager's discretion when they are de minimus and/or the Manager deems it equitable to do so, including without limitation when the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premiums and/or redemption fees, if any, imposed by the underlying funds are less than
19
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
the purchase premiums and/or redemption fee imposed by the Fund. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of a Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases an d redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. References to investments include those held directly by the Fund and indirectly through the Fund's investments in the underlying funds. Some of the underlying funds are non-diversified investment companies under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by those funds may affect their performance more than if they were diversified. The principal risks of investing in the Fund are summarized below, including those risks to which the Fund is exposed as a result of its investments in the underlying funds. This summary is not intended to incl ude every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Declines in stock market prices generally are likely to reduce the market value of the Fund's investments.
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund or the underlying funds may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund or the underlying funds need to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund or the underlying funds to credit and other risks with respect to participating brokers,
20
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund's investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund's investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Market Risk — Fixed Income Securities — Typically, the value of fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund or an underlying fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
• Derivatives Risk — The use of derivatives involves the risk that their value may not correlate with the value of the relevant underlying assets, rates or indices. Derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk.
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in the underlying funds, including the risk that the underlying funds in which it invests do not perform as expected. Because the Fund bears the fees and expenses of the underlying funds in which it invests, new investments in underlying funds with higher fees or expenses than those of the underlying funds in which the Fund is currently invested will increase the Fund's total expenses. The fees and expenses associated with an investment in the Fund are less predictable and may be higher than fees and expenses associated with an investment in funds that charge a fixed management fee.
Other principal risks of an investment in the Fund include Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Market Risk — Value Securities (risk that the price of investments held by the Fund will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Market Risk — Growth Securities (greater price fl uctuations resulting from dependence on future earnings expectations); Commodities Risk (value of an underlying fund's shares may be affected by factors particular to the commodities markets and may fluctuate more than the share value of a fund with a broader range of investments); Currency Risk (risk that fluctuations in exchange rates may adversely affect the value of investments denominated in foreign currencies or that the U.S. dollar will decline in value relation to a foreign currency being hedged); Leveraging Risk (increased risk of loss from use of reverse repurchase agreements and other derivatives and securities
21
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
lending); Credit and Counterparty Risk (risk of default of an issuer of a portfolio security, a derivatives counterparty, or a borrower of the Fund's securities); Real Estate Risk (risk to an underlying fund that concentrates its assets in real estate-related investments that factors affecting the real estate industry may cause the value of the Fund's investments to fluctuate more than if it invested in securities of companies in a broader range of industries); Short Sales Risk (risk that an underlying fund's loss on the short sale of securities that it does not own is unlimited); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
The most significant market risk for Funds investing in fixed income securities is that the securities in which they invest experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. These risks apply to the Fund because it invests in asset-backed securities. Asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as "collateralized debt obligations" or "collateralized loan obligations") and by the fees earned by service providers. Payment of interest on asset-backed securities and repayment of principal largely depend on t he cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. Many asset-backed securities owned (directly or indirectly) by the Fund that were once rated investment grade are now rated below investment grade as of the date of this Report.
With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently,
22
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and a Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.
The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution's business may have a material impact on multiple investments.
4. Derivative financial instruments
At August 31, 2010, the Fund held no derivative contracts.
5. Fees and other transactions with affiliates
The Manager decides how to allocate the assets of the Fund among underlying funds. The Manager does not charge the Fund a management fee or shareholder service fee, but it receives management and shareholder service fees from the underlying funds in which the Fund invests. Because those fees vary from fund to fund, the levels of indirect net expenses set forth below are affected by the Manager's asset allocation decisions.
23
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.00% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investme nt company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). This contractual expense limitation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $19,049 and $6,716, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Indirect Interest Expense | Total Indirect Expenses | ||||||||||||
0.404 | % | 0.069 | % | 0.004 | % | 0.477 | % |
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments and class exchanges, for the period ended August 31, 2010 aggregated $500,747,561 and $274,010,806, respectively.
24
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, 34.91% of the outstanding shares of the Fund were held by two shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2010, 0.02% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 99.98% of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 14,197,581 | $ | 260,085,077 | 28,866,186 | $ | 530,237,819 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 10,016 | 181,092 | 2,735,629 | 50,897,400 | |||||||||||||||
Shares repurchased | (3,092,318 | ) | (58,194,448 | ) | (8,781,233 | ) | (162,767,398 | ) | |||||||||||
Purchase premiums | — | — | — | 16,056 | |||||||||||||||
Redemption fees | — | — | — | 5,763 | |||||||||||||||
Net increase (decrease) | 11,115,279 | $ | 202,071,721 | 22,820,582 | $ | 418,389,640 |
25
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
10. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income* | Distributions of Realized Gains* | Return of Capital* | Value, end of period | ||||||||||||||||||||||||
GMO Alpha Only Fund, Class IV | $ | 112,357,485 | $ | 43,825,829 | $ | 50,000,000 | $ | — | $ | — | $ | — | $ | 105,251,400 | |||||||||||||||||
GMO Asset Allocation Bond Fund, Class VI | 68,552,916 | 25,506,816 | 51,031,847 | 579,197 | 317,146 | — | 43,923,177 | ||||||||||||||||||||||||
GMO Domestic Bond Fund, Class VI | 37,840,849 | — | — | 248,587 | — | 8,566,555 | 30,449,565 | ||||||||||||||||||||||||
GMO Emerging Country Debt Fund, Class IV | 8,875,698 | 399,144 | — | 399,144 | — | — | 10,372,563 | ||||||||||||||||||||||||
GMO Emerging Markets Fund, Class VI | — | 97,184,933 | — | — | — | — | 101,291,483 | ||||||||||||||||||||||||
GMO Flexible Equities Fund, Class VI | 46,041,138 | 72,674 | — | — | — | — | 42,435,583 | ||||||||||||||||||||||||
GMO Inflation Indexed Plus Bond Fund, Class VI | 31,566,819 | 1,785,086 | — | — | — | — | 36,332,694 | ||||||||||||||||||||||||
GMO International Growth Equity Fund, Class IV | 287,905,759 | 89,929,743 | 4,710,000 | 1,197,889 | — | — | 367,504,881 | ||||||||||||||||||||||||
GMO International Intrinsic Value Fund, Class IV | 286,060,774 | 93,183,032 | 3,950,000 | 1,435,683 | — | — | 362,909,401 | ||||||||||||||||||||||||
GMO International Small Companies Fund, Class III | 36,967,704 | 391,120 | 38,170,923 | 391,120 | — | — | — | ||||||||||||||||||||||||
GMO Quality Fund, Class VI | 691,556,972 | 71,738,334 | 115,065,000 | 6,686,779 | — | — | 601,776,064 | ||||||||||||||||||||||||
GMO Special Situations Fund, Class VI | 47,401,017 | 72,871,414 | — | — | — | — | 117,949,304 | ||||||||||||||||||||||||
GMO Strategic Fixed Income Fund, Class VI | 78,620,566 | — | — | 2,810,541 | — | 1,383,670 | 80,092,481 | ||||||||||||||||||||||||
GMO U.S. Core Equity Fund, Class VI | 75,200,697 | 3,859,436 | 1,900,000 | 647,950 | — | — | 72,330,996 | ||||||||||||||||||||||||
GMO World Opportunity Overlay Fund | 8,385,725 | — | — | — | — | — | 8,728,241 | ||||||||||||||||||||||||
Totals | $ | 1,817,334,119 | $ | 500,747,561 | $ | 264,827,770 | $ | 14,396,890 | $ | 317,146 | $ | 9,950,225 | $ | 1,981,347,833 |
* The table above includes estimated sources of all distributions paid by the underlying funds during the period March 1, 2010 through August 31, 2010. The actual tax characterization of distributions paid by the underlying funds will be determined through fiscal year ending February 28, 2011 and in the case of GMO Inflation Indexed Plus Bond Fund, Class VI, through its tax year ending December 31, 2010.
26
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one- and three-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
27
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
The Trustees also gave substantial consideration to the fact that the Fund does not pay a management fee to the Manager under the Fund's investment management agreement, but that the Fund indirectly bears management and shareholder servicing fees paid to the Manager by other funds of the Trust in which it invests. The Trustees also considered so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees noted that they had approved renewal of the Manager's investment management agreements with the other funds of the Trust in which the Fund may invest and had concluded that the advisory fees charged to those funds were reasonable, after considering, among other things: possible economies of scale to the Manager in connection with its management of the other funds of the Trust; the Manager's profitability with respect to the other funds of the Trust and the Trust as a whole (including the effect of recent changes in assets under management); and information prepared by a third-party data service concerning fee s paid to managers of funds deemed by that service to have similar objectives to those of the other funds of the Trust.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the
28
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
29
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including indirect management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.48 | % | $ | 1,000.00 | $ | 975.30 | $ | 2.39 | |||||||||||
2) Hypothetical | 0.48 | % | $ | 1,000.00 | $ | 1,022.79 | $ | 2.45 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
30
GMO Taiwan Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a private placement memorandum, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained by calling 1-617-346-7646 (collect).
GMO Taiwan Fund
(A Series of GMO Trust
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 94.3 | % | |||||
Investment Funds | 2.9 | ||||||
Short-Term Investments | 2.4 | ||||||
Other | 0.4 | ||||||
100.0 | % | ||||||
Industry Sector Summary | % of Equity Investments* | ||||||
Semiconductors & Semiconductor Equipment | 24.3 | % | |||||
Computers & Peripherals | 18.1 | ||||||
Electronic Equipment, Instruments & Components | 17.1 | ||||||
Chemicals | 10.5 | ||||||
Communications Equipment | 9.4 | ||||||
Commerical Banks | 8.3 | ||||||
Diversified Telecommunication Services | 4.6 | ||||||
Miscellaneous | 3.0 | ||||||
Metals & Mining | 2.2 | ||||||
Wireless Telecommunication Services | 1.4 | ||||||
Diversified Financial Services | 1.1 | ||||||
100.0 | % |
* Equity investments may consist of common stocks, preferred stocks and rights and warrants. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
1
GMO Taiwan Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 94.3% | |||||||||||
Taiwan — 94.3% | |||||||||||
468,400 | Asustek Computer Inc | 3,119,448 | |||||||||
2,581,000 | China Petrochemical Development Corp. * | 1,521,530 | |||||||||
1,851,418 | China Steel Corp | 1,749,559 | |||||||||
2,368,996 | Chinatrust Financial Holding Co Ltd | 1,326,465 | |||||||||
1,769,931 | Chunghwa Telecom Co Ltd | 3,635,112 | |||||||||
3,299,500 | Compal Electronics Inc | 3,704,686 | |||||||||
734,000 | Delta Electronics Inc | 2,782,926 | |||||||||
851,507 | Far Eastone Telecommunications Co Ltd | 1,105,145 | |||||||||
2,604,900 | First Financial Holding Co Ltd | 1,503,507 | |||||||||
738,769 | Fubon Financial Holding Co Ltd | 858,973 | |||||||||
1,925,014 | Hon Hai Precision Industry Co Ltd | 6,787,555 | |||||||||
403,884 | HTC Corp | 7,407,689 | |||||||||
99,000 | Largan Precision Co Ltd | 1,783,138 | |||||||||
868,376 | Lite-On Technology Corp | 1,001,967 | |||||||||
4,027,000 | Mega Financial Holding Co Ltd | 2,428,019 | |||||||||
3,512,180 | Nan Ya Plastics Corp | 6,765,774 | |||||||||
402,995 | Novatek Microelectronics Corp Ltd | 964,103 | |||||||||
983,888 | Pegatron Corp * | 1,231,626 | |||||||||
767,750 | Powertech Technology Inc | 2,279,334 | |||||||||
1,905,656 | Quanta Computer Inc | 2,895,774 | |||||||||
39,285 | Synnex Technology International Corp | 80,854 | |||||||||
3,068,884 | Taishin Financial Holding Co Ltd * | 1,252,357 | |||||||||
8,692,828 | Taiwan Semiconductor Manufacturing Co Ltd | 15,896,998 | |||||||||
1,489,164 | Wistron Corp | 2,332,804 | |||||||||
1,121,879 | WPG Holdings Co Ltd | 2,076,892 | |||||||||
2,968,195 | Ya Hsin Industrial Co Ltd * (a) (b) | — | |||||||||
Total Taiwan | 76,492,235 | ||||||||||
TOTAL COMMON STOCKS (COST $75,773,867) | 76,492,235 |
See accompanying notes to the financial statements.
2
GMO Taiwan Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares/ Par Value ($) | Description | Value ($) | |||||||||
INVESTMENT FUNDS — 2.9% | |||||||||||
United States — 2.9% | |||||||||||
193,883 | iShares MSCI Taiwan Index Fund (c) | 2,355,678 | |||||||||
TOTAL INVESTMENT FUNDS (COST $2,395,924) | 2,355,678 | ||||||||||
SHORT-TERM INVESTMENTS — 2.4% | |||||||||||
Time Deposits — 2.4% | |||||||||||
USD | 1,000,000 | DnB Nor Bank (Oslo) Time Deposit, 0.21%, due 09/01/10 | 1,000,000 | ||||||||
USD | 947,537 | Nordea Bank Norge ASA (Oslo) Time Deposit, 0.21%, due 09/01/10 | 947,537 | ||||||||
Total Time Deposits | 1,947,537 | ||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $1,947,537) | 1,947,537 | ||||||||||
TOTAL INVESTMENTS — 99.6% (Cost $80,117,328) | 80,795,450 | ||||||||||
Other Assets and Liabilities (net) — 0.4% | 290,437 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 81,085,887 |
Notes to Schedule of Investments:
MSCI - Morgan Stanley Capital International
* Non-income producing security.
(a) Bankrupt issuer.
(b) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
(c) Represents an investment to equitize cash in the iShares® MSCI Taiwan Index Fund, which is a separate investment portfolio of iShares, Inc., a registered investment company. The iShares® MSCI Taiwan Index Fund invests in the Taiwanese market and seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the MSCI Taiwan Index. iShares® is a registered trademark of BlackRock. Neither BlackRock nor the iShares® Funds make any representations regarding the advisability of investing in the iShares® MSCI Taiwan Index Fund.
Currency Abbreviations:
USD - United States Dollar
See accompanying notes to the financial statements.
3
GMO Taiwan Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments, at value (cost $80,117,328) (Note 2) | $ | 80,795,450 | |||||
Foreign currency, at value (cost $746,133) (Note 2) | 745,487 | ||||||
Dividends receivable | 799,020 | ||||||
Total assets | 82,339,957 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 1,032,901 | ||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 53,123 | ||||||
Shareholder service fee | 9,838 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 132 | ||||||
Accrued expenses | 158,076 | ||||||
Total liabilities | 1,254,070 | ||||||
Net assets | $ | 81,085,887 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 97,282,203 | |||||
Accumulated undistributed net investment income | 1,366,967 | ||||||
Accumulated net realized loss | (18,236,651 | ) | |||||
Net unrealized appreciation | 673,368 | ||||||
$ | 81,085,887 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 81,085,887 | |||||
Shares outstanding: | |||||||
Class III | 4,381,693 | ||||||
Net asset value per share: | |||||||
Class III | $ | 18.51 |
See accompanying notes to the financial statements.
4
GMO Taiwan Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $495,096) | $ | 1,890,568 | |||||
Interest | 177 | ||||||
Total investment income | 1,890,745 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 263,623 | ||||||
Shareholder service fee – Class III (Note 5) | 48,819 | ||||||
Custodian and fund accounting agent fees | 129,352 | ||||||
Audit and tax fees | 41,124 | ||||||
Transfer agent fees | 13,892 | ||||||
Registration fees | 1,840 | ||||||
Legal fees | 1,564 | ||||||
Trustees fees and related expenses (Note 5) | 655 | ||||||
Miscellaneous | 2,208 | ||||||
Total expenses | 503,077 | ||||||
Net investment income (loss) | 1,387,668 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 12,708,012 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 33,514 | ||||||
Net realized gain (loss) | 12,741,526 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | (7,423,858 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | (4,542 | ) | |||||
Net unrealized gain (loss) | (7,428,400 | ) | |||||
Net realized and unrealized gain (loss) | 5,313,126 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 6,700,794 |
See accompanying notes to the financial statements.
5
GMO Taiwan Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 1,387,668 | $ | 1,873,434 | |||||||
Net realized gain (loss) | 12,741,526 | 24,661,277 | |||||||||
Change in net unrealized appreciation (depreciation) | (7,428,400 | ) | 35,935,530 | ||||||||
Net increase (decrease) in net assets from operations | 6,700,794 | 62,470,241 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (896,232 | ) | (3,367,217 | ) | |||||||
Net share transactions (Note 9): | |||||||||||
Class III | (16,171,186 | ) | (68,529,947 | ) | |||||||
Purchase premiums and redemption fees (Notes 2 and 9): | |||||||||||
Class III | 276,918 | 426,456 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees | (15,894,268 | ) | (68,103,491 | ) | |||||||
Total increase (decrease) in net assets | (10,089,706 | ) | (9,000,467 | ) | |||||||
Net assets: | |||||||||||
Beginning of period | 91,175,593 | 100,176,060 | |||||||||
End of period (including accumulated undistributed net investment income of $1,366,967 and $875,531, respectively) | $ | 81,085,887 | $ | 91,175,593 |
See accompanying notes to the financial statements.
6
GMO Taiwan Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 17.75 | $ | 11.06 | $ | 22.42 | $ | 30.98 | $ | 28.34 | $ | 26.79 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.39 | 0.25 | 0.59 | 0.61 | 0.46 | 0.52 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.57 | (a) | 6.89 | (a) | (10.80 | ) | 1.50 | 4.32 | 1.91 | ||||||||||||||||||
Total from investment operations | 0.96 | 7.14 | (10.21 | ) | 2.11 | 4.78 | 2.43 | ||||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.20 | ) | (0.45 | ) | (0.30 | ) | (0.85 | ) | (0.39 | ) | (0.59 | ) | |||||||||||||||
From net realized gains | — | — | (0.85 | ) | (9.82 | ) | (1.75 | ) | (0.29 | ) | |||||||||||||||||
Total distributions | (0.20 | ) | (0.45 | ) | (1.15 | ) | (10.67 | ) | (2.14 | ) | (0.88 | ) | |||||||||||||||
Net asset value, end of period | $ | 18.51 | $ | 17.75 | $ | 11.06 | $ | 22.42 | $ | 30.98 | $ | 28.34 | |||||||||||||||
Total Return(b) | 5.37 | %** | 64.80 | % | (47.14 | )% | 6.97 | %(c) | 17.12 | % | 9.13 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 81,086 | $ | 91,176 | $ | 100,176 | $ | 220,359 | $ | 316,887 | $ | 291,250 | |||||||||||||||
Net expenses to average daily net assets | 1.55 | %* | 1.35 | %(d)(e) | 1.32 | %(d) | 1.29 | %(d) | 1.26 | % | 1.28 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 4.26 | %* | 1.55 | % | 3.42 | % | 1.98 | % | 1.56 | % | 1.95 | % | |||||||||||||||
Portfolio turnover rate | 80 | %** | 106 | % | 88 | % | 94 | % | 41 | % | 31 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.08 | $ | 0.06 | $ | 0.03 | $ | 0.06 | $ | 0.03 | $ | 0.04 |
(a) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain/loss for the period due to the timing of purchases and redemptions of Fund shares in relation to the fluctuating market values of the Fund.
(b) Calculation excludes purchase premiums and redemption fees which are borne by the shareholder and assumes the effect of reinvested distributions.
(c) The effect of losses in the amount of $56,687, resulting from compliance violations and the Manager's reimbursement of such losses, had no effect on the total return.
(d) The net expense ratio does not include the effect of expense reductions, if any (Note 2).
(e) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
7
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO Taiwan Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks total return in excess of that of its benchmark, the MSCI Taiwan Index. The Fund typically makes equity investments directly and indirectly (e.g., through the GMO Funds in which the Fund invests, collectively referred to as the "underlying funds" or derivatives) in companies doing business in, or otherwise tied economically to, Taiwan. The Fund may invest in companies of any market capitalization. The term "equity investments" refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts. Under normal circumstances, the Fund invests directly and indirectly at least 80% of its assets in investments tied economically to Taiwan.
The Manager uses proprietary quantitative models and fundamental analysis to evaluate and select sectors and equity investments. The Manager evaluates and selects sectors and equity investments based on value, momentum, and quality models (that take into account various factors including, but not limited to, historical profitability, earnings stability and low debt to equity ratios), and also evaluates sectors based on macroeconomic models (that take into account various factors including, but not limited to, currency valuations, inflation, and current account deficits). The models used by the Manager may change over time.
From time to time, the Fund may invest a significant portion of its assets in securities of issuers in industries with high positive correlations to one another (e.g., different industries within broad sectors, such as technology or financial services).
In pursuing its investment objective, the Fund is permitted to (but is not obligated to) use a wide variety of exchange-traded and over-the-counter derivatives (including options, futures, warrants, swap contracts, and reverse repurchase agreements) and exchange-traded funds ("ETFs") (i) as a substitute for direct investment; (ii) in an attempt to reduce investment exposures (which may result in a reduction below zero); (iii) to effect transactions intended as substitutes for securities lending; and/or (iv) in an attempt to adjust elements of its investment and/or foreign currency exposure. The Fund's foreign currency exposure may differ significantly from the currency exposure represented by its equity investments. In addition, the Fund may take active overweighted or underweighted positions in particular currencies relative to its benchmark. In addition, the Fund may lend its portfolio securities.
8
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the over-the-counter ("OTC") market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not rea dily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of August 31, 2010, the total value of securities held directly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 0.0% of net assets. The Fund classifies such securities (as defined below) as Level 3. Additionally, because many foreign equity securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on local closing prices and adjustments supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2010, 92.8% of the net assets of the Fund were valued using fair value prices based on those adjustments and are classified as using Level 2 inputs in the table below.
9
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include: fair value adjustments applied to closing prices of foreign securities due to market events that have occurred since the local market close but before the Fund's daily NAV calculation.
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund used the following fair value techniques on Level 3 investments: The Fund deemed certain bankrupt securities to be worthless.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | |||||||||||||||||||
Taiwan | $ | 1,231,626 | $ | 75,260,609 | $ | 0 | * | $ | 76,492,235 | ||||||||||
TOTAL COMMON STOCKS | 1,231,626 | 75,260,609 | 0 | 76,492,235 | |||||||||||||||
Investment Funds | |||||||||||||||||||
United States | 2,355,678 | — | — | 2,355,678 | |||||||||||||||
TOTAL INVESTMENT FUNDS | 2,355,678 | — | — | 2,355,678 | |||||||||||||||
Short-Term Investments | 1,947,537 | — | — | 1,947,537 | |||||||||||||||
Total Investments | 5,534,841 | 75,260,609 | 0 | 80,795,450 | |||||||||||||||
Total | $ | 5,534,841 | $ | 75,260,609 | $ | 0 | $ | 80,795,450 |
* Represents the interest in securities that are defaulted and have no value at August 31, 2010.
The aggregate net value of the Fund's direct investments in securities using Level 3 inputs was 0.0% of total net assets.
10
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2010 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Net Transfer into Level 3* | Net Transfers out of Level 3* | Balances as of August 31, 2010 | ||||||||||||||||||||||||||||
Common Stocks Taiwan | $ | 928 | $ | — | $ | — | $ | — | $ | (928 | ) | $ | — | $ | — | $ | — | ||||||||||||||||||
Total | $ | 928 | $ | — | $ | — | $ | — | $ | (928 | ) | $ | — | $ | — | $ | — |
* The Fund recognizes investments and derivatives transferred into Level 3 at the value at the begining of the period and transferred out of Level 3 at the value at the end of the period.
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are inclu ded with the net realized and unrealized gain or loss on investment securities.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on Taiwan-source interest and dividend income are withheld in accordance with applicable Taiwanese law.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if paid by the shareholders of the Fund.
11
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (15,146,428 | ) | ||||
2/28/2018 | (13,155,043 | ) | |||||
Total | $ | (28,301,471 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 81,489,100 | $ | 2,936,767 | $ | (3,630,417 | ) | $ | (693,650 | ) |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally
12
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which co llection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis. Taiwanese companies typically declare dividends in the third calendar quarter of each year.
Dividend and interest income generated in Taiwan is subject to a 20% withholding tax. Stock dividends received (except those which have resulted from capitalization of capital surplus) are taxable at 20% of the par value of the stock dividends received.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds.
Brown Brothers Harriman & Co. ("BBH") serves as the Fund's custodian and fund accounting agent. State Street Bank and Trust Company ("State Street") serves as the Fund's transfer agent. BBH's and State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
For the period ended August 31, 2010, the premium on cash purchases of Fund shares was 0.15% of the amount invested and the fee on cash redemptions was 0.45% of the amount redeemed. Purchase premiums and redemption fees are paid to and retained by a Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on
13
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by t he Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with the Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund's investments.
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement
14
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
to pay for securities prior to receipt) may expose the Fund to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund's investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund's investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries. Certain characteristics of Taiwan's economy and geographic location also make foreign investment risk particularly pronounced for the Fund. For example, Taiwan is a small island state with few raw material resources and limited land area and is reliant on imports for its commodity needs. Any fluctuations or shortages in the commodity markets could have a negative impact on the Taiwanese economy. Also, rising labor costs and increasing environmental consciousness have led some labor-intensive industries to relocate to countries with cheaper work forces, and continued labor outsourcing may adversely affect the Taiwanese economy. Taiwan's economy also is intricately linked with economies of other Asian countries, which, similar to emerging market economies, are often characterized by over-extension of credit, frequent and pronounced currency fluctuations, devaluations and restrictions, rising unemployment, rapid fluctuation in, among other things, inflation, reliance on exports, and less efficient markets. Currency devaluations in any one country can have a significant effect on the entire region. Recently, the markets in some Asian countries have suffered significant downturns as well as significant volatility. Furthermore, increased political and social unrest in some Asian countries could cause further economic and market uncertainty in the entire region. In particular, the Taiwanese economy is dependent on the economies of Asia, mainly those of Japan and China, but also the United States as key trading partners. Reduction in spending by any of these countries on Taiwanese products and services or negative changes in any of these economies may have an adverse impact on the Taiwanese economy. Taiwan's geographic proximity to the People's Republic of China and Taiwan's history of political contention with China have resulted in ongoing tensions with China, including the continual risk of war with China. These tensions may materially affect the Taiwanese economy and securities markets. All of these risks could reduce the value of an investment in Taiwan Fund.
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
• Focused Investment Risk — Focusing investments in countries, regions, sectors or companies with high positive correlations to one another creates additional risk. This risk is particularly pronounced for the Fund because it principally invests in investments tied economically to a single country.
• Market Disruption and Geopolitical Risk — Geopolitical events may disrupt securities markets and adversely affect global economies and markets. Those events as well as other changes in foreign and domestic economic and political conditions could adversely affect the value of the Fund's investments.
15
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
• Large Shareholder Risk — To the extent that shares of the Fund are held by large shareholders (e.g., institutional investors, asset allocation funds, or other GMO Funds), the Fund is subject to the risk that these shareholders will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis.
Other principal risks of an investment in the Fund include Liquidity Risk (difficulty in selling Fund investments at desirable prices and/or increased likelihood of honoring redemption requests in-kind); Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund's securities); Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Leveraging Risk (increased risk of loss from use of reverse repurchase agreements and other derivatives and securities lending); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal system s or controls will cause losses for the Fund or hinder Fund operations); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps or other derivatives on an index, a single security or a basket of securities to gain investment exposures (e.g., by selling protection under a credit default swap). The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). For example, the Fund may use credit default swaps to take a short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its
16
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund's exposure to the credit of an issuer through the debt instrument, but adjust the Fund's interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed versus variable rates and shorter duration versus longer duration exposure. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedin gs. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be secured by collateral, that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and even ts affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a
17
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. The Fund had no forward currency contracts outstanding at the end of the period.
18
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because regular trading on many foreign exchanges closes prior to the close of the NYSE, closing prices for foreign futures contracts on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures contracts using fair value prices, which are based on adjustments to local closing prices, and supplied by a third party vendor based on that vendor's proprietary models. The Fund had no futures contracts outstanding at the end of the period.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of
19
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the
20
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
21
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.81% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares.
The Manager has contractually agreed to reimburse the Fund for an amount equal to the fees and expenses incurred indirectly by the Fund through its investment in other GMO Funds (excluded those Funds' Excluded Fund Fees and Expenses). "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company unde r the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). This expense limitation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $655 and $276, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
22
GMO Taiwan Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended August 31, 2010 aggregated $52,569,919 and $69,553,613, respectively.
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, all of the outstanding shares of the Fund were held by two shareholders, each holding more than 10% of the Fund's outstanding shares.
As of August 31, 2010, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and all of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 1,847,865 | $ | 33,368,372 | 1,414,619 | $ | 22,313,972 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 47,319 | 896,232 | 202,585 | 3,367,217 | |||||||||||||||
Shares repurchased | (2,648,796 | ) | (50,435,790 | ) | (5,537,531 | ) | (94,211,136 | ) | |||||||||||
Purchase premiums | — | 50,128 | — | 25,853 | |||||||||||||||
Redemption fees | — | 226,790 | — | 400,603 | |||||||||||||||
Net increase (decrease) | (753,612 | ) | $ | (15,894,268 | ) | (3,920,327 | ) | $ | (68,103,491 | ) |
23
GMO Taiwan Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three-, five- and seven-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
24
GMO Taiwan Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparis on to the Manager's separate account clients and the expenses and risks borne by the Manager as a result of the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by , for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the
25
GMO Taiwan Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
26
GMO Taiwan Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including indirect management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 1.55 | % | $ | 1,000.00 | $ | 1,053.70 | $ | 8.02 | |||||||||||
2) Hypothetical | 1.55 | % | $ | 1,000.00 | $ | 1,017.39 | $ | 7.88 |
* Expenses are calculated using the Class's annualized net expense ratio for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
27
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 96.4 | % | |||||
Short-Term Investments | 2.6 | ||||||
Preferred Stocks | 0.6 | ||||||
Options Purchased | 0.1 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Written Options | (0.0 | ) | |||||
Other | 0.3 | ||||||
100.0 | % | ||||||
Country Summary | % of Equity Investments* | ||||||
Japan | 24.9 | % | |||||
United Kingdom | 22.5 | ||||||
France | 9.9 | ||||||
Switzerland | 6.7 | ||||||
Italy | 6.5 | ||||||
Germany | 4.6 | ||||||
Singapore | 3.8 | ||||||
Sweden | 3.6 | ||||||
Australia | 3.2 | ||||||
Netherlands | 3.1 | ||||||
Spain | 1.7 | ||||||
Hong Kong | 1.6 | ||||||
Belgium | 1.4 | ||||||
Denmark | 1.3 | ||||||
Canada | 1.1 | ||||||
Austria | 1.0 | ||||||
Finland | 0.7 | ||||||
Greece | 0.7 | ||||||
Ireland | 0.7 | ||||||
Norway | 0.7 | ||||||
New Zealand | 0.3 | ||||||
Malta | 0.0 | ||||||
100.0 | % |
* Equity investments may consist of common stocks, preferred stocks and rights and warrants. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
1
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2010 (Unaudited)
Industry Group Summary | % of Equity Investments* | ||||||
Pharmaceuticals, Biotechnology & Life Sciences | 15.3 | % | |||||
Banks | 11.3 | ||||||
Energy | 10.6 | ||||||
Capital Goods | 10.0 | ||||||
Materials | 8.0 | ||||||
Telecommunication Services | 5.7 | ||||||
Food, Beverage & Tobacco | 4.9 | ||||||
Automobiles & Components | 4.3 | ||||||
Utilities | 4.1 | ||||||
Retailing | 3.4 | ||||||
Consumer Durables & Apparel | 2.9 | ||||||
Diversified Financials | 2.4 | ||||||
Technology Hardware & Equipment | 2.3 | ||||||
Real Estate | 2.2 | ||||||
Media | 2.1 | ||||||
Food & Staples Retailing | 1.6 | ||||||
Household & Personal Products | 1.6 | ||||||
Transportation | 1.4 | ||||||
Software & Services | 1.4 | ||||||
Semiconductors & Semiconductor Equipment | 1.1 | ||||||
Consumer Services | 1.0 | ||||||
Insurance | 0.9 | ||||||
Health Care Equipment & Services | 0.8 | ||||||
Commercial & Professional Services | 0.7 | ||||||
100.0 | % |
* Equity investments may consist of common stocks, preferred stocks and rights and warrants. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
2
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 96.4% | |||||||||||
Australia — 3.1% | |||||||||||
301,186 | BlueScope Steel Ltd * | 578,343 | |||||||||
1,846,894 | Charter Hall Office (REIT) | 404,686 | |||||||||
111,319 | Commonwealth Bank of Australia | 5,003,185 | |||||||||
1,147,737 | Goodman Group (REIT) | 651,918 | |||||||||
343,612 | GPT Group (REIT) | 917,074 | |||||||||
258,757 | Intoll Group | 340,001 | |||||||||
302,836 | Mirvac Group (REIT) | 362,365 | |||||||||
153,875 | Qantas Airways Ltd * | 345,488 | |||||||||
16,086 | Rio Tinto Ltd | 1,010,280 | |||||||||
324,485 | Stockland (REIT) | 1,142,247 | |||||||||
150,795 | Suncorp-Metway Ltd | 1,123,515 | |||||||||
56,959 | TABCORP Holdings Ltd | 324,245 | |||||||||
704,441 | Telstra Corp Ltd | 1,730,189 | |||||||||
32,916 | Westfield Group (REIT) | 367,936 | |||||||||
33,113 | Woodside Petroleum Ltd | 1,238,438 | |||||||||
14,458 | Woolworths Ltd | 357,383 | |||||||||
Total Australia | 15,897,293 | ||||||||||
Austria — 1.0% | |||||||||||
4,473 | BWIN Interactive Entertainment AG | 213,983 | |||||||||
27,217 | Erste Group Bank AG | 981,592 | |||||||||
183,043 | Immofinanz AG * | 595,748 | |||||||||
88,088 | Immofinanz AG (Entitlement Shares) | — | |||||||||
58,522 | OMV AG | 1,881,430 | |||||||||
15,218 | Raiffeisen International Bank Holding | 618,884 | |||||||||
20,435 | Voestalpine AG | 604,486 | |||||||||
Total Austria | 4,896,123 | ||||||||||
Belgium — 1.4% | |||||||||||
254,999 | Ageas | 641,710 | |||||||||
13,810 | Anheuser-Busch InBev NV | 715,293 | |||||||||
34,388 | Belgacom SA | 1,222,566 |
See accompanying notes to the financial statements.
3
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Belgium — continued | |||||||||||
4,021 | Colruyt SA | 993,827 | |||||||||
11,855 | Delhaize Group | 792,346 | |||||||||
110,056 | Dexia SA * | 456,812 | |||||||||
34,359 | KBC Groep NV * | 1,418,426 | |||||||||
6,642 | Mobistar SA | 371,548 | |||||||||
16,435 | Umicore | 569,058 | |||||||||
Total Belgium | 7,181,586 | ||||||||||
Canada — 1.1% | |||||||||||
16,700 | BCE Inc | 522,604 | |||||||||
72,500 | EnCana Corp | 1,988,676 | |||||||||
11,900 | Magna International Inc Class A | 926,690 | |||||||||
28,100 | Penn West Energy Trust | 527,822 | |||||||||
24,100 | Sun Life Financial Inc | 565,916 | |||||||||
34,600 | Teck Resources Ltd Class B | 1,157,389 | |||||||||
Total Canada | 5,689,097 | ||||||||||
Denmark — 1.2% | |||||||||||
52,110 | Danske Bank A/S * | 1,151,000 | |||||||||
61,404 | Novo-Nordisk A/S Class B | 5,246,348 | |||||||||
Total Denmark | 6,397,348 | ||||||||||
Finland — 0.7% | |||||||||||
7,579 | Kone Oyj Class B | 347,603 | |||||||||
24,298 | Metso Oyj | 884,249 | |||||||||
90,713 | Nokia Oyj | 772,969 | |||||||||
11,128 | Rautaruukki Oyj | 194,822 | |||||||||
12,300 | Sampo Oyj Class A | 295,500 | |||||||||
51,401 | Stora Enso Oyj Class R | 393,948 | |||||||||
19,239 | Tieto Oyj | 315,621 | |||||||||
41,573 | UPM–Kymmene Oyj | 568,900 | |||||||||
Total Finland | 3,773,612 |
See accompanying notes to the financial statements.
4
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
France — 9.6% | |||||||||||
7,191 | Air Liquide SA | 743,785 | |||||||||
21,336 | ArcelorMittal | 618,396 | |||||||||
99,312 | BNP Paribas | 6,152,515 | |||||||||
2,944 | Bongrain SA | 195,663 | |||||||||
5,500 | Carrefour SA | 248,481 | |||||||||
9,357 | Casino Guichard-Perrachon SA | 755,900 | |||||||||
9,962 | Compagnie de Saint-Gobain | 363,872 | |||||||||
12,581 | Dassault Systemes SA | 756,918 | |||||||||
18,017 | Essilor International SA | 1,090,069 | |||||||||
1,613 | Esso SAF | 204,144 | |||||||||
10,133 | Eutelsat Communications | 363,380 | |||||||||
41,468 | France Telecom SA | 842,907 | |||||||||
7,521 | GDF Suez | 231,926 | |||||||||
16,002 | GDF Suez VVPR Strip * | 20 | |||||||||
6,197 | Hermes International | 1,119,923 | |||||||||
10,797 | L'Oreal SA | 1,069,078 | |||||||||
4,660 | Lafarge SA | 213,786 | |||||||||
20,102 | Lagardere SCA | 721,066 | |||||||||
17,754 | Legrand SA | 537,806 | |||||||||
18,189 | LVMH Moet Hennessy Louis Vuitton SA | 2,107,342 | |||||||||
5,550 | Nexans SA | 331,443 | |||||||||
4,045 | NYSE Euronext | 112,828 | |||||||||
25,597 | PagesJaunes Groupe | 242,472 | |||||||||
7,439 | Peugeot SA * | 194,393 | |||||||||
10,826 | PPR | 1,403,408 | |||||||||
10,209 | Publicis Groupe SA | 426,206 | |||||||||
32,694 | Renault SA * | 1,320,730 | |||||||||
58,430 | Rhodia SA | 1,092,163 | |||||||||
18,058 | Safran SA | 443,499 | |||||||||
182,846 | Sanofi-Aventis | 10,467,257 | |||||||||
9,232 | Schneider Electric SA | 975,667 | |||||||||
8,149 | SES SA | 186,653 | |||||||||
67,478 | Societe Generale | 3,402,776 | |||||||||
17,205 | Technip SA | 1,121,694 |
See accompanying notes to the financial statements.
5
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
France — continued | |||||||||||
150,592 | Total SA | 7,004,699 | |||||||||
6,300 | Vallourec SA | 539,314 | |||||||||
93,352 | Vivendi SA | 2,165,899 | |||||||||
Total France | 49,768,078 | ||||||||||
Germany — 3.8% | |||||||||||
26,907 | Aixtron AG | 664,487 | |||||||||
16,187 | Aurubis AG | 642,202 | |||||||||
40,524 | BASF AG | 2,131,391 | |||||||||
14,667 | Bayerische Motoren Werke AG | 770,647 | |||||||||
5,547 | Beiersdorf AG | 296,551 | |||||||||
42,179 | Daimler AG (Registered) * | 2,040,621 | |||||||||
20,072 | Deutsche Post AG (Registered) | 327,570 | |||||||||
21,914 | Deutsche Telekom AG (Registered) | 287,888 | |||||||||
61,333 | E.ON AG | 1,721,448 | |||||||||
230,544 | Infineon Technologies AG * | 1,278,444 | |||||||||
15,194 | Kloeckner & Co AG * | 296,986 | |||||||||
22,034 | Lanxess AG | 960,267 | |||||||||
8,791 | MAN SE | 755,997 | |||||||||
17,999 | MTU Aero Engines Holding AG | 1,000,442 | |||||||||
2,340 | Muenchener Rueckversicherungs-Gesellschaft AG (Registered) | 298,193 | |||||||||
4,768 | RWE AG | 312,079 | |||||||||
17,623 | Salzgitter AG | 1,071,081 | |||||||||
54,938 | SAP AG | 2,392,306 | |||||||||
7,692 | Siemens AG (Registered) | 697,264 | |||||||||
6,911 | Software AG | 725,516 | |||||||||
10,315 | Stada Arzneimittel AG | 314,947 | |||||||||
37,961 | Suedzucker AG | 690,941 | |||||||||
Total Germany | 19,677,268 | ||||||||||
Greece — 0.6% | |||||||||||
102,697 | Alpha Bank A.E. * | 657,535 | |||||||||
25,684 | EFG Eurobank Ergasias * | 165,801 | |||||||||
76,520 | National Bank of Greece SA * | 950,058 |
See accompanying notes to the financial statements.
6
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Greece — continued | |||||||||||
80,491 | OPAP SA | 1,221,808 | |||||||||
20,009 | Public Power Corp SA | 284,161 | |||||||||
Total Greece | 3,279,363 | ||||||||||
Hong Kong — 1.6% | |||||||||||
316,500 | BOC Hong Kong Holdings Ltd | 835,836 | |||||||||
295,400 | CLP Holdings Ltd | 2,255,329 | |||||||||
160,365 | Esprit Holdings Ltd | 904,782 | |||||||||
260,000 | Hong Kong Electric Holdings Ltd | 1,584,521 | |||||||||
143,000 | Hong Kong & China Gas | 346,556 | |||||||||
112,000 | Li & Fung Ltd | 565,514 | |||||||||
715,000 | Pacific Basin Shipping Ltd | 491,121 | |||||||||
55,000 | Swire Pacific Ltd | 665,204 | |||||||||
175,000 | Yue Yuen Industrial Holdings | 574,897 | |||||||||
Total Hong Kong | 8,223,760 | ||||||||||
Ireland — 0.7% | |||||||||||
141,627 | C&C Group Plc | 551,574 | |||||||||
70,498 | CRH Plc | 1,085,444 | |||||||||
28,028 | DCC Plc | 701,346 | |||||||||
29,600 | Kerry Group Plc Class A | 971,849 | |||||||||
20,438 | Smurfit Kappa Group Plc * | 174,575 | |||||||||
Total Ireland | 3,484,788 | ||||||||||
Italy — 6.3% | |||||||||||
13,233 | Atlantia SPA | 248,710 | |||||||||
34,987 | Azimut Holding SPA | 299,161 | |||||||||
16,309 | Benetton Group SPA | 109,996 | |||||||||
90,968 | Bulgari SPA | 669,390 | |||||||||
1,157,501 | Enel SPA | 5,492,895 | |||||||||
477,518 | ENI SPA | 9,434,846 | |||||||||
35,304 | Fondiaria–Sai SPA | 333,687 | |||||||||
254,826 | Intesa San Paolo | 710,056 | |||||||||
76,707 | Maire Tecnimont SPA | 255,812 |
See accompanying notes to the financial statements.
7
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Italy — continued | |||||||||||
223,415 | Mediaset SPA | 1,379,924 | |||||||||
109,186 | Mediobanca SPA * | 854,535 | |||||||||
134,224 | Milano Assicurazioni SPA | 232,227 | |||||||||
165,071 | Parmalat SPA | 396,091 | |||||||||
37,165 | Recordati SPA | 291,826 | |||||||||
48,378 | Saipem SPA | 1,683,905 | |||||||||
250,459 | Snam Rete Gas SPA | 1,157,847 | |||||||||
870,316 | Telecom Italia SPA | 1,172,741 | |||||||||
1,553,914 | Telecom Italia SPA-Di RISP | 1,704,620 | |||||||||
44,557 | Tenaris SA | 751,454 | |||||||||
355,286 | Terna SPA | 1,426,244 | |||||||||
1,673,633 | UniCredit SPA | 3,901,353 | |||||||||
Total Italy | 32,507,320 | ||||||||||
Japan — 24.2% | |||||||||||
5,200 | ABC-Mart Inc | 155,942 | |||||||||
100 | Advance Residence Investment Corp (REIT) * | 156,284 | |||||||||
83,300 | Aeon Co Ltd | 888,037 | |||||||||
98,550 | Aiful Corp * | 123,130 | |||||||||
42,100 | Aisin Seiki Co Ltd | 1,087,575 | |||||||||
54,300 | Alps Electric Co Ltd * | 375,218 | |||||||||
13,000 | Asahi Breweries Ltd | 245,045 | |||||||||
187,000 | Asahi Glass Co Ltd | 1,824,594 | |||||||||
104,000 | Asahi Kasei Corp | 513,950 | |||||||||
81,400 | Astellas Pharma Inc | 2,810,955 | |||||||||
35,200 | Canon Inc | 1,441,105 | |||||||||
205,000 | Cosmo Oil Co Ltd | 490,209 | |||||||||
337 | CyberAgent Inc | 540,613 | |||||||||
49,500 | Daiei Inc * | 201,028 | |||||||||
184,000 | Daikyo Inc * | 258,743 | |||||||||
86,000 | Dainippon Screen Manufacturing Co Ltd * | 377,303 | |||||||||
37,200 | Daito Trust Construction Co Ltd | 2,136,234 | |||||||||
24,700 | Dena Co Ltd | 743,538 | |||||||||
132,000 | Denki Kagaku Kogyo K K | 531,463 |
See accompanying notes to the financial statements.
8
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
8,700 | Disco Corp | 434,566 | |||||||||
20,700 | Don Quijote Co Ltd | 506,351 | |||||||||
142,000 | Dowa Holdings Co Ltd | 733,544 | |||||||||
107,000 | Ebara Corp * | 423,894 | |||||||||
29,900 | Eisai Co Ltd | 1,078,658 | |||||||||
22,600 | Electric Power Development Co Ltd | 726,750 | |||||||||
52,900 | Elpida Memory Inc * | 634,272 | |||||||||
23,100 | Fanuc Ltd | 2,486,068 | |||||||||
7,600 | Fast Retailing Co Ltd | 1,049,720 | |||||||||
73,000 | Fujikura Ltd | 316,561 | |||||||||
35,000 | Fujitsu Ltd | 242,348 | |||||||||
216,000 | Fuji Electric Holdings Co Ltd | 535,105 | |||||||||
157,000 | Fuji Heavy Industries Ltd * | 878,705 | |||||||||
23,500 | Fuji Oil Co Ltd | 362,033 | |||||||||
4,200 | Gree Inc | 309,321 | |||||||||
91,000 | Hanwa Co Ltd | 329,322 | |||||||||
29,100 | Hitachi Construction Machinery Co Ltd | 578,943 | |||||||||
443,000 | Hitachi Ltd * | 1,800,232 | |||||||||
108,300 | Honda Motor Co Ltd | 3,587,138 | |||||||||
30,800 | Hosiden Corp | 287,108 | |||||||||
85 | INPEX Corp | 384,888 | |||||||||
252,000 | Isuzu Motors Ltd | 836,065 | |||||||||
252,000 | Itochu Corp | 2,054,384 | |||||||||
345 | Japan Retail Fund Investment Corp (REIT) | 461,698 | |||||||||
4,900 | JFE Holdings Inc | 144,584 | |||||||||
576,600 | JX Holdings Inc * | 2,919,285 | |||||||||
22,460 | K's Holdings Corp | 485,191 | |||||||||
322,000 | Kajima Corp | 753,820 | |||||||||
62,000 | Kamigumi Co Ltd | 449,373 | |||||||||
88,900 | Kao Corp | 2,069,513 | |||||||||
229,000 | Kawasaki Kisen Kaisha Ltd * | 852,840 | |||||||||
364 | KDDI Corp | 1,755,449 | |||||||||
187,000 | Kobe Steel Ltd | 386,864 | |||||||||
59,400 | Komatsu Ltd | 1,206,098 |
See accompanying notes to the financial statements.
9
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
7,800 | Kyocera Corp | 662,540 | |||||||||
13,000 | Kyudenko Corp | 66,527 | |||||||||
7,700 | Lawson Inc | 350,300 | |||||||||
127,600 | Leopalace21 Corp * | 272,886 | |||||||||
231,000 | Marubeni Corp | 1,189,288 | |||||||||
414,000 | Mazda Motor Corp | 925,575 | |||||||||
254,000 | Mitsubishi Chemical Holdings Corp | 1,201,756 | |||||||||
120,600 | Mitsubishi Corp | 2,584,147 | |||||||||
142,000 | Mitsubishi Electric Corp | 1,133,193 | |||||||||
197,900 | Mitsubishi UFJ Financial Group Inc | 938,345 | |||||||||
20,350 | Mitsubishi UFJ Lease & Finance Co Ltd | 723,408 | |||||||||
63,400 | Mitsui & Co Ltd | 825,310 | |||||||||
356,000 | Mitsui Mining & Smelting Co Ltd | 960,530 | |||||||||
217,000 | Mitsui OSK Lines Ltd | 1,364,012 | |||||||||
1,492,400 | Mizuho Financial Group Inc | 2,288,919 | |||||||||
19,500 | Murata Manufacturing Co Ltd | 926,431 | |||||||||
21,000 | Nagase & Co | 227,699 | |||||||||
178 | Net One Systems Co Ltd | 204,754 | |||||||||
17,100 | Nidec Corp | 1,506,095 | |||||||||
4,200 | Nintendo Co Ltd | 1,164,366 | |||||||||
19,000 | Nippon Corp | 124,440 | |||||||||
72,000 | Nippon Electric Glass Co Ltd | 805,870 | |||||||||
58,900 | Nippon Telegraph & Telephone Corp | 2,532,569 | |||||||||
88,500 | Nippon Yakin Koguo Co Ltd * | 256,028 | |||||||||
228,000 | Nippon Yusen KK | 878,190 | |||||||||
473,200 | Nissan Motor Co Ltd * | 3,606,728 | |||||||||
24,000 | Nisshinbo Holdings Inc | 226,855 | |||||||||
9,550 | Nitori Co Ltd | 832,205 | |||||||||
27,300 | Nitto Denko Corp | 876,093 | |||||||||
2,015 | NTT Docomo Inc | 3,414,467 | |||||||||
111,000 | Obayashi Corp | 422,240 | |||||||||
12,000 | Ono Pharmaceutical Co Ltd | 526,806 | |||||||||
31,020 | ORIX Corp | 2,332,518 | |||||||||
368,000 | Osaka Gas Co Ltd | 1,387,647 |
See accompanying notes to the financial statements.
10
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
83,000 | Pacific Metals Co Ltd | 596,562 | |||||||||
169,100 | Pioneer Corp * | 501,519 | |||||||||
10,440 | Point Inc | 487,994 | |||||||||
137,000 | Resona Holdings Inc | 1,353,275 | |||||||||
103,400 | Ricoh Company Ltd | 1,325,240 | |||||||||
39,500 | Round One Corp | 171,052 | |||||||||
14,200 | Ryohin Keikaku Co Ltd | 496,120 | |||||||||
8,700 | Ryosan Co | 221,541 | |||||||||
28,100 | Sankyo Co Ltd | 1,421,428 | |||||||||
22,500 | Secom Co Ltd | 981,265 | |||||||||
23,500 | Sega Sammy Holdings Inc | 348,960 | |||||||||
91,400 | Seven & I Holdings Co Ltd | 2,085,234 | |||||||||
4,600 | Shimamura Co Ltd | 418,862 | |||||||||
4,300 | SMC Corp | 530,218 | |||||||||
20,200 | SoftBank Corp | 579,015 | |||||||||
344,500 | Sojitz Corp | 554,131 | |||||||||
23,700 | Sony Corp | 664,264 | |||||||||
201,500 | Sumitomo Corp | 2,308,303 | |||||||||
19,800 | Sumitomo Electric Industries Ltd | 212,224 | |||||||||
10,000 | Sumitomo Metal Mining Co Ltd | 128,392 | |||||||||
305,423 | Sumitomo Trust & Banking Co Ltd | 1,619,799 | |||||||||
332,000 | Taisei Corp | 654,956 | |||||||||
19,000 | Taisho Pharmaceutical Co Ltd | 379,464 | |||||||||
38,000 | Taiyo Yuden Co Ltd | 419,235 | |||||||||
160,300 | Takeda Pharmaceutical Co Ltd | 7,367,616 | |||||||||
10,400 | TDK Corp | 545,642 | |||||||||
7,000 | Tokyo Electron Ltd | 328,426 | |||||||||
112,000 | Tokyo Gas Co Ltd | 521,983 | |||||||||
96,500 | Tokyo Steel Manufacturing Co | 1,053,239 | |||||||||
165,000 | Tokyo Tatemono Co Ltd | 577,261 | |||||||||
69,000 | TonenGeneral Sekiyu KK | 623,418 | |||||||||
248,000 | Toshiba Corp * | 1,165,685 | |||||||||
150,000 | Tosoh Corp | 375,846 | |||||||||
101,900 | Toyota Motor Corp | 3,457,040 |
See accompanying notes to the financial statements.
11
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Japan — continued | |||||||||||
68,600 | Toyota Tsusho Corp | 981,800 | |||||||||
6,900 | Unicharm Corp | 841,202 | |||||||||
92,000 | UNY Co Ltd | 675,564 | |||||||||
7,780 | USS Co Ltd | 574,005 | |||||||||
1,632 | Yahoo Japan Corp | 586,388 | |||||||||
20,420 | Yamada Denki Co Ltd | 1,270,431 | |||||||||
64,500 | Yamaha Motor Co Ltd * | 865,606 | |||||||||
Total Japan | 124,970,599 | ||||||||||
Malta — 0.0% | |||||||||||
1,718,063 | BGP Holdings Plc | — | |||||||||
Netherlands — 3.0% | |||||||||||
36,011 | ASML Holding NV | 891,050 | |||||||||
6,178 | Boskalis Westminster | 229,635 | |||||||||
27,844 | CSM | 722,937 | |||||||||
3,771 | Fugro NV | 211,306 | |||||||||
4,124 | Heineken Holding NV | 158,268 | |||||||||
34,901 | Heineken NV | 1,559,908 | |||||||||
660,608 | ING Groep NV * | 5,833,546 | |||||||||
27,505 | Koninklijke Ahold NV | 337,647 | |||||||||
40,353 | Koninklijke BAM Groep NV | 200,717 | |||||||||
29,921 | Koninklijke DSM NV | 1,238,146 | |||||||||
126,717 | Koninklijke Philips Electronics NV | 3,531,194 | |||||||||
10,131 | TNT NV | 256,058 | |||||||||
18,561 | Unilever NV | 495,310 | |||||||||
Total Netherlands | 15,665,722 | ||||||||||
New Zealand — 0.3% | |||||||||||
125,132 | Fletcher Building Ltd | 656,965 | |||||||||
658,907 | Telecom Corp of New Zealand | 946,479 | |||||||||
Total New Zealand | 1,603,444 |
See accompanying notes to the financial statements.
12
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Norway — 0.7% | |||||||||||
23,130 | Acergy SA | 352,910 | |||||||||
155,600 | DnB NOR ASA | 1,708,572 | |||||||||
20,394 | Frontline Ltd | 538,953 | |||||||||
11,446 | Statoil ASA | 214,202 | |||||||||
50,200 | Telenor ASA | 732,181 | |||||||||
Total Norway | 3,546,818 | ||||||||||
Singapore — 3.7% | |||||||||||
805,000 | CapitaCommercial Trust (REIT) | 833,296 | |||||||||
228,000 | Cosco Corp | 266,829 | |||||||||
61,000 | DBS Group Holdings Ltd | 626,579 | |||||||||
454,000 | Ezra Holdings Ltd | 592,829 | |||||||||
449,000 | Genting Singapore Plc * | 561,560 | |||||||||
4,598,000 | Golden Agri-Resources Ltd | 1,907,938 | |||||||||
210,000 | Ho Bee Investment Ltd | 225,502 | |||||||||
334,000 | Indofood Agri Resources Ltd * | 569,794 | |||||||||
370,200 | Jaya Holdings Ltd * | 184,860 | |||||||||
154,000 | Keppel Corp Ltd | 1,020,585 | |||||||||
161,000 | Keppel Land Ltd | 462,488 | |||||||||
747,500 | Neptune Orient Lines Ltd * | 1,057,482 | |||||||||
952,000 | Noble Group Ltd | 1,110,151 | |||||||||
216,000 | Oversea-Chinese Banking Corp Ltd | 1,385,175 | |||||||||
448,000 | SembCorp Marine Ltd | 1,263,593 | |||||||||
48,000 | Singapore Airlines Ltd | 535,684 | |||||||||
186,000 | Singapore Exchange Ltd | 1,034,409 | |||||||||
335,000 | Singapore Press Holdings Ltd | 1,010,328 | |||||||||
829,670 | Singapore Telecommunications | 1,890,496 | |||||||||
603,000 | Suntec Real Estate Investment Trust (REIT) | 632,730 | |||||||||
391,000 | Swiber Holdings Ltd * | 278,007 | |||||||||
87,000 | United Overseas Bank Ltd | 1,203,971 | |||||||||
66,000 | Venture Corp Ltd | 423,984 | |||||||||
Total Singapore | 19,078,270 |
See accompanying notes to the financial statements.
13
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Spain — 1.6% | |||||||||||
107,791 | Banco Bilbao Vizcaya Argentaria SA | 1,298,372 | |||||||||
90,290 | Banco Popular Espanol SA | 534,161 | |||||||||
212,959 | Banco Santander SA | 2,479,755 | |||||||||
19,198 | Gas Natural SDG SA | 289,183 | |||||||||
22,039 | Inditex SA | 1,465,661 | |||||||||
104,342 | Repsol YPF SA | 2,375,081 | |||||||||
Total Spain | 8,442,213 | ||||||||||
Sweden — 3.5% | |||||||||||
41,320 | Alfa Laval AB | 602,210 | |||||||||
39,690 | Assa Abloy AB Class B | 790,239 | |||||||||
33,169 | Atlas Copco AB | 452,973 | |||||||||
93,076 | Atlas Copco AB Class A | 1,410,116 | |||||||||
58,416 | Boliden AB | 659,446 | |||||||||
24,701 | Electrolux AB Class B | 474,480 | |||||||||
78,570 | Hennes & Mauritz AB Class B | 2,560,447 | |||||||||
6,996 | Modern Times Group AB Class B | 401,036 | |||||||||
141,166 | Nordea Bank AB | 1,258,838 | |||||||||
123,747 | Sandvik AB | 1,460,042 | |||||||||
11,179 | Scania AB Class B | 205,565 | |||||||||
168,930 | Skandinaviska Enskilda Banken AB Class A | 1,045,858 | |||||||||
44,293 | Skanska AB Class B | 678,540 | |||||||||
25,768 | SKF AB Class B | 460,543 | |||||||||
60,742 | Svenska Handelsbanken AB Class A | 1,578,697 | |||||||||
186,906 | Swedbank AB Class A * | 2,083,724 | |||||||||
25,856 | Swedish Match AB | 594,596 | |||||||||
29,390 | Tele2 AB Class B | 528,497 | |||||||||
56,462 | Trelleborg AB Class B | 373,731 | |||||||||
41,944 | Volvo AB Class B * | 483,569 | |||||||||
Total Sweden | 18,103,147 | ||||||||||
Switzerland — 6.5% | |||||||||||
2,523 | Bobst Group AG (Registered) * | 94,842 | |||||||||
72,126 | Compagnie Financiere Richemont SA Class A | 2,789,266 |
See accompanying notes to the financial statements.
14
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Switzerland — continued | |||||||||||
173,968 | Nestle SA (Registered) | 8,993,413 | |||||||||
229,769 | Novartis AG (Registered) | 12,044,886 | |||||||||
41,867 | Roche Holding AG (Non Voting) | 5,679,240 | |||||||||
6,641 | Swatch Group AG | 2,130,330 | |||||||||
2,252 | Swisscom AG (Registered) | 874,123 | |||||||||
10,518 | Synthes Inc | 1,156,769 | |||||||||
Total Switzerland | 33,762,869 | ||||||||||
United Kingdom — 21.8% | |||||||||||
47,044 | 3i Group Plc | 187,110 | |||||||||
31,655 | Aggreko Plc | 686,260 | |||||||||
79,832 | Amlin Plc | 495,393 | |||||||||
77,340 | Anglo American Plc | 2,758,424 | |||||||||
28,798 | Antofagasta Plc | 452,982 | |||||||||
176,317 | ARM Holdings Plc | 983,919 | |||||||||
267,090 | AstraZeneca Plc | 13,128,913 | |||||||||
716,902 | Barclays Plc | 3,291,312 | |||||||||
153,272 | BG Group Plc | 2,454,917 | |||||||||
85,762 | BHP Billiton Plc | 2,391,527 | |||||||||
336,743 | BP Plc | 1,943,426 | |||||||||
42,816 | British American Tobacco Plc | 1,450,739 | |||||||||
32,212 | British Sky Broadcasting Group Plc | 347,724 | |||||||||
997,210 | BT Group Plc | 2,033,605 | |||||||||
126,276 | Burberry Group Plc | 1,639,509 | |||||||||
54,926 | Capita Group Plc | 590,741 | |||||||||
7,965 | Carnival Plc | 257,572 | |||||||||
152,608 | Centrica Plc | 759,193 | |||||||||
197,295 | Cobham Plc | 630,598 | |||||||||
173,689 | Compass Group Plc | 1,416,069 | |||||||||
40,149 | Cookson Group Plc * | 256,920 | |||||||||
114,550 | Diageo Plc | 1,861,937 | |||||||||
147,071 | Drax Group Plc | 891,623 | |||||||||
575,237 | DSG International Plc * | 211,357 | |||||||||
60,184 | Eurasian Natural Resources Corp | 777,708 |
See accompanying notes to the financial statements.
15
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
46,743 | Experian Plc | 444,304 | |||||||||
885,736 | GlaxoSmithKline Plc | 16,529,081 | |||||||||
259,984 | Home Retail Group Plc | 866,486 | |||||||||
181,211 | HSBC Holdings Plc | 1,774,902 | |||||||||
10,148 | Imperial Tobacco Group Plc | 279,282 | |||||||||
77,582 | Inchcape Plc * | 303,620 | |||||||||
26,347 | Intertek Group Plc | 678,502 | |||||||||
40,448 | J Sainsbury Plc | 225,882 | |||||||||
55,601 | Kazakhmys Plc | 978,625 | |||||||||
1,390,039 | Lloyds Banking Group Plc * | 1,463,145 | |||||||||
206,704 | Man Group Plc | 656,761 | |||||||||
55,775 | Next Plc | 1,686,578 | |||||||||
230,179 | Old Mutual Plc | 447,325 | |||||||||
54,249 | Pearson Plc | 804,451 | |||||||||
35,724 | Petrofac Ltd | 764,374 | |||||||||
271,282 | Punch Taverns Plc * | 332,944 | |||||||||
38,783 | Reckitt Benckiser Group Plc | 1,933,031 | |||||||||
74,895 | Reed Elsevier Plc | 599,342 | |||||||||
165,745 | Rentokil Initial Plc * | 237,608 | |||||||||
130,839 | Rio Tinto Plc | 6,580,947 | |||||||||
62,329 | Rolls–Royce Group Plc * | 527,364 | |||||||||
188,582 | Royal Dutch Shell Group Class A (Amsterdam) | 4,992,721 | |||||||||
147,585 | Royal Dutch Shell Plc A Shares (London) | 3,908,619 | |||||||||
172,455 | Royal Dutch Shell Plc B Shares (London) | 4,395,395 | |||||||||
50,719 | SABMiller Plc | 1,440,223 | |||||||||
156,433 | Sage Group Plc (The) | 585,791 | |||||||||
54,040 | Scottish & Southern Energy Plc | 948,146 | |||||||||
37,145 | Shire Plc | 799,110 | |||||||||
128,530 | Smith & Nephew Plc | 1,063,693 | |||||||||
29,186 | SSL International Plc | 517,633 | |||||||||
72,945 | Standard Chartered Plc | 1,948,003 | |||||||||
88,180 | Tesco Plc | 548,750 | |||||||||
83,170 | Travis Perkins Plc * | 969,362 | |||||||||
14,465 | Unilever Plc | 381,078 |
See accompanying notes to the financial statements.
16
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares / Par Value | Description | Value ($) | |||||||||
United Kingdom — continued | |||||||||||
18,145 | Vedanta Resources Plc | 522,797 | |||||||||
2,250,636 | Vodafone Group Plc | 5,403,907 | |||||||||
253,927 | William Hill Plc | 649,353 | |||||||||
62,961 | Wolseley Plc * | 1,210,839 | |||||||||
66,705 | WPP Plc | 659,459 | |||||||||
106,052 | Xstrata Plc | 1,654,981 | |||||||||
287,645 | Yell Group Plc * | 63,629 | |||||||||
Total United Kingdom | 112,677,521 | ||||||||||
TOTAL COMMON STOCKS (COST $484,541,909) | 498,626,239 | ||||||||||
PREFERRED STOCKS — 0.6% | |||||||||||
Germany — 0.6% | |||||||||||
34,060 | Henkel AG & Co KGaA 1.40% | 1,596,383 | |||||||||
25,650 | Porsche Automobil Holding SE 0.13% | 1,196,335 | |||||||||
36,657 | ProSiebenSat.1 Media AG 0.13% | 657,828 | |||||||||
Total Germany | 3,450,546 | ||||||||||
TOTAL PREFERRED STOCKS (COST $3,698,344) | 3,450,546 | ||||||||||
OPTIONS PURCHASED — 0.1% | |||||||||||
United Kingdom — 0.1% | |||||||||||
GBP | 1,047,916 | Barclays PLC Call, Expires 09/17/10 Strike 280.00 | 399,704 | ||||||||
TOTAL OPTIONS PURCHASED (COST $655,765) | 399,704 | ||||||||||
SHORT-TERM INVESTMENTS — 2.6% | |||||||||||
Time Deposits — 1.8% | |||||||||||
NZD | 47,895 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 3.07%, due 09/01/10 | 33,397 | ||||||||
CHF | 10,478 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.02%, due 09/01/10 | 10,321 |
See accompanying notes to the financial statements.
17
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value | Description | Value ($) | |||||||||
Time Deposits — continued | |||||||||||
HKD | 113,377 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.03%, due 09/01/10 | 14,575 | ||||||||
CAD | 13,853 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.70%, due 09/01/10 | 12,991 | ||||||||
SEK | 70,952 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.20%, due 09/01/10 | 9,599 | ||||||||
NOK | 60,095 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 1.89%, due 09/01/10 | 9,528 | ||||||||
DKK | 56,258 | Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.10%, due 09/01/10 | 9,577 | ||||||||
EUR | 6,205,819 | Citibank (New York) Time Deposit, 0.28%, due 09/01/10 | 7,864,325 | ||||||||
AUD | 91,590 | Deustche Bank (Frankfurt) Time Deposit, 4.44%, due 09/01/10 | 81,488 | ||||||||
USD | 1,172,311 | DnB Nor Bank (Oslo) Time Deposit, 0.21%, due 09/01/10 | 1,172,311 | ||||||||
GBP | 29,763 | HSBC Bank (London) Time Deposit, 0.46%, due 09/01/10 | 45,646 | ||||||||
Total Time Deposits | 9,263,758 | ||||||||||
U.S. Government — 0.8% | |||||||||||
4,336,000 | U.S. Treasury Bill, 0.15%, due 09/23/10 (a) | 4,335,523 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $13,599,281) | 13,599,281 | ||||||||||
TOTAL INVESTMENTS — 99.7% (Cost $502,495,299) | 516,075,770 | ||||||||||
Other Assets and Liabilities (net) — 0.3% | 1,294,110 | ||||||||||
TOTAL NET ASSETS — 100.0% | $ | 517,369,880 |
See accompanying notes to the financial statements.
18
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
A summary of outstanding financial instruments at August 31, 2010 is as follows:
Forward Currency Contracts
Settlement Date | Counterparty | Deliver/ Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||
Buys † | |||||||||||||||||||||||
10/22/10 | Bank of America N.A. | GBP | 2,874,517 | $ | 4,406,984 | $ | (96,809 | ) |
† Fund buys foreign currency; sells USD.
Written Options
Notional Amount | Expiration Date | Description | Premiums | Market Value | |||||||||||||||||||||||
PUT | 1,047,916 | 9/17/2010 | GBP | Barclays PLC, Strike 240.00 | $ | (491,823 | ) | $ | (13,855 | ) |
As of August 31, 2010, for futures contracts, swap agreements and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
See accompanying notes to the financial statements.
19
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Notes to Schedule of Investments:
REIT - Real Estate Investment Trust
* Non-income producing security.
(a) Rate shown represents yield-to-maturity.
Currency Abbreviations:
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
DKK - Danish Krone
EUR - Euro
GBP - British Pound
HKD - Hong Kong Dollar
NOK - Norwegian Krone
NZD - New Zealand Dollar
SEK - Swedish Krona
USD - United States Dollar
See accompanying notes to the financial statements.
20
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments, at value (cost $502,495,299) (Note 2) | $ | 516,075,770 | |||||
Foreign currency, at value (cost $150,010) (Note 2) | 151,205 | ||||||
Dividends receivable | 1,520,775 | ||||||
Foreign taxes receivable | 306,919 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 48,019 | ||||||
Total assets | 518,102,688 | ||||||
Liabilities: | |||||||
Payable for Fund shares repurchased | 171,294 | ||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 227,986 | ||||||
Shareholder service fee | 68,396 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 1,028 | ||||||
Unrealized depreciation on open forward currency contracts (Note 4) | 96,809 | ||||||
Written options outstanding, at value (premiums $491,823) (Note 4) | 13,855 | ||||||
Accrued expenses | 153,440 | ||||||
Total liabilities | 732,808 | ||||||
Net assets | $ | 517,369,880 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 620,842,906 | |||||
Accumulated undistributed net investment income | 5,761,124 | ||||||
Accumulated net realized loss | (122,892,798 | ) | |||||
Net unrealized appreciation | 13,658,648 | ||||||
$ | 517,369,880 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 517,369,880 | |||||
Shares outstanding: | |||||||
Class III | 41,143,393 | ||||||
Net asset value per share: | |||||||
Class III | $ | 12.57 |
See accompanying notes to the financial statements.
21
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $1,048,466) | $ | 9,952,800 | |||||
Interest | 8,430 | ||||||
Total investment income | 9,961,230 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 1,372,557 | ||||||
Shareholder service fee – Class III (Note 5) | 411,767 | ||||||
Custodian and fund accounting agent fees | 192,556 | ||||||
Audit and tax fees | 41,676 | ||||||
Transfer agent fees | 15,364 | ||||||
Legal fees | 13,524 | ||||||
Trustees fees and related expenses (Note 5) | 5,981 | ||||||
Registration fees | 1,012 | ||||||
Miscellaneous | 21,896 | ||||||
Total expenses | 2,076,333 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (281,796 | ) | |||||
Expense reductions (Note 2) | (182 | ) | |||||
Net expenses | 1,794,355 | ||||||
Net investment income (loss) | 8,166,875 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | (2,977,645 | ) | |||||
Closed futures contracts | 375,442 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (13,758 | ) | |||||
Net realized gain (loss) | (2,615,961 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | (20,637,064 | ) | |||||
Open futures contracts | 308,049 | ||||||
Written options | 222,413 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | (240,818 | ) | |||||
Net unrealized gain (loss) | (20,347,420 | ) | |||||
Net realized and unrealized gain (loss) | (22,963,381 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (14,796,506 | ) |
See accompanying notes to the financial statements.
22
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 8,166,875 | $ | 11,114,190 | |||||||
Net realized gain (loss) | (2,615,961 | ) | (73,948,723 | ) | |||||||
Change in net unrealized appreciation (depreciation) | (20,347,420 | ) | 238,686,937 | ||||||||
Net increase (decrease) in net assets from operations | (14,796,506 | ) | 175,852,404 | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | — | (15,061,272 | ) | ||||||||
— | (15,061,272 | ) | |||||||||
Net share transactions (Note 9): | |||||||||||
Class III | (15,012,020 | ) | (27,636,783 | ) | |||||||
Total increase (decrease) in net assets | (29,808,526 | ) | 133,154,349 | ||||||||
Net assets: | |||||||||||
Beginning of period | 547,178,406 | 414,024,057 | |||||||||
End of period (including accumulated undistributed net investment income of $5,761,124 and distributions in excess of net investment income of $2,405,751, respectively) | $ | 517,369,880 | $ | 547,178,406 |
See accompanying notes to the financial statements.
23
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 12.97 | $ | 9.28 | $ | 18.73 | $ | 20.76 | $ | 18.31 | $ | 15.78 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.19 | 0.26 | 0.48 | 0.51 | 0.36 | 0.35 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.59 | ) | 3.80 | (8.92 | ) | 0.20 | (a) | 3.28 | 2.77 | ||||||||||||||||||
Total from investment operations | (0.40 | ) | 4.06 | (8.44 | ) | 0.71 | 3.64 | 3.12 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | — | (0.37 | ) | (0.49 | ) | (0.57 | ) | (0.40 | ) | (0.31 | ) | ||||||||||||||||
From net realized gains | — | — | (0.52 | ) | (2.17 | ) | (0.79 | ) | (0.28 | ) | |||||||||||||||||
Total distributions | — | (0.37 | ) | (1.01 | ) | (2.74 | ) | (1.19 | ) | (0.59 | ) | ||||||||||||||||
Net asset value, end of period | $ | 12.57 | $ | 12.97 | $ | 9.28 | $ | 18.73 | $ | 20.76 | $ | 18.31 | |||||||||||||||
Total Return(b) | (3.08 | )%** | 43.60 | % | (46.71 | )% | 2.28 | % | 20.33 | % | 20.04 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 517,370 | $ | 547,178 | $ | 414,024 | $ | 1,092,346 | $ | 1,105,264 | $ | 829,583 | |||||||||||||||
Net expenses to average daily net assets | 0.65 | %(c)* | 0.65 | %(c) | 0.67 | %(c) | 0.69 | %(c) | 0.69 | % | 0.69 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 2.98 | %* | 2.08 | % | 3.09 | % | 2.33 | % | 1.83 | % | 2.10 | % | |||||||||||||||
Portfolio turnover rate | 23 | %** | 49 | % | 67 | % | 41 | % | 34 | % | 39 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.10 | %* | 0.09 | % | 0.11 | % | 0.09 | % | 0.08 | % | 0.10 | % |
(a) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain (loss) on investments due to the timing of purchases and redemptions of Fund shares in relation to fluctuating market values of the investments of the Fund.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(c) The net expense ratio does not include the effect of expense reductions (Note 2).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
24
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO Tax-Managed International Equities Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks high after-tax total return. The Fund seeks to achieve its investment objective by outperforming its benchmark, the MSCI EAFE Index (after tax). The Fund typically makes equity investments directly and indirectly (e.g., through the GMO Funds in which the Fund invests, collectively referred to as the "underlying funds" or derivatives) in companies tied economically to countries other than the U.S. The term "equity investments" refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts. The Manager uses quantitative models integrated with tax management techniques to provide broad exposure to the international equity markets to investors subject to U.S. federal income tax. Under normal circumstances, the Fund invests directly and indirectly at least 80% of its assets in equity investments.
The Manager relies principally on proprietary quantitative models and also employs fundamental investment techniques to evaluate and select individual equity investments, countries, and currencies. The Manager selects equity investments it believes (i) are undervalued (e.g., equity investments trading at prices below what the Manager believes to be their fundamental value); (ii) have superior fundamentals (e.g., earnings stability); and/or (iii) have shown indications of improving investor sentiment (e.g., positive price movement or upgraded analyst ratings). In selecting countries in which to invest and determining the Fund's currency exposures, the Manager considers many factors, which may include aggregate stock market valuations, global competitiveness, and investor sentiment. The Manager also uses proprietary techniques to adjust the composition of the portfolio for other factors such as position size, country, industry and sector weights, and market capitalization. The factors considered and the models used by the Manager may change over time based on the Manager's assessment of what combination of models and factors are best positioned to achieve the Fund's investment objective.
The Manager considers the tax effects of a proposed purchase or sale of an equity investment in conjunction with the return it forecasts for that equity investment and the contribution it expects that investment to make to the overall portfolio. The Manager may employ a variety of tax management techniques, such as seeking to minimize sales of securities that result in capital gains, selling securities producing long-term capital rather than short-term capital gains, and selling securities to realize capital losses that can be offset against realized capital gains. The tax management techniques employed by the
25
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Manager may change over time depending upon a variety of factors, including current market conditions and the amount of unrealized gains and losses in the Fund's portfolio.
The Fund may make investments tied economically to emerging countries, but these investments generally will represent 15% or less of the Fund's total assets. In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the-counter ("OTC") derivatives, including options, futures, and swap contracts, (i) as a substitute for direct investment; (ii) in an attempt to reduce investment exposures (which may result in a reduction below zero); (iii) to effect transactions intended as substitutes for securities lending; and/or (iv) in an attempt to adjust elements of its investment and/or foreign currency exposure. The Fund's foreign currency exposure may differ from the currency exposure represented by its equity investments. In addition, the Fund may take active overweighted and underweighted positions in particular currencies relative to its benchmark. In addition, the Fund may lend its portfolio securities.
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the OTC market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or who se values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to
26
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. Additionally, because many foreign equity securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on local closing prices and adjustments supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2010, 95.5% of the net assets of the Fund were valued using fair value prices based on those adjustments and are classified as using Level 2 inputs in the table below. See note 4 for a further discussi on on valuation of derivative financial instruments.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include: fair value adjustments applied to closing prices of foreign securities due to market events that have occurred since the local market close but before the Fund's daily NAV calculation.
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | |||||||||||||||||||
Australia | $ | — | $ | 15,897,293 | $ | — | $ | 15,897,293 | |||||||||||
Austria | — | 4,896,123 | — | 4,896,123 | |||||||||||||||
Belgium | — | 7,181,586 | — | 7,181,586 | |||||||||||||||
Canada | 5,689,097 | — | — | 5,689,097 | |||||||||||||||
Denmark | — | 6,397,348 | — | 6,397,348 | |||||||||||||||
Finland | — | 3,773,612 | — | 3,773,612 |
27
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
ASSET VALUATION INPUTS — continued
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
France | $ | 842,927 | $ | 48,925,151 | $ | — | $ | 49,768,078 | |||||||||||
Germany | — | 19,677,268 | — | 19,677,268 | |||||||||||||||
Greece | — | 3,279,363 | — | 3,279,363 | |||||||||||||||
Hong Kong | — | 8,223,760 | — | 8,223,760 | |||||||||||||||
Ireland | — | 3,484,788 | — | 3,484,788 | |||||||||||||||
Italy | — | 32,507,320 | — | 32,507,320 | |||||||||||||||
Japan | — | 124,970,599 | — | 124,970,599 | |||||||||||||||
Malta | — | 0 | * | — | 0 | ||||||||||||||
Netherlands | — | 15,665,722 | — | 15,665,722 | |||||||||||||||
New Zealand | 946,479 | 656,965 | — | 1,603,444 | |||||||||||||||
Norway | — | 3,546,818 | — | 3,546,818 | |||||||||||||||
Singapore | 592,829 | 18,485,441 | — | 19,078,270 | |||||||||||||||
Spain | — | 8,442,213 | — | 8,442,213 | |||||||||||||||
Sweden | — | 18,103,147 | — | 18,103,147 | |||||||||||||||
Switzerland | — | 33,762,869 | — | 33,762,869 | |||||||||||||||
United Kingdom | — | 112,677,521 | — | 112,677,521 | |||||||||||||||
TOTAL COMMON STOCKS | 8,071,332 | 490,554,907 | — | 498,626,239 | |||||||||||||||
Preferred Stocks | |||||||||||||||||||
Germany | — | 3,450,546 | — | 3,450,546 | |||||||||||||||
TOTAL PREFERRED STOCKS | — | 3,450,546 | — | 3,450,546 | |||||||||||||||
Options Purchased | |||||||||||||||||||
United Kingdom | — | 399,704 | — | 399,704 | |||||||||||||||
TOTAL OPTIONS PURCHASED | — | 399,704 | — | 399,704 | |||||||||||||||
Short-Term Investments | 9,263,758 | 4,335,523 | — | 13,599,281 | |||||||||||||||
Total Investments | 17,335,090 | 498,740,680 | — | 516,075,770 | |||||||||||||||
Total | $ | 17,335,090 | $ | 498,740,680 | $ | — | $ | 516,075,770 |
28
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Forward Currency Contracts | |||||||||||||||||||
Foreign Exchange Risk | $ | — | $ | (96,809 | ) | $ | — | $ | (96,809 | ) | |||||||||
Written Options | |||||||||||||||||||
Equity Contracts Risk | — | (13,855 | ) | — | (13,855 | ) | |||||||||||||
Total Derivatives | — | (110,664 | ) | — | (110,664 | ) | |||||||||||||
Total | $ | — | $ | (110,664 | ) | $ | — | $ | (110,664 | ) |
* Represents the interest in securities that have no value at August 31, 2010.
The Fund held no investments or other financial instruments at either August 31, 2010 or February 28, 2010, whose fair value was determined using Level 3 inputs.
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are inclu ded with the net realized and unrealized gain or loss on investment securities.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country's tax treaty with the United States. The foreign withholding rates applicable to a Fund's investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.
29
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if paid by the shareholders of the Fund.
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Transaction based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund elected to defer to March 1, 2010 post-October currency losses of $77,676.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2018 | $ | (119,015,220 | ) | ||||
Total | $ | (119,015,220 | ) |
30
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 506,367,903 | $ | 48,329,079 | $ | (38,621,212 | ) | $ | 9,707,867 |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which co llection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds.
31
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Brown Brothers Harriman & Co. ("BBH") serves as the Fund's custodian and fund accounting agent. State Street Bank and Trust Company ("State Street") serves as the Fund's transfer agent. BBH's and State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. There can be no assurance that the Fund's tax management strategies will be effective, and an investor may incur tax liabilities that exceed their economic return. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risk s because the types of investments it makes may change over time.
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund's investments.
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to rec eipt) may expose the Fund to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund's investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund's investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies.
32
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Other principal risks of an investment in the Fund include Market Risk — Value Securities (risk that the price of the Fund's investments will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Liquidity Risk (difficulty in selling Fund investments at desirable prices and/or increased likelihood of honoring redemption requests in kind); Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund's securities); Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or oth er GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes,
33
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index). The Funds also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedin gs. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be secured by collateral (e.g., foreign currency forwards; see "Currency Risk" above), that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a
34
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. During the period ended August 31, 2010, the Fund used forward currency contracts to manage against anticipated currency exchange rate changes and adjust exposure to foreign currencies. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
35
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because regular trading on many foreign exchanges closes prior to the close of the NYSE, closing prices for foreign futures contracts on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures contracts using fair value prices, which are based on adjustments to local closing prices, and supplied by a third party vendor based on that vendor's proprietary models. During the period ended August 31, 2010, the Fund used futures contracts to adjust exposure to certain securities markets and maintain the diversity and liquidity of the portfolio. The Fund had no futures contracts outstanding at the end of the period.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. During the period ended August 31, 2010, the Fund used purchased call option contracts as a substitute for direct equity investment (when paired with written put options). Option cont racts purchased by the Fund and outstanding at the end of the period are listed in the Fund's Schedule of Investments.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash,
36
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. During the period ended August 31, 2010, the Fund used written put option contracts as a substitute for di rect equity investment (when paired with purchased call options). Written options outstanding at the end of the period are listed in the Fund's Schedule of Investments.
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
For the period ended August 31, 2010, investment activity in options contracts written by the Fund was as follows:
Puts | Calls | ||||||||||||||||||||||||||
Principal Amount of Contracts | Number of Contracts | Premiums | Principal Amount of Contracts | Number of Contracts | Premiums | ||||||||||||||||||||||
Outstanding, beginning of period | $ | (1,047,916 | ) | — | $ | (491,823 | ) | $ | — | — | $ | — | |||||||||||||||
Options written | — | — | — | — | — | — | |||||||||||||||||||||
Options exercised | — | — | — | ||||||||||||||||||||||||
Options expired | — | — | — | — | — | — | |||||||||||||||||||||
Options sold | — | — | — | — | — | — | |||||||||||||||||||||
Outstanding, end of period | $ | (1,047,916 | ) | — | $ | (491,823 | ) | $ | — | — | $ | — |
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
37
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price
38
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. During the period ended August 31, 2010, the Fund held rights and warrants received as a result of a corporate action. The Fund held no rights or warrants at the end of the period.
39
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Equity contracts | Other contracts | Total | |||||||||||||||||||
Assets: | |||||||||||||||||||||||
Investments, at value (purchased options, rights and warrants) | $ | — | $ | — | $ | 399,704 | $ | — | $ | 399,704 | |||||||||||||
Total | $ | — | $ | — | $ | 399,704 | $ | — | $ | 399,704 | |||||||||||||
Liabilities: | |||||||||||||||||||||||
Written options outstanding | $ | — | $ | — | $ | (13,855 | ) | $ | — | $ | (13,855 | ) | |||||||||||
Unrealized depreciation on forward currency contracts | — | (96,809 | ) | — | — | (96,809 | ) | ||||||||||||||||
Total | $ | — | $ | (96,809 | ) | $ | (13,855 | ) | $ | — | $ | (110,664 | ) |
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Equity contracts | Other contracts | Total | |||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||
Purchased options, rights and warrants | $ | — | $ | — | $ | (51,313 | ) | $ | — | $ | (51,313 | ) | |||||||||||
Forward Currency Contracts | — | 7,528 | — | — | 7,528 | ||||||||||||||||||
Futures Contracts | — | — | 375,442 | — | 375,442 | ||||||||||||||||||
Total | $ | — | $ | 7,528 | $ | 324,129 | $ | — | $ | 331,657 | |||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||
Future contracts | $ | — | $ | — | $ | 308,049 | $ | — | $ | 308,049 | |||||||||||||
Purchased options, rights and warrants | — | — | (503,780 | ) | — | (503,780 | ) | ||||||||||||||||
Forward currency contracts | — | 20,240 | — | — | 20,240 | ||||||||||||||||||
Written option contracts | — | — | 222,413 | — | 222,413 | ||||||||||||||||||
Total | $ | — | $ | 20,240 | $ | 26,682 | $ | — | $ | 46,922 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
40
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The volume of derivative activity, based on absolute values (forward currency contracts and futures contracts), notional amounts (swap agreements), or principal amounts (options) outstanding at each month-end, was as follows for the period ended August 31, 2010:
Forward Currency Contracts | Futures Contracts | Options | Rights/Warrants | ||||||||||||||||
Average amount outstanding | 4,358,466 | 6,429,317 | 3,178,351 | 7,392 |
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.50% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.50% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investme nt company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund's Expense Reimbursement Amount. These contractual expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $5,981 and $2,024, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
41
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended August 31, 2010 aggregated $118,913,576 and $117,533,578, respectively.
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, 21.00% of the outstanding shares of the Fund were held by two shareholders. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2010, 0.58% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and none of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 3,457,305 | $ | 43,013,408 | 4,695,558 | $ | 58,406,771 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 550,972 | 7,346,499 | |||||||||||||||
Shares repurchased | (4,517,325 | ) | (58,025,428 | ) | (7,646,088 | ) | (93,390,053 | ) | |||||||||||
Net increase (decrease) | (1,060,020 | ) | $ | (15,012,020 | ) | (2,399,558 | ) | $ | (27,636,783 | ) |
42
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three-, five-, seven- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received
43
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparis on to the Manager's separate account clients and the expenses and risks borne by the Manager as a result of the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by , for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating
44
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
45
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1 | ) Actual | 0.65 | % | $ | 1,000.00 | $ | 969.20 | $ | 3.23 | ||||||||||
2 | ) Hypothetical | 0.65 | % | $ | 1,000.00 | $ | 1,021.93 | $ | 3.31 |
* Expenses are calculated using the Class's annualized net expense ratio for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
46
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 94.8 | % | |||||
Short-Term Investments | 3.3 | ||||||
Mutual Funds | 1.6 | ||||||
Futures Contracts | (0.2 | ) | |||||
Other | 0.5 | ||||||
100.0 | % | ||||||
Industry Group Summary | % of Equity Investments* | ||||||
Software & Services | 19.7 | % | |||||
Pharmaceuticals, Biotechnology & Life Sciences | 18.5 | ||||||
Food, Beverage & Tobacco | 10.2 | ||||||
Energy | 9.0 | ||||||
Technology Hardware & Equipment | 8.9 | ||||||
Health Care Equipment & Services | 7.2 | ||||||
Capital Goods | 5.4 | ||||||
Food & Staples Retailing | 5.2 | ||||||
Household & Personal Products | 4.6 | ||||||
Retailing | 1.7 | ||||||
Consumer Services | 1.6 | ||||||
Telecommunication Services | 1.5 | ||||||
Diversified Financials | 1.4 | ||||||
Insurance | 1.1 | ||||||
Media | 1.0 | ||||||
Materials | 0.8 | ||||||
Consumer Durables & Apparel | 0.7 | ||||||
Transportation | 0.5 | ||||||
Banks | 0.4 | ||||||
Automobiles & Components | 0.3 | ||||||
Semiconductors & Semiconductor Equipment | 0.2 | ||||||
Utilities | 0.1 | ||||||
Commercial & Professional Services | 0.0 | ||||||
100.0 | % |
* Equity investments may consist of common stocks, preferred stocks and rights and warrants. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
1
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
COMMON STOCKS — 94.8% | |||||||||||||||
Automobiles & Components — 0.3% | |||||||||||||||
2,600 | Ford Motor Co. * | 29,354 | |||||||||||||
300 | Harley-Davidson, Inc. | 7,296 | |||||||||||||
400 | Johnson Controls, Inc. | 10,612 | |||||||||||||
Total Automobiles & Components | 47,262 | ||||||||||||||
Banks — 0.3% | |||||||||||||||
200 | BB&T Corp. | 4,424 | |||||||||||||
200 | Comerica, Inc. | 6,882 | |||||||||||||
100 | M&T Bank Corp. | 8,564 | |||||||||||||
100 | New York Community Bancorp, Inc. | 1,589 | |||||||||||||
400 | PNC Financial Services Group, Inc. | 20,384 | |||||||||||||
400 | Wells Fargo & Co. | 9,420 | |||||||||||||
Total Banks | 51,263 | ||||||||||||||
Capital Goods — 5.2% | |||||||||||||||
2,400 | 3M Co. | 188,520 | |||||||||||||
500 | Boeing Co. | 30,565 | |||||||||||||
1,000 | Caterpillar, Inc. | 65,160 | |||||||||||||
200 | Cummins, Inc. | 14,882 | |||||||||||||
200 | Danaher Corp. | 7,266 | |||||||||||||
100 | Deere & Co. | 6,327 | |||||||||||||
100 | Eaton Corp. | 6,948 | |||||||||||||
600 | Emerson Electric Co. | 27,990 | |||||||||||||
9,400 | General Electric Co. | 136,112 | |||||||||||||
1,500 | General Dynamics Corp. | 83,805 | |||||||||||||
100 | L-3 Communications Holdings, Inc. | 6,660 | |||||||||||||
20 | Lockheed Martin Corp. | 1,390 | |||||||||||||
200 | Northrop Grumman Corp. | 10,824 | |||||||||||||
100 | Owens Corning, Inc. * | 2,720 | |||||||||||||
100 | Parker Hannifin Corp. | 5,916 | |||||||||||||
200 | Rockwell Automation, Inc. | 10,228 | |||||||||||||
200 | Rockwell Collins, Inc. | 10,786 | |||||||||||||
2,500 | United Technologies Corp. | 163,025 | |||||||||||||
Total Capital Goods | 779,124 |
See accompanying notes to the financial statements.
2
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Commercial & Professional Services — 0.0% | |||||||||||||||
100 | Pitney Bowes, Inc. | 1,924 | |||||||||||||
Consumer Durables & Apparel — 0.7% | |||||||||||||||
1,400 | Coach, Inc. | 50,176 | |||||||||||||
100 | Newell Rubbermaid, Inc. | 1,502 | |||||||||||||
500 | Nike, Inc.-Class B | 35,000 | |||||||||||||
100 | Polo Ralph Lauren Corp. | 7,574 | |||||||||||||
100 | Stanley Black & Decker, Inc. | 5,364 | |||||||||||||
100 | Whirlpool Corp. | 7,416 | |||||||||||||
Total Consumer Durables & Apparel | 107,032 | ||||||||||||||
Consumer Services — 1.5% | |||||||||||||||
200 | Apollo Group, Inc.-Class A * | 8,496 | |||||||||||||
200 | ITT Educational Services, Inc. * | 10,652 | |||||||||||||
200 | Marriott International, Inc.-Class A | 6,402 | |||||||||||||
2,600 | McDonald's Corp. | 189,956 | |||||||||||||
700 | Starbucks Corp. | 16,093 | |||||||||||||
Total Consumer Services | 231,599 | ||||||||||||||
Diversified Financials — 1.3% | |||||||||||||||
1,700 | American Express Co. | 67,779 | |||||||||||||
200 | Ameriprise Financial, Inc. | 8,716 | |||||||||||||
6,000 | Bank of America Corp. | 74,700 | |||||||||||||
50 | BlackRock, Inc. | 7,097 | |||||||||||||
200 | Capital One Financial Corp. | 7,572 | |||||||||||||
230 | Franklin Resources, Inc. | 22,197 | |||||||||||||
40 | Goldman Sachs Group (The), Inc. | 5,478 | |||||||||||||
200 | Morgan Stanley | 4,938 | |||||||||||||
100 | T. Rowe Price Group, Inc. | 4,378 | |||||||||||||
Total Diversified Financials | 202,855 | ||||||||||||||
Energy — 8.5% | |||||||||||||||
300 | Arch Coal, Inc. | 6,753 | |||||||||||||
60 | Baker Hughes, Inc. | 2,255 |
See accompanying notes to the financial statements.
3
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Energy — continued | |||||||||||||||
200 | Cameron International Corp. * | 7,356 | |||||||||||||
300 | Chesapeake Energy Corp. | 6,204 | |||||||||||||
3,100 | Chevron Corp. | 229,896 | |||||||||||||
100 | Cimarex Energy Co. | 6,542 | |||||||||||||
1,974 | ConocoPhillips | 103,497 | |||||||||||||
100 | EOG Resources, Inc. | 8,687 | |||||||||||||
13,900 | Exxon Mobil Corp. | 822,324 | |||||||||||||
100 | FMC Technologies, Inc. * | 6,185 | |||||||||||||
500 | Halliburton Co. | 14,105 | |||||||||||||
300 | Nabors Industries Ltd. * | 4,704 | |||||||||||||
100 | Newfield Exploration Co. * | 4,801 | |||||||||||||
100 | Occidental Petroleum Corp. | 7,308 | |||||||||||||
100 | Peabody Energy Corp. | 4,280 | |||||||||||||
100 | Pioneer Natural Resources Co. | 5,782 | |||||||||||||
300 | Plains Exploration & Production Co. * | 7,164 | |||||||||||||
200 | Schlumberger Ltd. | 10,666 | |||||||||||||
200 | Sunoco, Inc. | 6,736 | |||||||||||||
100 | Tesoro Corp. | 1,123 | |||||||||||||
600 | Valero Energy Corp. | 9,462 | |||||||||||||
100 | Whiting Petroleum Corp. * | 8,484 | |||||||||||||
300 | Williams Cos., Inc. | 5,439 | |||||||||||||
Total Energy | 1,289,753 | ||||||||||||||
Food & Staples Retailing — 4.9% | |||||||||||||||
300 | Kroger Co. (The) | 5,919 | |||||||||||||
6,300 | Walgreen Co. | 169,344 | |||||||||||||
11,300 | Wal-Mart Stores, Inc. | 566,582 | |||||||||||||
200 | Whole Foods Market, Inc. * | 6,958 | |||||||||||||
Total Food & Staples Retailing | 748,803 | ||||||||||||||
Food, Beverage & Tobacco — 9.7% | |||||||||||||||
5,300 | Altria Group, Inc. | 118,296 | |||||||||||||
200 | Archer-Daniels-Midland Co. | 6,156 | |||||||||||||
300 | Coca-Cola Enterprises, Inc. | 8,538 |
See accompanying notes to the financial statements.
4
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Food, Beverage & Tobacco — continued | |||||||||||||||
8,500 | Coca-Cola Co. (The) | 475,320 | |||||||||||||
1,400 | General Mills, Inc. | 50,624 | |||||||||||||
300 | Green Mountain Coffee Roasters, Inc. * | 9,246 | |||||||||||||
200 | Hansen Natural Corp. * | 9,008 | |||||||||||||
600 | Kellogg Co. | 29,808 | |||||||||||||
500 | Kraft Foods, Inc.-Class A | 14,975 | |||||||||||||
5,630 | PepsiCo, Inc. | 361,333 | |||||||||||||
7,100 | Philip Morris International, Inc. | 365,224 | |||||||||||||
400 | Sara Lee Corp. | 5,776 | |||||||||||||
400 | Tyson Foods, Inc.-Class A | 6,552 | |||||||||||||
Total Food, Beverage & Tobacco | 1,460,856 | ||||||||||||||
Health Care Equipment & Services — 6.8% | |||||||||||||||
500 | Aetna, Inc. | 13,360 | |||||||||||||
2,000 | AmerisourceBergen Corp. | 54,560 | |||||||||||||
1,200 | Cardinal Health, Inc. | 35,952 | |||||||||||||
100 | Cerner Corp. * | 7,285 | |||||||||||||
600 | Cigna Corp. | 19,332 | |||||||||||||
200 | Community Health Systems, Inc. * | 5,214 | |||||||||||||
300 | Coventry Health Care, Inc. * | 5,805 | |||||||||||||
100 | DaVita, Inc. * | 6,462 | |||||||||||||
600 | Express Scripts, Inc. * | 25,560 | |||||||||||||
200 | Humana, Inc. * | 9,558 | |||||||||||||
80 | Intuitive Surgical, Inc. * | 21,203 | |||||||||||||
800 | McKesson Corp. | 46,440 | |||||||||||||
7,400 | Medtronic, Inc. | 232,952 | |||||||||||||
200 | Quest Diagnostics, Inc. | 8,700 | |||||||||||||
200 | ResMed, Inc. * | 6,028 | |||||||||||||
900 | Stryker Corp. | 38,871 | |||||||||||||
10,921 | UnitedHealth Group, Inc. | 346,414 | |||||||||||||
1,900 | WellPoint, Inc. * | 94,392 | |||||||||||||
1,100 | Zimmer Holdings, Inc. * | 51,887 | |||||||||||||
Total Health Care Equipment & Services | 1,029,975 |
See accompanying notes to the financial statements.
5
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Household & Personal Products — 4.3% | |||||||||||||||
400 | Avon Products, Inc. | 11,640 | |||||||||||||
100 | Clorox Co. | 6,482 | |||||||||||||
3,000 | Colgate-Palmolive Co. | 221,520 | |||||||||||||
200 | Estee Lauder Cos. (The), Inc.-Class A | 11,214 | |||||||||||||
800 | Kimberly-Clark Corp. | 51,520 | |||||||||||||
5,900 | Procter & Gamble Co. (The) | 352,053 | |||||||||||||
Total Household & Personal Products | 654,429 | ||||||||||||||
Insurance — 1.0% | |||||||||||||||
700 | AFLAC, Inc. | 33,075 | |||||||||||||
700 | Allstate Corp. (The) | 19,320 | |||||||||||||
200 | Assurant, Inc. | 7,312 | |||||||||||||
300 | Chubb Corp. | 16,536 | |||||||||||||
200 | HCC Insurance Holdings, Inc. | 5,046 | |||||||||||||
200 | MetLife, Inc. | 7,520 | |||||||||||||
400 | Progressive Corp. (The) | 7,920 | |||||||||||||
100 | Prudential Financial, Inc. | 5,057 | |||||||||||||
200 | Torchmark Corp. | 9,870 | |||||||||||||
600 | Travelers Cos. (The), Inc. | 29,388 | |||||||||||||
300 | Unum Group | 6,015 | |||||||||||||
300 | W.R. Berkley Corp. | 7,905 | |||||||||||||
Total Insurance | 154,964 | ||||||||||||||
Materials — 0.8% | |||||||||||||||
800 | Alcoa, Inc. | 8,168 | |||||||||||||
1,300 | Dow Chemical Co. (The) | 31,681 | |||||||||||||
200 | E.I. du Pont de Nemours & Co. | 8,154 | |||||||||||||
100 | Eastman Chemical Co. | 6,155 | |||||||||||||
200 | Freeport-McMoRan Copper & Gold, Inc. | 14,396 | |||||||||||||
400 | International Paper Co. | 8,184 | |||||||||||||
100 | Lubrizol Corp. | 9,331 | |||||||||||||
100 | MeadWestvaco Corp. | 2,176 | |||||||||||||
600 | Southern Copper Corp. | 18,144 | |||||||||||||
100 | Walter Energy, Inc. | 7,204 | |||||||||||||
Total Materials | 113,593 |
See accompanying notes to the financial statements.
6
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Media — 1.0% | |||||||||||||||
800 | CBS Corp.-Class B (Non Voting) | 11,056 | |||||||||||||
900 | Comcast Corp.-Class A | 15,408 | |||||||||||||
300 | DirectTV-Class A * | 11,376 | |||||||||||||
100 | Discovery Communications, Inc. * | 3,775 | |||||||||||||
200 | Interpublic Group of Cos. (The), Inc. * | 1,706 | |||||||||||||
1,000 | Liberty Media Corp.-Interactive-Class A * | 10,550 | |||||||||||||
1,600 | News Corp.-Class A | 20,112 | |||||||||||||
200 | Time Warner Cable, Inc. | 10,322 | |||||||||||||
400 | Viacom, Inc.-Class B | 12,568 | |||||||||||||
400 | Virgin Media, Inc. | 8,324 | |||||||||||||
1,200 | Walt Disney Co. (The) | 39,108 | |||||||||||||
Total Media | 144,305 | ||||||||||||||
Pharmaceuticals, Biotechnology & Life Sciences — 17.5% | |||||||||||||||
6,300 | Abbott Laboratories | 310,842 | |||||||||||||
200 | Allergan, Inc. | 12,284 | |||||||||||||
3,100 | Amgen, Inc. * | 158,224 | |||||||||||||
300 | Biogen Idec, Inc. * | 16,140 | |||||||||||||
1,400 | Bristol-Myers Squibb Co. | 36,512 | |||||||||||||
7,000 | Eli Lilly & Co. | 234,920 | |||||||||||||
1,300 | Forest Laboratories, Inc. * | 35,477 | |||||||||||||
1,200 | Gilead Sciences, Inc. * | 38,232 | |||||||||||||
9,900 | Johnson & Johnson | 564,498 | |||||||||||||
10,361 | Merck & Co., Inc. | 364,293 | |||||||||||||
10 | Mettler-Toledo International, Inc. * | 1,106 | |||||||||||||
54,964 | Pfizer, Inc. | 875,576 | |||||||||||||
Total Pharmaceuticals, Biotechnology & Life Sciences | 2,648,104 | ||||||||||||||
Retailing — 1.6% | |||||||||||||||
200 | Abercrombie & Fitch Co.-Class A | 6,920 | |||||||||||||
200 | Advance Auto Parts, Inc. | 10,894 | |||||||||||||
170 | Amazon.com, Inc. * | 21,221 | |||||||||||||
30 | AutoZone, Inc. * | 6,293 | |||||||||||||
200 | Bed Bath & Beyond, Inc. * | 7,194 |
See accompanying notes to the financial statements.
7
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Retailing — continued | |||||||||||||||
200 | Best Buy Co., Inc. | 6,278 | |||||||||||||
300 | CarMax, Inc. * | 5,979 | |||||||||||||
300 | Expedia, Inc. | 6,858 | |||||||||||||
300 | Gap (The), Inc. | 5,067 | |||||||||||||
200 | Guess?, Inc. | 6,462 | |||||||||||||
1,800 | Home Depot, Inc. | 50,058 | |||||||||||||
500 | Limited Brands, Inc. | 11,800 | |||||||||||||
500 | Lowe's Cos., Inc. | 10,150 | |||||||||||||
300 | Macy's, Inc. | 5,832 | |||||||||||||
100 | Netflix, Inc. * | 12,552 | |||||||||||||
400 | Nordstrom, Inc. | 11,568 | |||||||||||||
300 | PetSmart, Inc. | 9,567 | |||||||||||||
60 | Priceline.com Inc. * | 17,489 | |||||||||||||
100 | Ross Stores, Inc. | 4,963 | |||||||||||||
100 | Sears Holdings Corp. * | 6,190 | |||||||||||||
200 | Tiffany & Co. | 7,926 | |||||||||||||
200 | TJX Cos. (The), Inc. | 7,938 | |||||||||||||
200 | Urban Outfitters, Inc. * | 6,064 | |||||||||||||
Total Retailing | 245,263 | ||||||||||||||
Semiconductors & Semiconductor Equipment — 0.2% | |||||||||||||||
100 | Broadcom Corp.-Class A | 2,997 | |||||||||||||
100 | Cree, Inc. * | 5,354 | |||||||||||||
700 | Micron Technology, Inc. * | 4,526 | |||||||||||||
400 | NVIDIA Corp. * | 3,732 | |||||||||||||
300 | Texas Instruments, Inc. | 6,909 | |||||||||||||
Total Semiconductors & Semiconductor Equipment | 23,518 | ||||||||||||||
Software & Services — 18.7% | |||||||||||||||
200 | Akamai Technologies, Inc. * | 9,214 | |||||||||||||
200 | Citrix Systems, Inc. * | 11,588 | |||||||||||||
1,000 | Cognizant Technology Solutions Corp.-Class A * | 57,605 | |||||||||||||
100 | Computer Sciences Corp. | 3,981 | |||||||||||||
8,161 | eBay, Inc. * | 189,662 | |||||||||||||
100 | Factset Research Systems, Inc. | 7,355 |
See accompanying notes to the financial statements.
8
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Software & Services — continued | |||||||||||||||
100 | Fiserv, Inc. * | 5,003 | |||||||||||||
200 | Global Payments, Inc. | 7,526 | |||||||||||||
1,430 | Google, Inc.-Class A * | 643,528 | |||||||||||||
1,540 | International Business Machines Corp. | 189,774 | |||||||||||||
37,300 | Microsoft Corp. | 875,804 | |||||||||||||
36,600 | Oracle Corp. | 800,808 | |||||||||||||
100 | Red Hat, Inc. * | 3,455 | |||||||||||||
110 | Salesforce.com, Inc. * | 12,087 | |||||||||||||
400 | Symantec Corp. * | 5,452 | |||||||||||||
100 | VMware, Inc. * | 7,857 | |||||||||||||
Total Software & Services | 2,830,699 | ||||||||||||||
Technology Hardware & Equipment — 8.5% | |||||||||||||||
400 | Agilent Technologies, Inc. * | 10,788 | |||||||||||||
2,730 | Apple, Inc. * | 664,400 | |||||||||||||
12,400 | Cisco Systems, Inc. * | 248,620 | |||||||||||||
1,200 | Dell, Inc. * | 14,124 | |||||||||||||
300 | EMC Corp. * | 5,472 | |||||||||||||
100 | F5 Networks, Inc. * | 8,743 | |||||||||||||
100 | FLIR Systems, Inc. * | 2,512 | |||||||||||||
2,900 | Hewlett-Packard Co. | 111,592 | |||||||||||||
400 | Jabil Circuit, Inc. | 4,100 | |||||||||||||
900 | Motorola, Inc. * | 6,777 | |||||||||||||
400 | NetApp, Inc. * | 16,176 | |||||||||||||
4,200 | Qualcomm, Inc. | 160,902 | |||||||||||||
100 | SanDisk Corp. * | 3,324 | |||||||||||||
600 | Western Digital Corp. * | 14,490 | |||||||||||||
1,300 | Xerox Corp. | 10,972 | |||||||||||||
Total Technology Hardware & Equipment | 1,282,992 | ||||||||||||||
Telecommunication Services — 1.4% | |||||||||||||||
5,163 | AT&T, Inc. | 139,556 | |||||||||||||
200 | Crown Castle International Corp. * | 8,224 | |||||||||||||
200 | NII Holdings, Inc. * | 7,250 | |||||||||||||
1,942 | Verizon Communications, Inc. | 57,309 | |||||||||||||
Total Telecommunication Services | 212,339 |
See accompanying notes to the financial statements.
9
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Transportation — 0.5% | |||||||||||||||
400 | CSX Corp. | 19,956 | |||||||||||||
300 | FedEx Corp. | 23,415 | |||||||||||||
300 | Norfolk Southern Corp. | 16,104 | |||||||||||||
600 | Southwest Airlines Co. | 6,630 | |||||||||||||
100 | Union Pacific Corp. | 7,294 | |||||||||||||
Total Transportation | 73,399 | ||||||||||||||
Utilities — 0.1% | |||||||||||||||
400 | AES Corp. (The) * | 4,096 | |||||||||||||
100 | Integrys Energy Group, Inc. | 4,845 | |||||||||||||
Total Utilities | 8,941 | ||||||||||||||
TOTAL COMMON STOCKS (COST $13,929,674) | 14,342,992 | ||||||||||||||
MUTUAL FUNDS — 1.6% | |||||||||||||||
Affiliated Issuers — 1.6% | |||||||||||||||
9,637 | GMO U.S. Treasury Fund | 240,931 | |||||||||||||
TOTAL MUTUAL FUNDS (COST $241,027) | 240,931 | ||||||||||||||
SHORT-TERM INVESTMENTS — 3.3% | |||||||||||||||
Money Market Funds — 3.3% | |||||||||||||||
509,994 | State Street Institutional Treasury Money Market Fund-Institutional Class | 509,994 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $509,994) | 509,994 | ||||||||||||||
TOTAL INVESTMENTS — 99.7% (Cost $14,680,695) | 15,093,917 | ||||||||||||||
Other Assets and Liabilities (net) — 0.3% | 39,392 | ||||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 15,133,309 |
See accompanying notes to the financial statements.
10
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
A summary of outstanding financial instruments at August 31, 2010 is as follows:
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
8 | S&P 500 E-Mini Index | September 2010 | $ | 419,320 | $ | (30,021 | ) |
As of August 31, 2010, for futures contracts, swap agreements and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
Notes to Schedule of Investments:
* Non-income producing security.
See accompanying notes to the financial statements.
11
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $14,439,668) (Note 2) | $ | 14,852,986 | |||||
Investments in affiliated issuers, at value (cost $241,027) (Notes 2 and 10) | 240,931 | ||||||
Dividends receivable | 46,863 | ||||||
Receivable for collateral on open futures contracts (Note 2) | 36,000 | ||||||
Receivable for variation margin on open futures contracts (Note 4) | 1,280 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 5,394 | ||||||
Total assets | 15,183,454 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 29 | ||||||
Payable for Fund shares repurchased | 9,430 | ||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 4,382 | ||||||
Shareholder service fee | 1,991 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 88 | ||||||
Accrued expenses | 34,225 | ||||||
Total liabilities | 50,145 | ||||||
Net assets | $ | 15,133,309 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 34,676,815 | |||||
Accumulated undistributed net investment income | 49,866 | ||||||
Accumulated net realized loss | (19,976,573 | ) | |||||
Net unrealized appreciation | 383,201 | ||||||
$ | 15,133,309 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 15,133,309 | |||||
Shares outstanding: | |||||||
Class III | 1,540,455 | ||||||
Net asset value per share: | |||||||
Class III | $ | 9.82 |
See accompanying notes to the financial statements.
12
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends | $ | 176,225 | |||||
Interest | 106 | ||||||
Dividends from affiliated issuers (Note 10) | 62 | ||||||
Total investment income | 176,393 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 26,422 | ||||||
Shareholder service fee – Class III (Note 5) | 12,010 | ||||||
Audit and tax fees | 28,704 | ||||||
Registration fees | 1,288 | ||||||
Custodian, fund accounting agent and transfer agent fees | 552 | ||||||
Legal fees | 368 | ||||||
Trustees fees and related expenses (Note 5) | 174 | ||||||
Miscellaneous | 243 | ||||||
Total expenses | 69,761 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (31,096 | ) | |||||
Expense reductions (Note 2) | (26 | ) | |||||
Net expenses | 38,639 | ||||||
Net investment income (loss) | 137,754 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | (21,929 | ) | |||||
Investments in affiliated issuers | (80 | ) | |||||
Realized gains distributions from affiliated issuers (Note 10) | 46 | ||||||
Closed futures contracts | 261 | ||||||
Net realized gain (loss) | (21,702 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | (965,986 | ) | |||||
Investments in affiliated issuers | (96 | ) | |||||
Open futures contracts | (30,021 | ) | |||||
Net unrealized gain (loss) | (996,103 | ) | |||||
Net realized and unrealized gain (loss) | (1,017,805 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (880,051 | ) |
See accompanying notes to the financial statements.
13
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 137,754 | $ | 211,747 | |||||||
Net realized gain (loss) | (21,702 | ) | (854,787 | ) | |||||||
Change in net unrealized appreciation (depreciation) | (996,103 | ) | 3,796,115 | ||||||||
Net increase (decrease) in net assets from operations | (880,051 | ) | 3,153,075 | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (126,086 | ) | (215,661 | ) | |||||||
Net share transactions (Note 9): | |||||||||||
Class III | 253,412 | 2,749,894 | |||||||||
Total increase (decrease) in net assets | (752,725 | ) | 5,687,308 | ||||||||
Net assets: | |||||||||||
Beginning of period | 15,886,034 | 10,198,726 | |||||||||
End of period (including accumulated undistributed net investment income of $49,866 and $38,198, respectively) | $ | 15,133,309 | $ | 15,886,034 |
See accompanying notes to the financial statements.
14
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 10.49 | $ | 7.74 | $ | 12.21 | $ | 13.48 | $ | 12.83 | $ | 12.14 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.09 | 0.18 | 0.18 | 0.21 | 0.19 | 0.20 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.68 | ) | 2.75 | (4.45 | ) | (1.08 | ) | 0.64 | 0.69 | ||||||||||||||||||
Total from investment operations | (0.59 | ) | 2.93 | (4.27 | ) | (0.87 | ) | 0.83 | 0.89 | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.08 | ) | (0.18 | ) | (0.20 | ) | (0.22 | ) | (0.18 | ) | (0.20 | ) | |||||||||||||||
From net realized gains | — | — | — | (0.18 | ) | — | — | ||||||||||||||||||||
Total distributions | (0.08 | ) | (0.18 | ) | (0.20 | ) | (0.40 | ) | (0.18 | ) | (0.20 | ) | |||||||||||||||
Net asset value, end of period | $ | 9.82 | $ | 10.49 | $ | 7.74 | $ | 12.21 | $ | 13.48 | $ | 12.83 | |||||||||||||||
Total Return(a) | (5.63 | )%** | 38.22 | % | (35.43 | )% | (6.78 | )% | 6.53 | % | 7.46 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 15,133 | $ | 15,886 | $ | 10,199 | $ | 88,686 | $ | 116,725 | $ | 121,339 | |||||||||||||||
Net expenses to average daily net assets | 0.48 | %(b)(c)* | 0.48 | %(b) | 0.48 | %(b) | 0.48 | %(b) | 0.48 | % | 0.48 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 1.72 | %* | 1.86 | % | 1.55 | % | 1.55 | % | 1.46 | % | 1.65 | % | |||||||||||||||
Portfolio turnover rate | 19 | %** | 61 | % | 66 | % | 62 | % | 67 | % | 62 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.39 | %* | 0.84 | % | 0.17 | % | 0.12 | % | 0.11 | % | 0.08 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
15
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO Tax-Managed U.S. Equities Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks high after-tax total return. The Fund seeks to achieve its investment objective by outperforming its benchmark, the Russell 3000 Index. The Fund uses quantitative models integrated with tax management techniques to provide broad exposure to the U.S. equity market to investors subject to U.S. federal income tax. Under normal circumstances, the Fund invests directly and indirectly (e.g., through the GMO Funds in which the Fund invests, collectively referred to as the "underlying funds" or derivatives) at least 80% of its assets in equity investments tied economically to the U.S. The term "equity investments" refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts.
The Manager relies principally on proprietary quantitative models and also employs fundamental investment techniques to evaluate and select equity investments for the Fund. The Manager selects equity investments it believes (i) are undervalued (e.g., equity investments trading at prices below what the Manager believes to be their fundamental value); (ii) have superior fundamentals (e.g., earnings stability); and/or (iii) have shown indications of improving investor sentiment (e.g., positive price movement or upgraded analyst ratings). The Manager also uses proprietary techniques to adjust the portfolio for other factors such as position size, industry and sector weights, and market capitalization. The factors considered and models used by the Manager may change over time based on the Manager's assessment of what combination of models and factors are best positioned to achieve the Fund's investment objective.
The Manager considers the tax effects of a proposed purchase or sale of an equity investment in conjunction with the return it forecasts for that investment and the contribution it expects that investment to make to the overall portfolio. The Manager may employ a variety of tax management techniques, such as seeking to minimize sales of securities that result in capital gains, selling securities producing long-term rather than short-term capital gains, and selling securities to realize capital losses that can be offset against realized capital gains. The tax management techniques employed by the Manager may change over time depending upon a variety of factors, including current market conditions and the amount of unrealized gains and losses in the Fund's portfolio.
In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the-counter ("OTC") derivatives, including options, futures, and swap contracts,
16
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
(i) as a substitute for direct investment; (ii) in an attempt to reduce investment exposures (which may result in a reduction below zero); (iii) to effect transactions intended as substitutes for securities lending; and/or (iv) in an attempt to adjust elements of its investment exposure. In addition, the Fund may lend its portfolio securities.
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the OTC market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or who se values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. See note 4 for a further discussion on valuation of derivative financial instruments.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The
17
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | $ | 14,342,992 | $ | — | $ | — | $ | 14,342,992 | |||||||||||
Mutual Funds | 240,931 | — | — | 240,931 | |||||||||||||||
Short-Term Investments | 509,994 | — | — | 509,994 | |||||||||||||||
Total Investments | 15,093,917 | — | — | 15,093,917 | |||||||||||||||
Total | $ | 15,093,917 | $ | — | $ | — | $ | 15,093,917 |
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Futures Contracts | |||||||||||||||||||
Equity Risk | $ | (30,021 | ) | $ | — | $ | — | $ | (30,021 | ) | |||||||||
Total | $ | (30,021 | ) | $ | — | $ | — | $ | (30,021 | ) |
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements.
18
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
All of the Fund's common stocks held at period end are classified as Level 1. Please refer to the Schedule of Investments for a more detailed categorization of common stocks.
The Fund held no investments or other financial instruments at either August 31, 2010 or February 28, 2010, whose fair value was determined using Level 3 inputs.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, quarterly, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (8,413,466 | ) | ||||
2/28/2018 | (11,370,066 | ) | |||||
Total | $ | (19,783,532 | ) |
19
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 14,846,897 | $ | 975,126 | $ | (728,106 | ) | $ | 247,020 |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which co llection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds (See Note 5).
20
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. There can be no assurance that the Fund's tax management strategies will be effective, and an investor may incur tax liabilities that exceed their economic return. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risk s because the types of investments it makes may change over time.
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund's investments.
Other principal risks of an investment in the Fund include Market Risk — Value Securities (risk that the price of the Fund's investments will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, and credit and counterparty risk); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund's securities); Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service pr ovider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (ri sk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
21
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero).
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, indices and markets without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index).
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedin gs. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be
22
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
secured by collateral, that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash,
23
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount tha t the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. During the period ended August 31, 2010, the Fund used futures contracts to maintain the diversity and liquidity of the portfolio. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an of fsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
24
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to
25
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of
26
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Unrealized depreciation on future contracts* | $ | — | $ | — | $ | — | $ | (30,021 | ) | $ | — | $ | (30,021 | ) | |||||||||||||
Total | $ | — | $ | — | $ | — | $ | (30,021 | ) | $ | — | $ | (30,021 | ) |
The Effect of Derivative Instruments on the Statement of Operations for the Period Ended August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Future contracts | $ | — | $ | — | $ | — | $ | 261 | $ | — | $ | 261 | |||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 261 | $ | — | $ | 261 | |||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Future contracts | $ | — | $ | — | $ | — | $ | (30,021 | ) | $ | — | $ | (30,021 | ) | |||||||||||||
Total | $ | — | $ | — | $ | — | $ | (30,021 | ) | $ | — | $ | (30,021 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair values of derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments.
The volume of derivative activity, based on absolute values (futures contracts) outstanding at each month-end, was as follows for the period ended August 31, 2010:
Futures Contracts | |||||||
Average amount outstanding | $ | 89,234 |
27
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.33% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investme nt company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition to the contractual expense reimbursement described above, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund's Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ending August 31, 2010 was $174 and $59, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Total Indirect Expenses | |||||||||
< 0.001% | 0.000 | % | < 0.001% |
28
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended August 31, 2010 aggregated $3,068,502 and $2,961,960, respectively.
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, 93.60% of the outstanding shares of the Fund were held by five shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2010, 0.24% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and none of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 20,725 | $ | 204,970 | 486,817 | $ | 5,188,445 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 7,343 | 75,001 | 11,344 | 103,124 | |||||||||||||||
Shares repurchased | (2,618 | ) | (26,559 | ) | (301,106 | ) | (2,541,675 | ) | |||||||||||
Net increase (decrease) | 25,450 | $ | 253,412 | 197,055 | $ | 2,749,894 |
29
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
10. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO U.S. Treasury Fund | $ | — | $ | 441,107 | $ | 200,000 | $ | 62 | $ | 46 | $ | 240,931 | |||||||||||||||
Totals | $ | — | $ | 441,107 | $ | 200,000 | $ | 62 | $ | 46 | $ | 240,931 |
30
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three-, five-, seven- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received
31
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparis on to the Manager's separate account clients and the expenses and risks borne by the Manager as a result of the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by , for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading of its officers and employees), the procedures by which the Manager allocates trades
32
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
33
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table below for each class provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.48 | % | $ | 1,000.00 | $ | 943.70 | $ | 2.35 | |||||||||||
2) Hypothetical | 0.48 | % | $ | 1,000.00 | $ | 1,022.79 | $ | 2.45 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
34
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 98.8 | % | |||||
Mutual Funds | 0.9 | ||||||
Short-Term Investments | 0.2 | ||||||
Other | 0.1 | ||||||
100.0 | % | ||||||
Industry Group Summary | % of Equity Investments * | ||||||
Pharmaceuticals, Biotechnology & Life Sciences | 18.7 | % | |||||
Software & Services | 17.5 | ||||||
Health Care Equipment & Services | 9.0 | ||||||
Technology Hardware & Equipment | 7.7 | ||||||
Capital Goods | 6.2 | ||||||
Food, Beverage & Tobacco | 6.1 | ||||||
Food & Staples Retailing | 5.6 | ||||||
Household & Personal Products | 5.0 | ||||||
Energy | 4.8 | ||||||
Media | 3.3 | ||||||
Insurance | 2.5 | ||||||
Retailing | 2.5 | ||||||
Consumer Services | 2.2 | ||||||
Consumer Durables & Apparel | 1.6 | ||||||
Diversified Financials | 1.5 | ||||||
Telecommunication Services | 1.3 | ||||||
Materials | 1.2 | ||||||
Real Estate | 0.9 | ||||||
Banks | 0.8 | ||||||
Transportation | 0.5 | ||||||
Automobiles & Components | 0.5 | ||||||
Commercial & Professional Services | 0.4 | ||||||
Utilities | 0.2 | ||||||
100.0 | % |
* Equity investments may consist of common stocks, preferred stocks and rights and warrants. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
1
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
COMMON STOCKS — 98.8% | |||||||||||||||
Automobiles & Components — 0.5% | |||||||||||||||
200 | Autoliv, Inc. | 10,828 | |||||||||||||
5,100 | Ford Motor Co. * | 57,579 | |||||||||||||
500 | Harley-Davidson, Inc. | 12,160 | |||||||||||||
400 | TRW Automotive Holdings Corp. * | 13,904 | |||||||||||||
Total Automobiles & Components | 94,471 | ||||||||||||||
Banks — 0.8% | |||||||||||||||
1,200 | CIT Group, Inc. * | 44,016 | |||||||||||||
800 | New York Community Bancorp, Inc. | 12,712 | |||||||||||||
1,600 | PNC Financial Services Group, Inc. | 81,536 | |||||||||||||
4,200 | Regions Financial Corp. | 27,006 | |||||||||||||
Total Banks | 165,270 | ||||||||||||||
Capital Goods — 6.1% | |||||||||||||||
2,600 | 3M Co. | 204,230 | |||||||||||||
1,600 | Boeing Co. | 97,808 | |||||||||||||
1,100 | Caterpillar, Inc. | 71,676 | |||||||||||||
1,300 | Danaher Corp. | 47,229 | |||||||||||||
400 | Dover Corp. | 17,904 | |||||||||||||
400 | Eaton Corp. | 27,792 | |||||||||||||
1,200 | Emerson Electric Co. | 55,980 | |||||||||||||
300 | Fastenal Co. | 13,581 | |||||||||||||
20,000 | General Electric Co. | 289,600 | |||||||||||||
1,900 | General Dynamics Corp. | 106,153 | |||||||||||||
200 | Joy Global, Inc. | 11,348 | |||||||||||||
300 | L-3 Communications Holdings, Inc. | 19,980 | |||||||||||||
800 | Northrop Grumman Corp. | 43,296 | |||||||||||||
300 | Owens Corning, Inc. * | 8,160 | |||||||||||||
460 | Precision Castparts Corp. | 52,063 | |||||||||||||
700 | Rockwell Collins, Inc. | 37,751 | |||||||||||||
500 | Spirit Aerosystems Holdings, Inc.-Class A * | 9,670 | |||||||||||||
1,500 | Textron, Inc. | 25,605 |
See accompanying notes to the financial statements.
2
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Capital Goods — continued | |||||||||||||||
1,500 | United Technologies Corp. | 97,815 | |||||||||||||
Total Capital Goods | 1,237,641 | ||||||||||||||
Commercial & Professional Services — 0.4% | |||||||||||||||
300 | Copart, Inc. * | 9,915 | |||||||||||||
200 | Dun & Bradstreet Corp. | 13,180 | |||||||||||||
1,000 | Pitney Bowes, Inc. | 19,240 | |||||||||||||
1,500 | RR Donnelley & Sons Co. | 22,717 | |||||||||||||
300 | Stericycle, Inc. * | 19,650 | |||||||||||||
Total Commercial & Professional Services | 84,702 | ||||||||||||||
Consumer Durables & Apparel — 1.6% | |||||||||||||||
1,200 | Coach, Inc. | 43,008 | |||||||||||||
500 | Hasbro, Inc. | 20,180 | |||||||||||||
2,788 | KB Home | 28,744 | |||||||||||||
300 | Mohawk Industries, Inc. * | 13,293 | |||||||||||||
1,000 | Newell Rubbermaid, Inc. | 15,020 | |||||||||||||
1,600 | Nike, Inc.-Class B | 112,000 | |||||||||||||
500 | Stanley Black & Decker, Inc. | 26,820 | |||||||||||||
500 | VF Corp. | 35,310 | |||||||||||||
400 | Whirlpool Corp. | 29,664 | |||||||||||||
Total Consumer Durables & Apparel | 324,039 | ||||||||||||||
Consumer Services — 2.2% | |||||||||||||||
900 | Apollo Group, Inc.-Class A * | 38,232 | |||||||||||||
200 | ITT Educational Services, Inc. * | 10,652 | |||||||||||||
800 | Las Vegas Sands Corp. * | 22,664 | |||||||||||||
3,110 | McDonald's Corp. | 227,217 | |||||||||||||
1,500 | MGM Mirage * | 13,515 | |||||||||||||
800 | Royal Caribbean Cruises Ltd. * | 19,648 | |||||||||||||
600 | Starwood Hotels & Resorts Worldwide, Inc. | 28,038 | |||||||||||||
50 | Strayer Education, Inc. | 7,239 | |||||||||||||
400 | Weight Watchers International, Inc. | 11,408 | |||||||||||||
1,100 | Wyndham Worldwide Corp. | 25,509 |
See accompanying notes to the financial statements.
3
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Consumer Services — continued | |||||||||||||||
200 | Wynn Resorts Ltd. | 16,122 | |||||||||||||
500 | Yum! Brands, Inc. | 20,850 | |||||||||||||
Total Consumer Services | 441,094 | ||||||||||||||
Diversified Financials — 1.5% | |||||||||||||||
1,200 | American Express Co. | 47,844 | |||||||||||||
600 | AmeriCredit Corp. * | 14,520 | |||||||||||||
800 | Ameriprise Financial, Inc. | 34,864 | |||||||||||||
10,110 | Bank of America Corp. | 125,869 | |||||||||||||
700 | Capital One Financial Corp. | 26,502 | |||||||||||||
3,100 | SLM Corp. * | 34,255 | |||||||||||||
400 | Towers Watson & Co.-Class A | 17,960 | |||||||||||||
Total Diversified Financials | 301,814 | ||||||||||||||
Energy — 4.7% | |||||||||||||||
120 | Anadarko Petroleum Corp. | 5,519 | |||||||||||||
400 | Atwood Oceanics, Inc. * | 10,032 | |||||||||||||
1,558 | Chevron Corp. | 115,541 | |||||||||||||
200 | Cimarex Energy Co. | 13,084 | |||||||||||||
5,024 | ConocoPhillips | 263,408 | |||||||||||||
4,811 | Exxon Mobil Corp. | 284,619 | |||||||||||||
1,000 | Marathon Oil Corp. | 30,490 | |||||||||||||
800 | National Oilwell Varco, Inc. | 30,072 | |||||||||||||
1,246 | Occidental Petroleum Corp. | 91,058 | |||||||||||||
200 | Oil States International, Inc. * | 8,246 | |||||||||||||
400 | Pioneer Natural Resources Co. | 23,128 | |||||||||||||
700 | Rowan Cos, Inc. * | 17,997 | |||||||||||||
207 | Schlumberger Ltd. | 11,039 | |||||||||||||
400 | Sunoco, Inc. | 13,472 | |||||||||||||
1,300 | Valero Energy Corp. | 20,501 | |||||||||||||
900 | Williams Cos., Inc. | 16,317 | |||||||||||||
Total Energy | 954,523 |
See accompanying notes to the financial statements.
4
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Food & Staples Retailing — 5.5% | |||||||||||||||
700 | Costco Wholesale Corp. | 39,585 | |||||||||||||
838 | CVS Caremark Corp. | 22,626 | |||||||||||||
1,700 | Kroger Co. (The) | 33,541 | |||||||||||||
1,200 | Safeway, Inc. | 22,560 | |||||||||||||
1,065 | Supervalu, Inc. | 10,352 | |||||||||||||
2,800 | Sysco Corp. | 76,972 | |||||||||||||
4,600 | Walgreen Co. | 123,648 | |||||||||||||
15,885 | Wal–Mart Stores, Inc. | 796,474 | |||||||||||||
Total Food & Staples Retailing | 1,125,758 | ||||||||||||||
Food, Beverage & Tobacco — 6.0% | |||||||||||||||
500 | Brown-Forman Corp.-Class B | 30,645 | |||||||||||||
800 | Campbell Soup Co. | 29,808 | |||||||||||||
1,600 | Coca-Cola Enterprises, Inc. | 45,536 | |||||||||||||
8,100 | Coca–Cola Co. (The) | 452,952 | |||||||||||||
2,100 | General Mills, Inc. | 75,936 | |||||||||||||
600 | Hansen Natural Corp. * | 27,024 | |||||||||||||
800 | Hershey Co. (The) | 37,176 | |||||||||||||
600 | Hormel Foods Corp. | 25,890 | |||||||||||||
1,200 | Kellogg Co. | 59,616 | |||||||||||||
400 | McCormick & Co., Inc. (Non Voting) | 15,948 | |||||||||||||
500 | Mead Johnson Nutrition Co. | 26,095 | |||||||||||||
5,730 | PepsiCo, Inc. | 367,751 | |||||||||||||
2,600 | Sara Lee Corp. | 37,544 | |||||||||||||
Total Food, Beverage & Tobacco | 1,231,921 | ||||||||||||||
Health Care Equipment & Services — 8.9% | |||||||||||||||
1,700 | Aetna, Inc. | 45,424 | |||||||||||||
2,100 | AmerisourceBergen Corp. | 57,288 | |||||||||||||
2,897 | Baxter International, Inc. | 123,296 | |||||||||||||
1,000 | Becton, Dickinson & Co. | 68,190 | |||||||||||||
300 | C.R. Bard, Inc. | 23,049 | |||||||||||||
2,200 | Cardinal Health, Inc. | 65,912 | |||||||||||||
500 | CareFusion Corp. * | 10,790 |
See accompanying notes to the financial statements.
5
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Health Care Equipment & Services — continued | |||||||||||||||
100 | Catalyst Health Solutions, Inc. * | 4,009 | |||||||||||||
300 | Cerner Corp. * | 21,855 | |||||||||||||
700 | Cigna Corp. | 22,554 | |||||||||||||
900 | Coventry Health Care, Inc. * | 17,415 | |||||||||||||
500 | DENTSPLY International, Inc. | 13,910 | |||||||||||||
400 | Edwards Lifesciences Corp. * | 23,028 | |||||||||||||
1,000 | Express Scripts, Inc. * | 42,600 | |||||||||||||
700 | Health Net, Inc. * | 16,716 | |||||||||||||
300 | Henry Schein, Inc. * | 15,840 | |||||||||||||
500 | Hospira, Inc. * | 25,680 | |||||||||||||
1,000 | Humana, Inc. * | 47,790 | |||||||||||||
300 | Idexx Laboratories, Inc. * | 16,581 | |||||||||||||
80 | Intuitive Surgical, Inc. * | 21,203 | |||||||||||||
600 | Kinetic Concepts, Inc. * | 19,152 | |||||||||||||
500 | Laboratory Corp. of America Holdings * | 36,310 | |||||||||||||
1,456 | Lincare Holdings, Inc. | 33,517 | |||||||||||||
1,000 | McKesson Corp. | 58,050 | |||||||||||||
200 | Mednax, Inc. * | 9,268 | |||||||||||||
6,200 | Medtronic, Inc. | 195,176 | |||||||||||||
400 | Omnicare, Inc. | 7,680 | |||||||||||||
400 | Owens & Minor, Inc. | 10,664 | |||||||||||||
500 | Patterson Cos., Inc. | 12,645 | |||||||||||||
100 | Quality Systems, Inc. | 5,605 | |||||||||||||
600 | Quest Diagnostics, Inc. | 26,100 | |||||||||||||
600 | ResMed, Inc. * | 18,084 | |||||||||||||
2,200 | Stryker Corp. | 95,018 | |||||||||||||
1,200 | St Jude Medical, Inc. * | 41,484 | |||||||||||||
9,692 | UnitedHealth Group, Inc. | 307,430 | |||||||||||||
700 | Varian Medical Systems, Inc. * | 37,268 | |||||||||||||
400 | VCA Antech, Inc. * | 7,908 | |||||||||||||
2,797 | WellPoint, Inc. * | 138,955 | |||||||||||||
1,500 | Zimmer Holdings, Inc. * | 70,755 | |||||||||||||
Total Health Care Equipment & Services | 1,814,199 |
See accompanying notes to the financial statements.
6
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Household & Personal Products — 5.0% | |||||||||||||||
700 | Avon Products, Inc. | 20,370 | |||||||||||||
300 | Church & Dwight Co., Inc. | 18,369 | |||||||||||||
500 | Clorox Co. | 32,410 | |||||||||||||
1,900 | Colgate–Palmolive Co. | 140,296 | |||||||||||||
800 | Estee Lauder Cos. (The), Inc.-Class A | 44,856 | |||||||||||||
300 | Herbalife Ltd. | 16,674 | |||||||||||||
1,200 | Kimberly–Clark Corp. | 77,280 | |||||||||||||
11,048 | Procter & Gamble Co. (The) | 659,234 | |||||||||||||
Total Household & Personal Products | 1,009,489 | ||||||||||||||
Insurance — 2.5% | |||||||||||||||
1,200 | AFLAC, Inc. | 56,700 | |||||||||||||
200 | Allied World Assurance Co. Holdings Ltd. | 10,074 | |||||||||||||
1,100 | Allstate Corp. (The) | 30,360 | |||||||||||||
300 | American Financial Group, Inc. | 8,631 | |||||||||||||
700 | American International Group, Inc. * | 23,751 | |||||||||||||
200 | Arch Capital Group Ltd. * | 15,960 | |||||||||||||
400 | Aspen Insurance Holdings Ltd. | 11,360 | |||||||||||||
400 | Assurant, Inc. | 14,624 | |||||||||||||
500 | Brown & Brown, Inc. | 9,520 | |||||||||||||
400 | Endurance Specialty Holdings Ltd. | 14,736 | |||||||||||||
2,400 | Genworth Financial, Inc.-Class A * | 25,992 | |||||||||||||
1,300 | Hartford Financial Services Group (The), Inc. | 26,208 | |||||||||||||
1,000 | Lincoln National Corp. | 23,360 | |||||||||||||
100 | Platinum Underwriters Holdings Ltd. | 4,021 | |||||||||||||
1,300 | Prudential Financial, Inc. | 65,741 | |||||||||||||
200 | RenaissanceRe Holdings Ltd. | 11,358 | |||||||||||||
300 | StanCorp Financial Group, Inc. | 10,689 | |||||||||||||
300 | Torchmark Corp. | 14,805 | |||||||||||||
300 | Transatlantic Holdings, Inc. | 14,301 | |||||||||||||
1,500 | Travelers Cos. (The), Inc. | 73,470 | |||||||||||||
700 | Unum Group | 14,035 | |||||||||||||
800 | Validus Holdings Ltd. | 20,376 | |||||||||||||
400 | W.R. Berkley Corp. | 10,540 | |||||||||||||
Total Insurance | 510,612 |
See accompanying notes to the financial statements.
7
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Materials — 1.2% | |||||||||||||||
300 | Ashland, Inc. | 13,938 | |||||||||||||
300 | Cliffs Natural Resources, Inc. | 18,357 | |||||||||||||
100 | Commercial Metals Co. | 1,303 | |||||||||||||
300 | Domtar Corp. | 18,006 | |||||||||||||
3,100 | Dow Chemical Co. (The) | 75,547 | |||||||||||||
500 | Ecolab, Inc. | 23,700 | |||||||||||||
2,000 | Huntsman Corp. | 18,220 | |||||||||||||
200 | Lubrizol Corp. | 18,662 | |||||||||||||
300 | PPG Industries, Inc. | 19,749 | |||||||||||||
300 | Sigma–Aldrich Corp. | 15,951 | |||||||||||||
300 | United States Steel Corp. | 12,753 | |||||||||||||
Total Materials | 236,186 | ||||||||||||||
Media — 3.3% | |||||||||||||||
4,813 | CBS Corp.-Class B (Non Voting) | 66,516 | |||||||||||||
1,200 | Clear Channel Outdoor Holdings, Inc.-Class A * | 12,060 | |||||||||||||
3,500 | Comcast Corp.-Class A | 59,920 | |||||||||||||
800 | DirectTV - Class A * | 30,336 | |||||||||||||
1,700 | Gannett Co., Inc. | 20,553 | |||||||||||||
300 | Liberty Media Corp. Capital-Class A * | 13,524 | |||||||||||||
3,500 | Liberty Media Corp.-Interactive-Class A * | 36,925 | |||||||||||||
1,100 | Liberty Media Corp.-Starz-Class A * | 65,714 | |||||||||||||
1,200 | McGraw-Hill Cos. (The), Inc. | 33,180 | |||||||||||||
3,300 | News Corp.-Class A | 41,481 | |||||||||||||
700 | Time Warner Cable, Inc. | 36,127 | |||||||||||||
3,000 | Time Warner, Inc. | 89,940 | |||||||||||||
1,800 | Viacom, Inc.-Class B | 56,556 | |||||||||||||
2,900 | Walt Disney Co. (The) | 94,511 | |||||||||||||
26 | Washington Post Co. (The)-Class B | 9,366 | |||||||||||||
Total Media | 666,709 | ||||||||||||||
Pharmaceuticals, Biotechnology & Life Sciences — 18.4% | |||||||||||||||
6,600 | Abbott Laboratories | 325,644 | |||||||||||||
1,400 | Allergan, Inc. | 85,988 |
See accompanying notes to the financial statements.
8
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Pharmaceuticals, Biotechnology & Life Sciences — continued | |||||||||||||||
4,000 | Amgen, Inc. * | 204,160 | |||||||||||||
700 | Biogen Idec, Inc. * | 37,660 | |||||||||||||
7,600 | Bristol–Myers Squibb Co. | 198,208 | |||||||||||||
8,600 | Eli Lilly & Co. | 288,616 | |||||||||||||
1,200 | Endo Pharmaceuticals Holdings, Inc. * | 32,604 | |||||||||||||
2,600 | Forest Laboratories, Inc. * | 70,954 | |||||||||||||
3,000 | Gilead Sciences, Inc. * | 95,580 | |||||||||||||
9,020 | Johnson & Johnson | 514,321 | |||||||||||||
20,351 | Merck & Co., Inc. | 715,541 | |||||||||||||
190 | Mettler-Toledo International, Inc. * | 21,012 | |||||||||||||
1,100 | Mylan, Inc. * | 18,876 | |||||||||||||
200 | Perrigo Co. | 11,398 | |||||||||||||
65,949 | Pfizer, Inc. | 1,050,568 | |||||||||||||
800 | Pharmaceutical Product Development, Inc. | 18,376 | |||||||||||||
1,086 | Thermo Fisher Scientific, Inc. * | 45,742 | |||||||||||||
400 | Waters Corp. * | 24,208 | |||||||||||||
Total Pharmaceuticals, Biotechnology & Life Sciences | 3,759,456 | ||||||||||||||
Real Estate — 0.9% | |||||||||||||||
1,200 | Annaly Capital Management, Inc. REIT | 20,856 | |||||||||||||
600 | Equity Residential REIT | 27,498 | |||||||||||||
700 | Forest City Enterprises, Inc.-Class A REIT * | 7,889 | |||||||||||||
1,000 | General Growth Properties, Inc. REIT | 14,070 | |||||||||||||
1,900 | Host Hotels & Resorts, Inc. REIT | 24,947 | |||||||||||||
500 | Simon Property Group, Inc. REIT | 45,225 | |||||||||||||
400 | SL Green Realty Corp. REIT | 24,112 | |||||||||||||
300 | Vornado Realty Trust REIT | 24,318 | |||||||||||||
Total Real Estate | 188,915 | ||||||||||||||
Retailing — 2.5% | |||||||||||||||
500 | Advance Auto Parts, Inc. | 27,235 | |||||||||||||
2,921 | Aeropostale, Inc. * | 62,217 | |||||||||||||
600 | AutoNation, Inc. * | 13,548 | |||||||||||||
350 | AutoZone, Inc. * | 73,423 |
See accompanying notes to the financial statements.
9
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Retailing — continued | |||||||||||||||
1,200 | Best Buy Co., Inc. | 37,668 | |||||||||||||
300 | Dollar Tree, Inc. * | 13,599 | |||||||||||||
400 | Genuine Parts Co. | 16,772 | |||||||||||||
2,400 | Home Depot, Inc. | 66,744 | |||||||||||||
1,300 | Limited Brands, Inc. | 30,680 | |||||||||||||
1,900 | Macy's, Inc. | 36,936 | |||||||||||||
400 | Nordstrom, Inc. | 11,568 | |||||||||||||
500 | RadioShack Corp. | 9,240 | |||||||||||||
1,050 | Sears Holdings Corp. * | 64,995 | |||||||||||||
1,000 | TJX Cos. (The), Inc. | 39,690 | |||||||||||||
Total Retailing | 504,315 | ||||||||||||||
Software & Services — 17.2% | |||||||||||||||
1,500 | Accenture Plc.-Class A | 54,900 | |||||||||||||
1,500 | Adobe Systems, Inc. * | 41,640 | |||||||||||||
1,100 | AMDOCS Ltd. * | 28,853 | |||||||||||||
1,200 | Automatic Data Processing, Inc. | 46,332 | |||||||||||||
400 | BMC Software, Inc. * | 14,424 | |||||||||||||
1,600 | Cognizant Technology Solutions Corp.-Class A * | 92,168 | |||||||||||||
300 | Computer Sciences Corp. | 11,943 | |||||||||||||
7,900 | eBay, Inc. * | 183,596 | |||||||||||||
200 | Factset Research Systems, Inc. | 14,710 | |||||||||||||
500 | Global Payments, Inc. | 18,815 | |||||||||||||
1,706 | Google, Inc.-Class A * | 767,734 | |||||||||||||
1,604 | International Business Machines Corp. | 197,661 | |||||||||||||
1,100 | Intuit, Inc. * | 47,080 | |||||||||||||
400 | Jack Henry & Associates, Inc. | 9,416 | |||||||||||||
200 | Mantech International Corp.-Class A * | 7,078 | |||||||||||||
386 | MasterCard, Inc.-Class A | 76,567 | |||||||||||||
400 | McAfee, Inc. * | 18,820 | |||||||||||||
300 | Micros Systems, Inc. * | 11,430 | |||||||||||||
44,254 | Microsoft Corp. | 1,039,084 | |||||||||||||
500 | NeuStar, Inc. * | 11,070 | |||||||||||||
5,664 | Novell, Inc. * | 31,832 |
See accompanying notes to the financial statements.
10
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Software & Services — continued | |||||||||||||||
27,800 | Oracle Corp. | 608,264 | |||||||||||||
1,300 | Paychex, Inc. | 32,357 | |||||||||||||
100 | Quest Software, Inc. * | 2,143 | |||||||||||||
300 | Salesforce.com, Inc. * | 32,964 | |||||||||||||
3,300 | Symantec Corp. * | 44,979 | |||||||||||||
900 | Total System Services, Inc. | 12,780 | |||||||||||||
700 | VMware, Inc. * | 54,999 | |||||||||||||
Total Software & Services | 3,513,639 | ||||||||||||||
Technology Hardware & Equipment — 7.6% | |||||||||||||||
2,110 | Apple, Inc. * | 513,511 | |||||||||||||
13,400 | Cisco Systems, Inc. * | 268,670 | |||||||||||||
5,180 | Dell, Inc. * | 60,969 | |||||||||||||
500 | Dolby Laboratories, Inc.-Class A * | 27,710 | |||||||||||||
300 | F5 Networks, Inc. * | 26,229 | |||||||||||||
700 | Harris Corp. | 29,449 | |||||||||||||
3,600 | Hewlett-Packard Co. | 138,528 | |||||||||||||
600 | Ingram Micro, Inc.-Class A * | 9,036 | |||||||||||||
600 | Lexmark International, Inc. * | 20,994 | |||||||||||||
500 | NetApp, Inc. * | 20,220 | |||||||||||||
8,743 | Qualcomm, Inc. | 334,944 | |||||||||||||
1,700 | Seagate Technology Plc * | 17,221 | |||||||||||||
300 | Tech Data Corp. * | 10,860 | |||||||||||||
1,000 | Western Digital Corp. * | 24,150 | |||||||||||||
6,500 | Xerox Corp. | 54,860 | |||||||||||||
Total Technology Hardware & Equipment | 1,557,351 | ||||||||||||||
Telecommunication Services — 1.3% | |||||||||||||||
4,200 | AT&T, Inc. | 113,526 | |||||||||||||
600 | Crown Castle International Corp. * | 24,672 | |||||||||||||
600 | NII Holdings, Inc. * | 21,750 | |||||||||||||
400 | Telephone & Data Systems, Inc. | 11,556 | |||||||||||||
3,084 | Verizon Communications, Inc. | 91,009 | |||||||||||||
Total Telecommunication Services | 262,513 |
See accompanying notes to the financial statements.
11
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Transportation — 0.5% | |||||||||||||||
600 | CH Robinson Worldwide, Inc. | 38,994 | |||||||||||||
1,600 | Delta Air Lines, Inc. * | 16,736 | |||||||||||||
500 | Norfolk Southern Corp. | 26,840 | |||||||||||||
900 | UAL Corp. * | 19,071 | |||||||||||||
Total Transportation | 101,641 | ||||||||||||||
Utilities — 0.2% | |||||||||||||||
500 | DTE Energy Co. | 23,425 | |||||||||||||
400 | Integrys Energy Group, Inc. | 19,380 | |||||||||||||
Total Utilities | 42,805 | ||||||||||||||
TOTAL COMMON STOCKS (COST $20,706,242) | 20,129,063 | ||||||||||||||
MUTUAL FUNDS — 0.9% | |||||||||||||||
Affiliated Issuers — 0.9% | |||||||||||||||
7,359 | GMO U.S. Treasury Fund | 183,973 | |||||||||||||
TOTAL MUTUAL FUNDS (COST $184,009) | 183,973 | ||||||||||||||
SHORT-TERM INVESTMENTS — 0.2% | |||||||||||||||
Money Market Funds — 0.2% | |||||||||||||||
45,358 | State Street Institutional Treasury Money Market Fund-Institutional Class | 45,358 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $45,358) | 45,358 | ||||||||||||||
TOTAL INVESTMENTS — 99.9% (Cost $20,935,609) | 20,358,394 | ||||||||||||||
Other Assets and Liabilities (net) — 0.1% | 22,531 | ||||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 20,380,925 |
Notes to Schedule of Investments:
REIT - Real Estate Investment Trust
* Non-income producing security.
See accompanying notes to the financial statements.
12
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $20,751,600) (Note 2) | $ | 20,174,421 | |||||
Investments in affiliated issuers, at value (cost $184,009) (Notes 2 and 10) | 183,973 | ||||||
Dividends and interest receivable | 53,952 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 7,998 | ||||||
Total assets | 20,420,344 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 390 | ||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 5,904 | ||||||
Shareholder service fee | 2,683 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 124 | ||||||
Accrued expenses | 30,318 | ||||||
Total liabilities | 39,419 | ||||||
Net assets | $ | 20,380,925 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 32,121,751 | |||||
Accumulated undistributed net investment income | 54,988 | ||||||
Accumulated net realized loss | (11,218,599 | ) | |||||
Net unrealized depreciation | (577,215 | ) | |||||
$ | 20,380,925 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 20,380,925 | |||||
Shares outstanding: | |||||||
Class III | 2,361,787 | ||||||
Net asset value per share: | |||||||
Class III | $ | 8.63 |
See accompanying notes to the financial statements.
13
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $15) | $ | 206,941 | |||||
Interest | 164 | ||||||
Dividends from affiliated issuers (Note 10) | 44 | ||||||
Total investment income | 207,149 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 36,029 | ||||||
Shareholder service fee – Class III (Note 5) | 16,377 | ||||||
Audit and tax fees | 31,188 | ||||||
Custodian, fund accounting agent and transfer agent fees | 11,684 | ||||||
Registration fees | 1,104 | ||||||
Legal fees | 552 | ||||||
Trustees fees and related expenses (Note 5) | 294 | ||||||
Miscellaneous | 706 | ||||||
Total expenses | 97,934 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (45,141 | ) | |||||
Net expenses | 52,793 | ||||||
Net investment income (loss) | 154,356 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 49,093 | ||||||
Realized gains distributions from affiliated issuers (Note 10) | 25 | ||||||
Closed futures contracts | 9,019 | ||||||
Net realized gain (loss) | 58,137 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | (1,438,789 | ) | |||||
Investments in affiliated issuers | (36 | ) | |||||
Open futures contracts | (2,954 | ) | |||||
Net unrealized gain (loss) | (1,441,779 | ) | |||||
Net realized and unrealized gain (loss) | (1,383,642 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (1,229,286 | ) |
See accompanying notes to the financial statements.
14
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 154,356 | $ | 324,660 | |||||||
Net realized gain (loss) | 58,137 | (1,908,963 | ) | ||||||||
Change in net unrealized appreciation (depreciation) | (1,441,779 | ) | 8,515,515 | ||||||||
Net increase (decrease) in net assets from operations | (1,229,286 | ) | 6,931,212 | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (154,151 | ) | (360,133 | ) | |||||||
Net share transactions (Note 9): | |||||||||||
Class III | 140,749 | (1,796,320 | ) | ||||||||
Total increase (decrease) in net assets | (1,242,688 | ) | 4,774,759 | ||||||||
Net assets: | |||||||||||
Beginning of period | 21,623,613 | 16,848,854 | |||||||||
End of period (including accumulated undistributed net investment income of $54,988 and $54,783, respectively) | $ | 20,380,925 | $ | 21,623,613 |
See accompanying notes to the financial statements.
15
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 9.22 | $ | 6.54 | $ | 10.03 | $ | 12.88 | $ | 12.45 | $ | 12.24 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.07 | 0.13 | 0.15 | 0.19 | 0.18 | 0.20 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.59 | ) | 2.70 | (3.50 | ) | (0.96 | )(a) | 0.54 | 0.44 | ||||||||||||||||||
Total from investment operations | (0.52 | ) | 2.83 | (3.35 | ) | (0.77 | ) | 0.72 | 0.64 | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.07 | ) | (0.15 | ) | (0.14 | ) | (0.22 | ) | (0.23 | ) | (0.15 | ) | |||||||||||||||
From net realized gains | — | — | — | (1.86 | ) | (0.06 | ) | (0.28 | ) | ||||||||||||||||||
Total distributions | (0.07 | ) | (0.15 | ) | (0.14 | ) | (2.08 | ) | (0.29 | ) | (0.43 | ) | |||||||||||||||
Net asset value, end of period | $ | 8.63 | $ | 9.22 | $ | 6.54 | $ | 10.03 | $ | 12.88 | $ | 12.45 | |||||||||||||||
Total Return(b) | (5.72 | )%** | 43.63 | % | (33.76 | )% | (7.30 | )% | 5.87 | % | 5.40 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 20,381 | $ | 21,624 | $ | 16,849 | $ | 45,197 | $ | 188,133 | $ | 224,097 | |||||||||||||||
Net expenses to average daily net assets | 0.48 | %(c)(d)* | 0.48 | %(c) | 0.48 | %(c) | 0.48 | %(c) | 0.48 | % | 0.48 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 1.41 | %* | 1.63 | % | 1.67 | % | 1.52 | % | 1.46 | % | 1.68 | % | |||||||||||||||
Portfolio turnover rate | 52 | %** | 60 | % | 65 | % | 74 | % | 73 | % | 63 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.41 | %* | 0.39 | % | 0.39 | % | 0.08 | % | 0.06 | % | 0.04 | % |
(a) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain (loss) on investments due to the timing of purchases and redemptions of Fund shares in relation to fluctuating market values of the investments of the Fund.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(c) The net expense ratio does not include the effect of expense reductions (Note 2).
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
16
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO Tobacco-Free Core Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks high total return. The Fund seeks to achieve its investment objective by outperforming its benchmark, the S&P 500 Index. The Fund typically invests directly and indirectly (e.g., through the GMO funds in which the Fund invests, collectively referred to as the "underlying funds" or derivatives) in equity investments. Under normal circumstances, the Fund invests directly and indirectly at least 80% of its assets, and expects to invest substantially all of its assets, in investments in tobacco-free companies. For these purposes, the term "equity investments" refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts, and the term "tobacco-free companies" refers to companies that are not listed in the Tobacco Producing Issuer industry classification maintained by Ford Investor Services.
The Manager relies principally on proprietary quantitative models and also employs fundamental investment techniques to evaluate and select equity investments for the Fund. The Manager selects equity investments it believes (i) are undervalued (e.g., equity investments trading at prices below what the Manager believes to be their fundamental value); (ii) have superior fundamentals (e.g., earnings stability); and/or (iii) have shown indications of improving investor sentiment (e.g., positive price movement or upgraded analyst ratings). The Manager also uses proprietary techniques to adjust the portfolio for other factors such as position size, industry and sector weights, and market capitalization. The factors considered and models used by the Manager may change over time based on the Manager's assessment of what combination of models and factors are best positioned to achieve the Fund's investment objective.
In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the-counter ("OTC") derivatives, including options, futures, and swap contracts, (i) as a substitute for direct investment; (ii) in an attempt to reduce investment exposures (which may result in a reduction below zero); (iii) to effect transactions intended as substitutes for securities lending; and/or (iv) in an attempt to adjust elements of its investment exposure. In addition, the Fund may lend its portfolio securities.
17
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the OTC market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or who se values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale.
In accordance with the authoritative guidance on fair value measurements and disclosures under the U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
18
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | $ | 20,129,063 | $ | — | $ | — | $ | 20,129,063 | |||||||||||
Mutual Funds | 183,973 | — | — | 183,973 | |||||||||||||||
Short-Term Investments | 45,358 | — | — | 45,358 | |||||||||||||||
Total Investments | 20,358,394 | — | — | 20,358,394 | |||||||||||||||
Total | $ | 20,358,394 | $ | — | $ | — | $ | 20,358,394 |
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to their portfolio valuation notes in the financial statements.
All of the Fund's common stocks held at period end are classified as Level 1. Please refer to the Schedule of Investments for a more detailed categorization of common stocks.
The Fund held no investments or other financial instruments at either August 31, 2010 or February 28, 2010, whose fair value was determined using Level 3 inputs.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, quarterly, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
19
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund elected to defer to March 1, 2010 post-October capital losses of $213,459.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (6,261,595 | ) | ||||
2/28/2018 | (3,874,200 | ) | |||||
Total | $ | (10,135,795 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 21,786,471 | $ | 797,118 | $ | (2,225,195 | ) | $ | (1,428,077 | ) |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any
20
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact its operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which co llection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds (See Note 5).
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
21
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund's investments.
• Market Risk — Value Securities — The Fund purchases some equity investments at prices below what the Manager believes to be their fundamental value. The Fund runs the risk that the prices of these investments will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value.
Other principal risks of an investment in the Fund include Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, and credit and counterparty risk); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund's securities); Market Risk — Growth Securities (greater price fluctuations re sulting from dependence on future earnings expectations); Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will incur additional expenses as a result o f such investments).
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using
22
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero).
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, indices and markets without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index).
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedin gs. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be secured by collateral, that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and even ts affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a
23
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able
24
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
to enter into a closing transaction due to an illiquid market. During the period ended August 31, 2010, the Fund used futures contracts to maintain the diversity and liquidity of the portfolio. The Fund had no futures contracts outstanding at the end of the period.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an of fsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
25
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price
26
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
27
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
The Effect of Derivative Instruments on the Statement of Operations for the period ended August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Futures contracts | $ | — | $ | — | $ | — | $ | 9,019 | $ | — | $ | 9,019 | |||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 9,019 | $ | — | $ | 9,019 | |||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Futures contracts | $ | — | $ | — | $ | — | $ | (2,954 | ) | $ | — | $ | (2,954 | ) | |||||||||||||
Total | $ | — | $ | — | $ | — | $ | (2,954 | ) | $ | — | $ | (2,954 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
The volume of derivative activity, based on absolute values (futures contracts) outstanding at each month-end, was as follows for the period ended August 31, 2010:
Futures Contracts | |||||||
Average amount outstanding | $ | 205,580 |
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.33% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for
28
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition to the contractual expense reimbursement described above, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect i nvestment in U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund's Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $294 and $93, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Total Indirect Expenses | |||||||||
< 0.001% | 0.000 | % | < 0.001% |
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended August 31, 2010 aggregated $11,914,337 and $10,953,229, respectively.
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss
29
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, 85.15% of the outstanding shares of the Fund were held by one shareholder. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2010, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and none of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 107 | $ | 1,000 | 1,012 | $ | 8,550 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 15,477 | 139,749 | 40,875 | 327,224 | |||||||||||||||
Shares repurchased | — | — | (271,563 | ) | (2,132,094 | ) | |||||||||||||
Net increase (decrease) | 15,584 | $ | 140,749 | (229,676 | ) | $ | (1,796,320 | ) |
10. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO U.S. Treasury Fund | $ | — | $ | 334,069 | $ | 150,000 | $ | 44 | $ | 25 | $ | 183,973 | |||||||||||||||
Totals | $ | — | $ | 334,069 | $ | 150,000 | $ | 44 | $ | 25 | $ | 183,973 |
30
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of a composite of accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three-, five-, seven- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications and experience
31
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparis on to the Manager's separate account clients and the expenses and risks borne by the Manager as a result of the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by , for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating
32
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
33
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including management fees, shareholder service fees and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.48 | % | $ | 1,000.00 | $ | 942.80 | $ | 2.35 | |||||||||||
2) Hypothetical | 0.48 | % | $ | 1,000.00 | $ | 1,022.79 | $ | 2.45 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
34
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 98.5 | % | |||||
Mutual Funds | 1.1 | ||||||
Short-Term Investments | 0.1 | ||||||
Other | 0.3 | ||||||
100.0 | % | ||||||
Industry Group Summary | % of Equity Investments* | ||||||
Pharmaceuticals, Biotechnology & Life Sciences | 18.4 | % | |||||
Software & Services | 17.1 | ||||||
Health Care Equipment & Services | 8.7 | ||||||
Food, Beverage & Tobacco | 7.9 | ||||||
Technology Hardware & Equipment | 7.6 | ||||||
Capital Goods | 6.1 | ||||||
Food & Staples Retailing | 5.4 | ||||||
Household & Personal Products | 5.0 | ||||||
Energy | 4.6 | ||||||
Media | 3.2 | ||||||
Retailing | 2.4 | ||||||
Insurance | 2.3 | ||||||
Consumer Services | 2.2 | ||||||
Consumer Durables & Apparel | 1.5 | ||||||
Materials | 1.5 | ||||||
Diversified Financials | 1.4 | ||||||
Telecommunication Services | 1.3 | ||||||
Real Estate | 1.0 | ||||||
Banks | 0.8 | ||||||
Automobiles & Components | 0.5 | ||||||
Transportation | 0.5 | ||||||
Commercial & Professional Services | 0.4 | ||||||
Utilities | 0.2 | ||||||
100.0 | % |
* Equity investments may consist of common stocks, preferred stocks and rights and warrants. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
1
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
COMMON STOCKS — 98.5% | |||||||||||||||
Automobiles & Components — 0.5% | |||||||||||||||
22,600 | Autoliv, Inc. | 1,223,564 | |||||||||||||
390,400 | Ford Motor Co. * | 4,407,616 | |||||||||||||
53,100 | Harley-Davidson, Inc. | 1,291,392 | |||||||||||||
4,800 | Thor Industries, Inc. | 112,032 | |||||||||||||
26,100 | TRW Automotive Holdings Corp. * | 907,236 | |||||||||||||
Total Automobiles & Components | 7,941,840 | ||||||||||||||
Banks — 0.8% | |||||||||||||||
87,900 | CIT Group, Inc. * | 3,224,172 | |||||||||||||
17,200 | Fulton Financial Corp. | 142,416 | |||||||||||||
63,300 | New York Community Bancorp, Inc. | 1,005,837 | |||||||||||||
119,100 | PNC Financial Services Group, Inc. | 6,069,336 | |||||||||||||
357,100 | Regions Financial Corp. | 2,296,153 | |||||||||||||
3,600 | SVB Financial Group * | 133,812 | |||||||||||||
36 | Valley National Bancorp | 469 | |||||||||||||
Total Banks | 12,872,195 | ||||||||||||||
Capital Goods — 6.0% | |||||||||||||||
205,000 | 3M Co. | 16,102,750 | |||||||||||||
121,800 | Boeing Co. | 7,445,634 | |||||||||||||
89,300 | Caterpillar, Inc. | 5,818,788 | |||||||||||||
110,700 | Danaher Corp. | 4,021,731 | |||||||||||||
7 | DigitalGlobe, Inc. * | 214 | |||||||||||||
29,600 | Dover Corp. | 1,324,896 | |||||||||||||
32,200 | Eaton Corp. | 2,237,256 | |||||||||||||
97,500 | Emerson Electric Co. | 4,548,375 | |||||||||||||
26,200 | Fastenal Co. | 1,186,074 | |||||||||||||
1,582,200 | General Electric Co. | 22,910,256 | |||||||||||||
153,600 | General Dynamics Corp. | 8,581,632 | |||||||||||||
20,900 | Joy Global, Inc. | 1,185,866 | |||||||||||||
26,400 | L-3 Communications Holdings, Inc. | 1,758,240 | |||||||||||||
64,200 | Northrop Grumman Corp. | 3,474,504 | |||||||||||||
26,600 | Owens Corning, Inc. * | 723,520 |
See accompanying notes to the financial statements.
2
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Capital Goods — continued | |||||||||||||||
34,310 | Precision Castparts Corp. | 3,883,206 | |||||||||||||
54,600 | Rockwell Collins, Inc. | 2,944,578 | |||||||||||||
38,600 | Spirit Aerosystems Holdings, Inc.-Class A * | 746,524 | |||||||||||||
101,200 | Textron, Inc. | 1,727,484 | |||||||||||||
112,700 | United Technologies Corp. | 7,349,167 | |||||||||||||
Total Capital Goods | 97,970,695 | ||||||||||||||
Commercial & Professional Services — 0.4% | |||||||||||||||
25,000 | Copart, Inc. * | 826,250 | |||||||||||||
12,300 | Dun & Bradstreet Corp. | 810,570 | |||||||||||||
68,100 | Pitney Bowes, Inc. | 1,310,244 | |||||||||||||
6,400 | Rollins, Inc. | 131,072 | |||||||||||||
98,900 | RR Donnelley & Sons Co. | 1,497,841 | |||||||||||||
24,000 | Stericycle, Inc. * | 1,572,000 | |||||||||||||
Total Commercial & Professional Services | 6,147,977 | ||||||||||||||
Consumer Durables & Apparel — 1.5% | |||||||||||||||
84,900 | Coach, Inc. | 3,042,816 | |||||||||||||
34,900 | Hasbro, Inc. | 1,408,564 | |||||||||||||
259,875 | KB Home | 2,679,311 | |||||||||||||
20,500 | Mohawk Industries, Inc. * | 908,355 | |||||||||||||
65,700 | Newell Rubbermaid, Inc. | 986,814 | |||||||||||||
127,600 | Nike, Inc.-Class B | 8,932,000 | |||||||||||||
33,400 | Stanley Black & Decker, Inc. | 1,791,576 | |||||||||||||
32,600 | VF Corp. | 2,302,212 | |||||||||||||
25,500 | Whirlpool Corp. | 1,891,080 | |||||||||||||
Total Consumer Durables & Apparel | 23,942,728 | ||||||||||||||
Consumer Services — 2.1% | |||||||||||||||
74,000 | Apollo Group, Inc.-Class A * | 3,143,520 | |||||||||||||
13,610 | ITT Educational Services, Inc. * | 724,869 | |||||||||||||
65,500 | Las Vegas Sands Corp. * | 1,855,615 | |||||||||||||
243,100 | McDonald's Corp. | 17,760,886 | |||||||||||||
127,200 | MGM Mirage * | 1,146,072 |
See accompanying notes to the financial statements.
3
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Consumer Services — continued | |||||||||||||||
64,500 | Royal Caribbean Cruises Ltd. * | 1,584,120 | |||||||||||||
39,000 | Starwood Hotels & Resorts Worldwide, Inc. | 1,822,470 | |||||||||||||
4,000 | Strayer Education, Inc. | 579,120 | |||||||||||||
29,200 | Weight Watchers International, Inc. | 832,784 | |||||||||||||
79,000 | Wyndham Worldwide Corp. | 1,832,010 | |||||||||||||
19,500 | Wynn Resorts Ltd. | 1,571,895 | |||||||||||||
42,800 | Yum! Brands, Inc. | 1,784,760 | |||||||||||||
Total Consumer Services | 34,638,121 | ||||||||||||||
Diversified Financials — 1.4% | |||||||||||||||
94,200 | American Express Co. | 3,755,754 | |||||||||||||
37,500 | AmeriCredit Corp. * | 907,500 | |||||||||||||
46,900 | Ameriprise Financial, Inc. | 2,043,902 | |||||||||||||
796,139 | Bank of America Corp. | 9,911,930 | |||||||||||||
47,800 | Capital One Financial Corp. | 1,809,708 | |||||||||||||
261,100 | SLM Corp. * | 2,885,155 | |||||||||||||
18,400 | Towers Watson & Co.-Class A | 826,160 | |||||||||||||
13 | World Acceptance Corp. * | 530 | |||||||||||||
Total Diversified Financials | 22,140,639 | ||||||||||||||
Energy — 4.5% | |||||||||||||||
5,700 | Anadarko Petroleum Corp. | 262,143 | |||||||||||||
16,000 | Atwood Oceanics, Inc. * | 401,280 | |||||||||||||
127,900 | Chevron Corp. | 9,485,064 | |||||||||||||
12,300 | Cimarex Energy Co. | 804,666 | |||||||||||||
398,668 | ConocoPhillips | 20,902,163 | |||||||||||||
377,300 | Exxon Mobil Corp. | 22,321,068 | |||||||||||||
83,400 | Marathon Oil Corp. | 2,542,866 | |||||||||||||
52,100 | National Oilwell Varco, Inc. | 1,958,439 | |||||||||||||
95,500 | Occidental Petroleum Corp. | 6,979,140 | |||||||||||||
19,100 | Oil States International, Inc. * | 787,493 | |||||||||||||
27,600 | Pioneer Natural Resources Co. | 1,595,832 | |||||||||||||
39,100 | Rowan Cos, Inc. * | 1,005,261 | |||||||||||||
14,800 | Schlumberger Ltd. | 789,284 |
See accompanying notes to the financial statements.
4
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Energy — continued | |||||||||||||||
32,900 | Sunoco, Inc. | 1,108,072 | |||||||||||||
6,900 | Superior Energy Services, Inc. * | 148,350 | |||||||||||||
90,400 | Valero Energy Corp. | 1,425,608 | |||||||||||||
64,600 | Williams Cos., Inc. | 1,171,198 | |||||||||||||
Total Energy | 73,687,927 | ||||||||||||||
Food & Staples Retailing — 5.4% | |||||||||||||||
47,600 | Costco Wholesale Corp. | 2,691,780 | |||||||||||||
60,075 | CVS Caremark Corp. | 1,622,025 | |||||||||||||
121,900 | Kroger Co. (The) | 2,405,087 | |||||||||||||
84,700 | Safeway, Inc. | 1,592,360 | |||||||||||||
63,625 | Supervalu, Inc. | 618,435 | |||||||||||||
212,800 | Sysco Corp. | 5,849,872 | |||||||||||||
363,100 | Walgreen Co. | 9,760,128 | |||||||||||||
1,242,500 | Wal-Mart Stores, Inc. | 62,298,950 | |||||||||||||
Total Food & Staples Retailing | 86,838,637 | ||||||||||||||
Food, Beverage & Tobacco — 7.8% | |||||||||||||||
837,300 | Altria Group, Inc. | 18,688,536 | |||||||||||||
42,100 | Brown-Forman Corp.-Class B | 2,580,309 | |||||||||||||
64,800 | Campbell Soup Co. | 2,414,448 | |||||||||||||
121,300 | Coca-Cola Enterprises, Inc. | 3,452,198 | |||||||||||||
641,400 | Coca-Cola Co. (The) | 35,867,088 | |||||||||||||
171,600 | General Mills, Inc. | 6,205,056 | |||||||||||||
40,300 | Hansen Natural Corp. * | 1,815,112 | |||||||||||||
67,000 | Hershey Co. (The) | 3,113,490 | |||||||||||||
38,300 | Hormel Foods Corp. | 1,652,645 | |||||||||||||
96,000 | Kellogg Co. | 4,769,280 | |||||||||||||
37,500 | Lorillard, Inc. | 2,850,375 | |||||||||||||
35,400 | McCormick & Co., Inc. (Non Voting) | 1,411,398 | |||||||||||||
37,100 | Mead Johnson Nutrition Co. | 1,936,249 | |||||||||||||
443,375 | PepsiCo, Inc. | 28,455,807 | |||||||||||||
98,811 | Philip Morris International, Inc. | 5,082,838 |
See accompanying notes to the financial statements.
5
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Food, Beverage & Tobacco — continued | |||||||||||||||
58,600 | Reynolds American, Inc. | 3,196,044 | |||||||||||||
172,100 | Sara Lee Corp. | 2,485,124 | |||||||||||||
Total Food, Beverage & Tobacco | 125,975,997 | ||||||||||||||
Health Care Equipment & Services — 8.6% | |||||||||||||||
125,400 | Aetna, Inc. | 3,350,688 | |||||||||||||
4,400 | AMERIGROUP Corp. * | 162,360 | |||||||||||||
167,700 | AmerisourceBergen Corp. | 4,574,856 | |||||||||||||
218,955 | Baxter International, Inc. | 9,318,725 | |||||||||||||
77,100 | Becton, Dickinson & Co. | 5,257,449 | |||||||||||||
24,100 | C.R. Bard, Inc. | 1,851,603 | |||||||||||||
173,600 | Cardinal Health, Inc. | 5,201,056 | |||||||||||||
40,500 | CareFusion Corp. * | 873,990 | |||||||||||||
4,500 | Catalyst Health Solutions, Inc. * | 180,405 | |||||||||||||
18,500 | Cerner Corp. * | 1,347,725 | |||||||||||||
49,400 | Cigna Corp. | 1,591,668 | |||||||||||||
64,800 | Coventry Health Care, Inc. * | 1,253,880 | |||||||||||||
39,200 | DENTSPLY International, Inc. | 1,090,544 | |||||||||||||
35,160 | Edwards Lifesciences Corp. * | 2,024,161 | |||||||||||||
87,560 | Express Scripts, Inc. * | 3,730,056 | |||||||||||||
56,600 | Health Net, Inc. * | 1,351,608 | |||||||||||||
23,300 | Henry Schein, Inc. * | 1,230,240 | |||||||||||||
28,100 | Hospira, Inc. * | 1,443,216 | |||||||||||||
82,500 | Humana, Inc. * | 3,942,675 | |||||||||||||
26,200 | Idexx Laboratories, Inc. * | 1,448,074 | |||||||||||||
6,290 | Intuitive Surgical, Inc. * | 1,667,039 | |||||||||||||
47,700 | Kinetic Concepts, Inc. * | 1,522,584 | |||||||||||||
38,100 | Laboratory Corp. of America Holdings * | 2,766,822 | |||||||||||||
107,550 | Lincare Holdings, Inc. | 2,475,801 | |||||||||||||
77,700 | McKesson Corp. | 4,510,485 | |||||||||||||
15,000 | Mednax, Inc. * | 695,100 | |||||||||||||
492,300 | Medtronic, Inc. | 15,497,604 | |||||||||||||
33,600 | Omnicare, Inc. | 645,120 | |||||||||||||
17,000 | Owens & Minor, Inc. | 453,220 |
See accompanying notes to the financial statements.
6
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Health Care Equipment & Services — continued | |||||||||||||||
36,500 | Patterson Cos., Inc. | 923,085 | |||||||||||||
3,200 | Quality Systems, Inc. | 179,360 | |||||||||||||
43,700 | Quest Diagnostics, Inc. | 1,900,950 | |||||||||||||
53,000 | ResMed, Inc. * | 1,597,420 | |||||||||||||
5,100 | Sirona Dental Systems, Inc. * | 160,752 | |||||||||||||
173,100 | Stryker Corp. | 7,476,189 | |||||||||||||
87,000 | St Jude Medical, Inc. * | 3,007,590 | |||||||||||||
754,972 | UnitedHealth Group, Inc. | 23,947,712 | |||||||||||||
44,700 | Varian Medical Systems, Inc. * | 2,379,828 | |||||||||||||
26,000 | VCA Antech, Inc. * | 514,020 | |||||||||||||
210,334 | WellPoint, Inc. * | 10,449,393 | |||||||||||||
116,200 | Zimmer Holdings, Inc. * | 5,481,154 | |||||||||||||
Total Health Care Equipment & Services | 139,476,207 | ||||||||||||||
Household & Personal Products — 4.9% | |||||||||||||||
53,100 | Avon Products, Inc. | 1,545,210 | |||||||||||||
16,100 | Church & Dwight Co., Inc. | 985,803 | |||||||||||||
40,500 | Clorox Co. | 2,625,210 | |||||||||||||
148,100 | Colgate-Palmolive Co. | 10,935,704 | |||||||||||||
65,000 | Estee Lauder Cos. (The), Inc.-Class A | 3,644,550 | |||||||||||||
22,700 | Herbalife Ltd. | 1,261,666 | |||||||||||||
95,900 | Kimberly-Clark Corp. | 6,175,960 | |||||||||||||
6,000 | Nu Skin Enterprises, Inc.-Class A | 153,420 | |||||||||||||
871,700 | Procter & Gamble Co. (The) | 52,014,339 | |||||||||||||
Total Household & Personal Products | 79,341,862 | ||||||||||||||
Insurance — 2.3% | |||||||||||||||
84,300 | AFLAC, Inc. | 3,983,175 | |||||||||||||
18,100 | Allied World Assurance Co. Holdings Ltd. | 911,697 | |||||||||||||
97,100 | Allstate Corp. (The) | 2,679,960 | |||||||||||||
29,600 | American Financial Group, Inc. | 851,592 | |||||||||||||
38,000 | American International Group, Inc. * | 1,289,340 | |||||||||||||
14,800 | Arch Capital Group Ltd. * | 1,181,040 | |||||||||||||
26,100 | Aspen Insurance Holdings Ltd. | 741,240 |
See accompanying notes to the financial statements.
7
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Insurance — continued | |||||||||||||||
27,800 | Assurant, Inc. | 1,016,368 | |||||||||||||
36,600 | Brown & Brown, Inc. | 696,864 | |||||||||||||
21,000 | Endurance Specialty Holdings Ltd. | 773,640 | |||||||||||||
159,800 | Genworth Financial, Inc.-Class A * | 1,730,634 | |||||||||||||
106,200 | Hartford Financial Services Group (The), Inc. | 2,140,992 | |||||||||||||
64,000 | Lincoln National Corp. | 1,495,040 | |||||||||||||
4,600 | Platinum Underwriters Holdings Ltd. | 184,966 | |||||||||||||
93,300 | Prudential Financial, Inc. | 4,718,181 | |||||||||||||
15,400 | RenaissanceRe Holdings Ltd. | 874,566 | |||||||||||||
10,800 | StanCorp Financial Group, Inc. | 384,804 | |||||||||||||
23,000 | Torchmark Corp. | 1,135,050 | |||||||||||||
18,700 | Transatlantic Holdings, Inc. | 891,429 | |||||||||||||
122,000 | Travelers Cos. (The), Inc. | 5,975,560 | |||||||||||||
52,100 | Unum Group | 1,044,605 | |||||||||||||
44,500 | Validus Holdings Ltd. | 1,133,415 | |||||||||||||
30,900 | W.R. Berkley Corp. | 814,215 | |||||||||||||
Total Insurance | 36,648,373 | ||||||||||||||
Materials — 1.4% | |||||||||||||||
19,800 | Ashland, Inc. | 919,908 | |||||||||||||
19,000 | Cliffs Natural Resources, Inc. | 1,162,610 | |||||||||||||
11,000 | Commercial Metals Co. | 143,330 | |||||||||||||
26,100 | Domtar Corp. | 1,566,522 | |||||||||||||
245,400 | Dow Chemical Co. (The) | 5,980,398 | |||||||||||||
41,900 | Ecolab, Inc. | 1,986,060 | |||||||||||||
109,900 | Huntsman Corp. | 1,001,189 | |||||||||||||
11,600 | Lubrizol Corp. | 1,082,396 | |||||||||||||
21,600 | PPG Industries, Inc. | 1,421,928 | |||||||||||||
105,375 | Schweitzer-Mauduit International, Inc. | 5,673,390 | |||||||||||||
23,900 | Sigma-Aldrich Corp. | 1,270,763 | |||||||||||||
10,800 | Solutia, Inc. * | 146,232 | |||||||||||||
23,410 | United States Steel Corp. | 995,159 | |||||||||||||
12,100 | Valhi, Inc. | 215,622 | |||||||||||||
Total Materials | 23,565,507 |
See accompanying notes to the financial statements.
8
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Media — 3.2% | |||||||||||||||
379,100 | CBS Corp.-Class B (Non Voting) | 5,239,162 | |||||||||||||
10,800 | Cinemark Holdings, Inc. | 157,788 | |||||||||||||
112,300 | Clear Channel Outdoor Holdings, Inc.-Class A * | 1,128,615 | |||||||||||||
274,100 | Comcast Corp.-Class A | 4,692,592 | |||||||||||||
63,700 | DirectTV-Class A * | 2,415,504 | |||||||||||||
122,300 | Gannett Co., Inc. | 1,478,607 | |||||||||||||
19,100 | Liberty Media Corp. Capital-Class A * | 861,028 | |||||||||||||
281,900 | Liberty Media Corp.-Interactive-Class A * | 2,974,045 | |||||||||||||
78,901 | Liberty Media Corp.-Starz-Class A * | 4,713,546 | |||||||||||||
86,300 | McGraw-Hill Cos. (The), Inc. | 2,386,195 | |||||||||||||
261,600 | News Corp.-Class A | 3,288,312 | |||||||||||||
49,500 | Time Warner Cable, Inc. | 2,554,695 | |||||||||||||
231,700 | Time Warner, Inc. | 6,946,366 | |||||||||||||
135,300 | Viacom, Inc.-Class B | 4,251,126 | |||||||||||||
227,200 | Walt Disney Co. (The) | 7,404,448 | |||||||||||||
2,046 | Washington Post Co. (The)-Class B | 737,030 | |||||||||||||
Total Media | 51,229,059 | ||||||||||||||
Pharmaceuticals, Biotechnology & Life Sciences — 18.2% | |||||||||||||||
523,700 | Abbott Laboratories | 25,839,358 | |||||||||||||
103,600 | Allergan, Inc. | 6,363,112 | |||||||||||||
312,800 | Amgen, Inc. * | 15,965,312 | |||||||||||||
51,500 | Biogen Idec, Inc. * | 2,770,700 | |||||||||||||
600,700 | Bristol-Myers Squibb Co. | 15,666,256 | |||||||||||||
682,500 | Eli Lilly & Co. | 22,904,700 | |||||||||||||
84,000 | Endo Pharmaceuticals Holdings, Inc. * | 2,282,280 | |||||||||||||
202,400 | Forest Laboratories, Inc. * | 5,523,496 | |||||||||||||
236,000 | Gilead Sciences, Inc. * | 7,518,960 | |||||||||||||
708,700 | Johnson & Johnson | 40,410,074 | |||||||||||||
1,596,785 | Merck & Co., Inc. | 56,142,961 | |||||||||||||
14,730 | Mettler-Toledo International, Inc. * | 1,628,991 | |||||||||||||
104,200 | Mylan, Inc. * | 1,788,072 | |||||||||||||
17,800 | Perrigo Co. | 1,014,422 | |||||||||||||
5,174,336 | Pfizer, Inc. | 82,427,172 |
See accompanying notes to the financial statements.
9
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Pharmaceuticals, Biotechnology & Life Sciences — continued | |||||||||||||||
42,300 | Pharmaceutical Product Development, Inc. | 971,631 | |||||||||||||
77,906 | Thermo Fisher Scientific, Inc. * | 3,281,401 | |||||||||||||
22,700 | Waters Corp. * | 1,373,804 | |||||||||||||
Total Pharmaceuticals, Biotechnology & Life Sciences | 293,872,702 | ||||||||||||||
Real Estate — 0.9% | |||||||||||||||
95,700 | Annaly Capital Management, Inc. REIT | 1,663,266 | |||||||||||||
6,750 | CommonWealth REIT REIT | 162,810 | |||||||||||||
45,100 | Equity Residential REIT | 2,066,933 | |||||||||||||
61,000 | Forest City Enterprises, Inc.-Class A REIT * | 687,470 | |||||||||||||
88,600 | General Growth Properties, Inc. REIT | 1,246,602 | |||||||||||||
143,300 | Host Hotels & Resorts, Inc. REIT | 1,881,529 | |||||||||||||
46,400 | Simon Property Group, Inc. REIT | 4,196,880 | |||||||||||||
20,000 | SL Green Realty Corp. REIT | 1,205,600 | |||||||||||||
25,600 | Vornado Realty Trust REIT | 2,075,136 | |||||||||||||
Total Real Estate | 15,186,226 | ||||||||||||||
Retailing — 2.3% | |||||||||||||||
28,600 | Advance Auto Parts, Inc. | 1,557,842 | |||||||||||||
211,705 | Aeropostale, Inc. * | 4,509,316 | |||||||||||||
54,800 | AutoNation, Inc. * | 1,237,384 | |||||||||||||
24,420 | AutoZone, Inc. * | 5,122,828 | |||||||||||||
81,100 | Best Buy Co., Inc. | 2,545,729 | |||||||||||||
20,100 | Dollar Tree, Inc. * | 911,133 | |||||||||||||
33,700 | Genuine Parts Co. | 1,413,041 | |||||||||||||
189,000 | Home Depot, Inc. | 5,256,090 | |||||||||||||
106,000 | Limited Brands, Inc. | 2,501,600 | |||||||||||||
141,600 | Macy's, Inc. | 2,752,704 | |||||||||||||
34,400 | Nordstrom, Inc. | 994,848 | |||||||||||||
36,600 | RadioShack Corp. | 676,368 | |||||||||||||
84,950 | Sears Holdings Corp. * | 5,258,405 | |||||||||||||
74,500 | TJX Cos. (The), Inc. | 2,956,905 | |||||||||||||
Total Retailing | 37,694,193 |
See accompanying notes to the financial statements.
10
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Software & Services — 16.8% | |||||||||||||||
104,300 | Accenture Plc.-Class A | 3,817,380 | |||||||||||||
106,400 | Adobe Systems, Inc. * | 2,953,664 | |||||||||||||
84,700 | AMDOCS Ltd. * | 2,221,681 | |||||||||||||
83,900 | Automatic Data Processing, Inc. | 3,239,379 | |||||||||||||
28,400 | BMC Software, Inc. * | 1,024,104 | |||||||||||||
125,500 | Cognizant Technology Solutions Corp.-Class A * | 7,229,428 | |||||||||||||
26,700 | Computer Sciences Corp. | 1,062,927 | |||||||||||||
623,300 | eBay, Inc. * | 14,485,492 | |||||||||||||
16,900 | Factset Research Systems, Inc. | 1,242,995 | |||||||||||||
31,200 | Global Payments, Inc. | 1,174,056 | |||||||||||||
133,480 | Google, Inc.-Class A * | 60,068,670 | |||||||||||||
121,123 | International Business Machines Corp. | 14,925,987 | |||||||||||||
86,700 | Intuit, Inc. * | 3,710,760 | |||||||||||||
29,300 | Jack Henry & Associates, Inc. | 689,722 | |||||||||||||
4,800 | Mantech International Corp.-Class A * | 169,872 | |||||||||||||
27,457 | MasterCard, Inc.-Class A | 5,446,371 | |||||||||||||
29,900 | McAfee, Inc. * | 1,406,795 | |||||||||||||
24,700 | Micros Systems, Inc. * | 941,070 | |||||||||||||
3,488,200 | Microsoft Corp. | 81,902,936 | |||||||||||||
29,200 | NeuStar, Inc. * | 646,488 | |||||||||||||
406,336 | Novell, Inc. * | 2,283,608 | |||||||||||||
2,181,430 | Oracle Corp. | 47,729,688 | |||||||||||||
97,800 | Paychex, Inc. | 2,434,242 | |||||||||||||
14,000 | Quest Software, Inc. * | 300,020 | |||||||||||||
22,400 | Salesforce.com, Inc. * | 2,461,312 | |||||||||||||
274,000 | Symantec Corp. * | 3,734,620 | |||||||||||||
4,600 | Syntel, Inc. | 177,077 | |||||||||||||
67,900 | Total System Services, Inc. | 964,180 | |||||||||||||
55,500 | VMware, Inc. * | 4,360,635 | |||||||||||||
Total Software & Services | 272,805,159 | ||||||||||||||
Technology Hardware & Equipment — 7.5% | |||||||||||||||
166,540 | Apple, Inc. * | 40,530,840 | |||||||||||||
1,071,300 | Cisco Systems, Inc. * | 21,479,565 | |||||||||||||
414,606 | Dell, Inc. * | 4,879,913 |
See accompanying notes to the financial statements.
11
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Technology Hardware & Equipment — continued | |||||||||||||||
33,400 | Dolby Laboratories, Inc.-Class A * | 1,851,028 | |||||||||||||
20,700 | F5 Networks, Inc. * | 1,809,801 | |||||||||||||
46,900 | Harris Corp. | 1,973,083 | |||||||||||||
287,300 | Hewlett-Packard Co. | 11,055,304 | |||||||||||||
51,300 | Ingram Micro, Inc.-Class A * | 772,578 | |||||||||||||
33,400 | Lexmark International, Inc. * | 1,168,666 | |||||||||||||
39,800 | NetApp, Inc. * | 1,609,512 | |||||||||||||
9,900 | QLogic Corp. * | 147,460 | |||||||||||||
665,610 | Qualcomm, Inc. | 25,499,519 | |||||||||||||
132,600 | Seagate Technology Plc * | 1,343,238 | |||||||||||||
20,500 | Tech Data Corp. * | 742,100 | |||||||||||||
77,400 | Western Digital Corp. * | 1,869,210 | |||||||||||||
489,800 | Xerox Corp. | 4,133,912 | |||||||||||||
Total Technology Hardware & Equipment | 120,865,729 | ||||||||||||||
Telecommunication Services — 1.3% | |||||||||||||||
331,300 | AT&T, Inc. | 8,955,039 | |||||||||||||
46,300 | Crown Castle International Corp. * | 1,903,856 | |||||||||||||
41,500 | NII Holdings, Inc. * | 1,504,375 | |||||||||||||
35,800 | Telephone & Data Systems, Inc. | 1,034,262 | |||||||||||||
241,722 | Verizon Communications, Inc. | 7,133,216 | |||||||||||||
Total Telecommunication Services | 20,530,748 | ||||||||||||||
Transportation — 0.5% | |||||||||||||||
42,900 | CH Robinson Worldwide, Inc. | 2,788,071 | |||||||||||||
123,300 | Delta Air Lines, Inc. * | 1,289,718 | |||||||||||||
42,800 | Norfolk Southern Corp. | 2,297,504 | |||||||||||||
50,400 | UAL Corp. * | 1,067,976 | |||||||||||||
Total Transportation | 7,443,269 | ||||||||||||||
Utilities — 0.2% | |||||||||||||||
36,900 | DTE Energy Co. | 1,728,765 | |||||||||||||
28,100 | Integrys Energy Group, Inc. | 1,361,445 | |||||||||||||
Total Utilities | 3,090,210 | ||||||||||||||
TOTAL COMMON STOCKS (COST $1,641,269,907) | 1,593,906,000 |
See accompanying notes to the financial statements.
12
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
MUTUAL FUNDS — 1.1% | |||||||||||||||
Affiliated Issuers — 1.1% | |||||||||||||||
737,632 | GMO U.S. Treasury Fund | 18,440,790 | |||||||||||||
TOTAL MUTUAL FUNDS (COST $18,441,673) | 18,440,790 | ||||||||||||||
SHORT-TERM INVESTMENTS — 0.1% | |||||||||||||||
Money Market Funds — 0.1% | |||||||||||||||
716,028 | State Street Institutional Treasury Money Market Fund-Institutional Class | 716,028 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $716,028) | 716,028 | ||||||||||||||
TOTAL INVESTMENTS — 99.7% (Cost $1,660,427,608) | 1,613,062,818 | ||||||||||||||
Other Assets and Liabilities (net) — 0.3% | 5,217,579 | ||||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 1,618,280,397 |
Notes to Schedule of Investments:
REIT - Real Estate Investment Trust
* Non-income producing security.
See accompanying notes to the financial statements.
13
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $1,641,985,935) (Note 2) | $ | 1,594,622,028 | |||||
Investments in affiliated issuers, at value (cost $18,441,673) (Notes 2 and 10) | 18,440,790 | ||||||
Receivable for Fund shares sold | 2,098,925 | ||||||
Dividends receivable | 4,268,245 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 47,988 | ||||||
Total assets | 1,619,477,976 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 34,363 | ||||||
Payable for Fund shares repurchased | 370,688 | ||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 443,033 | ||||||
Shareholder service fee | 121,244 | ||||||
Administration fee – Class M | 192 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 3,818 | ||||||
Payable for 12b-1 fee – Class M | 482 | ||||||
Accrued expenses | 223,759 | ||||||
Total liabilities | 1,197,579 | ||||||
Net assets | $ | 1,618,280,397 |
See accompanying notes to the financial statements.
14
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited) — (Continued)
Net assets consist of: | |||||||
Paid-in capital | $ | 2,538,518,422 | |||||
Accumulated undistributed net investment income | 4,539,723 | ||||||
Accumulated net realized loss | (877,412,958 | ) | |||||
Net unrealized depreciation | (47,364,790 | ) | |||||
$ | 1,618,280,397 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 421,832,650 | |||||
Class IV shares | $ | 143,851,344 | |||||
Class VI shares | $ | 1,051,519,042 | |||||
Class M shares | $ | 1,077,361 | |||||
Shares outstanding: | |||||||
Class III | 42,669,094 | ||||||
Class IV | 14,576,101 | ||||||
Class VI | 106,634,601 | ||||||
Class M | 109,030 | ||||||
Net asset value per share: | |||||||
Class III | $ | 9.89 | |||||
Class IV | $ | 9.87 | |||||
Class VI | $ | 9.86 | |||||
Class M | $ | 9.88 |
See accompanying notes to the financial statements.
15
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $729) | $ | 18,915,770 | |||||
Interest | 27,521 | ||||||
Dividends from affiliated issuers (Note 10) | 3,515 | ||||||
Total investment income | 18,946,806 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 2,969,399 | ||||||
Shareholder service fee – Class III (Note 5) | 378,959 | ||||||
Shareholder service fee – Class IV (Note 5) | 165,465 | ||||||
Shareholder service fee – Class VI (Note 5) | 296,532 | ||||||
12b-1 fee – Class M (Note 5) | 1,545 | ||||||
Administration fee – Class M (Note 5) | 1,236 | ||||||
Custodian, fund accounting agent and transfer agent fees | 179,768 | ||||||
Legal fees | 50,232 | ||||||
Audit and tax fees | 29,900 | ||||||
Trustees fees and related expenses (Note 5) | 22,147 | ||||||
Registration fees | 15,180 | ||||||
Miscellaneous | 18,310 | ||||||
Total expenses | 4,128,673 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (285,660 | ) | |||||
Expense reductions (Note 2) | (149 | ) | |||||
Net expenses | 3,842,864 | ||||||
Net investment income (loss) | 15,103,942 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | (15,472,905 | ) | |||||
Investments in affiliated issuers | (2,800 | ) | |||||
Realized gains distributions from affiliated issuers (Note 10) | 958 | ||||||
Closed futures contracts | (485,448 | ) | |||||
Net realized gain (loss) | (15,960,195 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | (114,081,968 | ) | |||||
Investments in affiliated issuers | (883 | ) | |||||
Net unrealized gain (loss) | (114,082,851 | ) | |||||
Net realized and unrealized gain (loss) | (130,043,046 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (114,939,104 | ) |
See accompanying notes to the financial statements.
16
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 15,103,942 | $ | 33,835,401 | |||||||
Net realized gain (loss) | (15,960,195 | ) | (249,904,990 | ) | |||||||
Change in net unrealized appreciation (depreciation) | (114,082,851 | ) | 829,307,675 | ||||||||
Net increase (decrease) in net assets from operations | (114,939,104 | ) | 613,238,086 | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (4,024,125 | ) | (10,923,666 | ) | |||||||
Class IV | (2,134,695 | ) | (6,982,974 | ) | |||||||
Class VI | (9,062,744 | ) | (18,598,750 | ) | |||||||
Class M | (8,140 | ) | (23,641 | ) | |||||||
Total distributions from net investment income | (15,229,704 | ) | (36,529,031 | ) | |||||||
Net share transactions (Note 9): | |||||||||||
Class III | (65,721,384 | ) | (175,328,045 | ) | |||||||
Class IV | (240,585,765 | ) | 19,146,175 | ||||||||
Class VI | 49,998,381 | (70,070,440 | ) | ||||||||
Class M | (132,735 | ) | (974,725 | ) | |||||||
Increase (decrease) in net assets resulting from net share transactions | (256,441,503 | ) | (227,227,035 | ) | |||||||
Total increase (decrease) in net assets | (386,610,311 | ) | 349,482,020 | ||||||||
Net assets: | |||||||||||
Beginning of period | 2,004,890,708 | 1,655,408,688 | |||||||||
End of period (including accumulated undistributed net investment income of $4,539,723 and $4,665,485, respectively) | $ | 1,618,280,397 | $ | 2,004,890,708 |
See accompanying notes to the financial statements.
17
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 10.57 | $ | 7.65 | $ | 12.05 | $ | 14.77 | $ | 14.50 | $ | 14.28 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.08 | 0.17 | 0.18 | 0.22 | 0.22 | 0.24 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.67 | ) | 2.93 | (4.40 | ) | (1.10 | ) | 0.64 | 0.54 | ||||||||||||||||||
Total from investment operations | (0.59 | ) | 3.10 | (4.22 | ) | (0.88 | ) | 0.86 | 0.78 | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.09 | ) | (0.18 | ) | (0.18 | ) | (0.25 | ) | (0.22 | ) | (0.24 | ) | |||||||||||||||
From net realized gains | — | — | — | (1.59 | ) | (0.37 | ) | (0.32 | ) | ||||||||||||||||||
Total distributions | (0.09 | ) | (0.18 | ) | (0.18 | ) | (1.84 | ) | (0.59 | ) | (0.56 | ) | |||||||||||||||
Net asset value, end of period | $ | 9.89 | $ | 10.57 | $ | 7.65 | $ | 12.05 | $ | 14.77 | $ | 14.50 | |||||||||||||||
Total Return(a) | (5.65 | )%** | 40.85 | % | (35.39 | )% | (7.33 | )% | 5.97 | % | 5.60 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 421,833 | $ | 519,309 | $ | 509,120 | $ | 1,131,800 | $ | 1,789,872 | $ | 2,841,959 | |||||||||||||||
Net expenses to average daily net assets | 0.46 | %(b)(c)* | 0.46 | %(b) | 0.46 | %(b) | 0.46 | %(b) | 0.46 | % | 0.47 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 1.51 | %* | 1.73 | % | 1.70 | % | 1.55 | % | 1.51 | % | 1.69 | % | |||||||||||||||
Portfolio turnover rate | 56 | %** | 52 | % | 62 | % | 71 | % | 78 | % | 65 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.03 | %* | 0.03 | % | 0.02 | % | 0.02 | % | 0.02 | % | 0.02 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
18
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class IV share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 10.55 | $ | 7.63 | $ | 12.02 | $ | 14.75 | $ | 14.48 | $ | 14.26 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.08 | 0.17 | 0.19 | 0.22 | 0.22 | 0.25 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.68 | ) | 2.93 | (4.39 | ) | (1.10 | ) | 0.65 | 0.54 | ||||||||||||||||||
Total from investment operations | (0.60 | ) | 3.10 | (4.20 | ) | (0.88 | ) | 0.87 | 0.79 | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.08 | ) | (0.18 | ) | (0.19 | ) | (0.26 | ) | (0.23 | ) | (0.25 | ) | |||||||||||||||
From net realized gains | — | — | — | (1.59 | ) | (0.37 | ) | (0.32 | ) | ||||||||||||||||||
Total distributions | (0.08 | ) | (0.18 | ) | (0.19 | ) | (1.85 | ) | (0.60 | ) | (0.57 | ) | |||||||||||||||
Net asset value, end of period | $ | 9.87 | $ | 10.55 | $ | 7.63 | $ | 12.02 | $ | 14.75 | $ | 14.48 | |||||||||||||||
Total Return(a) | (5.68 | )%** | 41.04 | % | (35.36 | )% | (7.36 | )% | 6.05 | % | 5.66 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 143,851 | $ | 415,267 | $ | 286,333 | $ | 478,084 | $ | 602,048 | $ | 749,822 | |||||||||||||||
Net expenses to average daily net assets | 0.41 | %(b)(c)* | 0.41 | %(b) | 0.41 | %(b) | 0.41 | %(b) | 0.41 | % | 0.43 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 1.55 | %* | 1.76 | % | 1.78 | % | 1.57 | % | 1.55 | % | 1.76 | % | |||||||||||||||
Portfolio turnover rate | 56 | %** | 52 | % | 62 | % | 71 | % | 78 | % | 65 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.03 | %* | 0.03 | % | 0.02 | % | 0.02 | % | 0.02 | % | 0.02 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
19
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class VI share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 10.54 | $ | 7.63 | $ | 12.02 | $ | 14.75 | $ | 14.47 | $ | 14.26 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.09 | 0.17 | 0.19 | 0.23 | 0.23 | 0.25 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.68 | ) | 2.93 | (4.38 | ) | (1.11 | ) | 0.65 | 0.54 | ||||||||||||||||||
Total from investment operations | (0.59 | ) | 3.10 | (4.19 | ) | (0.88 | ) | 0.88 | 0.79 | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.09 | ) | (0.19 | ) | (0.20 | ) | (0.26 | ) | (0.23 | ) | (0.26 | ) | |||||||||||||||
From net realized gains | — | — | — | (1.59 | ) | (0.37 | ) | (0.32 | ) | ||||||||||||||||||
Total distributions | (0.09 | ) | (0.19 | ) | (0.20 | ) | (1.85 | ) | (0.60 | ) | (0.58 | ) | |||||||||||||||
Net asset value, end of period | $ | 9.86 | $ | 10.54 | $ | 7.63 | $ | 12.02 | $ | 14.75 | $ | 14.47 | |||||||||||||||
Total Return(a) | (5.62 | )%** | 40.96 | % | (35.33 | )% | (7.32 | )% | 6.17 | % | 5.64 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,051,519 | $ | 1,069,030 | $ | 858,170 | $ | 2,031,659 | $ | 3,671,926 | $ | 2,543,300 | |||||||||||||||
Net expenses to average daily net assets | 0.37 | %(b)(c)* | 0.37 | %(c) | 0.37 | %(c) | 0.37 | %(c) | 0.37 | % | 0.38 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 1.62 | %* | 1.80 | % | 1.78 | % | 1.63 | % | 1.61 | % | 1.78 | % | |||||||||||||||
Portfolio turnover rate | 56 | %** | 52 | % | 62 | % | 71 | % | 78 | % | 65 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.03 | %* | 0.03 | % | 0.02 | % | 0.02 | % | 0.02 | % | 0.02 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(c) The net expense ratio does not include the effect of expense reductions (Note 2).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
20
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class M share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 10.57 | $ | 7.65 | $ | 12.03 | $ | 14.75 | $ | 14.47 | $ | 14.26 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.06 | 0.14 | 0.15 | 0.18 | 0.18 | 0.20 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.68 | ) | 2.94 | (4.40 | ) | (1.11 | ) | 0.64 | 0.53 | ||||||||||||||||||
Total from investment operations | (0.62 | ) | 3.08 | (4.25 | ) | (0.93 | ) | 0.82 | 0.73 | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.07 | ) | (0.16 | ) | (0.13 | ) | (0.20 | ) | (0.17 | ) | (0.20 | ) | |||||||||||||||
From net realized gains | — | — | — | (1.59 | ) | (0.37 | ) | (0.32 | ) | ||||||||||||||||||
Total distributions | (0.07 | ) | (0.16 | ) | (0.13 | ) | (1.79 | ) | (0.54 | ) | (0.52 | ) | |||||||||||||||
Net asset value, end of period | $ | 9.88 | $ | 10.57 | $ | 7.65 | $ | 12.03 | $ | 14.75 | $ | 14.47 | |||||||||||||||
Total Return(a) | (5.89 | )%** | 40.51 | % | (35.61 | )% | (7.64 | )% | 5.73 | % | 5.22 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,077 | $ | 1,285 | $ | 1,786 | $ | 56,422 | $ | 131,640 | $ | 157,009 | |||||||||||||||
Net expenses to average daily net assets | 0.76 | %(b)(c)* | 0.76 | %(c) | 0.76 | %(c) | 0.76 | %(c) | 0.76 | % | 0.77 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 1.21 | %* | 1.51 | % | 1.29 | % | 1.23 | % | 1.22 | % | 1.41 | % | |||||||||||||||
Portfolio turnover rate | 56 | %** | 52 | % | 62 | % | 71 | % | 78 | % | 65 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.03 | %* | 0.03 | % | 0.02 | % | 0.02 | % | 0.02 | % | 0.02 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(c) The net expense ratio does not include the effect of expense reductions (Note 2).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
21
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO U.S. Core Equity Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks high total return. The Fund seeks to achieve its investment objective by outperforming its benchmark, the S&P 500 Index. Under normal circumstances, the Fund invests directly and indirectly (e.g., through the GMO Funds in which the Fund invests, collectively referred to as the "underlying funds" or derivatives) at least 80% of its assets in equity investments tied economically to the U.S. The term "equity investments" refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts.
The Manager relies principally on proprietary quantitative models and also employs fundamental investment techniques to evaluate and select equity investments for the Fund. The Manager selects equity investments it believes (i) are undervalued (e.g., equity investments trading at prices below what the Manager believes to be their fundamental value); (ii) have superior fundamentals (e.g., earnings stability); and/or (iii) have shown indications of improving investor sentiment (e.g., positive price movement or upgraded analyst ratings). The Manager also uses proprietary techniques to adjust the portfolio for other factors such as position size, industry and sector weights, and market capitalization. The factors considered and models used by the Manager may change over time based on the Manager's assessment of what combination of models and factors are best positioned to achieve the Fund's investment objective.
In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the-counter ("OTC") derivatives, including options, futures, and swap contracts, (i) as a substitute for direct investment; (ii) in an attempt to reduce investment exposures (which may result in a reduction below zero); (iii) to effect transactions intended as substitutes for securities lending; and/or (iv) in an attempt to adjust elements of its investment exposure. In addition, the Fund may lend its portfolio securities.
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective
Throughout the period ended August 31, 2010, the Fund had four classes of shares outstanding: Class III, Class IV, Class VI, and Class M. Class M shares bear an administration fee and a 12b-1 fee while Classes III,
22
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
IV and VI bear a shareholder service fee (See Note 5). The principal economic difference among the classes of shares is the type and level of fees they bear.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the OTC market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or who se values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. See note 4 for a further discussion on valuation of derivative financial instruments.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
23
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | $ | 1,593,906,000 | $ | — | $ | — | $ | 1,593,906,000 | |||||||||||
Mutual Funds | 18,440,790 | — | — | 18,440,790 | |||||||||||||||
Short-Term Investments | 716,028 | — | — | 716,028 | |||||||||||||||
Total Investments | 1,613,062,818 | — | — | 1,613,062,818 | |||||||||||||||
Total | $ | 1,613,062,818 | $ | — | $ | — | $ | 1,613,062,818 |
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements.
All of the Fund's common stocks held at period end are classified as Level 1. Please refer to the Schedule of Investments for a more detailed categorization of common stocks.
The Fund held no investments or other financial instruments at either August 31, 2010 or February 28, 2010, whose fair value was determined using Level 3 inputs.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, quarterly, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are
24
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund elected to defer to March 1, 2010 post-October capital losses of $24,183,972.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (253,190,292 | ) | ||||
2/28/2018 | (511,404,531 | ) | |||||
Total | $ | (764,594,823 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 1,743,670,127 | $ | 61,527,192 | $ | (192,134,501 | ) | $ | (130,607,309 | ) |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally
25
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which co llection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. Investment income, common expenses and realized and unrealized gains and losses are allocated among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service, 12b-1, and administration fees, which are directly attributable to a class of shares, are charged to that class's operations. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds (See Note 5).
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
26
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund's investments.
• Market Risk — Value Securities — The Fund purchases some equity investments at prices below what the Manager believes to be their fundamental value. The Fund runs the risk that the prices of these investments will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value.
Other principal risks of an investment in the Fund include Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, and credit and counterparty risk); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund's securities); Market Risk — Growth Securities (greater price fluctuations re sulting from dependence on future earnings expectations); Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fun d will incur additional expenses as a result of such investments).
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using
27
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero).
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, indices and markets without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index).
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedin gs. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be secured by collateral, that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and even ts affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a
28
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. During the period ended August 31, 2010, the
29
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Fund used futures contracts to maintain the diversity and liquidity of the portfolio. The Fund had no futures contracts outstanding at the end of the period.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an of fsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
30
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price
31
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
32
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
The Effect of Derivative Instruments on the Statement of Operations for the Period Ended August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Future contracts | $ | — | $ | — | $ | — | $ | (485,448 | ) | $ | — | $ | (485,448 | ) | |||||||||||||
Total | $ | — | $ | — | $ | — | $ | (485,448 | ) | $ | — | $ | (485,448 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
The volume of derivative activity, based on absolute values (futures contracts) outstanding at each month-end, was as follows for the period ended August 31, 2010:
Futures Contracts | |||||||
Average amount outstanding | $ | 11,289,010 |
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.31% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets of each class at the annual rate of 0.15% for Class III shares, 0.10% for Class IVshares and 0.055% for Class VI shares.
Holders of Class M shares of the Fund pay GMO an administration fee for support services provided to Class M shareholders. That fee is paid monthly at the annual rate of 0.20% of the average daily net assets of Class M shares. Pursuant to a Rule 12b-1 distribution and service plan adopted by the Fund, holders of Class M shares of the Fund may pay a fee, at the annual rate of up to 1.00% of average daily net assets of Class M shares, for any activities or expenses primarily intended to result in the sale of Class M shares of the Fund and/or the provision of services to Class M shareholders. The Trustees currently limit payments on Class M shares to 0.25% of the Fund's average daily net assets of Class M shares.
33
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.31% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means the administration fee and distribution (12b-1) fee (Class M Shares only), shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an inv estment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition to the contractual expense reimbursement described above, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund's Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $22,147 and $7,728, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Total Indirect Expenses | |||||||||
< 0.001% | 0.00 | % | < 0.001% |
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended August 31, 2010 aggregated $1,046,596,935 and $1,282,771,431, respectively.
34
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, 41.13% of the outstanding shares of the Fund were held by two shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholders owned more than 10% of the outstanding shares of the Fund. One of the shareholders is another fund of the Trust.
As of August 31, 2010, 0.02% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 57.98% of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 1,208,640 | $ | 13,061,552 | 3,511,410 | $ | 32,897,874 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 330,674 | 3,400,065 | 966,073 | 8,947,756 | |||||||||||||||
Shares repurchased | (7,998,637 | ) | (82,183,001 | ) | (21,930,843 | ) | (217,173,675 | ) | |||||||||||
Net increase (decrease) | (6,459,323 | ) | $ | (65,721,384 | ) | (17,453,360 | ) | $ | (175,328,045 | ) |
35
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class IV: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | — | $ | — | 7,571,207 | $ | 76,018,597 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 182,765 | 1,952,673 | 726,034 | 6,697,682 | |||||||||||||||
Shares repurchased | (24,984,490 | ) | (242,538,438 | ) | (6,449,352 | ) | (63,570,104 | ) | |||||||||||
Net increase (decrease) | (24,801,725 | ) | $ | (240,585,765 | ) | 1,847,889 | $ | 19,146,175 | |||||||||||
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class VI: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 13,636,219 | $ | 137,099,528 | 25,991,710 | $ | 252,219,486 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 885,235 | 9,062,744 | 2,002,865 | 18,598,750 | |||||||||||||||
Shares repurchased | (9,272,638 | ) | (96,163,891 | ) | (39,110,545 | ) | (340,888,676 | ) | |||||||||||
Net increase (decrease) | 5,248,816 | $ | 49,998,381 | (11,115,970 | ) | $ | (70,070,440 | ) | |||||||||||
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class M: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | — | $ | — | — | $ | — | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 795 | 8,140 | 2,609 | 23,641 | |||||||||||||||
Shares repurchased | (13,377 | ) | (140,875 | ) | (114,519 | ) | (998,366 | ) | |||||||||||
Net increase (decrease) | (12,582 | ) | $ | (132,735 | ) | (111,910 | ) | $ | (974,725 | ) |
36
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
10. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO U.S. Treasury Fund | $ | — | $ | 25,444,473 | $ | 7,000,000 | $ | 3,515 | $ | 958 | $ | 18,440,790 | |||||||||||||||
Totals | $ | — | $ | 25,444,473 | $ | 7,000,000 | $ | 3,515 | $ | 958 | $ | 18,440,790 |
37
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of a composite of accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three-, five-, seven- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications and experience of the per sonnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
38
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparis on to the Manager's separate account clients and the expenses and risks borne by the Manager as a result of the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by , for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the
39
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
40
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, distribution (12b-1) and/or administration fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
This example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
41
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Fund Expenses — (Continued)
August 31, 2010 (Unaudited)
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.46 | % | $ | 1,000.00 | $ | 943.50 | $ | 2.25 | |||||||||||
2) Hypothetical | 0.46 | % | $ | 1,000.00 | $ | 1,022.89 | $ | 2.35 | |||||||||||
Class IV | |||||||||||||||||||
1) Actual | 0.41 | % | $ | 1,000.00 | $ | 943.20 | $ | 2.01 | |||||||||||
2) Hypothetical | 0.41 | % | $ | 1,000.00 | $ | 1,023.14 | $ | 2.09 | |||||||||||
Class VI | |||||||||||||||||||
1) Actual | 0.37 | % | $ | 1,000.00 | $ | 943.80 | $ | 1.81 | |||||||||||
2) Hypothetical | 0.37 | % | $ | 1,000.00 | $ | 1,023.34 | $ | 1.89 | |||||||||||
Class M | |||||||||||||||||||
1) Actual | 0.76 | % | $ | 1,000.00 | $ | 941.10 | $ | 3.72 | |||||||||||
2) Hypothetical | 0.76 | % | $ | 1,000.00 | $ | 1,021.37 | $ | 3.87 |
* Expenses are calculated using each Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
42
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 96.9 | % | |||||
Short-Term Investments | 2.1 | ||||||
Other | 1.0 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
1
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
MUTUAL FUNDS — 100.0% | |||||||||||
Affiliated Issuers — 100.0% | |||||||||||
3,324,008 | GMO Quality Fund, Class VI | 58,436,055 | |||||||||
5,851,664 | GMO U.S. Core Equity Fund, Class VI | 57,697,409 | |||||||||
92,216 | GMO U.S. Small/Mid Cap Growth Fund, Class III | 1,018,061 | |||||||||
175,927 | GMO U.S. Small/Mid Cap Value Fund, Class III | 1,094,269 | |||||||||
TOTAL MUTUAL FUNDS (COST $133,071,114) | 118,245,794 | ||||||||||
SHORT-TERM INVESTMENTS — 0.0% | |||||||||||
Time Deposits — 0.0% | |||||||||||
25,053 | State Street Eurodollar Time Deposit, 0.01%, due 09/01/2010 | 25,053 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $25,053) | 25,053 | ||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $133,096,167) | 118,270,847 | ||||||||||
Other Assets and Liabilities (net) — (0.0%) | (20,683 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 118,250,164 |
See accompanying notes to the financial statements.
2
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments in affiliated issuers, at value (cost $133,071,114) (Notes 2 and 10) | $ | 118,245,794 | |||||
Investments in unaffiliated issuers, at value (cost $25,053) (Note 2) | 25,053 | ||||||
Receivable for Fund shares sold | 1,000,000 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 4,743 | ||||||
Total assets | 119,275,590 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 1,000,000 | ||||||
Payable to affiliate for (Note 5): | |||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 200 | ||||||
Accrued expenses | 25,226 | ||||||
Total liabilities | 1,025,426 | ||||||
Net assets | $ | 118,250,164 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 142,340,704 | |||||
Accumulated undistributed net investment income | 1,179,239 | ||||||
Accumulated net realized loss | (10,444,459 | ) | |||||
Net unrealized depreciation | (14,825,320 | ) | |||||
$ | 118,250,164 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 118,250,164 | |||||
Shares outstanding: | |||||||
Class III | 27,822,998 | ||||||
Net asset value per share: | |||||||
Class III | $ | 4.25 |
See accompanying notes to the financial statements.
3
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 10) | $ | 1,202,026 | |||||
Interest | 2 | ||||||
Total investment income | 1,202,028 | ||||||
Expenses: | |||||||
Audit and tax fees | 16,100 | ||||||
Custodian, fund accounting agent and transfer agent fees | 6,992 | ||||||
Legal fees | 3,128 | ||||||
Registration fees | 1,380 | ||||||
Trustees fees and related expenses (Note 5) | 1,299 | ||||||
Miscellaneous | 1,196 | ||||||
Total expenses | 30,095 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (28,336 | ) | |||||
Expense reductions (Note 2) | (25 | ) | |||||
Net expenses | 1,734 | ||||||
Net investment income (loss) | 1,200,294 | ||||||
Realized and unrealized gain (loss): | |||||||
Investments in affiliated issuers | (1,537,349 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in affiliated issuers | (6,532,177 | ) | |||||
Net realized and unrealized gain (loss) | (8,069,526 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (6,869,232 | ) |
See accompanying notes to the financial statements.
4
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 1,200,294 | $ | 2,237,184 | |||||||
Net realized gain (loss) | (1,537,349 | ) | (496,961 | ) | |||||||
Change in net unrealized appreciation (depreciation) | (6,532,177 | ) | 31,860,661 | ||||||||
Net increase (decrease) in net assets from operations | (6,869,232 | ) | 33,600,884 | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (1,131,789 | ) | (1,126,450 | ) | |||||||
Net share transactions (Note 9): | |||||||||||
Class III | (2,313,362 | ) | 26,669,880 | ||||||||
Purchase premiums and redemption fees (Notes 2 and 9): | |||||||||||
Class III | — | 4,778 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions and redemption fees | (2,313,362 | ) | 26,674,658 | ||||||||
Total increase (decrease) in net assets | (10,314,383 | ) | 59,149,092 | ||||||||
Net assets: | |||||||||||
Beginning of period | 128,564,547 | 69,415,455 | |||||||||
End of period (including accumulated undistributed net investment income of $1,179,239 and $1,110,734, respectively) | $ | 118,250,164 | $ | 128,564,547 |
See accompanying notes to the financial statements.
5
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 4.56 | $ | 3.31 | $ | 5.11 | $ | 6.38 | $ | 6.56 | $ | 6.41 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(a)† | 0.04 | 0.08 | 0.09 | 0.11 | 0.10 | 0.10 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.31 | ) | 1.21 | (1.70 | ) | (0.42 | ) | 0.28 | 0.31 | ||||||||||||||||||
Total from investment operations | (0.27 | ) | 1.29 | (1.61 | ) | (0.31 | ) | 0.38 | 0.41 | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.04 | ) | (0.04 | ) | (0.08 | ) | (0.32 | ) | (0.15 | ) | (0.12 | ) | |||||||||||||||
From net realized gains | — | — | (0.11 | ) | (0.64 | ) | (0.41 | ) | (0.14 | ) | |||||||||||||||||
Total distributions | (0.04 | ) | (0.04 | ) | (0.19 | ) | (0.96 | ) | (0.56 | ) | (0.26 | ) | |||||||||||||||
Net asset value, end of period | $ | 4.25 | $ | 4.56 | $ | 3.31 | $ | 5.11 | $ | 6.38 | $ | 6.56 | |||||||||||||||
Total Return(b) | (5.91 | )%** | 38.94 | % | (32.42 | )% | (6.43 | )% | 6.48 | % | 6.45 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 118,250 | $ | 128,565 | $ | 69,415 | $ | 95,067 | $ | 149,312 | $ | 173,146 | |||||||||||||||
Net expenses to average daily net assets(c) | 0.00 | %(d)(e)* | 0.00 | %(d)(e) | 0.00 | %(d)(e) | 0.00 | %(d)(e) | 0.04 | % | 0.01 | % | |||||||||||||||
Net investment income (loss) to average daily net assets(a) | 1.92 | %* | 1.99 | % | 1.94 | % | 1.78 | % | 1.63 | % | 1.52 | % | |||||||||||||||
Portfolio turnover rate | 5 | %** | 2 | % | 39 | % | 26 | % | 35 | % | 13 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.05 | %* | 0.05 | % | 0.06 | % | 0.04 | % | 0.18 | % | 0.51 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.00 | (f) | $ | 0.00 | (g) | $ | 0.00 | (g) | $ | 0.00 | (g) | $ | 0.00 | (g) | $ | 0.00 | (g) |
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(d) The net expense ratio does not include the effect of expense reductions (Note 2).
(e) Net expenses were less than 0.01%.
(f) There were no purchase premiums and redemption fees during the period.
(g) Purchase premiums and redemption fees were less than $ 0.01 per share.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
6
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO U.S. Equity Allocation Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks total return greater than that of its benchmark, the Russell 3000 Index. The Fund is a fund of funds and invests primarily in shares of the GMO U.S. Equity Funds. The Fund also may invest in shares of GMO Flexible Equities Fund (GMO Funds in which the Fund invests are collectively referred to as "underlying funds"). In addition, the Fund may hold securities directly. The Fund primarily seeks exposure to U.S. equity investments (including both growth and value style equities and equities of any market capitalization). The Fund also may have exposure to foreign equity investments. Under normal circumstances, the Fund invests (including through investment in the underlying funds) at least 80% of its assets in equity investments tied economically to the U.S. The term "equity investments" refers to direct and indirect (e.g., through the underlying funds) investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts.
The Manager uses proprietary quantitative models and fundamental investment techniques to select the underlying funds in which the Fund invests and to decide how much to invest in each. The models use multi-year forecasts of relative value and risk among major sectors in the U.S. equity market (large-cap value, large-cap growth, large-cap core, small- and mid-cap value, small- and mid-cap growth, and real estate/REIT). The Manager changes the Fund's holdings of underlying funds in response to changes in its investment outlook and market valuations and may use redemption/purchase activity to rebalance the Fund's investments.
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
The financial statements of the underlying funds should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect) or by visiting GMO's website at www.gmo.com.
7
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Shares of the underlying funds and other investment funds are generally valued at their net asset value. Investments held by the underlying funds are valued as follows. Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the over-the-counter ("OTC") market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximat es market value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. Additionally, because many foreign equity securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund and the underlying funds generally value foreign equity securities as of the NYSE close using fair value prices, which are based on local closing prices and adjustments supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2010, 6.5% of the net assets of the Fund, through investments in the underlying funds, were valued using fair value prices based on those adjustments. Those underlying funds classify such securities (as defined below) as Level 2.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The
8
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Mutual Funds | $ | 118,245,794 | $ | — | $ | — | $ | 118,245,794 | |||||||||||
Short-Term Investments | 25,053 | — | — | 25,053 | |||||||||||||||
Total Investments | 118,270,847 | — | — | 118,270,847 | |||||||||||||||
Total | $ | 118,270,847 | $ | — | $ | — | $ | 118,270,847 |
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements.
The Fund held no investments or other financial instruments at either August 31, 2010 or February 28, 2010, whose fair value was determined using Level 3 inputs.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are
9
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund elected to defer to March 1, 2010 post-October capital losses of $17,496.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/29/2012 | $ | (136,192 | ) | ||||
2/28/2017 | (4,328,424 | ) | |||||
2/28/2018 | (176,824 | ) | |||||
Total | $ | (4,641,440 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 137,694,003 | $ | — | $ | (19,423,156 | ) | $ | (19,423,156 | ) |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the
10
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact its operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Income dividends and capital gain distributions from the underlying funds are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for the purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 5).
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
For the period ended August 31, 2010, the Fund did not charge a premium on cash purchases or fee on cash redemptions of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by a Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. The Fund charges purchase premiums and redemption fees based on the weighted average of
11
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
(i) the estimated transaction costs for directly held assets and (ii) the purchase premiums and/or redemption fees, if any, imposed by the underlying Funds in which it invests, provided that, if that weighted average is less than 0.05%, the Fund generally will not charge a purchase premium or redemption fee. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that po rtion. The Manager may consider known cash flows out of or into other series of the Trust when placing orders for the cash purchase or redemption of shares by the Fund shareholders or other prospective or existing shareholders of the Funds for whom GMO provides asset allocation advice. Consequently, the Fund and those other shareholders for whom GMO provides asset allocation advice will tend to benefit from waivers of the Funds' purchase premiums and redemption fees to a greater extent than other prospective and existing shareholders of the other series of the Trust. All or a portion of the Fund's purchase premiums and /or redemption fees may be waived at the Manager's discretion when they are de minimis and/or the Manager deems it equitable to do so, including without limitation when the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premiums and /or redemption fees, if any, imposed by the underlying funds are less than the purchase premiums and /or re demption fees imposed by the Fund. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. References to investments include those held directly by the Fund and indirectly through the Fund's investments in the underlying funds. The Fund and some of the underlying funds are non-diversified investment companies under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the
12
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Fund or an underlying fund may affect the Fund's or the underlying fund's performance more than if the Fund or the underlying fund were diversified. The principal risks of investing in the Fund are summarized below, including those risks to which the Fund is exposed as a result of its investments in the underlying funds. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund and the underlying funds normally do not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund's investments.
• Smaller Company Risk — The securities of small- and mid-cap companies often are less widely held and trade less frequently and in lesser quantities, and their market prices often fluctuate more, than the securities of companies with larger market capitalizations.
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in the underlying funds, including the risk that the underlying funds in which it invests do not perform as expected. Because the Fund bears the fees and expenses of the underlying funds in which it invests, new investments in underlying funds with higher fees or expenses than those of the underlying funds in which the Fund is currently invested will increase the Fund's total expenses. The fees and expenses associated with an investment in the Fund are less predictable and may be higher than fees and expenses associated with an investment in funds that charge a fixed management fee.
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund or the underlying funds may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund or the underlying funds need to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund or the underlying funds to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund's investments.
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of foreign currency holdings and investments denominated in foreign currencies.
13
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund or an underlying fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
Other principal risks of an investment in the Fund include Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund's securities); Market Risk — Value Securities (risk that the p rice of investments held by the Fund will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Market Risk — Growth Securities (greater price fluctuations resulting from dependence on future earnings expectations); Real Estate Risk (risk to an underlying fund that concentrates its assets in real estate-related investments that factors affecting the real estate industry may cause the value of the Fund's investments to fluctuate more than if it invested in securities of companies in a broader range of industries); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
4. Derivative financial instruments
At August 31, 2010, the Fund held no derivative contracts.
5. Fees and other transactions with affiliates
The Manager decides how to allocate the assets of the Fund among underlying funds. The Manager does not charge the Fund a management fee or shareholder service fee, but it receives management and shareholder service fees from the underlying funds in which the Fund invests. Because those fees vary from fund to fund, the levels of indirect net expenses set forth below are affected by the Manager's asset allocation decisions.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.00% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means
14
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). This contractual expense lim itation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $1,299 and $460, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees) | Indirect Shareholder Service Fees | Total Indirect Expenses | |||||||||
0.323 | % | 0.057 | % | 0.380 | % |
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments and class exchanges, for the period ended August 31, 2010 aggregated $6,676,580 and $8,914,988, respectively.
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
15
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
8. Principal shareholders and related parties
As of August 31, 2010, 74.52% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2010, less than 0.01% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and none of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 1,261,926 | $ | 5,482,697 | 7,489,744 | $ | 27,882,504 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 199,947 | 859,772 | 181,207 | 853,486 | |||||||||||||||
Shares repurchased | (1,811,985 | ) | (8,655,831 | ) | (456,960 | ) | (2,066,110 | ) | |||||||||||
Purchase premiums | — | — | — | 4,651 | |||||||||||||||
Redemption fees | — | — | — | 127 | |||||||||||||||
Net increase (decrease) | (350,112 | ) | $ | (2,313,362 | ) | 7,213,991 | $ | 26,674,658 |
16
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
10. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO Quality Fund, Class VI | $ | 63,773,409 | $ | 4,034,681 | $ | 4,978,436 | $ | 671,307 | $ | — | $ | 58,436,055 | |||||||||||||||
GMO U.S. Core Equity Fund, Class VI | 62,497,103 | 2,636,804 | 3,808,015 | 525,623 | — | 57,697,409 | |||||||||||||||||||||
GMO U.S. Small/Mid Cap Growth Fund, Class III | 1,080,728 | 1,096 | 60,425 | 1,097 | — | 1,018,061 | |||||||||||||||||||||
GMO U.S. Small/Mid Cap Value Fund, Class III | 1,202,569 | 3,999 | 68,112 | 3,999 | — | 1,094,269 | |||||||||||||||||||||
Totals | $ | 128,553,809 | $ | 6,676,580 | $ | 8,914,988 | $ | 1,202,026 | $ | — | $ | 118,245,794 |
11. Subsequent events
On October 5, 2010, the Fund's Board of Trustees approved a reverse stock split for the Fund. It is anticipated that the reverse split will be effective for shareholders of record after the close of the NYSE on or about November 12, 2010. The Fund will trade at its post-split price on or about November 15, 2010, and the ticker symbol and cusip for the Fund will not change.
The reverse split will reduce the number of shares outstanding for the Fund, and result in a proportionate increase in the price per share of the Fund. The reverse split does not change the value of a shareholder's investment. For example, for a 1-for-5 reverse split, every five pre-split shares held by a shareholder will result in the receipt of one post-split share, which will be priced five times higher than the pre-split shares.
17
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of a composite of accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three-, five-, seven- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications
18
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fact that the Fund does not pay a management fee to the Manager under the Fund's investment management agreement, but that the Fund indirectly bears management and shareholder servicing fees paid to the Manager by other funds of the Trust in which it invests. The Trustees also considered so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees noted that they had approved renewal of the Manager's investment management agreements with the other funds of the Trust in which the Fund may invest and had concluded that the advisory fees charged to those funds were reasonable, after considering, among other things: possible economies of scale to the Manager in connection with its management of the other funds of the Trust; the Manager's profitability with respect to the other funds of the Trust and the Trust as a whole (including the effect of recent changes in assets under management); and information prepared by a third-party data service concerning fee s paid to managers of funds deemed by that service to have similar objectives to those of the other funds of the Trust.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
19
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
20
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including indirect management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1 | ) Actual | 0.38 | % | $ | 1,000.00 | $ | 940.90 | $ | 1.86 | ||||||||||
2 | ) Hypothetical | 0.38 | % | $ | 1,000.00 | $ | 1,023.29 | $ | 1.94 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
21
GMO U.S. Growth Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO U.S. Growth Fund
(A series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 95.9 | % | |||||
Mutual Funds | 5.0 | ||||||
Short-Term Investments | 0.5 | ||||||
Other | (1.4 | ) | |||||
100.0 | % | ||||||
Industry Group Summary | % of Equity Investments* | ||||||
Software & Services | 19.1 | % | |||||
Technology Hardware & Equipment | 15.9 | ||||||
Food, Beverage & Tobacco | 15.3 | ||||||
Pharmaceuticals, Biotechnology & Life Sciences | 6.6 | ||||||
Household & Personal Products | 6.5 | ||||||
Food & Staples Retailing | 5.8 | ||||||
Consumer Services | 5.3 | ||||||
Energy | 5.2 | ||||||
Capital Goods | 4.6 | ||||||
Retailing | 4.4 | ||||||
Health Care Equipment & Services | 3.8 | ||||||
Media | 2.0 | ||||||
Semiconductors & Semiconductor Equipment | 2.0 | ||||||
Consumer Durables & Apparel | 0.9 | ||||||
Transportation | 0.8 | ||||||
Materials | 0.6 | ||||||
Telecommunication Services | 0.5 | ||||||
Diversified Financials | 0.3 | ||||||
Insurance | 0.2 | ||||||
Real Estate | 0.2 | ||||||
Commercial & Professional Services | 0.0 | ||||||
Utilities | 0.0 | ||||||
100.0 | % |
* Equity investments may consist of common stocks, preferred stocks and rights and warrants. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
1
GMO U.S. Growth Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
COMMON STOCKS — 95.9% | |||||||||||||||
Capital Goods — 4.5% | |||||||||||||||
386 | 3M Co. | 30,320 | |||||||||||||
62 | Danaher Corp. | 2,252 | |||||||||||||
100 | Emerson Electric Co. | 4,665 | |||||||||||||
37 | Flowserve Corp. | 3,307 | |||||||||||||
62 | Goodrich Corp. | 4,246 | |||||||||||||
57 | Lockheed Martin Corp. | 3,963 | |||||||||||||
31 | Pall Corp. | 1,060 | |||||||||||||
26 | Rockwell Collins, Inc. | 1,402 | |||||||||||||
136 | TransDigm Group, Inc. | 7,873 | |||||||||||||
450 | United Technologies Corp. | 29,345 | |||||||||||||
Total Capital Goods | 88,433 | ||||||||||||||
Commercial & Professional Services — 0.0% | |||||||||||||||
21 | Verisk Analytics, Inc.-Class A * | 584 | |||||||||||||
Consumer Durables & Apparel — 0.8% | |||||||||||||||
236 | Nike, Inc.-Class B | 16,520 | |||||||||||||
Consumer Services — 5.1% | |||||||||||||||
560 | Apollo Group, Inc.-Class A * | 23,789 | |||||||||||||
21 | Carnival Corp. | 655 | |||||||||||||
172 | Las Vegas Sands Corp. * | 4,873 | |||||||||||||
766 | McDonald's Corp. | 55,964 | |||||||||||||
21 | Strayer Education, Inc. | 3,040 | |||||||||||||
319 | Yum! Brands, Inc. | 13,302 | |||||||||||||
Total Consumer Services | 101,623 | ||||||||||||||
Diversified Financials — 0.3% | |||||||||||||||
5 | BlackRock, Inc. | 710 | |||||||||||||
399 | TD Ameritrade Holding Corp. * | 5,829 | |||||||||||||
Total Diversified Financials | 6,539 |
See accompanying notes to the financial statements.
2
GMO U.S. Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Energy — 5.0% | |||||||||||||||
100 | Chevron Corp. | 7,416 | |||||||||||||
1,444 | Exxon Mobil Corp. | 85,427 | |||||||||||||
100 | Halliburton Co. | 2,821 | |||||||||||||
105 | Range Resources Corp. | 3,550 | |||||||||||||
Total Energy | 99,214 | ||||||||||||||
Food & Staples Retailing — 5.6% | |||||||||||||||
319 | Costco Wholesale Corp. | 18,039 | |||||||||||||
265 | CVS Caremark Corp. | 7,155 | |||||||||||||
262 | Kroger Co. (The) | 5,169 | |||||||||||||
548 | Sysco Corp. | 15,065 | |||||||||||||
678 | Walgreen Co. | 18,225 | |||||||||||||
937 | Wal-Mart Stores, Inc. | 46,981 | |||||||||||||
Total Food & Staples Retailing | 110,634 | ||||||||||||||
Food, Beverage & Tobacco — 14.6% | |||||||||||||||
779 | Altria Group, Inc. | 17,387 | |||||||||||||
157 | Brown-Forman Corp.-Class B | 9,622 | |||||||||||||
330 | Campbell Soup Co. | 12,296 | |||||||||||||
157 | Coca-Cola Enterprises, Inc. | 4,468 | |||||||||||||
1,065 | Coca-Cola Co. (The) | 59,555 | |||||||||||||
200 | ConAgra Foods, Inc. | 4,318 | |||||||||||||
366 | Flowers Foods, Inc. | 9,457 | |||||||||||||
476 | General Mills, Inc. | 17,212 | |||||||||||||
130 | Green Mountain Coffee Roasters, Inc. * | 4,007 | |||||||||||||
219 | Hansen Natural Corp. * | 9,864 | |||||||||||||
304 | Hershey Co. (The) | 14,127 | |||||||||||||
272 | HJ Heinz Co. | 12,577 | |||||||||||||
345 | Kellogg Co. | 17,139 | |||||||||||||
261 | McCormick & Co., Inc. (Non Voting) | 10,406 | |||||||||||||
19 | Mead Johnson Nutrition Co. | 992 | |||||||||||||
798 | PepsiCo, Inc. | 51,216 | |||||||||||||
713 | Philip Morris International, Inc. | 36,677 | |||||||||||||
Total Food, Beverage & Tobacco | 291,320 |
See accompanying notes to the financial statements.
3
GMO U.S. Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Health Care Equipment & Services — 3.7% | |||||||||||||||
10 | Aetna, Inc. | 267 | |||||||||||||
238 | Baxter International, Inc. | 10,129 | |||||||||||||
21 | Community Health Systems, Inc. * | 548 | |||||||||||||
189 | DaVita, Inc. * | 12,213 | |||||||||||||
354 | Express Scripts, Inc. * | 15,080 | |||||||||||||
336 | Health Management Associates, Inc.-Class A * | 2,100 | |||||||||||||
37 | Laboratory Corp. of America Holdings * | 2,687 | |||||||||||||
155 | Lincare Holdings, Inc. | 3,568 | |||||||||||||
663 | Medtronic, Inc. | 20,871 | |||||||||||||
47 | Quest Diagnostics, Inc. | 2,045 | |||||||||||||
89 | St Jude Medical, Inc. * | 3,077 | |||||||||||||
5 | WellPoint, Inc. * | 248 | |||||||||||||
Total Health Care Equipment & Services | 72,833 | ||||||||||||||
Household & Personal Products — 6.2% | |||||||||||||||
340 | Avon Products, Inc. | 9,894 | |||||||||||||
162 | Church & Dwight Co., Inc. | 9,919 | |||||||||||||
214 | Clorox Co. | 13,872 | |||||||||||||
344 | Colgate-Palmolive Co. | 25,401 | |||||||||||||
283 | Estee Lauder Cos. (The), Inc.-Class A | 15,868 | |||||||||||||
116 | Herbalife Ltd. | 6,447 | |||||||||||||
219 | Kimberly-Clark Corp. | 14,104 | |||||||||||||
475 | Procter & Gamble Co. (The) | 28,343 | |||||||||||||
Total Household & Personal Products | 123,848 | ||||||||||||||
Insurance — 0.2% | |||||||||||||||
100 | MetLife, Inc. | 3,760 | |||||||||||||
Materials — 0.6% | |||||||||||||||
165 | Monsanto Co. | 8,688 | |||||||||||||
52 | Pactiv Corp. * | 1,668 | |||||||||||||
16 | Sherwin-Williams Co. (The) | 1,126 | |||||||||||||
Total Materials | 11,482 |
See accompanying notes to the financial statements.
4
GMO U.S. Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Media — 1.9% | |||||||||||||||
639 | DirectTV-Class A * | 24,231 | |||||||||||||
300 | Discovery Communications, Inc. * | 11,325 | |||||||||||||
100 | News Corp.-Class A | 1,257 | |||||||||||||
47 | Omnicom Group, Inc. | 1,645 | |||||||||||||
Total Media | 38,458 | ||||||||||||||
Pharmaceuticals, Biotechnology & Life Sciences — 6.3% | |||||||||||||||
908 | Abbott Laboratories | 44,801 | |||||||||||||
443 | Eli Lilly & Co. | 14,867 | |||||||||||||
1 | Furiex Pharmaceuticals, Inc. * | 10 | |||||||||||||
595 | Gilead Sciences, Inc. * | 18,957 | |||||||||||||
99 | Illumina, Inc. * | 4,246 | |||||||||||||
751 | Johnson & Johnson | 42,822 | |||||||||||||
16 | Pharmaceutical Product Development, Inc. | 367 | |||||||||||||
Total Pharmaceuticals, Biotechnology & Life Sciences | 126,070 | ||||||||||||||
Real Estate — 0.2% | |||||||||||||||
200 | General Growth Properties, Inc. REIT | 2,814 | |||||||||||||
Retailing — 4.2% | |||||||||||||||
100 | Abercrombie & Fitch Co.-Class A | 3,460 | |||||||||||||
189 | Amazon.com, Inc. * | 23,593 | |||||||||||||
42 | Dick's Sporting Goods, Inc. * | 1,028 | |||||||||||||
220 | Dollar General Corp. * | 6,008 | |||||||||||||
117 | Dollar Tree, Inc. * | 5,304 | |||||||||||||
89 | Expedia, Inc. | 2,035 | |||||||||||||
189 | Family Dollar Stores, Inc. | 8,087 | |||||||||||||
120 | Gap (The), Inc. | 2,027 | |||||||||||||
331 | Home Depot, Inc. | 9,205 | |||||||||||||
100 | Lowe's Cos., Inc. | 2,030 | |||||||||||||
16 | Netflix, Inc. * | 2,008 | |||||||||||||
26 | Priceline.com Inc. * | 7,579 | |||||||||||||
220 | Staples, Inc. | 3,909 | |||||||||||||
94 | Target Corp. | 4,809 |
See accompanying notes to the financial statements.
5
GMO U.S. Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Retailing — continued | |||||||||||||||
63 | Urban Outfitters, Inc. * | 1,910 | |||||||||||||
Total Retailing | 82,992 | ||||||||||||||
Semiconductors & Semiconductor Equipment — 1.9% | |||||||||||||||
1,428 | Intel Corp. | 25,304 | |||||||||||||
472 | Marvell Technology Group Ltd * | 7,524 | |||||||||||||
100 | Skyworks Solutions, Inc. * | 1,786 | |||||||||||||
147 | Texas Instruments, Inc. | 3,385 | |||||||||||||
Total Semiconductors & Semiconductor Equipment | 37,999 | ||||||||||||||
Software & Services — 18.3% | |||||||||||||||
100 | Activision Blizzard, Inc. | 1,069 | |||||||||||||
219 | Autodesk, Inc. * | 6,077 | |||||||||||||
120 | Citrix Systems, Inc. * | 6,953 | |||||||||||||
200 | Cognizant Technology Solutions Corp.-Class A * | 11,521 | |||||||||||||
126 | eBay, Inc. * | 2,928 | |||||||||||||
300 | Electronic Arts, Inc. * | 4,572 | |||||||||||||
120 | Equinix, Inc. * | 10,945 | |||||||||||||
100 | Genpact Ltd. * | 1,399 | |||||||||||||
136 | Google, Inc.-Class A * | 61,203 | |||||||||||||
94 | IAC/InterActiveCorp * | 2,330 | |||||||||||||
519 | International Business Machines Corp. | 63,957 | |||||||||||||
37 | Lender Processing Services, Inc. | 1,085 | |||||||||||||
41 | MasterCard, Inc.-Class A | 8,133 | |||||||||||||
2,911 | Microsoft Corp. | 68,350 | |||||||||||||
2,485 | Oracle Corp. | 54,372 | |||||||||||||
31 | Salesforce.com, Inc. * | 3,406 | |||||||||||||
136 | Teradata Corp. * | 4,453 | |||||||||||||
605 | Visa, Inc.-Class A | 41,733 | |||||||||||||
579 | Western Union Co. | 9,079 | |||||||||||||
40 | Yahoo!, Inc. * | 523 | |||||||||||||
Total Software & Services | 364,088 |
See accompanying notes to the financial statements.
6
GMO U.S. Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Technology Hardware & Equipment — 15.2% | |||||||||||||||
100 | Amphenol Corp.-Class A | 4,072 | |||||||||||||
485 | Apple, Inc. * | 118,034 | |||||||||||||
2,861 | Cisco Systems, Inc. * | 57,363 | |||||||||||||
77 | Corning, Inc. | 1,207 | |||||||||||||
200 | Dell, Inc. * | 2,354 | |||||||||||||
616 | EMC Corp. * | 11,236 | |||||||||||||
1,360 | Hewlett-Packard Co. | 52,333 | |||||||||||||
31 | Itron, Inc. * | 1,674 | |||||||||||||
120 | Juniper Networks, Inc. * | 3,264 | |||||||||||||
1,350 | Qualcomm, Inc. | 51,719 | |||||||||||||
Total Technology Hardware & Equipment | 303,256 | ||||||||||||||
Telecommunication Services — 0.5% | |||||||||||||||
26 | American Tower Corp.-Class A * | 1,218 | |||||||||||||
183 | Crown Castle International Corp. * | 7,525 | |||||||||||||
Total Telecommunication Services | 8,743 | ||||||||||||||
Transportation — 0.8% | |||||||||||||||
10 | Union Pacific Corp. | 729 | |||||||||||||
241 | United Parcel Service, Inc.-Class B | 15,376 | |||||||||||||
Total Transportation | 16,105 | ||||||||||||||
Utilities — 0.0% | |||||||||||||||
16 | Allegheny Energy, Inc. | 361 | |||||||||||||
TOTAL COMMON STOCKS (COST $2,025,531) | 1,907,676 | ||||||||||||||
MUTUAL FUNDS — 5.0% | |||||||||||||||
Affiliated Issuers — 5.0% | |||||||||||||||
4,000 | GMO U.S. Treasury Fund | 99,999 | |||||||||||||
TOTAL MUTUAL FUNDS (COST $100,025) | 99,999 |
See accompanying notes to the financial statements.
7
GMO U.S. Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
SHORT-TERM INVESTMENTS — 0.5% | |||||||||||||||
Money Market Funds — 0.5% | |||||||||||||||
9,806 | State Street Institutional Treasury Money Market Fund-Institutional Class | 9,806 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $9,806) | 9,806 | ||||||||||||||
TOTAL INVESTMENTS — 101.4% (Cost $2,135,362) | 2,017,481 | ||||||||||||||
Other Assets and Liabilities (net) — (1.4%) | (27,252 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 1,990,229 |
Notes to Schedule of Investments:
REIT - Real Estate Investment Trust
* Non-income producing security.
See accompanying notes to the financial statements.
8
GMO U.S. Growth Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $2,035,337) (Note 2) | $ | 1,917,482 | |||||
Investments in affiliated issuers, at value (cost $100,025) (Notes 2 and 10) | 99,999 | ||||||
Dividends and interest receivable | 4,517 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 11,625 | ||||||
Total assets | 2,033,623 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 11 | ||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 542 | ||||||
Shareholder service fee | 195 | ||||||
Administration fee – Class M | 88 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 20 | ||||||
Payable for 12b-1 fee – Class M | 225 | ||||||
Accrued expenses | 42,313 | ||||||
Total liabilities | 43,394 | ||||||
Net assets | $ | 1,990,229 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 21,580,065 | |||||
Accumulated undistributed net investment income | 4,602 | ||||||
Accumulated net realized loss | (19,476,557 | ) | |||||
Net unrealized depreciation | (117,881 | ) | |||||
$ | 1,990,229 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 1,485,250 | |||||
Class M shares | $ | 504,979 | |||||
Shares outstanding: | |||||||
Class III | 106,666 | ||||||
Class M | 36,347 | ||||||
Net asset value per share: | |||||||
Class III | $ | 13.92 | |||||
Class M | $ | 13.89 |
See accompanying notes to the financial statements.
9
GMO U.S. Growth Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $1) | $ | 107,231 | |||||
Interest | 141 | ||||||
Dividends from affiliated issuers (Note 10) | 18 | ||||||
Total investment income | 107,390 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 21,379 | ||||||
Shareholder service fee – Class III (Note 5) | 9,920 | ||||||
12b-1 fee – Class M (Note 5) | 707 | ||||||
Administration fee – Class M (Note 5) | 566 | ||||||
Audit and tax fees | 27,655 | ||||||
Custodian, fund accounting agent and transfer agent fees | 24,588 | ||||||
Registration fees | 12,328 | ||||||
Trustees fees and related expenses (Note 5) | 178 | ||||||
Legal fees | 13 | ||||||
Miscellaneous | 532 | ||||||
Total expenses | 97,866 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (65,060 | ) | |||||
Net expenses | 32,806 | ||||||
Net investment income (loss) | 74,584 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | 6,085,470 | ||||||
Realized gains distributions from affiliated issuers (Note 10) | 7 | ||||||
Closed futures contracts | 70,177 | ||||||
Net realized gain (loss) | 6,155,654 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | (3,465,885 | ) | |||||
Investments in affiliated issuers | (26 | ) | |||||
Open futures contracts | (4,319 | ) | |||||
Net unrealized gain (loss) | (3,470,230 | ) | |||||
Net realized and unrealized gain (loss) | 2,685,424 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 2,760,008 |
See accompanying notes to the financial statements.
10
GMO U.S. Growth Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 74,584 | $ | 670,063 | |||||||
Net realized gain (loss) | 6,155,654 | (4,520,387 | ) | ||||||||
Change in net unrealized appreciation (depreciation) | (3,470,230 | ) | 18,290,138 | ||||||||
Net increase (decrease) in net assets from operations | 2,760,008 | 14,439,814 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (151,145 | ) | (700,931 | ) | |||||||
Class M | (1,563 | ) | (8,245 | ) | |||||||
Total distributions from net investment income | (152,708 | ) | (709,176 | ) | |||||||
Net share transactions (Note 9): | |||||||||||
Class III | (41,665,926 | ) | (7,776,148 | ) | |||||||
Class M | (73,481 | ) | (115,249 | ) | |||||||
Increase (decrease) in net assets resulting from net share transactions | (41,739,407 | ) | (7,891,397 | ) | |||||||
Total increase (decrease) in net assets | (39,132,107 | ) | 5,839,241 | ||||||||
Net assets: | |||||||||||
Beginning of period | 41,122,336 | 35,283,095 | |||||||||
End of period (including accumulated undistributed net investment income of $4,602 and $82,726, respectively) | $ | 1,990,229 | $ | 41,122,336 |
See accompanying notes to the financial statements.
11
GMO U.S. Growth Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 14.61 | $ | 10.47 | $ | 15.82 | $ | 17.24 | $ | 18.17 | $ | 18.26 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.08 | 0.21 | 0.18 | 0.17 | 0.15 | 0.15 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.71 | )(a) | 4.15 | (5.32 | ) | (1.06 | ) | 0.07 | 0.86 | ||||||||||||||||||
Total from investment operations | (0.63 | ) | 4.36 | (5.14 | ) | (0.89 | ) | 0.22 | 1.01 | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.06 | ) | (0.22 | ) | (0.21 | ) | (0.17 | ) | (0.15 | ) | (0.16 | ) | |||||||||||||||
From net realized gains | — | — | — | (0.36 | ) | (1.00 | ) | (0.94 | ) | ||||||||||||||||||
Total distributions | (0.06 | ) | (0.22 | ) | (0.21 | ) | (0.53 | ) | (1.15 | ) | (1.10 | ) | |||||||||||||||
Net asset value, end of period | $ | 13.92 | $ | 14.61 | $ | 10.47 | $ | 15.82 | $ | 17.24 | $ | 18.17 | |||||||||||||||
Total Return(b) | (4.32 | )%** | 41.94 | % | (32.84 | )% | (5.49 | )% | 1.24 | % | 5.64 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,485 | $ | 40,521 | $ | 34,758 | $ | 129,666 | $ | 224,554 | $ | 342,203 | |||||||||||||||
Net expenses to average daily net assets | 0.46 | %*(c) | 0.46 | % | 0.46 | %(d) | 0.46 | %(d) | 0.46 | % | 0.48 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 1.08 | %* | 1.60 | % | 1.19 | % | 0.94 | % | 0.85 | % | 0.84 | % | |||||||||||||||
Portfolio turnover rate | 35 | %** | 118 | % | 70 | % | 97 | % | 111 | % | 94 | % | |||||||||||||||
Fees and expenses reimbursed by Manager to average daily net assets: | 0.80 | %* | 0.33 | % | 0.19 | % | 0.07 | % | 0.05 | % | 0.04 | % |
(a) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain (loss) on investments due to the timing of purchases and redemptions of Fund shares in relation to fluctuating market values of the investments of the Fund.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(d) The net expense ratio does not include the effect of expense reductions.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
12
GMO U.S. Growth Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class M share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 14.58 | $ | 10.45 | $ | 15.76 | $ | 17.16 | $ | 18.10 | $ | 18.19 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.08 | 0.17 | 0.13 | 0.11 | 0.10 | 0.10 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.73 | )(a) | 4.14 | (5.30 | ) | (1.05 | ) | 0.06 | 0.85 | ||||||||||||||||||
Total from investment operations | (0.65 | ) | 4.31 | (5.17 | ) | (0.94 | ) | 0.16 | 0.95 | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.04 | ) | (0.18 | ) | (0.14 | ) | (0.10 | ) | (0.10 | ) | (0.10 | ) | |||||||||||||||
From net realized gains | — | — | — | (0.36 | ) | (1.00 | ) | (0.94 | ) | ||||||||||||||||||
Total distributions | (0.04 | ) | (0.18 | ) | (0.14 | ) | (0.46 | ) | (1.10 | ) | (1.04 | ) | |||||||||||||||
Net asset value, end of period | $ | 13.89 | $ | 14.58 | $ | 10.45 | $ | 15.76 | $ | 17.16 | $ | 18.10 | |||||||||||||||
Total Return(b) | (4.48 | )%** | 41.50 | % | (33.01 | )% | (5.79 | )% | 0.91 | % | 5.33 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 505 | $ | 601 | $ | 525 | $ | 68,732 | $ | 85,714 | $ | 253,332 | |||||||||||||||
Net expenses to average daily net assets | 0.77 | %(c)* | 0.76 | % | 0.76 | %(d) | 0.76 | %(d) | 0.76 | % | 0.77 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 1.12 | %* | 1.31 | % | 0.80 | % | 0.64 | % | 0.56 | % | 0.54 | % | |||||||||||||||
Portfolio turnover rate | 35 | %** | 118 | % | 70 | % | 97 | % | 111 | % | 94 | % | |||||||||||||||
Fees and expenses reimbursed by Manager to average daily net assets: | 4.31 | %* | 0.34 | % | 0.10 | % | 0.07 | % | 0.05 | % | 0.04 | % |
(a) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain (loss) on investments due to the timing of purchases and redemptions of Fund shares in relation to fluctuating market values of the investments of the Fund.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(d) The net expense ratio does not include the effect of expense reductions.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
13
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO U.S. Growth Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks long-term capital growth. The Fund seeks to achieve its investment objective by outperforming its benchmark, the Russell 1000 Growth Index. The Fund typically invests directly and indirectly (e.g., through the GMO Funds in which the Fund invests, collectively referred to as the "underlying funds" or derivatives) in equity investments. The term "equity investments" refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts. Under normal circumstances, the Fund invests directly and indirectly at least 80% of its assets in investments tied economically to the U.S.
The Manager relies principally on proprietary quantitative models and also employs fundamental investment techniques to evaluate and select equity investments for the Fund. The Manager selects equity investments it believes (i) have superior fundamentals (e.g., earnings stability); (ii) have shown indications of improving investor sentiment (e.g., positive price movement or upgraded analyst ratings); and/or (iii) are undervalued (e.g., equity investments trading at prices below what the Manager believes to be their fundamental value). The Manager also uses proprietary techniques to adjust the portfolio for other factors such as position size, industry and sector weights, and market capitalization. The factors considered and models used by the Manager may change over time based on the Manager's assessment of what combination of models and factors are best positioned to achieve the Fund's investment objective.
In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the-counter ("OTC") derivatives, including options, futures, and swap contracts, (i) as a substitute for direct investment; (ii) in an attempt to reduce investment exposures (which may result in a reduction below zero); (iii) to effect transactions intended as substitutes for securities lending; and/or (iv) in an attempt to adjust elements of its investment exposure. In addition, the Fund may lend its portfolio securities.
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
14
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Throughout the period ended August 31, 2010, the Fund had two classes of shares outstanding: Class III and Class M. Class M shares bear an administration fee and a 12b-1 fee, while Class III shares bear a shareholder service fee (See Note 5). The principal economic difference between the classes of shares is the type and level of fees they bear.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the OTC market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or who se values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. See note 4 for a further discussion on valuation of derivative financial instruments.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
15
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | $ | 1,907,676 | $ | — | $ | — | $ | 1,907,676 | |||||||||||
Mutual Funds | 99,999 | — | — | 99,999 | |||||||||||||||
Short-Term Investments | 9,806 | — | — | 9,806 | |||||||||||||||
Total Investments | 2,017,481 | — | — | 2,017,481 | |||||||||||||||
Total | $ | 2,017,481 | $ | — | $ | — | $ | 2,017,481 |
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements.
All of the Fund's common stocks held at period end are classified as Level 1. Please refer to the Schedule of Investments for a more detailed categorization of common stocks.
The Fund held no investments or other financial instruments at either August 31, 2010 or February 28, 2010, whose fair value was determined using Level 3 inputs.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, quarterly, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid
16
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund elected to defer to March 1, 2010 post-October capital losses of $111,039.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards and current year realized losses, if any, will be subject to significant limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2011 | $ | (2,843,668 | ) | ||||
2/29/2012 | (782,016 | ) | |||||
2/28/2017 | (11,615,801 | ) | |||||
2/28/2018 | (9,764,884 | ) | |||||
Total | $ | (25,006,369 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 2,169,636 | $ | 53,770 | $ | (205,925 | ) | $ | (152,155 | ) |
17
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which co llection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. Investment income, common expenses and realized and unrealized gains and losses are allocated among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service, 12b-1, and administration fees, which are directly attributable to a class of shares, are charged to that class's operations. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying fund (See Note 5).
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the
18
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund's investments.
• Market Risk — Growth Securities — Because growth securities typically trade at higher multiples of current earnings than other securities, their market values are often more sensitive than other securities to changes in future earnings expectations.
Other principal risks of an investment in the Fund include Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, and credit and counterparty risk); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund's securities); Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-te rm effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
19
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero).
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, indices and markets without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index).
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedin gs. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be
20
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
secured by collateral, that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash,
21
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount tha t the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. During the period ended August 31, 2010, the Fund used futures contracts to maintain the diversity and liquidity of the portfolio. The Fund had no futures contracts outstanding at the end of the period.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an of fsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
22
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to
23
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of
24
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
The Effect of Derivative Instruments on the Statement of Operations for the period ended August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Futures contracts | $ | — | $ | — | $ | — | $ | 70,177 | $ | — | $ | 70,177 | |||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 70,177 | $ | — | $ | 70,177 | |||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Futures contracts | $ | — | $ | — | $ | — | $ | (4,319 | ) | $ | — | $ | (4,319 | ) | |||||||||||||
Total | $ | — | $ | — | $ | — | $ | (4,319 | ) | $ | — | $ | (4,319 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
The volume of derivative activity, based on absolute values (futures contracts) outstanding at each month-end, was as follows for the period ended August 31, 2010:
Futures Contracts | |||||||
Average amount outstanding | $ | 210,214 |
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.31% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares.
Holders of Class M shares of the Fund pay GMO an administration fee for support services provided to Class M shareholders. That fee is paid monthly at the annual rate of 0.20% of the average net assets daily
25
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
of Class M shares. Pursuant to a Rule 12b-1 distribution and service plan adopted by the Fund, holders of Class M shares of the Fund may pay a fee, at the annual rate of up to 1.00% of average daily net assets of Class M shares, for any activities or expenses primarily intended to result in the sale of Class M shares of the Fund and/or the provision of services to Class M shareholders. The Trustees currently limit payments on Class M shares to 0.25% of the Fund's average daily net assets of Class M shares.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.31% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means the administration fee and distribution (12b-1) fee (Class M Shares only) shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an inve stment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition to the contractual expense reimbursement described above, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund's Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $178 and $51, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Total Indirect Expenses | |||||||||
<0.001% | 0.000 | % | <0.001% |
26
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended August 31, 2010 aggregated $4,627,467 and $44,908,731, respectively.
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, 91.59% of the outstanding shares of the Fund were held by three shareholders. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2010, 0.37% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and none of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 483 | $ | 7,339 | 5,132 | $ | 67,630 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 9,754 | 150,982 | 54,613 | 700,053 | |||||||||||||||
Shares repurchased | (2,677,169 | ) | (41,824,247 | ) | (605,706 | ) | (8,543,831 | ) | |||||||||||
Net increase (decrease) | (2,666,932 | ) | $ | (41,665,926 | ) | (545,961 | ) | $ | (7,776,148 | ) |
27
GMO U.S. Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class M: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | — | $ | — | — | $ | — | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 102 | 1,563 | 644 | 8,245 | |||||||||||||||
Shares repurchased | (4,998 | ) | (75,044 | ) | (9,658 | ) | (123,494 | ) | |||||||||||
Net increase (decrease) | (4,896 | ) | $ | (73,481 | ) | (9,014 | ) | $ | (115,249 | ) |
10. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO U.S. Treasury Fund | $ | — | $ | 110,025 | $ | 10,000 | $ | 18 | $ | 7 | $ | 99,999 | |||||||||||||||
Totals | $ | — | $ | 110,025 | $ | 10,000 | $ | 18 | $ | 7 | $ | 99,999 |
28
GMO U.S. Growth Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of a composite of accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three-, five-, seven- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications and experience of the per sonnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
29
GMO U.S. Growth Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparis on to the Manager's separate account clients and the expenses and risks borne by the Manager as a result of the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by , for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the
30
GMO U.S. Growth Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
31
GMO U.S. Growth Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, distribution (12b-1) and/or administration fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
This example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.46 | % | $ | 1,000.00 | $ | 956.80 | $ | 2.27 | |||||||||||
2) Hypothetical | 0.46 | % | $ | 1,000.00 | $ | 1,022.89 | $ | 2.35 | |||||||||||
Class M | |||||||||||||||||||
1) Actual | 0.77 | % | $ | 1,000.00 | $ | 955.20 | $ | 3.79 | |||||||||||
2) Hypothetical | 0.77 | % | $ | 1,000.00 | $ | 1,021.32 | $ | 3.92 |
* Expenses are calculated using each Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
32
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 97.8 | % | |||||
Mutual Funds | 1.9 | ||||||
Short-Term Investments | 0.4 | ||||||
Other | (0.1 | ) | |||||
100.0 | % | ||||||
Industry Group Summary | % of Equity Investments* | ||||||
Pharmaceuticals, Biotechnology & Life Sciences | 13.6 | % | |||||
Health Care Equipment & Services | 12.1 | ||||||
Software & Services | 11.7 | ||||||
Energy | 11.0 | ||||||
Capital Goods | 7.3 | ||||||
Technology Hardware & Equipment | 6.3 | ||||||
Insurance | 5.8 | ||||||
Food, Beverage & Tobacco | 4.7 | ||||||
Diversified Financials | 3.8 | ||||||
Food & Staples Retailing | 3.7 | ||||||
Real Estate | 2.7 | ||||||
Telecommunication Services | 2.6 | ||||||
Media | 2.6 | ||||||
Household & Personal Products | 2.2 | ||||||
Materials | 1.9 | ||||||
Retailing | 1.6 | ||||||
Transportation | 1.6 | ||||||
Consumer Durables & Apparel | 1.3 | ||||||
Banks | 1.2 | ||||||
Consumer Services | 0.8 | ||||||
Utilities | 0.6 | ||||||
Automobiles & Components | 0.5 | ||||||
Commercial & Professional Services | 0.4 | ||||||
100.0 | % |
* Equity investments may consist of common stocks, preferred stocks and rights and warrants. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
1
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
COMMON STOCKS — 97.8% | |||||||||||||||
Automobiles & Components — 0.5% | |||||||||||||||
100 | Autoliv, Inc. | 5,414 | |||||||||||||
1,300 | Ford Motor Co. * | 14,677 | |||||||||||||
300 | Harley-Davidson, Inc. | 7,296 | |||||||||||||
100 | Johnson Controls, Inc. | 2,653 | |||||||||||||
Total Automobiles & Components | 30,040 | ||||||||||||||
Banks — 1.1% | |||||||||||||||
400 | Associated Banc Corp. | 4,824 | |||||||||||||
400 | BB&T Corp. | 8,848 | |||||||||||||
100 | City National Corp. | 4,844 | |||||||||||||
200 | Comerica, Inc. | 6,882 | |||||||||||||
100 | M&T Bank Corp. | 8,564 | |||||||||||||
400 | New York Community Bancorp, Inc. | 6,356 | |||||||||||||
500 | PNC Financial Services Group, Inc. | 25,480 | |||||||||||||
300 | TCF Financial Corp. | 4,284 | |||||||||||||
500 | TFS Financial Corp. | 4,595 | |||||||||||||
Total Banks | 74,677 | ||||||||||||||
Capital Goods — 7.1% | |||||||||||||||
400 | 3M Co. | 31,420 | |||||||||||||
200 | BE Aerospace, Inc. * | 5,390 | |||||||||||||
200 | Boeing Co. | 12,226 | |||||||||||||
300 | Caterpillar, Inc. | 19,548 | |||||||||||||
100 | Cummins, Inc. | 7,441 | |||||||||||||
100 | Deere & Co. | 6,327 | |||||||||||||
100 | Dover Corp. | 4,476 | |||||||||||||
200 | Eaton Corp. | 13,896 | |||||||||||||
100 | Gardner Denver, Inc. | 4,774 | |||||||||||||
11,300 | General Electric Co. | 163,624 | |||||||||||||
1,200 | General Dynamics Corp. | 67,044 | |||||||||||||
100 | Illinois Tool Works, Inc. | 4,126 | |||||||||||||
100 | ITT Industries, Inc. | 4,250 |
See accompanying notes to the financial statements.
2
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Capital Goods — continued | |||||||||||||||
300 | L-3 Communications Holdings, Inc. | 19,980 | |||||||||||||
800 | Masco Corp. | 8,392 | |||||||||||||
400 | Northrop Grumman Corp. | 21,648 | |||||||||||||
100 | Oshkosh Corp. * | 2,488 | |||||||||||||
100 | Parker Hannifin Corp. | 5,916 | |||||||||||||
100 | Precision Castparts Corp. | 11,318 | |||||||||||||
100 | Raytheon Co. | 4,392 | |||||||||||||
100 | Rockwell Automation, Inc. | 5,114 | |||||||||||||
100 | Rockwell Collins, Inc. | 5,393 | |||||||||||||
300 | Textron, Inc. | 5,121 | |||||||||||||
100 | Tyco International Ltd. | 3,728 | |||||||||||||
400 | United Technologies Corp. | 26,084 | |||||||||||||
200 | WESCO International, Inc. * | 6,456 | |||||||||||||
Total Capital Goods | 470,572 | ||||||||||||||
Commercial & Professional Services — 0.3% | |||||||||||||||
200 | Copart, Inc. * | 6,610 | |||||||||||||
200 | Pitney Bowes, Inc. | 3,848 | |||||||||||||
800 | RR Donnelley & Sons Co. | 12,116 | |||||||||||||
Total Commercial & Professional Services | 22,574 | ||||||||||||||
Consumer Durables & Apparel — 1.3% | |||||||||||||||
600 | Coach, Inc. | 21,504 | |||||||||||||
200 | Fossil, Inc. * | 9,498 | |||||||||||||
200 | Garmin Ltd | 5,322 | |||||||||||||
100 | Harman International Industries, Inc. * | 3,117 | |||||||||||||
200 | Jarden Corp. | 5,388 | |||||||||||||
200 | Jones Apparel Group, Inc. | 3,076 | |||||||||||||
400 | Newell Rubbermaid, Inc. | 6,008 | |||||||||||||
100 | Nike, Inc.-Class B | 7,000 | |||||||||||||
100 | Phillips-Van Heusen Corp. | 4,568 | |||||||||||||
100 | Stanley Black & Decker, Inc. | 5,364 | |||||||||||||
200 | Whirlpool Corp. | 14,832 | |||||||||||||
Total Consumer Durables & Apparel | 85,677 |
See accompanying notes to the financial statements.
3
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Consumer Services — 0.8% | |||||||||||||||
200 | Apollo Group, Inc.-Class A * | 8,496 | |||||||||||||
50 | ITT Educational Services, Inc. * | 2,663 | |||||||||||||
400 | McDonald's Corp. | 29,224 | |||||||||||||
200 | Starwood Hotels & Resorts Worldwide, Inc. | 9,346 | |||||||||||||
200 | Wyndham Worldwide Corp. | 4,638 | |||||||||||||
Total Consumer Services | 54,367 | ||||||||||||||
Diversified Financials — 3.7% | |||||||||||||||
1,600 | American Express Co. | 63,792 | |||||||||||||
200 | AmeriCredit Corp. * | 4,840 | |||||||||||||
200 | Ameriprise Financial, Inc. | 8,716 | |||||||||||||
7,800 | Bank of America Corp. | 97,110 | |||||||||||||
70 | BlackRock, Inc. | 9,936 | |||||||||||||
500 | Capital One Financial Corp. | 18,930 | |||||||||||||
400 | Discover Financial Services | 5,804 | |||||||||||||
180 | Franklin Resources, Inc. | 17,372 | |||||||||||||
400 | Invesco Ltd. | 7,240 | |||||||||||||
300 | Morgan Stanley | 7,407 | |||||||||||||
400 | SLM Corp. * | 4,420 | |||||||||||||
Total Diversified Financials | 245,567 | ||||||||||||||
Energy — 10.8% | |||||||||||||||
100 | Arch Coal, Inc. | 2,251 | |||||||||||||
100 | Atwood Oceanics, Inc. * | 2,508 | |||||||||||||
200 | Baker Hughes, Inc. | 7,516 | |||||||||||||
400 | Chesapeake Energy Corp. | 8,272 | |||||||||||||
1,200 | Chevron Corp. | 88,992 | |||||||||||||
100 | Cimarex Energy Co. | 6,542 | |||||||||||||
3,829 | ConocoPhillips | 200,754 | |||||||||||||
3,800 | Exxon Mobil Corp. | 224,808 | |||||||||||||
400 | Halliburton Co. | 11,284 | |||||||||||||
600 | Marathon Oil Corp. | 18,294 | |||||||||||||
500 | Nabors Industries Ltd. * | 7,840 | |||||||||||||
500 | National Oilwell Varco, Inc. | 18,795 | |||||||||||||
100 | Newfield Exploration Co. * | 4,801 |
See accompanying notes to the financial statements.
4
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Energy — continued | |||||||||||||||
100 | Occidental Petroleum Corp. | 7,308 | |||||||||||||
100 | Oceaneering International, Inc. * | 5,001 | |||||||||||||
100 | Oil States International, Inc. * | 4,123 | |||||||||||||
100 | Peabody Energy Corp. | 4,280 | |||||||||||||
200 | Pioneer Natural Resources Co. | 11,564 | |||||||||||||
200 | Rowan Cos, Inc. * | 5,142 | |||||||||||||
30 | Schlumberger Ltd. | 1,600 | |||||||||||||
300 | Sunoco, Inc. | 10,104 | |||||||||||||
400 | Tesoro Corp. | 4,492 | |||||||||||||
100 | Tidewater, Inc. | 4,008 | |||||||||||||
200 | Unit Corp. * | 6,814 | |||||||||||||
1,500 | Valero Energy Corp. | 23,655 | |||||||||||||
100 | Whiting Petroleum Corp. * | 8,484 | |||||||||||||
300 | Williams Cos., Inc. | 5,439 | |||||||||||||
200 | World Fuel Services Corp. | 5,108 | |||||||||||||
Total Energy | 709,779 | ||||||||||||||
Food & Staples Retailing — 3.6% | |||||||||||||||
200 | CVS Caremark Corp. | 5,400 | |||||||||||||
600 | Kroger Co. (The) | 11,838 | |||||||||||||
500 | Safeway, Inc. | 9,400 | |||||||||||||
775 | Supervalu, Inc. | 7,533 | |||||||||||||
2,600 | Walgreen Co. | 69,888 | |||||||||||||
2,700 | Wal-Mart Stores, Inc. | 135,378 | |||||||||||||
Total Food & Staples Retailing | 239,437 | ||||||||||||||
Food, Beverage & Tobacco — 4.6% | |||||||||||||||
1,400 | Altria Group, Inc. | 31,248 | |||||||||||||
400 | Archer-Daniels-Midland Co. | 12,312 | |||||||||||||
1,700 | Coca-Cola Co. (The) | 95,064 | |||||||||||||
200 | General Mills, Inc. | 7,232 | |||||||||||||
100 | Kellogg Co. | 4,968 | |||||||||||||
107 | Kraft Foods, Inc.-Class A | 3,205 | |||||||||||||
1,097 | PepsiCo, Inc. | 70,405 | |||||||||||||
1,400 | Philip Morris International, Inc. | 72,016 |
See accompanying notes to the financial statements.
5
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Food, Beverage & Tobacco — continued | |||||||||||||||
400 | Sara Lee Corp. | 5,776 | |||||||||||||
224 | Tyson Foods, Inc.-Class A | 3,669 | |||||||||||||
Total Food, Beverage & Tobacco | 305,895 | ||||||||||||||
Health Care Equipment & Services — 11.9% | |||||||||||||||
1,300 | Aetna, Inc. | 34,736 | |||||||||||||
1,400 | AmerisourceBergen Corp. | 38,192 | |||||||||||||
2,000 | Cardinal Health, Inc. | 59,920 | |||||||||||||
800 | Cigna Corp. | 25,776 | |||||||||||||
100 | Community Health Systems, Inc. * | 2,607 | |||||||||||||
600 | Coventry Health Care, Inc. * | 11,610 | |||||||||||||
380 | Express Scripts, Inc. * | 16,188 | |||||||||||||
400 | Health Net, Inc. * | 9,552 | |||||||||||||
700 | Humana, Inc. * | 33,453 | |||||||||||||
300 | Kinetic Concepts, Inc. * | 9,576 | |||||||||||||
100 | LifePoint Hospitals, Inc. * | 3,042 | |||||||||||||
1,300 | McKesson Corp. | 75,465 | |||||||||||||
2,000 | Medtronic, Inc. | 62,960 | |||||||||||||
100 | Omnicare, Inc. | 1,920 | |||||||||||||
200 | Patterson Cos., Inc. | 5,058 | |||||||||||||
100 | Quest Diagnostics, Inc. | 4,350 | |||||||||||||
400 | Stryker Corp. | 17,276 | |||||||||||||
6,767 | UnitedHealth Group, Inc. | 214,649 | |||||||||||||
2,200 | WellPoint, Inc. * | 109,296 | |||||||||||||
1,000 | Zimmer Holdings, Inc. * | 47,170 | |||||||||||||
Total Health Care Equipment & Services | 782,796 | ||||||||||||||
Household & Personal Products — 2.1% | |||||||||||||||
100 | Clorox Co. | 6,482 | |||||||||||||
600 | Colgate-Palmolive Co. | 44,304 | |||||||||||||
200 | Kimberly-Clark Corp. | 12,880 | |||||||||||||
200 | NBTY, Inc. * | 10,898 | |||||||||||||
1,100 | Procter & Gamble Co. (The) | 65,637 | |||||||||||||
Total Household & Personal Products | 140,201 |
See accompanying notes to the financial statements.
6
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Insurance — 5.6% | |||||||||||||||
100 | ACE, Ltd. | 5,347 | |||||||||||||
500 | AFLAC, Inc. | 23,625 | |||||||||||||
100 | Allied World Assurance Co. Holdings Ltd. | 5,037 | |||||||||||||
1,400 | Allstate Corp. (The) | 38,640 | |||||||||||||
400 | American Financial Group, Inc. | 11,508 | |||||||||||||
200 | Arch Capital Group Ltd. * | 15,960 | |||||||||||||
200 | Assurant, Inc. | 7,312 | |||||||||||||
200 | Axis Capital Holdings Ltd. | 6,176 | |||||||||||||
600 | Chubb Corp. | 33,072 | |||||||||||||
300 | CNA Financial Corp. * | 7,806 | |||||||||||||
200 | Endurance Specialty Holdings Ltd. | 7,368 | |||||||||||||
100 | Everest Re Group Ltd. | 7,914 | |||||||||||||
200 | First American Financial Corp. | 2,966 | |||||||||||||
400 | HCC Insurance Holdings, Inc. | 10,092 | |||||||||||||
300 | Lincoln National Corp. | 7,008 | |||||||||||||
200 | LOEWS Corp. | 7,028 | |||||||||||||
400 | MetLife, Inc. | 15,040 | |||||||||||||
575 | Old Republic International Corp. | 7,349 | |||||||||||||
100 | PartnerRe Ltd. | 7,445 | |||||||||||||
500 | Progressive Corp. (The) | 9,900 | |||||||||||||
200 | Protective Life Corp. | 3,736 | |||||||||||||
200 | Prudential Financial, Inc. | 10,114 | |||||||||||||
200 | Reinsurance Group of America, Inc. | 8,748 | |||||||||||||
100 | RenaissanceRe Holdings Ltd. | 5,679 | |||||||||||||
100 | StanCorp Financial Group, Inc. | 3,563 | |||||||||||||
200 | Torchmark Corp. | 9,870 | |||||||||||||
100 | Transatlantic Holdings, Inc. | 4,767 | |||||||||||||
1,400 | Travelers Cos. (The), Inc. | 68,572 | |||||||||||||
300 | Unum Group | 6,015 | |||||||||||||
300 | W.R. Berkley Corp. | 7,905 | |||||||||||||
300 | XL Group Plc | 5,373 | |||||||||||||
Total Insurance | 370,935 |
See accompanying notes to the financial statements.
7
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Materials — 1.9% | |||||||||||||||
1,100 | Alcoa, Inc. | 11,231 | |||||||||||||
100 | Allegheny Technologies, Inc. | 4,072 | |||||||||||||
100 | Ashland, Inc. | 4,646 | |||||||||||||
100 | Cytec Industries, Inc. | 4,743 | |||||||||||||
1,600 | Dow Chemical Co. (The) | 38,992 | |||||||||||||
100 | E.I. du Pont de Nemours & Co. | 4,077 | |||||||||||||
100 | Eastman Chemical Co. | 6,155 | |||||||||||||
100 | Freeport-McMoRan Copper & Gold, Inc. | 7,198 | |||||||||||||
500 | Huntsman Corp. | 4,555 | |||||||||||||
400 | International Paper Co. | 8,184 | |||||||||||||
200 | MeadWestvaco Corp. | 4,352 | |||||||||||||
200 | Reliance Steel & Aluminum Co. | 7,450 | |||||||||||||
200 | Southern Copper Corp. | 6,048 | |||||||||||||
120 | United States Steel Corp. | 5,101 | |||||||||||||
200 | Valspar Corp. | 6,024 | |||||||||||||
Total Materials | 122,828 | ||||||||||||||
Media — 2.5% | |||||||||||||||
1,200 | CBS Corp.-Class B (Non Voting) | 16,584 | |||||||||||||
1,400 | Comcast Corp.-Class A | 23,968 | |||||||||||||
100 | DirectTV-Class A * | 3,792 | |||||||||||||
100 | DreamWorks Animation SKG, Inc.-Class A * | 2,963 | |||||||||||||
700 | Gannett Co., Inc. | 8,463 | |||||||||||||
100 | Liberty Media Corp. Capital-Class A * | 4,508 | |||||||||||||
900 | Liberty Media Corp.-Interactive-Class A * | 9,495 | |||||||||||||
200 | Meredith Corp. | 5,852 | |||||||||||||
2,100 | News Corp.-Class A | 26,397 | |||||||||||||
100 | Time Warner Cable, Inc. | 5,161 | |||||||||||||
200 | Time Warner, Inc. | 5,996 | |||||||||||||
300 | Viacom, Inc.-Class B | 9,426 | |||||||||||||
500 | Virgin Media, Inc. | 10,405 | |||||||||||||
1,000 | Walt Disney Co. (The) | 32,590 | |||||||||||||
Total Media | 165,600 |
See accompanying notes to the financial statements.
8
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Pharmaceuticals, Biotechnology & Life Sciences — 13.4% | |||||||||||||||
1,300 | Abbott Laboratories | 64,142 | |||||||||||||
100 | Allergan, Inc. | 6,142 | |||||||||||||
1,500 | Amgen, Inc. * | 76,560 | |||||||||||||
700 | Biogen Idec, Inc. * | 37,660 | |||||||||||||
400 | Bristol-Myers Squibb Co. | 10,432 | |||||||||||||
2,100 | Eli Lilly & Co. | 70,476 | |||||||||||||
300 | Endo Pharmaceuticals Holdings, Inc. * | 8,151 | |||||||||||||
1,500 | Forest Laboratories, Inc. * | 40,935 | |||||||||||||
400 | Gilead Sciences, Inc. * | 12,744 | |||||||||||||
2,500 | Johnson & Johnson | 142,550 | |||||||||||||
600 | King Pharmaceuticals, Inc. * | 5,226 | |||||||||||||
1,900 | Merck & Co., Inc. | 66,804 | |||||||||||||
400 | Mylan, Inc. * | 6,864 | |||||||||||||
20,776 | Pfizer, Inc. | 330,962 | |||||||||||||
Total Pharmaceuticals, Biotechnology & Life Sciences | 879,648 | ||||||||||||||
Real Estate — 2.6% | |||||||||||||||
90 | Alexandria Real Estate Equities, Inc. REIT | 6,243 | |||||||||||||
200 | AMB Property Corp. REIT | 4,758 | |||||||||||||
130 | AvalonBay Communities, Inc. REIT | 13,679 | |||||||||||||
200 | Boston Properties, Inc. REIT | 16,280 | |||||||||||||
200 | BRE Properties, Inc. REIT | 8,176 | |||||||||||||
500 | Equity Residential REIT | 22,915 | |||||||||||||
60 | Essex Property Trust, Inc. REIT | 6,346 | |||||||||||||
300 | Hospitality Properties Trust REIT | 5,865 | |||||||||||||
100 | Jones Lang LaSalle, Inc. | 7,551 | |||||||||||||
400 | Kimco Realty Corp. REIT | 5,964 | |||||||||||||
100 | Plum Creek Timber Co., Inc. REIT | 3,447 | |||||||||||||
200 | Simon Property Group, Inc. REIT | 18,090 | |||||||||||||
100 | Taubman Centers, Inc. REIT | 4,149 | |||||||||||||
300 | UDR, Inc. REIT | 6,174 | |||||||||||||
100 | Ventas, Inc. REIT | 5,051 | |||||||||||||
400 | Vornado Realty Trust REIT | 32,424 | |||||||||||||
300 | Weingarten Realty Investors REIT | 6,054 | |||||||||||||
Total Real Estate | 173,166 |
See accompanying notes to the financial statements.
9
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Retailing — 1.6% | |||||||||||||||
200 | Abercrombie & Fitch Co.-Class A | 6,920 | |||||||||||||
100 | Advance Auto Parts, Inc. | 5,447 | |||||||||||||
150 | Aeropostale, Inc. * | 3,195 | |||||||||||||
30 | AutoZone, Inc. * | 6,294 | |||||||||||||
200 | Best Buy Co., Inc. | 6,278 | |||||||||||||
100 | Expedia, Inc. | 2,286 | |||||||||||||
100 | Guess?, Inc. | 3,231 | |||||||||||||
1,000 | Home Depot, Inc. | 27,810 | |||||||||||||
300 | Limited Brands, Inc. | 7,080 | |||||||||||||
500 | Lowe's Cos., Inc. | 10,150 | |||||||||||||
400 | Macy's, Inc. | 7,776 | |||||||||||||
400 | Penske Auto Group, Inc. * | 4,804 | |||||||||||||
200 | RadioShack Corp. | 3,696 | |||||||||||||
100 | Sears Holdings Corp. * | 6,190 | |||||||||||||
100 | Williams-Sonoma, Inc. | 2,596 | |||||||||||||
Total Retailing | 103,753 | ||||||||||||||
Software & Services — 11.5% | |||||||||||||||
400 | Cognizant Technology Solutions Corp.-Class A * | 23,042 | |||||||||||||
200 | CoreLogic, Inc. | 3,454 | |||||||||||||
3,600 | eBay, Inc. * | 83,664 | |||||||||||||
100 | Fiserv, Inc. * | 5,003 | |||||||||||||
420 | Google, Inc.-Class A * | 189,008 | |||||||||||||
290 | International Business Machines Corp. | 35,737 | |||||||||||||
9,500 | Microsoft Corp. | 223,060 | |||||||||||||
8,300 | Oracle Corp. | 181,604 | |||||||||||||
900 | Symantec Corp. * | 12,267 | |||||||||||||
Total Software & Services | 756,839 | ||||||||||||||
Technology Hardware & Equipment — 6.2% | |||||||||||||||
660 | Apple, Inc. * | 160,624 | |||||||||||||
2,700 | Cisco Systems, Inc. * | 54,135 | |||||||||||||
1,100 | Dell, Inc. * | 12,947 | |||||||||||||
100 | F5 Networks, Inc. * | 8,743 |
See accompanying notes to the financial statements.
10
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Technology Hardware & Equipment — continued | |||||||||||||||
1,000 | Hewlett-Packard Co. | 38,480 | |||||||||||||
700 | Ingram Micro, Inc.-Class A * | 10,542 | |||||||||||||
500 | Jabil Circuit, Inc. | 5,125 | |||||||||||||
400 | JDS Uniphase Corp. * | 3,676 | |||||||||||||
300 | Lexmark International, Inc. * | 10,497 | |||||||||||||
1,200 | Motorola, Inc. * | 9,036 | |||||||||||||
300 | QLogic Corp. * | 4,469 | |||||||||||||
1,000 | Qualcomm, Inc. | 38,310 | |||||||||||||
300 | Seagate Technology Plc * | 3,039 | |||||||||||||
200 | Tech Data Corp. * | 7,240 | |||||||||||||
1,000 | Western Digital Corp. * | 24,150 | |||||||||||||
1,800 | Xerox Corp. | 15,192 | |||||||||||||
Total Technology Hardware & Equipment | 406,205 | ||||||||||||||
Telecommunication Services — 2.6% | |||||||||||||||
4,558 | AT&T, Inc. | 123,203 | |||||||||||||
200 | NII Holdings, Inc. * | 7,250 | |||||||||||||
1,352 | Verizon Communications, Inc. | 39,897 | |||||||||||||
Total Telecommunication Services | 170,350 | ||||||||||||||
Transportation — 1.5% | |||||||||||||||
500 | CSX Corp. | 24,945 | |||||||||||||
300 | FedEx Corp. | 23,415 | |||||||||||||
100 | Kansas City Southern * | 3,357 | |||||||||||||
500 | Norfolk Southern Corp. | 26,840 | |||||||||||||
1,300 | Southwest Airlines Co. | 14,365 | |||||||||||||
100 | Union Pacific Corp. | 7,294 | |||||||||||||
Total Transportation | 100,216 | ||||||||||||||
Utilities — 0.6% | |||||||||||||||
300 | AES Corp. (The) * | 3,072 | |||||||||||||
300 | Aqua America, Inc. | 5,964 | |||||||||||||
100 | Dominion Resources, Inc./Virginia | 4,276 | |||||||||||||
200 | DTE Energy Co. | 9,370 |
See accompanying notes to the financial statements.
11
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Utilities — continued | |||||||||||||||
100 | Exelon Corp. | 4,072 | |||||||||||||
100 | Integrys Energy Group, Inc. | 4,845 | |||||||||||||
100 | ONEOK, Inc. | 4,291 | |||||||||||||
Total Utilities | 35,890 | ||||||||||||||
TOTAL COMMON STOCKS (COST $6,673,004) | 6,447,012 | ||||||||||||||
MUTUAL FUNDS — 1.9% | |||||||||||||||
Affiliated Issuers — 1.9% | |||||||||||||||
5,120 | GMO U.S. Treasury Fund | 127,992 | |||||||||||||
TOTAL MUTUAL FUNDS (COST $128,043) | 127,992 | ||||||||||||||
SHORT-TERM INVESTMENTS — 0.4% | |||||||||||||||
Money Market Funds — 0.4% | |||||||||||||||
24,308 | State Street Institutional Treasury Money Market Fund-Institutional Class | 24,308 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $24,308) | 24,308 | ||||||||||||||
TOTAL INVESTMENTS — 100.1% (Cost $6,825,355) | 6,599,312 | ||||||||||||||
Other Assets and Liabilities (net) — (0.1%) | (7,313 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 6,591,999 |
Notes to Schedule of Investments:
REIT - Real Estate Investment Trust
* Non-income producing security.
See accompanying notes to the financial statements.
12
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $6,697,312) (Note 2) | $ | 6,471,320 | |||||
Investments in affiliated issuers, at value (cost $128,043) (Notes 2 and 10) | 127,992 | ||||||
Dividends receivable | 18,385 | ||||||
Foreign taxes receivable | 8 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 6,076 | ||||||
Total assets | 6,623,781 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 16 | ||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 1,797 | ||||||
Shareholder service fee | 870 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 32 | ||||||
Accrued expenses | 29,067 | ||||||
Total liabilities | 31,782 | ||||||
Net assets | $ | 6,591,999 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 10,537,703 | |||||
Accumulated undistributed net investment income | 18,134 | ||||||
Accumulated net realized loss | (3,737,795 | ) | |||||
Net unrealized depreciation | (226,043 | ) | |||||
$ | 6,591,999 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 6,591,999 | |||||
Shares outstanding: | |||||||
Class III | 1,083,000 | ||||||
Net asset value per share: | |||||||
Class III | $ | 6.09 |
See accompanying notes to the financial statements.
13
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends (net of withholding taxes of $6) | $ | 68,027 | |||||
Interest | 59 | ||||||
Dividends from affiliated issuers (Note 10) | 30 | ||||||
Total investment income | 68,116 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 10,980 | ||||||
Shareholder service fee – Class III (Note 5) | 5,313 | ||||||
Audit and tax fees | 28,704 | ||||||
Custodian, fund accounting agent and transfer agent fees | 6,624 | ||||||
Registration fees | 368 | ||||||
Legal fees | 184 | ||||||
Trustees fees and related expenses (Note 5) | 88 | ||||||
Miscellaneous | 552 | ||||||
Total expenses | 52,813 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (36,406 | ) | |||||
Net expenses | 16,407 | ||||||
Net investment income (loss) | 51,709 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 20,274 | ||||||
Realized gains distributions from affiliated issuers (Note 10) | 13 | ||||||
Net realized gain (loss) | 20,287 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | (498,767 | ) | |||||
Investments in affiliated issuers | (51 | ) | |||||
Net unrealized gain (loss) | (498,818 | ) | |||||
Net realized and unrealized gain (loss) | (478,531 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (426,822 | ) |
See accompanying notes to the financial statements.
14
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 51,709 | $ | 106,886 | |||||||
Net realized gain (loss) | 20,287 | (509,954 | ) | ||||||||
Change in net unrealized appreciation (depreciation) | (498,818 | ) | 2,618,818 | ||||||||
Net increase (decrease) in net assets from operations | (426,822 | ) | 2,215,750 | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (48,785 | ) | (102,749 | ) | |||||||
Net share transactions (Note 9): | |||||||||||
Class III | 47,272 | 69,350 | |||||||||
Total increase (decrease) in net assets | (428,335 | ) | 2,182,351 | ||||||||
Net assets: | |||||||||||
Beginning of period | 7,020,334 | 4,837,983 | |||||||||
End of period (including accumulated undistributed net investment income of $18,134 and $15,210, respectively) | $ | 6,591,999 | $ | 7,020,334 |
See accompanying notes to the financial statements.
15
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 6.53 | $ | 4.55 | $ | 7.86 | $ | 9.68 | $ | 10.78 | $ | 11.71 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.05 | 0.10 | 0.14 | 0.18 | 0.21 | 0.26 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.44 | ) | 1.98 | (3.31 | ) | (1.23 | ) | 0.80 | 0.58 | ||||||||||||||||||
Total from investment operations | (0.39 | ) | 2.08 | (3.17 | ) | (1.05 | ) | 1.01 | 0.84 | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.05 | ) | (0.10 | ) | (0.14 | ) | (0.18 | ) | (0.23 | ) | (0.28 | ) | |||||||||||||||
From net realized gains | — | — | — | (0.59 | ) | (1.88 | ) | (1.49 | ) | ||||||||||||||||||
Total distributions | (0.05 | ) | (0.10 | ) | (0.14 | ) | (0.77 | ) | (2.11 | ) | (1.77 | ) | |||||||||||||||
Net asset value, end of period | $ | 6.09 | $ | 6.53 | $ | 4.55 | $ | 7.86 | $ | 9.68 | $ | 10.78 | |||||||||||||||
Total Return(a) | (6.07 | )%** | 45.95 | % | (40.83 | )% | (11.88 | )% | 9.80 | % | 7.73 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 6,592 | $ | 7,020 | $ | 4,838 | $ | 29,358 | $ | 35,726 | $ | 95,605 | |||||||||||||||
Net expenses to average daily net assets | 0.46 | %*(c) | 0.46 | % | 0.46 | %(b) | 0.46 | % | 0.46 | % | 0.48 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 1.46 | %* | 1.70 | % | 1.94 | % | 1.93 | % | 1.91 | % | 2.31 | % | |||||||||||||||
Portfolio turnover rate | 32 | %** | 54 | % | 57 | % | 75 | % | 72 | % | 62 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 1.03 | %* | 1.22 | % | 0.43 | % | 0.23 | % | 0.13 | % | 0.12 | % |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
16
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO U.S. Intrinsic Value Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks long-term capital growth. The Fund seeks to achieve its investment objective by outperforming its benchmark, the Russell 1000 Value Index. The Fund typically invests directly and indirectly (e.g., through the GMO Funds in which the Fund invests, collectively referred to as the "underlying funds" or derivatives) in equity investments. The term "equity investments" refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts. Under normal circumstances, the Fund invests directly and indirectly at least 80% of its assets in investments tied economically to the U.S.
The Manager relies principally on proprietary quantitative models and also employs fundamental investment techniques to evaluate and select equity investments for the Fund. The Manager selects equity investments it believes (i) are undervalued (e.g., equity investments trading at prices below what the Manager believes to be their fundamental value); (ii) have superior fundamentals (e.g., earnings stability); and/or (iii) have shown indications of improving investor sentiment (e.g., positive price movement or upgraded analyst ratings). The Manager also uses proprietary techniques to adjust the portfolio for other factors such as position size, industry and sector weights, and market capitalization. The factors considered and models used by the Manager may change over time based on the Manager's assessment of what combination of models and factors are best positioned to achieve the Fund's investment objective.
In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the-counter ("OTC") derivatives, including options, futures, and swap contracts, (i) as a substitute for direct investment; (ii) in an attempt to reduce investment exposures (which may result in a reduction below zero); (iii) to effect transactions intended as substitutes for securities lending; and/or (iv) in an attempt to adjust elements of its investment exposure. In addition, the Fund may lend its portfolio securities.
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
17
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the OTC market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or who se values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. See note 4 for a further discussion on valuation of derivative financial instruments.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
18
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | $ | 6,447,012 | $ | — | $ | — | $ | 6,447,012 | |||||||||||
Mutual Funds | 127,992 | — | — | 127,992 | |||||||||||||||
Short-Term Investments | 24,308 | — | — | 24,308 | |||||||||||||||
Total | $ | 6,599,312 | $ | — | $ | — | $ | 6,599,312 |
All of the Fund's common stocks held at period end are classified as Level 1. Please refer to the Schedule of Investments for a more detailed categorization of common stocks.
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements.
The Fund held no investments or other financial instruments at either August 31, 2010 or February 28, 2010, whose fair value was determined using Level 3 inputs.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, quarterly, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing
19
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund elected to defer to March 1, 2010 post-October capital losses of $71,304.
Utilization of post-October capital losses realized subsequent to February 28, 2009 were subject to limitations imposed by the Code related to share ownership activity. As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (3,007,129 | ) | ||||
2/28/2018 | (290,942 | ) | |||||
Total | $ | (3,298,071 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 7,165,792 | $ | 303,881 | $ | (870,361 | ) | $ | (566,480 | ) |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
20
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which co llection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying fund (See Note 5).
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund's investments.
21
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
• Market Risk — Value Securities — The Fund purchases some equity investments at prices below what the Manager believes to be their fundamental value. The Fund runs the risk that the prices of these investments will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value.
Other principal risks of an investment in the Fund include Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, and credit and counterparty risk); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund's securities); Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-te rm effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero).
22
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, indices and markets without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index).
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedin gs. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be secured by collateral, that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and even ts affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will
23
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. The Fund had no futures contracts outstanding at the end of the period.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set
24
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an of fsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
25
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
26
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.31% of average daily net assets. The Fund has adopted a Shareholder Service Plan underwhich the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.31% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and
27
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition to the contractual expense reimbursement described above, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund's Expense Reimbursement A mount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $88 and $26, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Total Indirect Expenses | |||||||||
< 0.001% | 0.000 | % | < 0.001% |
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended August 31, 2010 aggregated $2,404,857 and $2,205,072, respectively.
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
28
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
8. Principal shareholders and related parties
As of August 31, 2010, 97.87% of the outstanding shares of the Fund were held by one shareholder. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
As of August 31, 2010, 0.36% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 0.20% of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 552 | $ | 3,748 | 3,224 | $ | 19,432 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 7,652 | 48,524 | 17,838 | 101,883 | |||||||||||||||
Shares repurchased | (728 | ) | (5,000 | ) | (8,970 | ) | (51,965 | ) | |||||||||||
Net increase (decrease) | 7,476 | $ | 47,272 | 12,092 | $ | 69,350 |
10. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO U.S. Treasury Fund | $ | — | $ | 128,043 | $ | — | $ | 30 | $ | 13 | $ | 127,992 | |||||||||||||||
Totals | $ | — | $ | 128,043 | $ | — | $ | 30 | $ | 13 | $ | 127,992 |
29
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of a composite of accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three-, five-, seven- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications and experience of the per sonnel responsible for managing the Fund, the support those
30
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparis on to the Manager's separate account clients and the expenses and risks borne by the Manager as a result of the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by , for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating
31
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
32
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1 | ) Actual | 0.46 | % | $ | 1,000.00 | $ | 939.30 | $ | 2.25 | ||||||||||
2 | ) Hypothetical | 0.46 | % | $ | 1,000.00 | $ | 1,022.89 | $ | 2.35 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
33
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 99.3 | % | |||||
Mutual Funds | 0.9 | ||||||
Short-Term Investments | 0.2 | ||||||
Other | (0.4 | ) | |||||
100.0 | % | ||||||
Industry Group Summary | % of Equity Investments* | ||||||
Capital Goods | 10.9 | % | |||||
Software & Services | 10.8 | ||||||
Health Care Equipment & Services | 9.5 | ||||||
Pharmaceuticals, Biotechnology & Life Sciences | 7.1 | ||||||
Retailing | 6.9 | ||||||
Technology Hardware & Equipment | 6.9 | ||||||
Consumer Durables & Apparel | 6.8 | ||||||
Materials | 5.9 | ||||||
Consumer Services | 5.0 | ||||||
Semiconductors & Semiconductor Equipment | 4.6 | ||||||
Transportation | 4.2 | ||||||
Energy | 3.9 | ||||||
Diversified Financials | 2.8 | ||||||
Household & Personal Products | 2.6 | ||||||
Insurance | 2.3 | ||||||
Commercial & Professional Services | 1.9 | ||||||
Real Estate | 1.9 | ||||||
Media | 1.9 | ||||||
Food, Beverage & Tobacco | 1.8 | ||||||
Automobiles & Components | 1.0 | ||||||
Telecommunication Services | 0.5 | ||||||
Utilities | 0.4 | ||||||
Food & Staples Retailing | 0.2 | ||||||
Banks | 0.2 | ||||||
100.0 | % |
* Equity investments may consist of common stocks, preferred stocks and rights and warrants. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
1
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
COMMON STOCKS — 99.3% | |||||||||||||||
Automobiles & Components — 1.0% | |||||||||||||||
1,400 | Cooper Tire & Rubber Co. | 22,666 | |||||||||||||
100 | Federal-Mogul Corp. * | 1,530 | |||||||||||||
400 | Standard Motor Products, Inc. | 3,440 | |||||||||||||
700 | Thor Industries, Inc. | 16,338 | |||||||||||||
1,400 | TRW Automotive Holdings Corp. * | 48,664 | |||||||||||||
Total Automobiles & Components | 92,638 | ||||||||||||||
Banks — 0.2% | |||||||||||||||
200 | Bank of the Ozarks, Inc. | 7,348 | |||||||||||||
100 | Commerce Bancshares, Inc. | 3,573 | |||||||||||||
100 | Great Southern Bancorp, Inc. | 2,008 | |||||||||||||
400 | Nara Bancorp, Inc. * | 2,388 | |||||||||||||
Total Banks | 15,317 | ||||||||||||||
Capital Goods — 10.9% | |||||||||||||||
900 | Actuant Corp.-Class A | 17,838 | |||||||||||||
500 | Acuity Brands, Inc. | 19,370 | |||||||||||||
200 | Altra Holdings, Inc. * | 2,574 | |||||||||||||
100 | American Science & Engineering, Inc. | 7,097 | |||||||||||||
2,000 | Ametek, Inc. | 85,980 | |||||||||||||
3,000 | ArvinMeritor, Inc. * | 39,210 | |||||||||||||
100 | AZZ, Inc. | 3,994 | |||||||||||||
100 | Baldor Electric Co. | 3,508 | |||||||||||||
1,200 | BE Aerospace, Inc. * | 32,340 | |||||||||||||
1,400 | Bucyrus International, Inc. | 80,486 | |||||||||||||
400 | Carlisle Cos., Inc. | 11,220 | |||||||||||||
200 | Chart Industries, Inc. * | 3,184 | |||||||||||||
700 | Crane Co. | 23,730 | |||||||||||||
400 | Dynamic Materials Corp. | 5,472 | |||||||||||||
100 | EnPro Industries, Inc. * | 2,731 | |||||||||||||
200 | Esterline Technologies Corp. * | 9,200 | |||||||||||||
1,500 | Force Protection, Inc. * | 5,812 |
See accompanying notes to the financial statements.
2
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Capital Goods — continued | |||||||||||||||
300 | Gardner Denver, Inc. | 14,322 | |||||||||||||
300 | Graco, Inc. | 8,373 | |||||||||||||
300 | Hubbell, Inc.-Class B | 13,494 | |||||||||||||
200 | II-VI, Inc. * | 6,878 | |||||||||||||
200 | Kaman Corp. | 4,274 | |||||||||||||
400 | Lennox International, Inc. | 16,956 | |||||||||||||
200 | Michael Baker Corp. * | 6,594 | |||||||||||||
1,000 | MSC Industrial Direct Co., Inc.-Class A | 44,570 | |||||||||||||
200 | Nordson Corp. | 12,834 | |||||||||||||
3,300 | Pall Corp. | 112,827 | |||||||||||||
400 | Pentair, Inc. | 12,040 | |||||||||||||
800 | Polypore International, Inc. * | 21,616 | |||||||||||||
400 | Quanex Building Products Corp. | 6,320 | |||||||||||||
200 | Snap-On, Inc. | 8,246 | |||||||||||||
500 | Spirit Aerosystems Holdings, Inc.-Class A * | 9,670 | |||||||||||||
500 | TAL International Group, Inc. | 10,660 | |||||||||||||
100 | Thomas & Betts Corp. * | 3,695 | |||||||||||||
1,400 | Toro Co. (The) | 69,860 | |||||||||||||
2,200 | TransDigm Group, Inc. | 127,358 | |||||||||||||
500 | Trimas Corp. * | 6,445 | |||||||||||||
3,200 | WABCO Holdings, Inc. * | 112,832 | |||||||||||||
600 | WESCO International, Inc. * | 19,368 | |||||||||||||
100 | Woodward Governor Co. | 2,612 | |||||||||||||
Total Capital Goods | 1,005,590 | ||||||||||||||
Commercial & Professional Services — 1.9% | |||||||||||||||
400 | Advisory Board Co. (The) * | 16,216 | |||||||||||||
400 | ATC Technology Corp. * | 9,652 | |||||||||||||
1,100 | Cenveo, Inc. * | 6,039 | |||||||||||||
100 | Consolidated Graphics, Inc. * | 3,971 | |||||||||||||
300 | Corporate Executive Board Co. (The) | 8,412 | |||||||||||||
800 | Deluxe Corp. | 13,384 | |||||||||||||
1,200 | Equifax, Inc. | 35,364 | |||||||||||||
200 | Exponent, Inc. * | 6,168 |
See accompanying notes to the financial statements.
3
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Commercial & Professional Services — continued | |||||||||||||||
400 | Herman Miller, Inc. | 6,568 | |||||||||||||
1,800 | HNI Corp. | 42,066 | |||||||||||||
200 | Interface, Inc.-Class A | 2,564 | |||||||||||||
900 | Knoll, Inc. | 12,078 | |||||||||||||
200 | Resources Connection, Inc. | 2,218 | |||||||||||||
200 | School Specialty, Inc. * | 2,606 | |||||||||||||
100 | Unifirst Corp. (The) | 3,926 | |||||||||||||
100 | VSE Corp. | 2,808 | |||||||||||||
Total Commercial & Professional Services | 174,040 | ||||||||||||||
Consumer Durables & Apparel — 6.8% | |||||||||||||||
300 | Carter's, Inc. * | 6,702 | |||||||||||||
1,000 | CROCS, Inc. * | 12,500 | |||||||||||||
2,300 | Deckers Outdoor Corp. * | 99,981 | |||||||||||||
2,300 | Fossil, Inc. * | 109,227 | |||||||||||||
200 | G-III Apparel Group Ltd. * | 4,824 | |||||||||||||
700 | Hanesbrands, Inc. * | 16,758 | |||||||||||||
1,100 | Harman International Industries, Inc. * | 34,287 | |||||||||||||
1,000 | Hasbro, Inc. | 40,360 | |||||||||||||
400 | Leggett & Platt, Inc. | 7,668 | |||||||||||||
1,500 | Liz Claiborne, Inc. * | 6,300 | |||||||||||||
200 | Maidenform Brands, Inc. * | 5,334 | |||||||||||||
200 | National Presto Industries, Inc. | 20,004 | |||||||||||||
500 | Oxford Industries, Inc. | 9,860 | |||||||||||||
1,100 | Phillips-Van Heusen Corp. | 50,248 | |||||||||||||
500 | Polaris Industries, Inc. | 26,665 | |||||||||||||
800 | Steven Madden Ltd. * | 27,544 | |||||||||||||
4,400 | Tempur-Pedic International, Inc. * | 117,920 | |||||||||||||
100 | Timberland Co.-Class A * | 1,607 | |||||||||||||
100 | True Religion Apparel, Inc. * | 1,758 | |||||||||||||
200 | Tupperware Corp. | 7,868 | |||||||||||||
200 | Universal Electronics, Inc. * | 3,826 | |||||||||||||
600 | Wolverine World Wide, Inc. | 15,162 | |||||||||||||
Total Consumer Durables & Apparel | 626,403 |
See accompanying notes to the financial statements.
4
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Consumer Services — 5.0% | |||||||||||||||
200 | California Pizza Kitchen, Inc. * | 3,072 | |||||||||||||
800 | CEC Entertainment, Inc. * | 25,096 | |||||||||||||
1,500 | Cheesecake Factory (The), Inc. * | 33,585 | |||||||||||||
900 | Chipotle Mexican Grill, Inc. * | 135,747 | |||||||||||||
1,500 | Cracker Barrel Old Country Store, Inc. | 66,915 | |||||||||||||
600 | Domino's Pizza, Inc. * | 7,692 | |||||||||||||
1,500 | Interval Leisure Group, Inc. * | 18,765 | |||||||||||||
700 | Panera Bread Co.-Class A * | 55,958 | |||||||||||||
100 | PF Chang's China Bistro, Inc. | 4,281 | |||||||||||||
200 | Pre-Paid Legal Services, Inc. * | 10,930 | |||||||||||||
1,000 | Shuffle Master, Inc. * | 7,950 | |||||||||||||
1,700 | Sotheby's | 45,237 | |||||||||||||
2,100 | Wyndham Worldwide Corp. | 48,699 | |||||||||||||
Total Consumer Services | 463,927 | ||||||||||||||
Diversified Financials — 2.8% | |||||||||||||||
2,700 | Advance America Cash Advance Centers, Inc. | 9,045 | |||||||||||||
700 | AmeriCredit Corp. * | 16,940 | |||||||||||||
2,000 | Cardtronics, Inc. * | 27,700 | |||||||||||||
900 | Credit Acceptance Corp. * | 50,985 | |||||||||||||
1,300 | Dollar Financial Corp. * | 25,142 | |||||||||||||
100 | Evercore Partners, Inc.-Class A | 2,449 | |||||||||||||
4,400 | EZCORP, Inc.-Class A * | 79,112 | |||||||||||||
400 | First Cash Financial Services, Inc. * | 9,544 | |||||||||||||
800 | GFI Group, Inc. | 3,584 | |||||||||||||
400 | Life Partners Holdings, Inc. | 5,908 | |||||||||||||
100 | Main Street Capital Corp. | 1,483 | |||||||||||||
300 | Nelnet, Inc.-Class A | 6,573 | |||||||||||||
500 | NewStar Financial, Inc. * | 3,355 | |||||||||||||
100 | Portfolio Recovery Associates, Inc. * | 6,370 | |||||||||||||
200 | World Acceptance Corp. * | 8,150 | |||||||||||||
Total Diversified Financials | 256,340 |
See accompanying notes to the financial statements.
5
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Energy — 3.9% | |||||||||||||||
1,100 | Atlas Energy, Inc. * | 29,920 | |||||||||||||
3,800 | Brigham Exploration Co. * | 58,216 | |||||||||||||
600 | CARBO Ceramics, Inc. | 45,438 | |||||||||||||
1,200 | Dril-Quip, Inc. * | 63,444 | |||||||||||||
1,800 | Forest Oil Corp. * | 47,016 | |||||||||||||
300 | Geokinetics, Inc. * | 1,500 | |||||||||||||
200 | Golar LNG Ltd. | 2,076 | |||||||||||||
300 | Gulfport Energy Corp. * | 3,411 | |||||||||||||
300 | Holly Corp. | 7,803 | |||||||||||||
300 | ION Geophysical Corp. * | 1,026 | |||||||||||||
1,000 | Lufkin Industries, Inc. | 38,660 | |||||||||||||
1,000 | Massey Energy Co. | 28,750 | |||||||||||||
300 | Rex Energy Corp. * | 3,393 | |||||||||||||
200 | Rowan Cos, Inc. * | 5,142 | |||||||||||||
800 | Ship Finance International Ltd. | 14,008 | |||||||||||||
100 | St Mary Land & Exploration Co. | 3,799 | |||||||||||||
100 | Teekay Tankers Ltd.-Class A | 1,155 | |||||||||||||
400 | Tetra Technologies, Inc. * | 3,356 | |||||||||||||
200 | World Fuel Services Corp. | 5,108 | |||||||||||||
Total Energy | 363,221 | ||||||||||||||
Food & Staples Retailing — 0.2% | |||||||||||||||
100 | BJ's Wholesale Club, Inc. * | 4,196 | |||||||||||||
600 | PriceSmart, Inc. | 15,486 | |||||||||||||
Total Food & Staples Retailing | 19,682 | ||||||||||||||
Food, Beverage & Tobacco — 1.7% | |||||||||||||||
800 | B&G Foods, Inc. | 8,544 | |||||||||||||
800 | Boston Beer Co., Inc.-Class A * | 52,568 | |||||||||||||
300 | Cal-Maine Foods, Inc. | 8,904 | |||||||||||||
400 | Darling International, Inc. * | 3,008 | |||||||||||||
100 | Diamond Foods, Inc. | 4,223 | |||||||||||||
1,100 | Hansen Natural Corp. * | 49,544 | |||||||||||||
100 | John B. Sanfilippo & Son, Inc. * | 1,280 |
See accompanying notes to the financial statements.
6
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Food, Beverage & Tobacco — continued | |||||||||||||||
700 | Sanderson Farms, Inc. | 30,107 | |||||||||||||
100 | Universal Corp. | 3,566 | |||||||||||||
Total Food, Beverage & Tobacco | 161,744 | ||||||||||||||
Health Care Equipment & Services — 9.4% | |||||||||||||||
200 | Almost Family, Inc. * | 5,054 | |||||||||||||
200 | American Dental Partners, Inc. * | 2,136 | |||||||||||||
300 | American Medical Systems Holdings, Inc. * | 5,466 | |||||||||||||
500 | AMERIGROUP Corp. * | 18,450 | |||||||||||||
100 | Arthrocare Corp. * | 2,596 | |||||||||||||
800 | Bio-Reference Labs, Inc. * | 15,856 | |||||||||||||
2,700 | BioScrip, Inc. * | 13,122 | |||||||||||||
1,000 | Catalyst Health Solutions, Inc. * | 40,090 | |||||||||||||
300 | Chemed Corp. | 14,970 | |||||||||||||
700 | Community Health Systems, Inc. * | 18,249 | |||||||||||||
200 | Computer Programs & Systems, Inc. | 8,172 | |||||||||||||
400 | CorVel Corp. * | 14,712 | |||||||||||||
400 | Delcath Systems, Inc. * | 2,432 | |||||||||||||
200 | Edwards Lifesciences Corp. * | 11,514 | |||||||||||||
300 | Emergency Medical Services, LP * | 14,415 | |||||||||||||
200 | Exactech, Inc. * | 2,902 | |||||||||||||
300 | Gentiva Health Services, Inc. * | 6,165 | |||||||||||||
11,300 | Health Management Associates, Inc.-Class A * | 70,625 | |||||||||||||
2,000 | Hill-Rom Holdings, Inc. | 64,200 | |||||||||||||
200 | HMS Holdings Corp. * | 10,436 | |||||||||||||
100 | Idexx Laboratories, Inc. * | 5,527 | |||||||||||||
500 | Integra LifeSciences Holdings Corp. * | 17,385 | |||||||||||||
400 | Invacare Corp. | 9,160 | |||||||||||||
100 | IPC The Hospitalist Co., Inc. * | 2,336 | |||||||||||||
200 | Kensey Nash Corp. * | 5,304 | |||||||||||||
800 | Kinetic Concepts, Inc. * | 25,536 | |||||||||||||
6,100 | Lincare Holdings, Inc. | 140,422 | |||||||||||||
500 | Merit Medical Systems, Inc. * | 7,890 | |||||||||||||
100 | Molina Healthcare, Inc. * | 2,536 |
See accompanying notes to the financial statements.
7
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Health Care Equipment & Services — continued | |||||||||||||||
400 | Natus Medical, Inc. * | 4,828 | |||||||||||||
1,800 | NxStage Medical, Inc. * | 28,386 | |||||||||||||
600 | Omnicare, Inc. | 11,520 | |||||||||||||
1,000 | Orthofix International NV * | 26,700 | |||||||||||||
2,900 | Patterson Cos., Inc. | 73,341 | |||||||||||||
600 | Providence Service Corp. (The) * | 8,112 | |||||||||||||
1,700 | ResMed, Inc. * | 51,238 | |||||||||||||
2,300 | Sirona Dental Systems, Inc. * | 72,496 | |||||||||||||
200 | Teleflex, Inc. | 9,612 | |||||||||||||
3,900 | Tenet Healthcare Corp. * | 15,288 | |||||||||||||
200 | Universal Health Services, Inc.-Class B | 6,280 | |||||||||||||
100 | Young Innovations, Inc. | 2,623 | |||||||||||||
200 | Zoll Medical Corp. * | 5,284 | |||||||||||||
Total Health Care Equipment & Services | 873,366 | ||||||||||||||
Household & Personal Products — 2.6% | |||||||||||||||
1,900 | Herbalife Ltd. | 105,602 | |||||||||||||
300 | Inter Parfums, Inc. | 4,926 | |||||||||||||
1,400 | Medifast, Inc. * | 37,408 | |||||||||||||
400 | NBTY, Inc. * | 21,796 | |||||||||||||
2,300 | Nu Skin Enterprises, Inc.-Class A | 58,811 | |||||||||||||
100 | USANA Health Sciences, Inc. * | 4,250 | |||||||||||||
200 | WD-40 Co. | 7,034 | |||||||||||||
Total Household & Personal Products | 239,827 | ||||||||||||||
Insurance — 2.3% | |||||||||||||||
600 | Axis Capital Holdings Ltd. | 18,528 | |||||||||||||
200 | Endurance Specialty Holdings Ltd. | 7,368 | |||||||||||||
2,200 | Erie Indemnity Co.-Class A | 115,500 | |||||||||||||
400 | FBL Financial Group, Inc.-Class A | 9,200 | |||||||||||||
5,200 | Genworth Financial, Inc.-Class A * | 56,316 | |||||||||||||
700 | Universal Insurance Holdings, Inc. | 2,912 | |||||||||||||
Total Insurance | 209,824 |
See accompanying notes to the financial statements.
8
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Materials — 5.8% | |||||||||||||||
1,400 | Albemarle Corp. | 56,126 | |||||||||||||
400 | Ashland, Inc. | 18,584 | |||||||||||||
600 | Balchem Corp.-Class B | 14,670 | |||||||||||||
900 | Boise, Inc. * | 6,192 | |||||||||||||
1,100 | Carpenter Technology Corp. | 34,111 | |||||||||||||
400 | Compass Minerals International, Inc. | 28,700 | |||||||||||||
2,200 | International Flavors & Fragrances, Inc. | 100,518 | |||||||||||||
700 | Lubrizol Corp. | 65,317 | |||||||||||||
200 | Nalco Holding Co. | 4,544 | |||||||||||||
600 | NewMarket Corp. | 60,318 | |||||||||||||
200 | Olin Corp. | 3,582 | |||||||||||||
1,600 | Omnova Solutions, Inc. * | 9,760 | |||||||||||||
2,300 | PolyOne Corp. * | 22,425 | |||||||||||||
400 | RPM International, Inc. | 6,760 | |||||||||||||
700 | Stillwater Mining Co. * | 9,590 | |||||||||||||
300 | Titanium Metals Corp. * | 5,436 | |||||||||||||
100 | Valspar Corp. | 3,012 | |||||||||||||
200 | W.R. Grace & Co. * | 5,060 | |||||||||||||
1,200 | Walter Energy, Inc. | 86,448 | |||||||||||||
Total Materials | 541,153 | ||||||||||||||
Media — 1.9% | |||||||||||||||
200 | Arbitron, Inc. | 5,088 | |||||||||||||
2,000 | Cinemark Holdings, Inc. | 29,220 | |||||||||||||
4,700 | Valassis Communications, Inc. * | 137,757 | |||||||||||||
Total Media | 172,065 | ||||||||||||||
Pharmaceuticals, Biotechnology & Life Sciences — 7.0% | |||||||||||||||
1,000 | Affymetrix, Inc. * | 4,110 | |||||||||||||
1,200 | Bruker Corp. * | 14,268 | |||||||||||||
100 | Charles River Laboratories International, Inc. * | 2,825 | |||||||||||||
500 | Dionex Corp. * | 36,250 | |||||||||||||
1,100 | eResearchTechnology, Inc. * | 8,146 | |||||||||||||
200 | Hi-Tech Pharmacal Co., Inc. * | 3,470 | |||||||||||||
3,900 | Impax Laboratories, Inc. * | 61,113 |
See accompanying notes to the financial statements.
9
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Pharmaceuticals, Biotechnology & Life Sciences — continued | |||||||||||||||
3,000 | Incyte Corp. * | 37,560 | |||||||||||||
1,500 | MannKind Corp. * | 8,332 | |||||||||||||
1,400 | Mettler-Toledo International, Inc. * | 154,826 | |||||||||||||
100 | Nabi Biopharmaceuticals * | 485 | |||||||||||||
1,000 | PAREXEL International Corp. * | 19,890 | |||||||||||||
1,400 | PerkinElmer, Inc. | 29,414 | |||||||||||||
2,300 | Perrigo Co. | 131,077 | |||||||||||||
1,200 | Pharmaceutical Product Development, Inc. | 27,564 | |||||||||||||
500 | Rigel Pharmaceuticals, Inc. * | 3,915 | |||||||||||||
2,000 | Salix Pharmaceuticals Ltd. * | 75,720 | |||||||||||||
500 | Valeant Pharmaceuticals International * | 28,845 | |||||||||||||
400 | Viropharma, Inc. * | 5,016 | |||||||||||||
Total Pharmaceuticals, Biotechnology & Life Sciences | 652,826 | ||||||||||||||
Real Estate — 1.9% | |||||||||||||||
1,300 | Associated Estates Realty Corp. REIT | 17,628 | |||||||||||||
5,300 | CB Richard Ellis Group, Inc. * | 87,026 | |||||||||||||
2,000 | DuPont Fabros Technology, Inc. REIT | 49,420 | |||||||||||||
100 | Potlatch Corp. REIT | 3,350 | |||||||||||||
400 | Saul Centers, Inc. REIT | 16,536 | |||||||||||||
Total Real Estate | 173,960 | ||||||||||||||
Retailing — 6.9% | |||||||||||||||
500 | Abercrombie & Fitch Co.-Class A | 17,300 | |||||||||||||
1,100 | Aeropostale, Inc. * | 23,430 | |||||||||||||
100 | America's Car-Mart, Inc. * | 2,500 | |||||||||||||
600 | Big 5 Sporting Goods Corp. | 7,119 | |||||||||||||
2,600 | Big Lots, Inc. * | 81,276 | |||||||||||||
800 | Childrens Place Retail Stores (The), Inc. * | 34,928 | |||||||||||||
100 | Citi Trends, Inc. * | 2,260 | |||||||||||||
100 | Core-Mark Holding Co., Inc. * | 2,589 | |||||||||||||
1,900 | Dress Barn, Inc. * | 39,615 | |||||||||||||
500 | DSW, Inc. * | 11,875 | |||||||||||||
600 | Finish Line (The), Inc.-Class A | 7,920 | |||||||||||||
500 | Foot Locker, Inc. | 5,870 |
See accompanying notes to the financial statements.
10
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Retailing — continued | |||||||||||||||
500 | Guess?, Inc. | 16,155 | |||||||||||||
1,200 | Hibbett Sports, Inc. * | 27,816 | |||||||||||||
900 | HSN, Inc. * | 23,661 | |||||||||||||
500 | Jo-Ann Stores, Inc. * | 20,330 | |||||||||||||
350 | Jos. A. Bank Clothiers, Inc. * | 12,785 | |||||||||||||
900 | Kirkland's, Inc. * | �� | 10,269 | ||||||||||||
100 | NutriSystem, Inc. | 1,756 | |||||||||||||
1,100 | Office Depot, Inc. * | 3,751 | |||||||||||||
2,500 | OfficeMax, Inc. * | 24,350 | |||||||||||||
3,100 | PetSmart, Inc. | 98,859 | |||||||||||||
200 | RadioShack Corp. | 3,696 | |||||||||||||
400 | Sonic Automotive, Inc. * | 3,524 | |||||||||||||
700 | Stein Mart, Inc. * | 5,058 | |||||||||||||
200 | Systemax, Inc. | 2,354 | |||||||||||||
1,800 | Talbots, Inc. * | 17,964 | |||||||||||||
1,300 | Tractor Supply Co. | 88,374 | |||||||||||||
200 | Ulta Salon Cosmetics & Fragrance, Inc. * | 4,530 | |||||||||||||
1,400 | Williams-Sonoma, Inc. | 36,344 | |||||||||||||
Total Retailing | 638,258 | ||||||||||||||
Semiconductors & Semiconductor Equipment — 4.6% | |||||||||||||||
300 | Amkor Technology, Inc. * | 1,521 | |||||||||||||
1,500 | Atheros Communications, Inc. * | 36,990 | |||||||||||||
6,200 | Cirrus Logic, Inc. * | 93,744 | |||||||||||||
1,600 | Cree, Inc. * | 85,664 | |||||||||||||
800 | Diodes, Inc. * | 11,800 | |||||||||||||
600 | Entropic Communications, Inc. * | 4,566 | |||||||||||||
700 | IXYS Corp. * | 6,622 | |||||||||||||
1,500 | Lattice Semiconductor Corp. * | 6,225 | |||||||||||||
500 | Micrel, Inc. | 4,423 | |||||||||||||
500 | Novellus System, Inc. * | 11,650 | |||||||||||||
100 | NVE Corp. * | 3,840 | |||||||||||||
800 | Power Integrations, Inc. | 21,912 | |||||||||||||
700 | Skyworks Solutions, Inc. * | 12,502 | |||||||||||||
2,400 | Teradyne, Inc. * | 21,552 |
See accompanying notes to the financial statements.
11
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Semiconductors & Semiconductor Equipment — continued | |||||||||||||||
1,300 | TriQuint Semiconductor, Inc. * | 9,035 | |||||||||||||
1,800 | Veeco Instruments, Inc. * | 59,814 | |||||||||||||
1,300 | Virage Logic Corp. * | 15,600 | |||||||||||||
1,000 | Volterra Semiconductor Corp. * | 20,050 | |||||||||||||
Total Semiconductors & Semiconductor Equipment | 427,510 | ||||||||||||||
Software & Services — 10.7% | |||||||||||||||
100 | ACI Worldwide, Inc. * | 1,899 | |||||||||||||
900 | Actuate Corp. * | 3,591 | |||||||||||||
4,000 | Acxiom Corp. * | 49,580 | |||||||||||||
1,700 | Akamai Technologies, Inc. * | 78,319 | |||||||||||||
1,200 | Blackbaud, Inc. | 24,984 | |||||||||||||
500 | Bottomline Technologies, Inc. * | 7,005 | |||||||||||||
100 | CommVault Systems, Inc. * | 2,455 | |||||||||||||
500 | Compuware Corp. * | 3,590 | |||||||||||||
1,300 | CSG Systems International, Inc. * | 23,790 | |||||||||||||
400 | Deltek, Inc. * | 2,860 | |||||||||||||
1,700 | Diamond Management & Technology Consultants, Inc. | 21,233 | |||||||||||||
200 | DivX, Inc. * | 1,539 | |||||||||||||
700 | ExlService Holdings, Inc. * | 11,627 | |||||||||||||
600 | Factset Research Systems, Inc. | 44,130 | |||||||||||||
100 | Forrester Research, Inc. * | 3,069 | |||||||||||||
800 | Gartner, Inc. * | 22,944 | |||||||||||||
800 | Genpact Ltd. * | 11,192 | |||||||||||||
2,900 | Global Cash Access Holdings, Inc. * | 10,498 | |||||||||||||
200 | GSI Commerce, Inc. * | 4,554 | |||||||||||||
1,100 | Heartland Payment Systems, Inc. | 15,565 | |||||||||||||
1,800 | Hewitt Associates, Inc.-Class A * | 86,886 | |||||||||||||
400 | IAC/InterActiveCorp * | 9,916 | |||||||||||||
1,000 | iGate Corp. | 15,690 | |||||||||||||
2,400 | Informatica Corp. * | 77,184 | |||||||||||||
500 | JDA Software Group, Inc. * | 11,485 | |||||||||||||
100 | Liquidity Services, Inc. * | 1,287 | |||||||||||||
900 | LivePerson, Inc. * | 6,435 | |||||||||||||
200 | LoopNet, Inc. * | 2,108 |
See accompanying notes to the financial statements.
12
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Software & Services — continued | |||||||||||||||
800 | Manhattan Associates, Inc. * | 20,836 | |||||||||||||
700 | MAXIMUS, Inc. | 37,597 | |||||||||||||
1,300 | Micros Systems, Inc. * | 49,530 | |||||||||||||
600 | MicroStrategy, Inc.-Class A * | 46,758 | |||||||||||||
200 | ModusLink Global Solutions, Inc. * | 1,162 | |||||||||||||
400 | Opnet Technologies, Inc. | 6,300 | |||||||||||||
2,100 | Parametric Technology Corp. * | 35,805 | |||||||||||||
1,700 | Progress Software Corp. * | 45,407 | |||||||||||||
1,000 | Radiant Systems, Inc. * | 17,910 | |||||||||||||
500 | Renaissance Learning, Inc. | 4,000 | |||||||||||||
2,900 | Sapient Corp. | 30,247 | |||||||||||||
1,200 | Smith Micro Software, Inc. * | 9,180 | |||||||||||||
100 | Sourcefire, Inc. * | 2,537 | |||||||||||||
1,400 | Synchronoss Technologies, Inc. * | 21,644 | |||||||||||||
2,200 | TIBCO Software, Inc. * | 31,878 | |||||||||||||
500 | Travelzoo, Inc. * | 9,130 | |||||||||||||
300 | Unisys Corp. * | 6,708 | |||||||||||||
2,600 | VeriFone Holdings, Inc. * | 62,868 | |||||||||||||
Total Software & Services | 994,912 | ||||||||||||||
Technology Hardware & Equipment — 6.8% | |||||||||||||||
2,000 | Acme Packet, Inc. * | 67,200 | |||||||||||||
100 | Anixter International, Inc. * | 4,588 | |||||||||||||
300 | Arrow Electronics, Inc. * | 6,864 | |||||||||||||
200 | Avnet, Inc. * | 4,580 | |||||||||||||
900 | AVX Corp. | 11,187 | |||||||||||||
300 | Benchmark Electronics, Inc. * | 4,209 | |||||||||||||
900 | Blue Coat Systems, Inc. * | 16,947 | |||||||||||||
200 | Checkpoint Systems, Inc. * | 3,668 | |||||||||||||
100 | CPI International, Inc. * | 1,411 | |||||||||||||
1,500 | F5 Networks, Inc. * | 131,145 | |||||||||||||
300 | Faro Technologies, Inc. * | 5,502 | |||||||||||||
100 | FLIR Systems, Inc. * | 2,512 | |||||||||||||
200 | Hughes Communications, Inc. * | 4,648 | |||||||||||||
400 | Insight Enterprises, Inc. * | 5,256 | |||||||||||||
200 | Isilon Systems, Inc. * | 3,990 |
See accompanying notes to the financial statements.
13
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Technology Hardware & Equipment — continued | |||||||||||||||
900 | Ixia * | 10,161 | |||||||||||||
4,600 | Jabil Circuit, Inc. | 47,150 | |||||||||||||
4,800 | JDS Uniphase Corp. * | 44,112 | |||||||||||||
100 | KVH Industries, Inc. * | 1,247 | |||||||||||||
100 | MTS Systems Corp. | 2,665 | |||||||||||||
400 | Multi-Fineline Electronix, Inc. * | 8,336 | |||||||||||||
1,300 | National Instruments Corp. | 37,479 | |||||||||||||
1,400 | NCR Corp. * | 17,990 | |||||||||||||
400 | Netgear, Inc. * | 8,448 | |||||||||||||
200 | Oplink Communications, Inc. * | 3,144 | |||||||||||||
600 | Plantronics, Inc. | 16,386 | |||||||||||||
400 | Plexus Corp. * | 9,208 | |||||||||||||
1,700 | Polycom, Inc. * | 48,416 | |||||||||||||
1,900 | Power-One, Inc. * | 19,342 | |||||||||||||
2,200 | QLogic Corp. * | 32,769 | |||||||||||||
500 | Stratasys, Inc. * | 11,355 | |||||||||||||
1,400 | Super Micro Computer, Inc. * | 12,649 | |||||||||||||
300 | Trimble Navigation Ltd. * | 8,439 | |||||||||||||
600 | Vishay Intertechnology, Inc. * | 4,614 | |||||||||||||
64 | Vishay Precision Group, Inc. * | 927 | |||||||||||||
400 | Zebra Technologies Corp. * | 11,448 | |||||||||||||
Total Technology Hardware & Equipment | 629,992 | ||||||||||||||
Telecommunication Services — 0.5% | |||||||||||||||
600 | Cogent Communications Group, Inc. * | 5,232 | |||||||||||||
1,000 | Consolidated Communications Holdings, Inc. | 17,340 | |||||||||||||
1,000 | Global Crossing Ltd. * | 12,300 | |||||||||||||
800 | tw telecom, Inc. * | 14,028 | |||||||||||||
Total Telecommunication Services | 48,900 | ||||||||||||||
Transportation — 4.1% | |||||||||||||||
200 | Alaska Air Group, Inc. * | 8,846 | |||||||||||||
1,600 | Avis Budget Group, Inc. * | 14,592 | |||||||||||||
200 | Celadon Group, Inc. * | 2,342 | |||||||||||||
700 | Continental Airlines, Inc. * | 15,638 | |||||||||||||
900 | Copa Holdings SA | 43,902 |
See accompanying notes to the financial statements.
14
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||||||
Transportation — continued | |||||||||||||||
1,800 | Kansas City Southern * | 60,426 | |||||||||||||
100 | Roadrunner Transportation Systems, Inc. * | 1,173 | |||||||||||||
11,000 | UAL Corp. * | 233,090 | |||||||||||||
100 | Werner Enterprises, Inc. | 1,994 | |||||||||||||
Total Transportation | 382,003 | ||||||||||||||
Utilities — 0.4% | |||||||||||||||
1,400 | CenterPoint Energy, Inc. | 20,706 | |||||||||||||
200 | Integrys Energy Group, Inc. | 9,690 | |||||||||||||
400 | Southwest Water Co. | 4,392 | |||||||||||||
Total Utilities | 34,788 | ||||||||||||||
TOTAL COMMON STOCKS (COST $9,262,672) | 9,198,286 | ||||||||||||||
MUTUAL FUNDS — 0.9% | |||||||||||||||
Affiliated Issuers — 0.9% | |||||||||||||||
3,240 | GMO U.S. Treasury Fund | 80,996 | |||||||||||||
TOTAL MUTUAL FUNDS (COST $81,020) | 80,996 | ||||||||||||||
SHORT-TERM INVESTMENTS — 0.2% | |||||||||||||||
Money Market Funds — 0.2% | |||||||||||||||
17,617 | State Street Institutional Treasury Money Market Fund-Institutional Class | 17,617 | |||||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $17,617) | 17,617 | ||||||||||||||
TOTAL INVESTMENTS — 100.4% (Cost $9,361,309) | 9,296,899 | ||||||||||||||
Other Assets and Liabilities (net) — (0.4%) | (38,341 | ) | |||||||||||||
TOTAL NET ASSETS — 100.0% | $ | 9,258,558 |
Notes to Schedule of Investments:
REIT - Real Estate Investment Trust
* Non-income producing security.
See accompanying notes to the financial statements.
15
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $9,280,289) (Note 2) | $ | 9,215,903 | |||||
Investments in affiliated issuers, at value (cost $81,020) (Notes 2 and 10) | 80,996 | ||||||
Receivable for investments sold | 220,236 | ||||||
Dividends and interest receivable | 6,132 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 10,509 | ||||||
Total assets | 9,533,776 | ||||||
Liabilities: | |||||||
Due to custodian | 4,585 | ||||||
Payable for investments purchased | 222,164 | ||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 2,531 | ||||||
Shareholder service fee | 1,226 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 71 | ||||||
Accrued expenses | 44,641 | ||||||
Total liabilities | 275,218 | ||||||
Net assets | $ | 9,258,558 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 10,996,736 | |||||
Accumulated undistributed net investment income | 4,111 | ||||||
Accumulated net realized loss | (1,677,879 | ) | |||||
Net unrealized depreciation | (64,410 | ) | |||||
$ | 9,258,558 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 9,258,558 | |||||
Shares outstanding: | |||||||
Class III | 838,428 | ||||||
Net asset value per share: | |||||||
Class III | $ | 11.04 |
See accompanying notes to the financial statements.
16
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends | $ | 34,659 | |||||
Interest | 150 | ||||||
Dividends from affiliated issuers (Note 10) | 18 | ||||||
Total investment income | 34,827 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 15,677 | ||||||
Shareholder service fee – Class III (Note 5) | 7,586 | ||||||
Custodian, fund accounting agent and transfer agent fees | 28,888 | ||||||
Audit and tax fees | 28,704 | ||||||
Registration fees | 1,656 | ||||||
Legal fees | 184 | ||||||
Trustees fees and related expenses (Note 5) | 143 | ||||||
Miscellaneous | 220 | ||||||
Total expenses | 83,058 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (59,616 | ) | |||||
Net expenses | 23,442 | ||||||
Net investment income (loss) | 11,385 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | 310,632 | ||||||
Investments in affiliated issuers | (6 | ) | |||||
Realized gains distributions from affiliated issuers (Note 10) | 8 | ||||||
Closed futures contracts | 7,248 | ||||||
Net realized gain (loss) | 317,882 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | (382,119 | ) | |||||
Investments in affiliated issuers | (24 | ) | |||||
Open futures contracts | (996 | ) | |||||
Net unrealized gain (loss) | (383,139 | ) | |||||
Net realized and unrealized gain (loss) | (65,257 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (53,872 | ) |
See accompanying notes to the financial statements.
17
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 11,385 | $ | 15,080 | |||||||
Net realized gain (loss) | 317,882 | (832,021 | ) | ||||||||
Change in net unrealized appreciation (depreciation) | (383,139 | ) | 2,534,293 | ||||||||
Net increase (decrease) in net assets from operations | (53,872 | ) | 1,717,352 | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (9,822 | ) | (12,384 | ) | |||||||
Net share transactions (Note 9): | |||||||||||
Class III | (535,239 | ) | 4,236,292 | ||||||||
Purchase premiums and redemption fees (Notes 2 and 9): | |||||||||||
Class III | 2,786 | 31,080 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees | (532,453 | ) | 4,267,372 | ||||||||
Total increase (decrease) in net assets | (596,147 | ) | 5,972,340 | ||||||||
Net assets: | |||||||||||
Beginning of period | 9,854,705 | 3,882,365 | |||||||||
End of period (including accumulated undistributed net investment income of $4,111 and $2,548, respectively) | $ | 9,258,558 | $ | 9,854,705 |
See accompanying notes to the financial statements.
18
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 11.17 | $ | 7.54 | $ | 13.59 | $ | 18.93 | $ | 19.67 | $ | 21.96 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.01 | 0.03 | 0.04 | 0.06 | 0.07 | 0.06 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.13 | ) | 3.63 | (6.05 | ) | (1.79 | ) | 0.79 | 2.93 | ||||||||||||||||||
Total from investment operations | (0.12 | ) | 3.66 | (6.01 | ) | (1.73 | ) | 0.86 | 2.99 | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.01 | ) | (0.03 | ) | (0.04 | ) | (0.06 | ) | (0.09 | ) | (0.07 | ) | |||||||||||||||
From net realized gains | — | — | — | (3.49 | ) | (1.51 | ) | (5.21 | ) | ||||||||||||||||||
Return of capital | — | — | — | (0.06 | ) | — | — | ||||||||||||||||||||
Total distributions | (0.01 | ) | (0.03 | ) | (0.04 | ) | (3.61 | ) | (1.60 | ) | (5.28 | ) | |||||||||||||||
Net asset value, end of period | $ | 11.04 | $ | 11.17 | $ | 7.54 | $ | 13.59 | $ | 18.93 | $ | 19.67 | |||||||||||||||
Total Return(a) | (1.06 | )%** | 48.53 | % | (44.27 | )% | (11.74 | )% | 4.86 | % | 14.63 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 9,259 | $ | 9,855 | $ | 3,882 | $ | 8,198 | $ | 25,314 | $ | 29,804 | |||||||||||||||
Net expenses to average daily net assets | 0.46 | %(b)* | 0.46 | % | 0.46 | % | 0.46 | % | 0.46 | % | 0.48 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 0.23 | %* | 0.28 | % | 0.35 | % | 0.30 | % | 0.38 | % | 0.30 | % | |||||||||||||||
Portfolio turnover rate | 61 | %** | 140 | % | 127 | % | 118 | % | 109 | % | 87 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 1.18 | %* | 1.94 | % | 1.74 | % | 0.48 | % | 0.60 | % | 0.35 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.00 | (c) | $ | 0.06 | $ | 0.01 | $ | 0.07 | $ | 0.03 | $ | 0.08 |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(b) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(c) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
19
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO U.S. Small/Mid Cap Growth Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks long-term capital growth. The Fund seeks to achieve its investment objective by outperforming its benchmark, the Russell 2500 Growth Index. The Fund typically makes equity investments directly and indirectly (e.g., through the GMO Funds in which the Fund invests, collectively referred to as the "underlying funds" or derivatives) in U.S. companies that issue stocks included in the Russell 2500 Index, a U.S. stock index, and in companies with similar market capitalizations ("small- and mid-cap companies"). The term "equity investments" refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts. Under normal circumstances, the Fund invests directly and indirectly at least 80% of its assets in investments in small- and mid-cap companies tied economically to the U.S.
The Manager relies principally on proprietary quantitative models and also employs fundamental investment techniques to evaluate and select equity investments for the Fund. The Manager selects small- and mid-cap company equity investments it believes (i) have superior fundamentals (e.g., earnings stability); (ii) have shown indications of improving investor sentiment (e.g., positive price movement or upgraded analyst ratings); and/or (iii) are undervalued (e.g., equity investments trading at prices below what the Manager believes to be their fundamental value). The Manager also uses proprietary techniques to adjust the portfolio for other factors such as position size, industry and sector weights, and market capitalization. The factors considered and models used by the Manager may change over time based on the Manager's assessment of what combination of models and factors are best positioned to achieve the Fund's investment obje ctive.
In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the-counter ("OTC") derivatives, including options, futures, and swap contracts, (i) as a substitute for direct investment; (ii) in an attempt to reduce investment exposures (which may result in a reduction below zero); (iii) to effect transactions intended as substitutes for securities lending; and/or (iv) in an attempt to adjust elements of its investment exposure. In addition, the Fund may lend its portfolio securities.
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
20
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the OTC market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or who se values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. See note 4 for a further discussion on valuation of derivative financial instruments.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
21
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | $ | 9,198,286 | $ | — | $ | — | $ | 9,198,286 | |||||||||||
Mutual Funds | 80,996 | — | — | 80,996 | |||||||||||||||
Short-Term Investments | 17,617 | — | — | 17,617 | |||||||||||||||
Total Investments | 9,296,899 | — | — | 9,296,899 | |||||||||||||||
Total | $ | 9,296,899 | $ | — | $ | — | $ | 9,296,899 |
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements.
All of the Fund's common stocks held at period end are classified as Level 1. Please refer to the Schedule of Investments for a more detailed categorization of common stocks.
The Fund held no investments or other financial instruments at either August 31, 2010 or February 28, 2010, whose fair value was determined using Level 3 inputs.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, quarterly, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are
22
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund elected to defer to March 1, 2010 post-October capital losses of $4,897.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (1,522,650 | ) | ||||
2/28/2018 | (455,959 | ) | |||||
Total | $ | (1,978,609 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 9,367,336 | $ | 651,430 | $ | (721,867 | ) | $ | (70,437 | ) |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
23
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which co llection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds (See Note 5).
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
For the period ended August 31, 2010, the premium on cash purchases and fee on cash redemptions of Fund shares were each 0.50% of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by a Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase oc curring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of a Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or
24
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with the Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund's investments.
• Smaller Company Risk — The securities of small- and mid-cap companies often are less widely held and trade less frequently and in lesser quantities, and their market prices often fluctuate more, than the securities of companies with larger market capitalizations.
• Market Risk — Growth Securities — Because growth securities typically trade at higher multiples of current earnings than other securities, their market values are often more sensitive than other securities to changes in future earnings expectations.
Other principal risks of an investment in the Fund include Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, and credit and counterparty risk); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund's securities); Liquidity Risk (difficulty in selling Fund investments at desirable prices and/or increased likelihood of honoring redemption requests in-kind); Leveraging Risk (increased risk of loss from use of derivatives and securities
25
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
lending); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero).
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, indices and markets without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index).
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically
26
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be secured by collateral, that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and even ts affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
27
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. During the period ended August 31, 2010, the Fund used futures contracts to maintain the diversity and liquidity of the portfolio. The Fund had no futures contracts outstanding at the end of the period.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an of fsetting
28
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
29
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated
30
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
The Effect of Derivative Instruments on the Statement of Operations for the Period Ended August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Future contracts | $ | — | $ | — | $ | — | $ | 7,248 | $ | — | $ | 7,248 | |||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 7,248 | $ | — | $ | 7,248 | |||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Future contracts | $ | — | $ | — | $ | — | $ | (996 | ) | $ | — | $ | (996 | ) | |||||||||||||
Total | $ | — | $ | — | $ | — | $ | (996 | ) | $ | — | $ | (996 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
The volume of derivative activity, based on absolute values (futures contracts) outstanding at each month-end, was as follows for the period ended August 31, 2010:
Futures Contracts | |||||||
Average amount outstanding | $ | 82,731 |
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.31% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares.
31
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.31% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investme nt company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition to the contractual expense reimbursement described above, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund's Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $143 and $36, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Total Indirect Expenses | |||||||||
<0.001% | 0.000 | % | <0.001% |
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended August 31, 2010 aggregated $5,971,166 and $6,113,659, respectively.
32
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, 68.14% of the outstanding shares of the Fund were held by two shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholders owned more than 10% of the outstanding shares of the Fund. One of the shareholders is another fund of the Trust.
As of August 31, 2010, 0.18% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 98.19% of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 523 | $ | 6,417 | 530,981 | $ | 5,902,580 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 777 | 8,935 | 982 | 9,393 | |||||||||||||||
Shares repurchased | (45,391 | ) | (550,591 | ) | (164,620 | ) | (1,675,681 | ) | |||||||||||
Purchase premiums | — | 33 | — | 26,226 | |||||||||||||||
Redemption fees | — | 2,753 | — | 4,854 | |||||||||||||||
Net increase (decrease) | (44,091 | ) | $ | (532,453 | ) | 367,343 | $ | 4,267,372 |
33
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
10. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO U.S. Treasury Fund | $ | — | $ | 96,026 | $ | 15,000 | $ | 18 | $ | 8 | $ | 80,996 | |||||||||||||||
Totals | $ | — | $ | 96,026 | $ | 15,000 | $ | 18 | $ | 8 | $ | 80,996 |
34
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of a composite of accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three-, five-, seven- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications and experience
35
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparis on to the Manager's separate account clients and the expenses and risks borne by the Manager as a result of the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by , for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating
36
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
37
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including management fees, shareholder service fees and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.46 | % | $ | 1,000.00 | $ | 989.40 | $ | 2.31 | |||||||||||
2) Hypothetical | 0.46 | % | $ | 1,000.00 | $ | 1,022.89 | $ | 2.35 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
38
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Common Stocks | 98.2 | % | |||||
Mutual Funds | 1.7 | ||||||
Short-Term Investments | 0.6 | ||||||
Other | (0.5 | ) | |||||
100.0 | % | ||||||
Industry Group Summary | % of Equity Investments* | ||||||
Health Care Equipment & Services | 12.8 | % | |||||
Retailing | 12.8 | ||||||
Consumer Durables & Apparel | 11.3 | ||||||
Insurance | 7.4 | ||||||
Capital Goods | 7.0 | ||||||
Materials | 5.9 | ||||||
Pharmaceuticals, Biotechnology & Life Sciences | 4.5 | ||||||
Consumer Services | 4.5 | ||||||
Software & Services | 4.1 | ||||||
Media | 3.6 | ||||||
Commercial & Professional Services | 3.4 | ||||||
Technology Hardware & Equipment | 3.3 | ||||||
Energy | 3.2 | ||||||
Household & Personal Products | 3.1 | ||||||
Diversified Financials | 3.1 | ||||||
Automobiles & Components | 2.6 | ||||||
Food, Beverage & Tobacco | 2.2 | ||||||
Real Estate | 1.6 | ||||||
Food & Staples Retailing | 1.3 | ||||||
Transportation | 0.9 | ||||||
Utilities | 0.8 | ||||||
Banks | 0.4 | ||||||
Telecommunication Services | 0.1 | ||||||
Semiconductors & Semiconductor Equipment | 0.1 | ||||||
100.0 | % |
* Equity investments may consist of common stocks, preferred stocks and rights and warrants. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
1
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
COMMON STOCKS — 98.2% | |||||||||||
Automobiles & Components — 2.6% | |||||||||||
2,100 | Autoliv, Inc. | 113,694 | |||||||||
500 | Dorman Products, Inc. * | 11,725 | |||||||||
1,200 | Tenneco, Inc. * | 29,664 | |||||||||
3,100 | TRW Automotive Holdings Corp. * | 107,756 | |||||||||
Total Automobiles & Components | 262,839 | ||||||||||
Banks — 0.4% | |||||||||||
500 | Community Bank System, Inc. | 11,290 | |||||||||
200 | Federal Agricultural Mortgage Corp.-Class C | 2,186 | |||||||||
1,700 | International Bancshares Corp. | 26,520 | |||||||||
100 | Northrim BanCorp, Inc. | 1,609 | |||||||||
Total Banks | 41,605 | ||||||||||
Capital Goods — 6.9% | |||||||||||
600 | A.O. Smith Corp. | 30,810 | |||||||||
800 | Acuity Brands, Inc. | 30,992 | |||||||||
2,200 | Aircastle Ltd. | 17,182 | |||||||||
200 | Alamo Group, Inc. | 3,900 | |||||||||
1,000 | Applied Industrial Technologies, Inc. | 26,800 | |||||||||
1,700 | BE Aerospace, Inc. * | 45,815 | |||||||||
500 | CAI International, Inc. * | 6,835 | |||||||||
1,000 | Carlisle Cos., Inc. | 28,050 | |||||||||
400 | Ceradyne, Inc. * | 8,736 | |||||||||
1,700 | Crane Co. | 57,630 | |||||||||
400 | DXP Enterprises, Inc. * | 7,260 | |||||||||
400 | EnPro Industries, Inc. * | 10,924 | |||||||||
700 | Esterline Technologies Corp. * | 32,200 | |||||||||
900 | Gardner Denver, Inc. | 42,966 | |||||||||
1,000 | Hubbell, Inc.-Class B | 44,980 | |||||||||
200 | Joy Global, Inc. | 11,348 | |||||||||
300 | LMI Aerospace, Inc. * | 4,539 | |||||||||
2,800 | Manitowoc Co. (The), Inc. | 25,648 |
See accompanying notes to the financial statements.
2
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Capital Goods — continued | |||||||||||
800 | Moog, Inc.-Class A * | 24,960 | |||||||||
210 | NACCO Industries, Inc.-Class A | 16,283 | |||||||||
300 | NN, Inc. * | 2,220 | |||||||||
1,300 | Oshkosh Corp. * | 32,344 | |||||||||
300 | Standex International Corp. | 7,059 | |||||||||
800 | TAL International Group, Inc. | 17,056 | |||||||||
900 | Teledyne Technologies, Inc. * | 32,562 | |||||||||
700 | Textainer Group Holdings Ltd. | 19,110 | |||||||||
700 | Toro Co. (The) | 34,930 | |||||||||
1,000 | Trimas Corp. * | 12,890 | |||||||||
500 | Triumph Group, Inc. | 33,190 | |||||||||
1,100 | WESCO International, Inc. * | 35,508 | |||||||||
Total Capital Goods | 704,727 | ||||||||||
Commercial & Professional Services — 3.3% | |||||||||||
1,900 | ACCO Brands Corp. * | 11,039 | |||||||||
800 | American Reprographics Co. * | 5,280 | |||||||||
1,500 | Avery Dennison Corp. | 48,780 | |||||||||
300 | Consolidated Graphics, Inc. * | 11,913 | |||||||||
700 | Corporate Executive Board Co. (The) | 19,628 | |||||||||
1,700 | Deluxe Corp. | 28,441 | |||||||||
800 | Ennis, Inc. | 12,312 | |||||||||
700 | HNI Corp. | 16,359 | |||||||||
300 | Hudson Highland Group, Inc. * | 900 | |||||||||
1,000 | Kelly Services, Inc.-Class A * | 10,440 | |||||||||
700 | Kforce, Inc. * | 7,399 | |||||||||
900 | Knoll, Inc. | 12,078 | |||||||||
600 | M&F Worldwide Corp. * | 13,920 | |||||||||
500 | Manpower, Inc. | 21,250 | |||||||||
2,300 | RR Donnelley & Sons Co. | 34,834 | |||||||||
700 | Schawk, Inc. | 10,640 | |||||||||
1,800 | SFN Group, Inc. * | 9,792 | |||||||||
500 | Unifirst Corp. (The) | 19,630 | |||||||||
800 | United Stationers, Inc. * | 35,912 |
See accompanying notes to the financial statements.
3
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Commercial & Professional Services — continued | |||||||||||
400 | Volt Information Sciences, Inc. * | 2,528 | |||||||||
100 | VSE Corp. | 2,808 | |||||||||
Total Commercial & Professional Services | 335,883 | ||||||||||
Consumer Durables & Apparel — 11.1% | |||||||||||
1,100 | American Greetings Corp.-Class A | 21,230 | |||||||||
300 | Arctic Cat, Inc. * | 2,097 | |||||||||
200 | Blyth, Inc. | 7,624 | |||||||||
1,100 | Carter's, Inc. * | 24,574 | |||||||||
1,000 | Columbia Sportswear Co. | 46,610 | |||||||||
1,290 | Deckers Outdoor Corp. * | 56,076 | |||||||||
4,300 | Eastman Kodak Co. * | 15,007 | |||||||||
2,200 | Fossil, Inc. * | 104,478 | |||||||||
1,000 | Furniture Brands International, Inc. * | 4,650 | |||||||||
500 | G-III Apparel Group Ltd. * | 12,060 | |||||||||
600 | Hanesbrands, Inc. * | 14,364 | |||||||||
3,200 | Hasbro, Inc. | 129,152 | |||||||||
400 | Helen of Troy Ltd. * | 8,902 | |||||||||
500 | Jakks Pacific, Inc. * | 7,450 | |||||||||
1,300 | Jarden Corp. | 35,022 | |||||||||
2,500 | Jones Apparel Group, Inc. | 38,450 | |||||||||
700 | La-Z-Boy, Inc. * | 4,690 | |||||||||
200 | Libbey, Inc. * | 2,244 | |||||||||
2,600 | Liz Claiborne, Inc. * | 10,920 | |||||||||
500 | Maidenform Brands, Inc. * | 13,335 | |||||||||
3,800 | Newell Rubbermaid, Inc. | 57,076 | |||||||||
600 | Oxford Industries, Inc. | 11,832 | |||||||||
500 | Perry Ellis International, Inc. * | 9,180 | |||||||||
1,900 | Phillips-Van Heusen Corp. | 86,792 | |||||||||
900 | Polaris Industries, Inc. | 47,997 | |||||||||
3,500 | Quiksilver, Inc. * | 12,565 | |||||||||
700 | RC2 Corp. * | 12,887 | |||||||||
2,400 | Sealy Corp. * | 5,688 | |||||||||
1,300 | Skechers U.S.A., Inc. * | 33,111 |
See accompanying notes to the financial statements.
4
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Consumer Durables & Apparel — continued | |||||||||||
2,000 | Stanley Black & Decker, Inc. | 107,280 | |||||||||
300 | Steinway Musical Instruments, Inc. * | 4,641 | |||||||||
600 | Steven Madden Ltd. * | 20,658 | |||||||||
500 | Tempur-Pedic International, Inc. * | 13,400 | |||||||||
1,200 | Timberland Co.-Class A * | 19,284 | |||||||||
500 | True Religion Apparel, Inc. * | 8,790 | |||||||||
1,200 | Tupperware Corp. | 47,208 | |||||||||
300 | Volcom, Inc. * | 4,677 | |||||||||
500 | Whirlpool Corp. | 37,080 | |||||||||
1,300 | Wolverine World Wide, Inc. | 32,851 | |||||||||
Total Consumer Durables & Apparel | 1,131,932 | ||||||||||
Consumer Services — 4.4% | |||||||||||
900 | Bluegreen Corp. * | 2,304 | |||||||||
1,300 | Brinker International, Inc. | 20,475 | |||||||||
2,200 | Career Education Corp. * | 38,566 | |||||||||
400 | CEC Entertainment, Inc. * | 12,548 | |||||||||
800 | Cheesecake Factory (The), Inc. * | 17,912 | |||||||||
800 | Cracker Barrel Old Country Store, Inc. | 35,688 | |||||||||
500 | DeVry, Inc. | 19,055 | |||||||||
400 | DineEquity, Inc. * | 12,768 | |||||||||
1,700 | Domino's Pizza, Inc. * | 21,794 | |||||||||
1,100 | Hillenbrand, Inc. | 20,933 | |||||||||
400 | Papa John's International, Inc. * | 9,524 | |||||||||
700 | Regis Corp. | 11,739 | |||||||||
1,300 | Royal Caribbean Cruises Ltd. * | 31,928 | |||||||||
1,600 | Ruby Tuesday, Inc. * | 14,736 | |||||||||
500 | Speedway Motorsports, Inc. | 6,660 | |||||||||
400 | Steiner Leisure Ltd. * | 14,244 | |||||||||
1,200 | Weight Watchers International, Inc. | 34,224 | |||||||||
5,500 | Wyndham Worldwide Corp. | 127,545 | |||||||||
Total Consumer Services | 452,643 |
See accompanying notes to the financial statements.
5
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Diversified Financials — 3.0% | |||||||||||
10,900 | American Capital Ltd. * | 55,263 | |||||||||
3,700 | Ares Capital Corp. | 55,278 | |||||||||
1,800 | BlackRock Kelso Capital Corp. | 19,440 | |||||||||
1,000 | Cash America International, Inc. | 30,630 | |||||||||
700 | Encore Capital Group, Inc. * | 13,867 | |||||||||
1,600 | EZCORP, Inc.-Class A * | 28,768 | |||||||||
2,900 | MCG Capital Corp. | 15,312 | |||||||||
1,500 | Nelnet, Inc.-Class A | 32,865 | |||||||||
1,500 | Primus Guaranty Ltd. * | 5,745 | |||||||||
2,700 | SLM Corp. * | 29,835 | |||||||||
500 | World Acceptance Corp. * | 20,375 | |||||||||
Total Diversified Financials | 307,378 | ||||||||||
Energy — 3.1% | |||||||||||
1,700 | Complete Production Services, Inc. * | 29,988 | |||||||||
800 | Crosstex Energy, Inc. * | 5,944 | |||||||||
500 | Energy Partners Ltd. * | 5,465 | |||||||||
1,000 | Frontline Ltd. | 26,500 | |||||||||
400 | Lufkin Industries, Inc. | 15,464 | |||||||||
1,600 | Oil States International, Inc. * | 65,968 | |||||||||
300 | Petroleum Development Corp. * | 8,070 | |||||||||
1,400 | Rowan Cos, Inc. * | 35,994 | |||||||||
2,100 | Ship Finance International Ltd. | 36,771 | |||||||||
1,400 | Sunoco, Inc. | 47,152 | |||||||||
200 | T-3 Energy Services, Inc. * | 4,416 | |||||||||
1,400 | World Fuel Services Corp. | 35,756 | |||||||||
Total Energy | 317,488 | ||||||||||
Food & Staples Retailing — 1.3% | |||||||||||
700 | BJ's Wholesale Club, Inc. * | 29,372 | |||||||||
200 | Nash Finch Co. | 7,854 | |||||||||
1,200 | Ruddick Corp. | 38,844 | |||||||||
400 | Spartan Stores, Inc. | 5,228 | |||||||||
1,100 | United Natural Foods, Inc. * | 38,214 | |||||||||
400 | Weis Markets, Inc. | 14,064 | |||||||||
Total Food & Staples Retailing | 133,576 |
See accompanying notes to the financial statements.
6
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Food, Beverage & Tobacco — 2.1% | |||||||||||
300 | Cal-Maine Foods, Inc. | 8,904 | |||||||||
2,700 | Constellation Brands, Inc.-Class A * | 44,982 | |||||||||
6,300 | Del Monte Foods Co. | 82,152 | |||||||||
700 | J.M. Smucker Co. (The) | 40,936 | |||||||||
100 | John B. Sanfilippo & Son, Inc. * | 1,280 | |||||||||
400 | McCormick & Co., Inc. (Non Voting) | 15,948 | |||||||||
500 | National Beverage Corp. | 7,170 | |||||||||
400 | Universal Corp. | 14,264 | |||||||||
Total Food, Beverage & Tobacco | 215,636 | ||||||||||
Health Care Equipment & Services — 12.6% | |||||||||||
600 | Allied Healthcare International, Inc. * | 1,218 | |||||||||
100 | Almost Family, Inc. * | 2,527 | |||||||||
900 | Amedisys, Inc. * | 20,808 | |||||||||
1,000 | American Medical Systems Holdings, Inc. * | 18,220 | |||||||||
1,500 | AMERIGROUP Corp. * | 55,350 | |||||||||
300 | Arthrocare Corp. * | 7,788 | |||||||||
1,300 | Centene Corp. * | 26,286 | |||||||||
500 | Chemed Corp. | 24,950 | |||||||||
2,000 | Community Health Systems, Inc. * | 52,140 | |||||||||
700 | Conmed Corp. * | 12,957 | |||||||||
1,100 | Continucare Corp. * | 3,575 | |||||||||
1,400 | Cooper Cos (The), Inc. | 56,476 | |||||||||
3,900 | Coventry Health Care, Inc. * | 75,465 | |||||||||
900 | Gentiva Health Services, Inc. * | 18,495 | |||||||||
5,800 | Health Management Associates, Inc.-Class A * | 36,250 | |||||||||
3,400 | Health Net, Inc. * | 81,192 | |||||||||
1,900 | Healthspring, Inc. * | 39,444 | |||||||||
300 | Henry Schein, Inc. * | 15,840 | |||||||||
2,100 | Hill-Rom Holdings, Inc. | 67,410 | |||||||||
700 | Integra LifeSciences Holdings Corp. * | 24,339 | |||||||||
800 | Invacare Corp. | 18,320 | |||||||||
2,300 | Kinetic Concepts, Inc. * | 73,416 | |||||||||
200 | LHC Group, Inc. * | 4,002 |
See accompanying notes to the financial statements.
7
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Health Care Equipment & Services — continued | |||||||||||
1,500 | LifePoint Hospitals, Inc. * | 45,630 | |||||||||
3,300 | Lincare Holdings, Inc. | 75,966 | |||||||||
900 | Magellan Health Services, Inc. * | 39,429 | |||||||||
700 | Mednax, Inc. * | 32,438 | |||||||||
700 | MedQuist, Inc. | 5,145 | |||||||||
700 | Molina Healthcare, Inc. * | 17,752 | |||||||||
2,300 | Omnicare, Inc. | 44,160 | |||||||||
400 | Orthofix International NV * | 10,680 | |||||||||
1,300 | Owens & Minor, Inc. | 34,658 | |||||||||
2,800 | Patterson Cos., Inc. | 70,812 | |||||||||
500 | Providence Service Corp. (The) * | 6,760 | |||||||||
1,300 | STERIS Corp. | 37,401 | |||||||||
1,800 | Sunrise Senior Living, Inc. * | 3,978 | |||||||||
1,100 | Teleflex, Inc. | 52,866 | |||||||||
2,500 | Universal American Financial Corp. | 34,525 | |||||||||
1,100 | WellCare Health Plans, Inc. * | 27,291 | |||||||||
200 | Young Innovations, Inc. | 5,246 | |||||||||
300 | Zoll Medical Corp. * | 7,926 | |||||||||
Total Health Care Equipment & Services | 1,289,131 | ||||||||||
Household & Personal Products — 3.0% | |||||||||||
900 | Elizabeth Arden, Inc. * | 14,733 | |||||||||
2,000 | Herbalife Ltd. | 111,160 | |||||||||
1,000 | Inter Parfums, Inc. | 16,420 | |||||||||
1,800 | NBTY, Inc. * | 98,082 | |||||||||
800 | Nu Skin Enterprises, Inc.-Class A | 20,456 | |||||||||
200 | Nutraceutical International Corp. * | 2,714 | |||||||||
700 | Prestige Brands Holdings, Inc. * | 5,180 | |||||||||
800 | Revlon, Inc.-Class A * | 8,680 | |||||||||
300 | Spectrum Brands Holdings, Inc. * | 7,653 | |||||||||
400 | USANA Health Sciences, Inc. * | 17,000 | |||||||||
200 | WD-40 Co. | 7,034 | |||||||||
Total Household & Personal Products | 309,112 |
See accompanying notes to the financial statements.
8
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Insurance — 7.3% | |||||||||||
1,700 | American Equity Investment Life Holding Co. | 16,133 | |||||||||
2,400 | American Financial Group, Inc. | 69,048 | |||||||||
2,800 | Assurant, Inc. | 102,368 | |||||||||
600 | CNA Surety Corp. * | 10,056 | |||||||||
6,600 | CNO Financial Group, Inc. * | 31,218 | |||||||||
1,300 | Endurance Specialty Holdings Ltd. | 47,892 | |||||||||
800 | FBL Financial Group, Inc.-Class A | 18,400 | |||||||||
10,100 | Genworth Financial, Inc.-Class A * | 109,383 | |||||||||
700 | Horace Mann Educators Corp. | 11,480 | |||||||||
700 | Mercury General Corp. | 27,454 | |||||||||
1,500 | National Financial Partners Corp. * | 15,960 | |||||||||
1,400 | Protective Life Corp. | 26,152 | |||||||||
1,100 | Reinsurance Group of America, Inc. | 48,114 | |||||||||
400 | Safety Insurance Group, Inc. | 16,300 | |||||||||
1,100 | StanCorp Financial Group, Inc. | 39,193 | |||||||||
2,300 | Torchmark Corp. | 113,505 | |||||||||
1,800 | Unitrin, Inc. | 42,840 | |||||||||
Total Insurance | 745,496 | ||||||||||
Materials — 5.8% | |||||||||||
1,500 | Ashland, Inc. | 69,690 | |||||||||
1,700 | Boise, Inc. * | 11,696 | |||||||||
1,200 | Cytec Industries, Inc. | 56,916 | |||||||||
200 | Hawkins, Inc. | 6,094 | |||||||||
500 | Innophos Holdings, Inc. | 14,585 | |||||||||
600 | Innospec, Inc. * | 7,446 | |||||||||
1,500 | International Flavors & Fragrances, Inc. | 68,535 | |||||||||
1,300 | KapStone Paper and Packaging Corp. * | 14,807 | |||||||||
100 | KMG Chemicals, Inc. | 1,329 | |||||||||
1,300 | Lubrizol Corp. | 121,303 | |||||||||
200 | Quaker Chemical Corp. | 5,922 | |||||||||
900 | Reliance Steel & Aluminum Co. | 33,525 | |||||||||
3,300 | RPM International, Inc. | 55,770 | |||||||||
900 | Silgan Holdings, Inc. | 26,901 |
See accompanying notes to the financial statements.
9
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Materials — continued | |||||||||||
1,600 | Sonoco Products Co. | 50,320 | |||||||||
1,700 | Valspar Corp. | 51,204 | |||||||||
Total Materials | 596,043 | ||||||||||
Media — 3.5% | |||||||||||
300 | AH Belo Corp.-Class A * | 2,004 | |||||||||
200 | Arbitron, Inc. | 5,088 | |||||||||
2,200 | Belo Corp.-Class A * | 11,506 | |||||||||
1,200 | Entercom Communications Corp.-Class A * | 6,600 | |||||||||
1,700 | EW Scripps Co.-Class A * | 11,543 | |||||||||
8,400 | Gannett Co., Inc. | 101,556 | |||||||||
600 | John Wiley and Sons, Inc.-Class A | 21,354 | |||||||||
1,600 | Journal Communications, Inc.-Class A * | 6,336 | |||||||||
2,000 | Lee Enterprises, Inc. * | 4,440 | |||||||||
1,400 | LIN TV Corp.-Class A * | 5,586 | |||||||||
2,800 | McClatchy Co. (The)-Class A * | 7,504 | |||||||||
700 | Media General Inc.-Class A * | 5,383 | |||||||||
1,300 | Meredith Corp. | 38,038 | |||||||||
3,500 | New York Times Co. (The)-Class A * | 25,130 | |||||||||
900 | PRIMEDIA, Inc. | 2,835 | |||||||||
900 | Scholastic Corp. | 21,087 | |||||||||
2,200 | Sinclair Broadcast Group, Inc. * | 13,156 | |||||||||
1,700 | Valassis Communications, Inc. * | 49,827 | |||||||||
57 | Washington Post Co. (The)-Class B | 20,533 | |||||||||
Total Media | 359,506 | ||||||||||
Pharmaceuticals, Biotechnology & Life Sciences — 4.4% | |||||||||||
3,000 | Endo Pharmaceuticals Holdings, Inc. * | 81,510 | |||||||||
200 | Hi-Tech Pharmacal Co., Inc. * | 3,470 | |||||||||
300 | Kendle International, Inc. * | 2,349 | |||||||||
1,800 | KV Pharmaceutical Co.-Class A * | 2,646 | |||||||||
1,400 | Medicis Pharmaceutical Corp.-Class A | 38,500 | |||||||||
90 | Mettler-Toledo International, Inc. * | 9,953 | |||||||||
2,000 | Mylan, Inc. * | 34,320 |
See accompanying notes to the financial statements.
10
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Pharmaceuticals, Biotechnology & Life Sciences — continued | |||||||||||
900 | Par Pharmaceutical Cos., Inc. * | 23,733 | |||||||||
1,300 | PAREXEL International Corp. * | 25,857 | |||||||||
3,000 | PerkinElmer, Inc. | 63,030 | |||||||||
100 | Perrigo Co. | 5,699 | |||||||||
1,800 | Pharmaceutical Product Development, Inc. | 41,346 | |||||||||
2,100 | Viropharma, Inc. * | 26,334 | |||||||||
2,200 | Watson Pharmaceuticals, Inc. * | 94,754 | |||||||||
Total Pharmaceuticals, Biotechnology & Life Sciences | 453,501 | ||||||||||
Real Estate — 1.6% | |||||||||||
200 | Agree Realty Corp. REIT | 4,750 | |||||||||
600 | American Capital Agency Corp. REIT | 16,344 | |||||||||
2,200 | Ashford Hospitality Trust, Inc. REIT * | 17,666 | |||||||||
1,700 | CBL & Associates Properties, Inc. REIT | 20,740 | |||||||||
900 | CommonWealth REIT | 21,708 | |||||||||
700 | General Growth Properties, Inc. REIT | 9,849 | |||||||||
1,800 | Glimcher Realty Trust REIT | 10,692 | |||||||||
2,600 | iStar Financial, Inc. REIT * | 9,074 | |||||||||
100 | One Liberty Properties, Inc. REIT | 1,434 | |||||||||
1,000 | Pennsylvania Real Estate Investment Trust REIT | 10,460 | |||||||||
1,200 | Resource Capital Corp. REIT | 7,104 | |||||||||
4,400 | Strategic Hotels & Resorts, Inc. REIT * | 15,708 | |||||||||
400 | Walter Investment Management Corp. REIT | 6,484 | |||||||||
400 | Winthrop Realty Trust REIT | 5,480 | |||||||||
Total Real Estate | 157,493 | ||||||||||
Retailing — 12.6% | |||||||||||
1,200 | Aaron's, Inc. | 19,548 | |||||||||
2,100 | Abercrombie & Fitch Co.-Class A | 72,660 | |||||||||
900 | Advance Auto Parts, Inc. | 49,023 | |||||||||
1,200 | Aeropostale, Inc. * | 25,560 | |||||||||
400 | America's Car-Mart, Inc. * | 10,000 | |||||||||
1,700 | AnnTaylor Stores Corp. * | 26,061 | |||||||||
700 | Asbury Automotive Group, Inc. * | 8,351 |
See accompanying notes to the financial statements.
11
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Retailing — continued | |||||||||||
400 | Big 5 Sporting Goods Corp. | 4,746 | |||||||||
2,300 | Big Lots, Inc. * | 71,898 | |||||||||
200 | Bon-Ton Stores (The), Inc. * | 1,270 | |||||||||
1,200 | Brown Shoe Co., Inc. | 12,624 | |||||||||
1,000 | Cabela's, Inc. * | 15,580 | |||||||||
700 | Cato Corp. (The)-Class A | 16,065 | |||||||||
700 | Childrens Place Retail Stores (The), Inc. * | 30,562 | |||||||||
1,600 | Collective Brands, Inc. * | 20,688 | |||||||||
300 | Core-Mark Holding Co., Inc. * | 7,767 | |||||||||
100 | Destination Maternity Corp. * | 2,660 | |||||||||
2,400 | Dillard's, Inc.-Class A | 52,488 | |||||||||
1,800 | Dress Barn, Inc. * | 37,530 | |||||||||
1,300 | Family Dollar Stores, Inc. | 55,627 | |||||||||
1,200 | Finish Line (The), Inc.-Class A | 15,840 | |||||||||
2,800 | Foot Locker, Inc. | 32,872 | |||||||||
500 | Genesco, Inc. * | 12,620 | |||||||||
500 | Gymboree Corp. (The) * | 18,815 | |||||||||
300 | Hibbett Sports, Inc. * | 6,954 | |||||||||
1,500 | HSN, Inc. * | 39,435 | |||||||||
800 | Jo-Ann Stores, Inc. * | 32,528 | |||||||||
750 | Jos. A. Bank Clothiers, Inc. * | 27,398 | |||||||||
600 | Limited Brands, Inc. | 14,160 | |||||||||
800 | NutriSystem, Inc. | 14,048 | |||||||||
4,600 | Office Depot, Inc. * | 15,686 | |||||||||
2,800 | OfficeMax, Inc. * | 27,272 | |||||||||
3,600 | PetSmart, Inc. | 114,804 | |||||||||
3,900 | RadioShack Corp. | 72,072 | |||||||||
1,600 | Rent-A-Center, Inc. | 32,128 | |||||||||
1,200 | Retail Ventures, Inc. * | 10,128 | |||||||||
300 | Shoe Carnival, Inc. * | 4,959 | |||||||||
1,000 | Systemax, Inc. | 11,770 | |||||||||
1,000 | Talbots, Inc. * | 9,980 | |||||||||
2,100 | Tiffany & Co. | 83,223 | |||||||||
1,000 | Tractor Supply Co. | 67,980 |
See accompanying notes to the financial statements.
12
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Retailing — continued | |||||||||||
1,500 | Tuesday Morning Corp. * | 5,565 | |||||||||
600 | West Marine, Inc. * | 5,052 | |||||||||
2,800 | Williams-Sonoma, Inc. | 72,688 | |||||||||
Total Retailing | 1,288,685 | ||||||||||
Semiconductors & Semiconductor Equipment — 0.1% | |||||||||||
1,400 | Silicon Image, Inc. * | 5,068 | |||||||||
Software & Services — 4.1% | |||||||||||
500 | CACI International, Inc.-Class A * | 20,405 | |||||||||
1,200 | China Information Technology, Inc. * | 6,072 | |||||||||
1,600 | Convergys Corp. * | 16,208 | |||||||||
1,000 | CSG Systems International, Inc. * | 18,300 | |||||||||
1,700 | EarthLink, Inc. | 14,552 | |||||||||
1,400 | Epicor Software Corp. * | 9,506 | |||||||||
1,100 | Fair Isaac Corp. | 24,629 | |||||||||
800 | Heartland Payment Systems, Inc. | 11,320 | |||||||||
700 | JDA Software Group, Inc. * | 16,079 | |||||||||
400 | Manhattan Associates, Inc. * | 10,418 | |||||||||
400 | MAXIMUS, Inc. | 21,484 | |||||||||
200 | MicroStrategy, Inc.-Class A * | 15,586 | |||||||||
1,000 | MoneyGram International, Inc. * | 2,020 | |||||||||
700 | Ness Technologies, Inc. * | 2,989 | |||||||||
2,000 | Parametric Technology Corp. * | 34,100 | |||||||||
1,300 | Progress Software Corp. * | 34,723 | |||||||||
1,800 | Quest Software, Inc. * | 38,574 | |||||||||
1,200 | Radiant Systems, Inc. * | 21,492 | |||||||||
1,000 | SRA International, Inc.-Class A * | 19,250 | |||||||||
3,700 | TIBCO Software, Inc. * | 53,613 | |||||||||
600 | Unisys Corp. * | 13,416 | |||||||||
1,700 | United Online, Inc. | 8,381 | |||||||||
Total Software & Services | 413,117 |
See accompanying notes to the financial statements.
13
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Technology Hardware & Equipment — 3.2% | |||||||||||
400 | Black Box Corp. | 11,280 | |||||||||
500 | Imation Corp. * | 4,280 | |||||||||
3,100 | Ingram Micro, Inc.-Class A * | 46,686 | |||||||||
1,700 | Insight Enterprises, Inc. * | 22,338 | |||||||||
2,700 | Lexmark International, Inc. * | 94,473 | |||||||||
400 | Measurement Specialties, Inc. * | 5,928 | |||||||||
400 | PC Connection, Inc. * | 2,604 | |||||||||
1,100 | Polycom, Inc. * | 31,328 | |||||||||
1,500 | QLogic Corp. * | 22,342 | |||||||||
2,700 | Quantum Corp. * | 3,888 | |||||||||
500 | Seagate Technology Plc * | 5,065 | |||||||||
1,600 | Smart Modular Technologies WWH, Inc. * | 7,504 | |||||||||
500 | Super Micro Computer, Inc. * | 4,518 | |||||||||
1,300 | Tech Data Corp. * | 47,060 | |||||||||
700 | Zebra Technologies Corp. * | 20,034 | |||||||||
Total Technology Hardware & Equipment | 329,328 | ||||||||||
Telecommunication Services — 0.1% | |||||||||||
500 | IDT Corp.-Class B * | 7,250 | |||||||||
2,300 | Vonage Holdings Corp. * | 4,968 | |||||||||
Total Telecommunication Services | 12,218 | ||||||||||
Transportation — 0.9% | |||||||||||
1,100 | Air Transport Services Group, Inc. * | 5,071 | |||||||||
1,300 | Avis Budget Group, Inc. * | 11,856 | |||||||||
700 | Dollar Thrifty Automotive Group, Inc. * | 32,928 | |||||||||
800 | Macquarie Infrastructure Co. LLC * | 10,880 | |||||||||
1,000 | Pacer International, Inc. * | 5,120 | |||||||||
100 | Pinnacle Airlines Corp. * | 475 | |||||||||
2,800 | US Airways Group, Inc. * | 25,312 | |||||||||
Total Transportation | 91,642 |
See accompanying notes to the financial statements.
14
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares | Description | Value ($) | |||||||||
Utilities — 0.8% | |||||||||||
900 | Integrys Energy Group, Inc. | 43,605 | |||||||||
1,400 | UGI Corp. | 38,640 | |||||||||
Total Utilities | 82,245 | ||||||||||
TOTAL COMMON STOCKS (COST $9,410,799) | 10,036,292 | ||||||||||
MUTUAL FUNDS — 1.7% | |||||||||||
Affiliated Issuers — 1.7% | |||||||||||
6,920 | GMO U.S. Treasury Fund | 173,003 | |||||||||
TOTAL MUTUAL FUNDS (COST $173,036) | 173,003 | ||||||||||
SHORT-TERM INVESTMENTS — 0.6% | |||||||||||
Money Market Funds — 0.6% | |||||||||||
64,788 | State Street Institutional Treasury Money Market Fund-Institutional Class | 64,788 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $64,788) | 64,788 | ||||||||||
TOTAL INVESTMENTS — 100.5% (Cost $9,648,623) | 10,274,083 | ||||||||||
Other Assets and Liabilities (net) — (0.5%) | (53,265 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 10,220,818 |
Notes to Schedule of Investments:
REIT - Real Estate Investment Trust
* Non-income producing security.
See accompanying notes to the financial statements.
15
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $9,475,587) (Note 2) | $ | 10,101,080 | |||||
Investments in affiliated issuers, at value (cost $173,036) (Notes 2 and 10) | 173,003 | ||||||
Dividends receivable | 9,785 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 8,494 | ||||||
Total assets | 10,292,362 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 18 | ||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 2,805 | ||||||
Shareholder service fee | 1,358 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 80 | ||||||
Accrued expenses | 67,283 | ||||||
Total liabilities | 71,544 | ||||||
Net assets | $ | 10,220,818 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 21,626,824 | |||||
Accumulated undistributed net investment income | 13,068 | ||||||
Accumulated net realized loss | (12,044,534 | ) | |||||
Net unrealized appreciation | 625,460 | ||||||
$ | 10,220,818 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 10,220,818 | |||||
Shares outstanding: | |||||||
Class III | 1,642,132 | ||||||
Net asset value per share: | |||||||
Class III | $ | 6.22 |
See accompanying notes to the financial statements.
16
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends | $ | 74,473 | |||||
Dividends from affiliated issuers (Note 10) | 27 | ||||||
Total investment income | 74,500 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 17,803 | ||||||
Shareholder service fee – Class III (Note 5) | 8,615 | ||||||
Audit and tax fees | 28,704 | ||||||
Custodian, fund accounting agent and transfer agent fees | 19,412 | ||||||
Registration fees | 368 | ||||||
Legal fees | 276 | ||||||
Trustees fees and related expenses (Note 5) | 149 | ||||||
Miscellaneous | 224 | ||||||
Total expenses | 75,551 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (48,944 | ) | |||||
Net expenses | 26,607 | ||||||
Net investment income (loss) | 47,893 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in unaffiliated issuers | 885,554 | ||||||
Realized gains distributions from affiliated issuers (Note 10) | 9 | ||||||
Closed futures contracts | 4,028 | ||||||
Net realized gain (loss) | 889,591 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in unaffiliated issuers | (1,351,810 | ) | |||||
Investments in affiliated issuers | (33 | ) | |||||
Net unrealized gain (loss) | (1,351,843 | ) | |||||
Net realized and unrealized gain (loss) | (462,252 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (414,359 | ) |
See accompanying notes to the financial statements.
17
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 47,893 | $ | 190,253 | |||||||
Net realized gain (loss) | 889,591 | (3,946,989 | ) | ||||||||
Change in net unrealized appreciation (depreciation) | (1,351,843 | ) | 9,830,454 | ||||||||
Net increase (decrease) in net assets from operations | (414,359 | ) | 6,073,718 | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | (36,808 | ) | (214,080 | ) | |||||||
Net share transactions (Note 9): | |||||||||||
Class III | (575,021 | ) | (7,776,760 | ) | |||||||
Purchase premiums and redemption fees (Notes 2 and 9): | |||||||||||
Class III | 3,113 | 41,995 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees | (571,908 | ) | (7,734,765 | ) | |||||||
Total increase (decrease) in net assets | (1,023,075 | ) | (1,875,127 | ) | |||||||
Net assets: | |||||||||||
Beginning of period | 11,243,893 | 13,119,020 | |||||||||
End of period (including accumulated undistributed net investment income of $13,068 and $1,983, respectively) | $ | 10,220,818 | $ | 11,243,893 |
See accompanying notes to the financial statements.
18
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 6.53 | $ | 4.44 | $ | 7.36 | $ | 10.01 | $ | 10.52 | $ | 12.38 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.03 | 0.07 | 0.10 | 0.13 | 0.15 | 0.20 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.32 | ) | 2.10 | (2.92 | ) | (1.87 | ) | 0.68 | 1.11 | ||||||||||||||||||
Total from investment operations | (0.29 | ) | 2.17 | (2.82 | ) | (1.74 | ) | 0.83 | 1.31 | ||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | (0.02 | ) | (0.08 | ) | (0.10 | ) | (0.13 | ) | (0.20 | ) | (0.21 | ) | |||||||||||||||
From net realized gains | — | — | — | (0.78 | ) | (1.14 | ) | (2.96 | ) | ||||||||||||||||||
Total distributions | (0.02 | ) | (0.08 | ) | (0.10 | ) | (0.91 | ) | (1.34 | ) | (3.17 | ) | |||||||||||||||
Net asset value, end of period | $ | 6.22 | $ | 6.53 | $ | 4.44 | $ | 7.36 | $ | 10.01 | $ | 10.52 | |||||||||||||||
Total Return(a) | (4.43 | )%** | 49.15 | % | (38.76 | )% | (18.73 | )% | 8.71 | % | 11.67 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 10,221 | $ | 11,244 | $ | 13,119 | $ | 35,230 | $ | 58,452 | $ | 53,389 | |||||||||||||||
Net expenses to average daily net assets | 0.46 | %*(b) | 0.46 | % | 0.46 | % | 0.46 | % | 0.46 | % | 0.48 | % | |||||||||||||||
Net investment income (loss) to average daily net assets | 0.83 | %* | 1.27 | % | 1.46 | % | 1.44 | % | 1.46 | % | 1.71 | % | |||||||||||||||
Portfolio turnover rate | 46 | %** | 175 | % | 73 | % | 63 | % | 79 | % | 48 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.85 | %* | 0.65 | % | 0.43 | % | 0.19 | % | 0.22 | % | 0.19 | % | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.00 | (c) | $ | 0.02 | $ | 0.02 | $ | 0.01 | $ | 0.02 | $ | 0.04 |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(b) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(c) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
19
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO U.S. Small/Mid Cap Value Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks long-term capital growth. The Fund seeks to achieve its investment objective by outperforming its benchmark, the Russell 2500 Value Index. The Fund typically makes equity investments directly and indirectly (e.g., through the GMO Funds in which the Fund invests, collectively referred to as the "underlying funds" or derivatives) in U.S. companies that issue stocks included in the Russell 2500 Index, a U.S. stock index, and in companies with similar market capitalizations ("small- and mid-cap companies"). The term "equity investments" refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts. Under normal circumstances, the Fund invests directly and indirectly at least 80% of its assets in investments in small- and mid-cap companies tied economically to the U.S.
The Manager relies principally on proprietary quantitative models and also employs fundamental investment techniques to evaluate and select equity investments for the Fund. The Manager selects small- and mid-cap company equity investments it believes (i) are undervalued (e.g., equity investments trading at prices below what the Manager believes to be their fundamental value); (ii) have superior fundamentals (e.g., earnings stability); and/or (iii) have shown indications of improving investor sentiment (e.g., positive price movement or upgraded analyst ratings). The Manager also uses proprietary techniques to adjust the portfolio for other factors such as position size, industry and sector weights, and market capitalization. The factors considered and models used by the Manager may change over time based on the Manager's assessment of what combination of models and factors are best positioned to achieve the Fund's investment obje ctive.
In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the-counter ("OTC") derivatives, including options, futures, and swap contracts, (i) as a substitute for direct investment; (ii) in an attempt to reduce investment exposures (which may result in a reduction below zero); (iii) to effect transactions intended as substitutes for securities lending; and/or (iv) in an attempt to adjust elements of its investment exposure. In addition, the Fund may lend its portfolio securities.
20
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the OTC market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or who se values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. See note 4 for a further discussion on valuation of derivative financial instruments.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
21
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Common Stocks | $ | 10,036,292 | $ | — | $ | — | $ | 10,036,292 | |||||||||||
Mutual Funds | 173,003 | — | — | 173,003 | |||||||||||||||
Short-Term Investments | 64,788 | — | — | 64,788 | |||||||||||||||
Total Investments | 10,274,083 | — | — | 10,274,083 | |||||||||||||||
Total | $ | 10,274,083 | $ | — | $ | — | $ | 10,274,083 |
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements.
All of the Fund's common stocks held at period end are classified as Level 1. Please refer to the Schedule of Investments for a more detailed categorization of common stocks.
The Fund held no investments or other financial instruments at either August 31, 2010 or February 28, 2010, whose fair value was determined using Level 3 inputs.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare and pay distributions from net investment income, if any, quarterly, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
22
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund elected to defer to March 1, 2010 post-October capital losses of $164,287.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2017 | $ | (5,940,234 | ) | ||||
2/28/2018 | (6,707,154 | ) | |||||
Total | $ | (12,647,388 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 9,710,976 | $ | 1,183,703 | $ | (620,596 | ) | $ | 563,107 |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally
23
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which co llection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds (See Note 5).
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
For the period ended August 31, 2010, the premium on cash purchases and fee on cash redemptions of Fund shares were each 0.50% of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by a Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase oc curring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the
24
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermed iary platforms that are allowed pursuant to agreements with the Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund's investments.
• Smaller Company Risk — The securities of small- and mid-cap companies often are less widely held and trade less frequently and in lesser quantities, and their market prices often fluctuate more, than the securities of companies with larger market capitalizations.
• Market Risk — Value Securities — The Fund purchases some equity investments at prices below what the Manager believes to be their fundamental value. The Fund runs the risk that the prices of these investments will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value.
Other principal risks of an investment in the Fund include Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, and credit and counterparty risk); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund's securities); Liquidity Risk (difficulty in selling Fund investments at desirable prices and/or increased likelihood of
25
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
honoring redemption requests in-kind); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase m arket volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by "equitizing" its cash balances using futures contracts or other types of derivatives.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero).
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, indices and markets without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically "sell" a portion of the Fund's portfolio) in combination with a long futures contract on another index (to synthetically "buy" exposure to that index).
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to
26
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be secured by collateral, that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and even ts affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed
27
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. During the period ended August 31, 2010, the Fund used futures contracts to maintain the diversity and liquidity of the portfolio. The Fund had no futures contracts outstanding at the end of the period.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash,
28
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
29
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type
30
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
The Effect of Derivative Instruments on the Statement of Operations for the Period Ended August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Future contracts | $ | — | $ | — | $ | — | $ | 4,028 | $ | — | $ | 4,028 | |||||||||||||||
Total | $ | — | $ | — | $ | — | $ | 4,028 | $ | — | $ | 4,028 |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
The volume of derivative activity, based on absolute values (futures contracts) outstanding at each month-end, was as follows for the period ended August 31, 2010:
Futures Contracts | |||||||
Average amount outstanding | $ | 32,070 |
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.31% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and
31
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.31% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investme nt company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition to the contractual expense reimbursement described above, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund's Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund's Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $149 and $40, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees and interest expense) | Indirect Shareholder Service Fees | Total Indirect Expenses | |||||||||
< 0.001% | 0.000 | % | < 0.001% |
32
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended August 31, 2010 aggregated $5,074,833 and $5,295,099, respectively.
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, 64.49% of the outstanding shares of the Fund were held by two shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund. One of the shareholders is another fund of the Trust.
As of August 31, 2010, 1.01% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 92.47% of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 999 | $ | 6,740 | 44,718 | $ | 210,967 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 5,118 | 34,094 | 37,225 | 199,297 | |||||||||||||||
Shares repurchased | (86,982 | ) | (615,855 | ) | (1,310,616 | ) | (8,187,024 | ) | |||||||||||
Purchase premiums | — | 34 | — | 1,060 | |||||||||||||||
Redemption fees | — | 3,079 | — | 40,935 | |||||||||||||||
Net increase (decrease) | (80,865 | ) | $ | (571,908 | ) | (1,228,673 | ) | $ | (7,734,765 | ) |
33
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
10. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO U.S. Treasury Fund | $ | — | $ | 173,036 | $ | — | $ | 27 | $ | 9 | $ | 173,003 | |||||||||||||||
Totals | $ | — | $ | 173,036 | $ | — | $ | 27 | $ | 9 | $ | 173,003 |
34
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of a composite of accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three-, five-, seven- and ten-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications and experience
35
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management and shareholder servicing agreements. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management and shareholder servicing fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund, and reviewed information provided by the Manager regarding fees paid to the Manager by its separate account clients with similar objectives. In comparing the fees, the Trustees considered information provided by the Manager regarding the generally broader scope of services provided by the Manager to the Fund in comparis on to the Manager's separate account clients and the expenses and risks borne by the Manager as a result of the more extensive regulatory and tax regimes to which the Fund is subject. The Trustees also reviewed information provided by the Manager regarding its profits on the management and shareholder services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by , for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees also considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset levels, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating
36
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
37
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including management fees, shareholder service fees and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.46 | % | $ | 1,000.00 | $ | 955.70 | $ | 2.27 | |||||||||||
2) Hypothetical | 0.46 | % | $ | 1,000.00 | $ | 1,022.89 | $ | 2.35 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
38
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Short-Term Investments | 100.0 | % | |||||
Other | (0.0 | ) | |||||
100.0 | % |
1
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
SHORT-TERM INVESTMENTS — 100.0% | |||||||||||
Money Market Fund — 0.0% | |||||||||||
28,333 | State Street Institutional Treasury Plus Money Market Fund-Institutional Class | 28,333 | |||||||||
U.S. Government — 100.0% | |||||||||||
503,100,000 | U.S. Treasury Bill, 0.14%, due 10/07/10 (a) | 503,029,889 | |||||||||
163,050,000 | U.S. Treasury Bill, 0.14%, due 10/14/10 (a) | 163,022,473 | |||||||||
64,725,000 | U.S. Treasury Bill, 0.14%, due 10/21/10 (a) | 64,712,774 | |||||||||
318,400,000 | U.S. Treasury Bill, 0.15%, due 09/16/10 (a) | 318,378,581 | |||||||||
100,000,000 | U.S. Treasury Bill, 0.15%, due 01/13/11 (a) | 99,943,400 | |||||||||
Total U.S. Government | 1,149,087,117 | ||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $1,149,118,078) | 1,149,115,450 | ||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $1,149,118,078) | 1,149,115,450 | ||||||||||
Other Assets and Liabilities (net) — (0.0%) | (46,612 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 1,149,068,838 |
Notes to Schedule of Investments:
(a) Rate shown represents yield-to-maturity.
See accompanying notes to the financial statements.
2
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments, at value (cost $1,149,118,078) (Note 2) | $ | 1,149,115,450 | |||||
Receivable for investments sold | 118,471,333 | ||||||
Receivable for Fund shares sold | 500,000 | ||||||
Interest receivable | 10 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 88,407 | ||||||
Total assets | 1,268,175,200 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 99,946,028 | ||||||
Payable for Fund shares repurchased | 19,000,000 | ||||||
Payable to affiliate for (Note 5): | |||||||
Management fee | 72,969 | ||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 1,676 | ||||||
Dividend payable | 26,507 | ||||||
Accrued expenses | 59,182 | ||||||
Total liabilities | 119,106,362 | ||||||
Net assets | $ | 1,149,068,838 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 1,149,072,101 | |||||
Accumulated net realized loss | (635 | ) | |||||
Net unrealized depreciation | (2,628 | ) | |||||
Net assets | $ | 1,149,068,838 | |||||
Shares outstanding: | 45,959,821 | ||||||
Net asset value per share: | $ | 25.00 |
See accompanying notes to the financial statements.
3
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Interest | $ | 500,597 | |||||
Dividends | 27 | ||||||
Total investment income | 500,624 | ||||||
Expenses: | |||||||
Management fee (Note 5) | 292,056 | ||||||
Audit and tax fees | 30,268 | ||||||
Custodian, fund accounting agent and transfer agent fees | 25,852 | ||||||
Legal fees | 17,480 | ||||||
Trustees fees and related expenses (Note 5) | 7,274 | ||||||
Registration fees | 3,128 | ||||||
Miscellaneous | 6,073 | ||||||
Total expenses | 382,131 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (372,280 | ) | |||||
Net expenses | 9,851 | ||||||
Net investment income (loss) | 490,773 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 10,858 | ||||||
Change in net unrealized appreciation (depreciation) on investments | 31,612 | ||||||
Net realized and unrealized gain (loss) | 42,470 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 533,243 |
See accompanying notes to the financial statements.
4
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Period from March 17, 2009 (commencement of operations) through February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 490,773 | $ | 699,567 | |||||||
Net realized gain (loss) | 10,858 | 250,764 | |||||||||
Change in net unrealized appreciation (depreciation) | 31,612 | (34,240 | ) | ||||||||
Net increase (decrease) in net assets from operations | 533,243 | 916,091 | |||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | (490,773 | ) | (699,567 | ) | |||||||
Net realized gains | (66,003 | ) | (196,254 | ) | |||||||
(556,776 | ) | (895,821 | ) | ||||||||
Net share transactions (Note 9): | 603,016,441 | 546,055,660 | |||||||||
Total increase (decrease) in net assets | 602,992,908 | 546,075,930 | |||||||||
Net assets: | |||||||||||
Beginning of period | 546,075,930 | — | |||||||||
End of period | $ | 1,149,068,838 | $ | 546,075,930 |
See accompanying notes to the financial statements.
5
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Financial Highlights
(For a share outstanding throughout the period)
Six Months Ended August 31, 2010 (Unaudited) | Period from March 17, 2009 (commencement of operations) through February 28, 2010 | ||||||||||
Net asset value, beginning of period | $ | 25.00 | $ | 25.00 | |||||||
Income (loss) from investment operations: | |||||||||||
Net investment income (loss)† | 0.02 | 0.04 | |||||||||
Net realized and unrealized gain (loss) | 0.00 | (a) | 0.02 | ||||||||
Total from investment operations | 0.02 | 0.06 | |||||||||
Less distributions to shareholders: | |||||||||||
From net investment income | (0.02 | ) | (0.05 | ) | |||||||
From net realized gains | (0.00 | )(b) | (0.01 | ) | |||||||
Total distributions | (0.02 | ) | (0.06 | ) | |||||||
Net asset value, end of period | $ | 25.00 | $ | 25.00 | |||||||
Total Return(c) | 0.08 | %** | 0.25 | %** | |||||||
Ratios/Supplemental Data: | |||||||||||
Net assets, end of period (000's) | $ | 1,149,069 | $ | 546,076 | |||||||
Net expenses to average daily net assets | 0.00 | %(d)* | 0.00 | %(d)* | |||||||
Net investment income (loss) to average daily net assets | 0.13 | %* | 0.18 | %* | |||||||
Portfolio turnover rate(e) | 0.00 | %** | 0.00 | %** | |||||||
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets | 0.10 | %* | 0.12 | %* |
(a) Net realized and unrealized gain (loss) was less than $0.01 per share.
(b) Distributions from net realized gains were less than $0.01 per share.
(c) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions.
(d) Total net expenses were less than 0.01% to average daily net assets.
(e) Portfolio turnover rate calculation excludes short-term investments.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
6
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO U.S. Treasury Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks liquidity and safety of principal with current income as a secondary objective. The Fund primarily invests in U.S. Treasury securities. Under normal circumstances, the Fund invests at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in Direct U.S. Treasury Obligations and repurchase agreements collateralized by these Obligations. "Direct U.S. Treasury Obligations" include U.S. Treasury bills, bonds, and notes and other securities issued by the U.S. Treasury, such as Separately Traded Registered Interest and Principal Securities ("STRIPS") and other zero-coupon securities, that are backed by the full faith and credit of the U.S. government as well as repurchase agreements relating to the foregoing.
The Fund may enter into repurchase agreements, under which the Fund purchases a security backed by the full faith and credit of the U.S. government from a seller who simultaneously commits to repurchase, on an agreed upon date in the future, the security from the Fund at the original purchase price plus an agreed upon amount representing the original purchase price plus interest. The counterparties in repurchase agreements are typically broker-dealers and banks, and the safety of the arrangement is dependent on, among other things, the Fund's having an interest in the security that can be realized in the event of the insolvency of the counterparty. In addition to Direct U.S. Treasury Obligations, the Fund also may invest in other fixed-income securities that are backed by the full faith and credit of the U.S. government, such as guaranteed securities issued by the Government National Mortgage Association (GNMA) and the Federal D eposit Insurance Corporation (FDIC). The Fund also may invest in unaffiliated money market funds.
The Fund normally invests in Direct U.S. Treasury Obligations and other fixed-income securities backed by the full faith and credit of the U.S. government with a stated or remaining maturity of one year or less. This may not be true of Direct U.S. Treasury Obligations purchased pursuant to repurchase agreements, and, therefore, if the counterparty to the repurchase agreement defaults, the Fund may own a security with a stated or remaining maturity of greater than one year.
Although the Fund primarily invests in short-term obligations, it is not a money market fund and is not subject to the duration, quality, diversification, and other requirements applicable to money market funds. In addition, the Manager normally seeks to maintain an interest rate duration of one year or less for the Fund's portfolio.
7
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
In selecting U.S. Treasury securities for the Fund's portfolio, the Manager focuses primarily on the relative attractiveness of different obligations (such as bonds, notes, or bills), which can vary depending on the general level of interest rates as well as supply/demand imbalances and other market conditions. The Fund's benchmark is the Citigroup 3 Month Treasury Bill Index.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the over-the-counter ("OTC") market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not rea dily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
8
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Level 2 – Valuations determined using other significant direct or indirect observable inputs. U.S. Treasury Bills having sixty days or less to final maturity were valued using amortized cost.
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Short-Term Investments | $ | 99,971,733 | $ | 1,049,143,717 | $ | — | $ | 1,149,115,450 | |||||||||||
Total Investments | 99,971,733 | 1,049,143,717 | — | 1,149,115,450 | |||||||||||||||
Total | $ | 99,971,733 | $ | 1,049,143,717 | $ | — | $ | 1,149,115,450 |
At August 31, 2010, the Fund's investments in U.S. Treasury Bills having sixty days or less to final maturity were valued using amortized cost, in accordance with rules under the Investment Company Act of 1940. Amortized cost approximates the current fair value of a security, but since the value is not obtained from a quoted price in an active market, securities valued at amortized cost are considered to be valued using Level 2 inputs.
The Fund held no investments or other financial instruments at either August 31, 2010 or February 28, 2010, whose fair value was determined using Level 3 inputs.
Repurchase agreements
The Fund may enter into repurchase agreements. Under a repurchase agreement the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities it acquired under the repurchase agreement. The value of the securities acquired is required by contract to be marked to market daily so that their market value is at least equal to the amount owed to the Fund by the seller. If the seller of a repurchase agreement defaults or enters into insolvency proceedings and/or the value of the securities subject to the repurchase agreement is insufficient, the Fund's recovery of cash from the seller may be delayed and the Fund may incur a loss equal to the difference between the cash it paid and the value of the securities. The Fund had no repurchase agreements outstanding at the end of the period.
9
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
The Fund's policy is to declare distributions from net investment income daily, and will pay distributions on the first business day following the end of each month in which distributions were declared. The Fund's policy is to declare and pay distributions from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 1,149,118,078 | $ | — | $ | (2,628 | ) | $ | (2,628 | ) |
10
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the year ended February 28, 2010 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which co llection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds.
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
11
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Fixed Income Securities — Typically, the value of the Fund's U.S. Treasury and other fixed income securities will decline during periods of rising interest rates, and yields on the Fund's securities may equal or approach zero under some market conditions.
• Credit and Counterparty Risk — The Fund runs the risk that the issuer or guarantor of a fixed income security, the counterparty to a repurchase agreement, or a borrower of the Fund's securities will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise honor its obligations.
• Focused Investment Risk — Focusing investments in a particular type of security (e.g., Direct U.S. Treasury Obligations) creates additional risk.
• Large Shareholder Risk — To the extent that shares of the Fund are held by large shareholders (e.g., institutional investors, asset allocation funds, or other GMO Funds), the Fund is subject to the risk that these shareholders will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis.
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
Other principal risks of an investment in the Fund include Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
4. Derivative financial instruments
At August 31, 2010, the Fund held no derivative contracts.
12
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
5. Fees and other transactions with affiliates
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.08% of average daily net assets. The Manager has voluntarily agreed to waive the Fund's management fee and to reimburse the Fund to the extent the Fund's total annual operating expenses exceed 0.00% of the Fund's average daily net assets (excluding the Fund's Excluded Fund Fees and Expenses described below). The Manager may change or terminate these voluntary waivers and reimbursements at any time, and these voluntary waivers and reimbursements are in addition to the Manager's contractual expense reimbursement agreement described below. During any period for which these voluntary waivers and reimbursements are in effect, the Fund will incur management fees at an annual rate lower than 0.08% of the Fund's average daily net assets, and, as a result, total annual operating expenses after expense reimbursement for the Fund will be lower.
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.08% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investme nt company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). This expense limitation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ended August 31, 2010 was $7,274 and $2,576, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
6. Purchases and sales of securities
There were no purchases or sales of securities, excluding short-term investments, for the period ended August 31, 2010.
13
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, 75.47% of the shares outstanding of the Fund were held by two shareholders, each holding more than 10% of the Fund's outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund. Each of the shareholders are other funds of the Trust.
As of August 31, 2010, 0.72% of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 99.26% of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Period from March 17, 2009 (commencement of operations) through February 28, 2010 | ||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||
Shares sold | 76,407,158 | $ | 1,910,235,787 | 97,033,628 | $ | 2,426,592,199 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | 20,205 | 505,154 | 35,275 | 882,302 | |||||||||||||||
Shares repurchased | (52,306,961 | ) | (1,307,724,500 | ) | (75,229,484 | ) | (1,881,418,841 | ) | |||||||||||
Net increase (decrease) | 24,120,402 | $ | 603,016,441 | 21,839,419 | $ | 546,055,660 |
14
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including a one-year period and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
15
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
The Trustees also gave substantial consideration to the fees payable to the Manager under the Fund's investment management agreement. The Trustees considered information prepared by a third-party data service concerning fees paid to managers of funds deemed by that service to have similar objectives. The Trustees also considered that the Fund's shareholder base was predominantly of an institutional nature. In evaluating the Fund's management fee arrangements, the Trustees took into account the sophistication of the investment techniques used to manage the Fund. The Trustees also reviewed information provided by the Manager regarding its profits on the management services (excluding distribution services) it provided to the Fund and the Trust, including the effect of recent changes in assets under management. In considering that information, the Trustees took into account so-called "fallout benefits" to the Manager, primarily the possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. In addition, the Trustees considered possible economies of scale to the Manager, including the effective fee rate for the Fund on its first dollar of assets and at recent asset level s, and concluded that the fee payable under the agreement appropriately reflected any economies of scale associated with managing the Fund. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the management fee charged to the Fund was reasonable.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement. The Trustees noted that legal counsel had advised that, in their experience, the
16
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
17
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio* | Beginning Account Value | Ending Account Value | Net Expense Incurred** | ||||||||||||||||
1) Actual | 0.00 | % | $ | 1,000.00 | $ | 1,000.80 | $ | 0.02 | |||||||||||
2) Hypothetical | 0.00 | % | $ | 1,000.00 | $ | 1,025.19 | $ | 0.02 |
* Annualized net expense ratios are less than 0.01%.
** Expenses are calculated using the annualized net expense ratio for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
18
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO's website at www.gmo.com a complete schedule of portfolio holdings.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary* | % of Total Net Assets | ||||||
Common Stocks | 95.6 | % | |||||
Short-Term Investments | 3.0 | ||||||
Preferred Stocks | 0.5 | ||||||
Debt Obligations | 0.0 | ||||||
Options Purchased | 0.0 | ||||||
Investment Funds | 0.0 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Rights and Warrants | 0.0 | ||||||
Written Options | (0.0 | ) | |||||
Futures Contracts | (0.0 | ) | |||||
Swap Agreements | (0.1 | ) | |||||
Other | 1.0 | ||||||
100.0 | % |
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust ("underlying funds").
1
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
August 31, 2010 (Unaudited)
Country / Region Summary** | % of Investments | ||||||
United States | 40.8 | % | |||||
Euro Region*** | 14.9 | ||||||
Japan | 13.6 | ||||||
United Kingdom | 12.6 | ||||||
Switzerland | 6.5 | ||||||
Sweden | 2.2 | ||||||
Singapore | 2.0 | ||||||
Australia | 1.2 | ||||||
Denmark | 1.1 | ||||||
Hong Kong | 0.9 | ||||||
Norway | 0.6 | ||||||
South Korea | 0.6 | ||||||
Russia | 0.5 | ||||||
Brazil | 0.4 | ||||||
Canada | 0.3 | ||||||
China | 0.2 | ||||||
India | 0.2 | ||||||
Thailand | 0.2 | ||||||
Taiwan | 0.2 | ||||||
Turkey | 0.2 | ||||||
New Zealand | 0.1 | ||||||
Czech Republic | 0.1 | ||||||
Egypt | 0.1 | ||||||
Hungary | 0.1 | ||||||
Indonesia | 0.1 | ||||||
Israel | 0.1 | ||||||
Mexico | 0.1 | ||||||
South Africa | 0.1 | ||||||
100.0 | % |
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds. The table excludes short-term investments. The table includes exposure through the use of derivative contracts.
*** The "Euro Region" is comprised of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
2
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
MUTUAL FUNDS — 100.0% | |||||||||||
Affiliated Issuers — 100.0% | |||||||||||
2,673,260 | GMO Emerging Markets Fund, Class VI | 32,934,568 | |||||||||
1,138,088 | GMO Flexible Equities Fund, Class VI | 19,438,546 | |||||||||
13,194,809 | GMO International Growth Equity Fund, Class IV | 255,979,288 | |||||||||
13,395,376 | GMO International Intrinsic Value Fund, Class IV | 252,770,736 | |||||||||
19,793,782 | GMO Quality Fund, Class VI | 347,974,682 | |||||||||
12,860,858 | GMO U.S. Core Equity Fund, Class VI | 126,808,062 | |||||||||
TOTAL MUTUAL FUNDS (COST $1,219,754,309) | 1,035,905,882 | ||||||||||
SHORT-TERM INVESTMENTS — 0.0% | |||||||||||
Time Deposits — 0.0% | |||||||||||
18,661 | State Street Eurodollar Time Deposit, 0.01%, due 09/01/10 | 18,661 | |||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $18,661) | 18,661 | ||||||||||
TOTAL INVESTMENTS — 100.0% (Cost $1,219,772,970) | 1,035,924,543 | ||||||||||
Other Assets and Liabilities (net) — (0.0%) | (45,669 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 1,035,878,874 |
See accompanying notes to the financial statements.
3
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments in unaffiliated issuers, at value (cost $18,661) (Note 2) | $ | 18,661 | |||||
Investments in affiliated issuers, at value (cost $1,219,754,309) (Notes 2 and 10) | 1,035,905,882 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 14,446 | ||||||
Total assets | 1,035,938,989 | ||||||
Liabilities: | |||||||
Payable to affiliate for (Note 5): | |||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 1,722 | ||||||
Accrued expenses | 58,393 | ||||||
Total liabilities | 60,115 | ||||||
Net assets | $ | 1,035,878,874 | |||||
Net assets consist of: | |||||||
Paid-in capital | $ | 1,374,480,914 | |||||
Accumulated undistributed net investment income | 7,511,648 | ||||||
Accumulated net realized loss | (162,265,261 | ) | |||||
Net unrealized depreciation | (183,848,427 | ) | |||||
$ | 1,035,878,874 | ||||||
Net assets attributable to: | |||||||
Class III shares | $ | 1,035,878,874 | |||||
Shares outstanding: | |||||||
Class III | 64,448,455 | ||||||
Net asset value per share: | |||||||
Class III | $ | 16.07 |
See accompanying notes to the financial statements.
4
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Dividends from affiliated issuers (Note 10) | $ | 7,526,149 | |||||
Interest | 2 | ||||||
Total investment income | 7,526,151 | ||||||
Expenses: | |||||||
Legal fees | 29,624 | ||||||
Custodian, fund accounting agent and transfer agent fees | 23,552 | ||||||
Audit and tax fees | 16,836 | ||||||
Trustees fees and related expenses (Note 5) | 10,941 | ||||||
Registration fees | 1,656 | ||||||
Miscellaneous | 9,017 | ||||||
Total expenses | 91,626 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (76,820 | ) | |||||
Expense reductions (Note 2) | (303 | ) | |||||
Net expenses | 14,503 | ||||||
Net investment income (loss) | 7,511,648 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments in affiliated issuers | (26,482,098 | ) | |||||
Net realized gain (loss) | (26,482,098 | ) | |||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments in affiliated issuers | (23,816,100 | ) | |||||
Net realized and unrealized gain (loss) | (50,298,198 | ) | |||||
Net increase (decrease) in net assets resulting from operations | $ | (42,786,550 | ) |
See accompanying notes to the financial statements.
5
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 7,511,648 | $ | 23,921,339 | |||||||
Net realized gain (loss) | (26,482,098 | ) | (68,000,417 | ) | |||||||
Change in net unrealized appreciation (depreciation) | (23,816,100 | ) | 326,717,906 | ||||||||
Net increase (decrease) in net assets from operations | (42,786,550 | ) | 282,638,828 | ||||||||
Distributions to shareholders from: | |||||||||||
Net investment income | |||||||||||
Class III | — | (23,938,105 | ) | ||||||||
Net share transactions (Note 9): | |||||||||||
Class III | 18,825,813 | 102,614,012 | |||||||||
Total increase (decrease) in net assets resulting from net share transactions | 18,825,813 | 102,614,012 | |||||||||
Total increase (decrease) in net assets | (23,960,737 | ) | 361,314,735 | ||||||||
Net assets: | |||||||||||
Beginning of period | 1,059,839,611 | 698,524,876 | |||||||||
End of period (including accumulated undistributed net investment income of $7,511,648 and $0, respectively) | $ | 1,035,878,874 | $ | 1,059,839,611 |
See accompanying notes to the financial statements.
6
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Financial Highlights
(For a Class III share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006(a) | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 16.74 | $ | 12.29 | $ | 21.71 | $ | 24.25 | $ | 22.49 | $ | 20.00 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)(b)† | 0.12 | 0.42 | 0.53 | 0.43 | 0.40 | 0.37 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | (0.79 | ) | 4.47 | (8.50 | ) | 0.01 | (c) | 2.93 | 2.78 | ||||||||||||||||||
Total from investment operations | (0.67 | ) | 4.89 | (7.97 | ) | 0.44 | 3.33 | 3.15 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From net investment income | — | (0.44 | ) | (0.54 | ) | (1.10 | ) | (0.73 | ) | (0.46 | ) | ||||||||||||||||
From net realized gains | — | — | (0.91 | ) | (1.88 | ) | (0.84 | ) | (0.20 | ) | |||||||||||||||||
Total distributions | — | (0.44 | ) | (1.45 | ) | (2.98 | ) | (1.57 | ) | (0.66 | ) | ||||||||||||||||
Net asset value, end of period | $ | 16.07 | $ | 16.74 | $ | 12.29 | $ | 21.71 | $ | 24.25 | $ | 22.49 | |||||||||||||||
Total Return(d) | (4.00 | )%** | 39.64 | % | (38.63 | )% | 0.72 | % | 14.94 | % | 15.90 | %** | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 1,035,879 | $ | 1,059,840 | $ | 698,525 | $ | 944,374 | $ | 902,324 | $ | 407,230 | |||||||||||||||
Net expenses to average daily net assets(e)(f) | 0.00 | %(g)* | 0.00 | %(g) | 0.00 | %(g) | 0.00 | %(g) | 0.00 | % | 0.00 | %* | |||||||||||||||
Net investment income (loss) to average daily net assets(b) | 1.40 | %* | 2.64 | % | 2.89 | % | 1.72 | % | 1.68 | % | 2.42 | %* | |||||||||||||||
Portfolio turnover rate | 11 | %** | 16 | % | 35 | % | 20 | % | 12 | % | 5 | %** | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets: | 0.01 | %* | 0.02 | % | 0.01 | % | 0.01 | % | 0.02 | % | 0.06 | %* | |||||||||||||||
Purchase premiums and redemption fees consisted of the following per share amounts:† | $ | 0.00 | (i) | $ | 0.00 | (i) | $ | 0.00 | (h) | $ | 0.00 | (h) | $ | 0.01 | $ | 0.02 |
(a) Period from June 16, 2005 (commencement of operations) through February 28, 2006.
(b) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(c) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain (loss) on investments due to the timing of purchases and redemptions of Fund shares in relation to fluctuating market values of the investments of the Fund.
(d) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(e) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(f) Net expenses to average daily net assets were less than 0.01%.
(g) The net expense ratio does not include the effect of expense reductions (Note 2).
(h) Purchase premiums and redemption fees were less than $0.01 per share.
(i) There were no purchase premiums and redemption fees during the period.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
7
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO World Opportunities Equity Allocation Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks total return greater than that of its benchmark, the MSCI World Index. The Fund is a fund of funds and invests primarily in shares of the GMO International Equity Funds and the GMO U.S. Equity Funds. The Fund also may invest in shares of other GMO Funds, including the GMO Fixed Income Funds, GMO Alpha Only Fund, and GMO Alternative Asset Opportunity Fund (GMO Funds in which the Fund invests are collectively referred to as "underlying funds"). In addition, the Fund may hold securities directly. Although the Fund's primary exposure is to foreign and U.S. equity investments (including emerging country equities, both growth and value style equities, and equities of any market capitalization), the Fund also may have exposure to foreign and U.S. fixed income securities (including fixed income securities of any credit quality and having any maturity or duration), the investment returns of commodities and, from time to ti me, other alternative asset classes. Under normal circumstances, the Fund invests (including through investment in the underlying funds) at least 80% of its assets in equity investments. The term "equity investments" refers to direct and indirect (e.g., through the underlying funds) investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts.
The Manager uses proprietary quantitative models and fundamental investment techniques to select the underlying funds in which the Fund invests and to decide how much to invest in each. The models use multi-year forecasts of relative value and risk among asset classes (e.g., U.S. equity, foreign equity, emerging country equity, emerging country debt, foreign fixed income, U.S. fixed income, and commodities). The Manager changes the Fund's holdings of underlying funds in response to changes in its investment outlook and market valuations and may use redemption/purchase activity to rebalance the Fund's investments.
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
The financial statements of the underlying funds should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect) or by visiting GMO's website at www.gmo.com.
8
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Shares of the underlying funds and other investment funds are generally valued at their net asset value. Investments held by the underlying funds are valued as follows. Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the over-the-counter ("OTC") market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximat es market value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of August 31, 2010, the total value of securities held indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 0.3% of net assets. The underlying funds classify such securities (as defined below) as Level 3. Additionally, because many foreign equity securities markets and exchanges close prior to the cl ose of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund and the underlying funds generally value foreign equity securities as of the NYSE close using fair value prices, which are based on local closing prices and adjustments supplied by a third party vendor using that vendor's proprietary models. As of August 31, 2010, equity securities and futures contracts representing 54.3% and (0.01)%, respectively, of the net assets of the Fund, through investments in the underlying funds, were valued using fair value prices based on those adjustments. Those underlying funds classify such securities (as defined below) as Level 2.
9
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Mutual Funds | $ | 1,035,905,882 | $ | — | $ | — | $ | 1,035,905,882 | |||||||||||
Short-Term Investments | 18,661 | — | — | 18,661 | |||||||||||||||
Total Investments | 1,035,924,543 | — | — | 1,035,924,543 | |||||||||||||||
Total | $ | 1,035,924,543 | $ | — | $ | — | $ | 1,035,924,543 |
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the portfolio valuation notes in their financial statements. The aggregate net values of the Fund's indirect investments in securities using Level 3 inputs were 0.2% of total net assets.
The Fund held no investments or other financial instruments at either August 31, 2010 or February 28, 2010, whose fair value was determined using Level 3 inputs.
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
10
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Fund's policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
Distributions in excess of tax basis earnings and profits, if significant, are reported in the Fund's financial statements as a return of capital for tax purposes.
As of February 28, 2010, the Fund elected to defer to March 1, 2010 post-October capital losses of $15,437,023.
As of February 28, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
2/28/2018 | $ | (27,174,228 | ) | ||||
Total | $ | (27,174,228 | ) |
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 1,321,192,373 | $ | 663,086 | $ | (285,930,916 | ) | $ | (285,267,830 | ) |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts
11
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact its operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Income dividends and capital gain distributions from the underlying funds are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for the purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 5).
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
For the period ended August 31, 2010, the Fund did not charge a premium on cash purchases or fee on cash redemptions of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by a Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. The Fund charges purchase premiums and redemption fees based on the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premiums and/or redemption fees, if any, imposed by the underlying Funds in which it invests, provided that, if that
12
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
weighted average is less than 0.05%, the Fund generally will not charge a purchase premium or redemption fee. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager may consider known cash flows out of or into other series of the Trust when placing orders for the cash purchase or redemption of shares by the Fund shareholders or other prospectiv e or existing shareholders of the Funds for whom GMO provides asset allocation advice. Consequently, the Fund and those other shareholders for whom GMO provides asset allocation advice will tend to benefit from waivers of the Funds' purchase premiums and redemption fees to a greater extent than other prospective and existing shareholders of the other series of the Trust. All or a portion of the Fund's purchase premium and/or redemption fees may be waived at the Manager's discretion when they are de minimis and/or the Manager deems it equitable to do so, including without limitation when the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premium and/or redemption fees, if any, imposed by the underlying funds are less than the purchase premium and/or redemption fee imposed by the Fund. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transa ction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of a Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. References to investments include those held directly by the Fund and indirectly through the Fund's investments in the underlying funds. Some of the underlying funds are non-diversified investment companies under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by those funds may affect their performance more than if they were diversified. The principal risks of investing in the Fund are summarized below, including those risks to which the Fund is exposed as a result of its investments in the
13
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
underlying funds. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund and the underlying funds normally do not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund's investments.
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund or the underlying funds may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund or the underlying funds need to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund or the underlying funds to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund's investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund's investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund or an underlying fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
• Derivatives Risk — The use of derivatives involves the risk that their value may not correlate with the value of the relevant underlying assets, rates or indices. Derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk.
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in the underlying funds, including the risk that the underlying funds in which it invests do not perform as expected. Because the Fund bears the fees and expenses of the underlying funds in which it invests, new investments in underlying funds with higher fees or expenses than those of the underlying funds in which the Fund is currently invested will increase the Fund's total expenses. The fees and expenses associated with an investment in the Fund are less predictable and may be higher than fees and expenses associated with an investment in funds that charge a fixed management fee.
14
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
• Market Risk — Fixed Income Securities — Typically, the value of fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.
Other principal risks of an investment in the Fund include Smaller Company Risk (greater market risk and liquidity risk resulting from investments in companies with smaller market capitalizations); Market Risk — Value Securities (risk that the price of investments held by the Fund will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Market Risk — Growth Securities (greater price fluctuations resulting from dependence on future earnings expectations); Commodities Risk (value of an underlying fund's shares may be affected by factors particular to the commodities markets and may fluctuate more than the share value of a fund with a broader range of investments); Currency Risk (risk that fluctuations in exchange rates may adversely affect the value of investments denominated in foreign currencies or that the U.S. dollar will decline in value relative to a foreign currency being hedged); Leveraging Risk (increased risk of loss from use of reverse repurchase agreements and other derivatives and securities lending); Credit and Co unterparty Risk (risk of default of an issuer of a portfolio security, a derivatives counterparty, or a borrower of the Fund's securities); Real Estate Risk (risk to an underlying fund that concentrates its assets in real estate-related investments that factors affecting the real estate industry may cause the value of the underlying fund's investments to fluctuate more than if it invested in securities of companies in a broader range of industries); Short Sales Risk (risk that an underlying fund's loss on the short sale of securities that it does not own is unlimited); Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operation s by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
4. Derivative financial instruments
At August 31, 2010, the Fund held no derivative contracts.
5. Fees and other transactions with affiliates
The Manager decides how to allocate the assets of the Fund among underlying funds. The Manager does not charge the Fund a management fee or shareholder service fee, but it receives management and shareholder service fees from the underlying funds in which the Fund invests. Because those fees vary from fund to fund, the levels of indirect net expenses set forth below are affected by the Manager's asset allocation decisions.
15
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's operating expenses that exceed 0.00% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investme nt company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). This contractual expense limitation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ending August 31, 2010 was $10,941 and $3,864, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the period ended August 31, 2010, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
Indirect Net Expenses (excluding shareholder service fees) | Indirect Shareholder Service Fees | Total Indirect Expenses | |||||||||
0.424 | % | 0.072 | % | 0.496 | % |
6. Purchases and sales of securities
Cost of purchases and proceeds from sales of securities, excluding short-term investments and class exchanges, for the period ended August 31, 2010 aggregated $137,271,465 and $110,919,995, respectively.
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss
16
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
8. Principal shareholders and related parties
As of August 31, 2010, the Fund had no shareholders who individually held more than 10% of the Funds outstanding shares.
As of August 31, 2010, none of the Fund's shares were held by senior management of the Manager and GMO Trust officers and 10.26% of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Class III: | Shares | Amount | Shares | Amount | |||||||||||||||
Shares sold | 2,112,663 | $ | 35,281,840 | 12,907,784 | $ | 207,883,739 | |||||||||||||
Shares issued to shareholders in reinvestment of distributions | — | — | 1,301,276 | 22,668,232 | |||||||||||||||
Shares repurchased | (966,584 | ) | (16,456,027 | ) | (7,736,512 | ) | (127,937,959 | ) | |||||||||||
Net increase (decrease) | 1,146,079 | $ | 18,825,813 | 6,472,548 | $ | 102,614,012 |
17
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
10. Investments in affiliated issuers
A summary of the Fund's transactions in the shares of other funds of the Trust during the period ended August 31, 2010 is set forth below:
Affiliate | Value, beginning of period | Purchases | Sales Proceeds | Dividend Income | Distributions of Realized Gains | Value, end of period | |||||||||||||||||||||
GMO Emerging Markets Fund, Class VI | $ | — | $ | 36,643,772 | $ | 4,380,800 | $ | — | $ | — | $ | 32,934,568 | |||||||||||||||
GMO Flexible Equities Fund, Class VI | 21,035,579 | 90,602 | — | — | — | 19,438,546 | |||||||||||||||||||||
GMO International Growth Equity Fund, Class IV | 223,870,059 | 39,667,155 | 3,362,188 | 879,123 | — | 255,979,288 | |||||||||||||||||||||
GMO International Intrinsic Value Fund, Class IV | 223,056,848 | 41,778,626 | 3,576,888 | 1,069,123 | — | 252,770,736 | |||||||||||||||||||||
GMO International Small Companies Fund, Class III | 19,834,925 | 292,399 | 20,601,377 | 205,724 | — | — | |||||||||||||||||||||
GMO Quality Fund, Class VI | 408,859,750 | 15,415,629 | 48,938,820 | 4,103,011 | — | 347,974,682 | |||||||||||||||||||||
GMO U.S. Core Equity Fund, Class VI | 163,195,449 | 3,383,282 | 30,059,922 | 1,269,168 | — | 126,808,062 | |||||||||||||||||||||
Totals | $ | 1,059,852,610 | $ | 137,271,465 | $ | 110,919,995 | $ | 7,526,149 | $ | — | $ | 1,035,905,882 |
18
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to the performance of a composite of accounts with similar objectives managed by the Manager and funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one- and three-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees considered information provided by the Manager addressing the Fund's performance, including a performance attribution analysis. The Trustees also considered the qualifications and experience of the
19
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees also gave substantial consideration to the fact that the Fund does not pay a management fee to the Manager under the Fund's investment management agreement, but that the Fund indirectly bears management and shareholder servicing fees paid to the Manager by other funds of the Trust in which it invests. The Trustees also considered so-called "fallout benefits" to the Manager, primarily the receipt of shareholder servicing fees pursuant to the Trust's servicing agreements and also possible reputational value derived from serving as investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest. The Trustees noted that they had approved renewal of the Manager's investment management agreements with the other funds of the Trust in which the Fund may invest and had concluded that the advisory fees charged to those funds were reasonable, after considering, among other things: possible economies of scale to the Manager in connection with its management of the other funds of the Trust; the Manager's profitability with respect to the other funds of the Trust and the Trust as a whole (including the effect of recent changes in assets under management); and information prepared by a third-party data service concerning fee s paid to managers of funds deemed by that service to have similar objectives to those of the other funds of the Trust.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
20
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement and shareholder servicing agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractua l expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
21
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including indirect management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
Class III | |||||||||||||||||||
1) Actual | 0.50 | % | $ | 1,000.00 | $ | 960.00 | $ | 2.47 | |||||||||||
2) Hypothetical | 0.50 | % | $ | 1,000.00 | $ | 1,022.68 | $ | 2.55 |
* Expenses are calculated using the Class's annualized net expense ratio (including indirect expenses incurred) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
22
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Semiannual Report
August 31, 2010
For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO's website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a private placement memorandum, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The private placement memorandum can be obtained by calling 1-617-346-7646 (collect).
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Investments Concentration Summary
August 31, 2010 (Unaudited)
Asset Class Summary | % of Total Net Assets | ||||||
Debt Obligations | 95.9 | % | |||||
Short-Term Investments | 12.2 | ||||||
Options Purchased | 9.3 | ||||||
Forward Currency Contracts | 0.0 | ||||||
Swaps | (4.5 | ) | |||||
Reverse Repurchase Agreements | (4.4 | ) | |||||
Written Options | (7.7 | ) | |||||
Futures Contracts | (1.6 | ) | |||||
Other | 0.8 | ||||||
100.0 | % | ||||||
Industry Summary | % of Debt Obligations | ||||||
U.S. Government & Agencies | 48.0 | % | |||||
Residential Asset-Backed Securities (United States) | 10.2 | ||||||
Credit Cards | 7.1 | ||||||
Auto Financing | 6.5 | ||||||
Insured Auto Financing | 5.2 | ||||||
Foreign Government Obligations | 4.6 | ||||||
CMBS | 4.5 | ||||||
Residential Mortgage-Backed Securities (European) | 3.8 | ||||||
Business Loans | 1.8 | ||||||
Corporate Collateralized Debt Obligations | 1.6 | ||||||
Residential Mortgage-Backed Securities (Australian) | 1.5 | ||||||
Insured Other | 1.4 | ||||||
Student Loans | 1.1 | ||||||
CMBS Collateralized Debt Obligations | 1.0 | ||||||
Insured Residential Asset-Backed Securities (United States) | 0.7 | ||||||
Insured Time Share | 0.4 | ||||||
Insured Transportation | 0.4 | ||||||
Bank Loan Collateralized Debt Obligations | 0.1 | ||||||
Insured Residential Mortgage-Backed Securities (United States) | 0.1 | ||||||
Residential Mortgage-Backed Securities (United States) | 0.0 | ||||||
100.0 | % |
1
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
DEBT OBLIGATIONS — 95.9% | |||||||||||
Asset-Backed Securities — 45.5% | |||||||||||
Auto Financing — 6.3% | |||||||||||
6,039,066 | Capital Auto Receivable Asset Trust, Series 07-2, Class A4B, 1 mo. LIBOR + .40%, 0.68%, due 02/18/14 | 6,051,326 | |||||||||
9,000,000 | Carmax Auto Owner Trust, Series 08-2, Class A4B, 1 mo. LIBOR + 1.65%, 1.93%, due 08/15/13 | 9,187,020 | |||||||||
4,685,000 | Daimler Chrysler Auto Trust, Series 08-B, Class A4A, 5.32%, due 11/10/14 | 4,920,655 | |||||||||
2,755,249 | Ford Credit Auto Owner Trust, Series 06-C, Class A4B, 1 mo. LIBOR + .04%, 0.32%, due 02/15/12 | 2,754,257 | |||||||||
1,700,000 | Ford Credit Auto Owner Trust, Series 07-B, Class A4B, 1 mo. LIBOR + .38%, 0.66%, due 07/15/12 | 1,704,029 | |||||||||
11,790,000 | Ford Credit Floorplan Master Owner Trust, Series 06-4, Class A, 1 mo. LIBOR + .25%, 0.53%, due 06/15/13 | 11,672,100 | |||||||||
9,000,000 | Merrill Auto Trust Securitization, Series 08-1, Class A4B, 1 mo. LIBOR + 2.20%, 2.48%, due 04/15/15 | 9,191,700 | |||||||||
2,713,322 | Merrill Auto Trust Securitization, Series 07-1, Class A4, 1 mo. LIBOR + .06%, 0.34%, due 12/15/13 | 2,710,880 | |||||||||
5,919,221 | Nissan Auto Receivables Owner Trust, Series 07-A, Class A4, 1 mo. LIBOR, 0.28%, due 06/17/13 | 5,912,118 | |||||||||
5,581,532 | World Omni Auto Receivables Trust, Series 07-A, Class A4, 1 mo. LIBOR, 0.28%, due 11/15/12 | 5,571,407 | |||||||||
Total Auto Financing | 59,675,492 | ||||||||||
Bank Loan Collateralized Debt Obligations — 0.1% | |||||||||||
905,104 | Arran Corp. Loans No. 1 B.V., Series 06-1A, Class A3, 144A, 3 mo. LIBOR + .17%, 0.71%, due 06/20/25 | 902,275 | |||||||||
Business Loans — 1.6% | |||||||||||
1,445,000 | Bayview Commercial Asset Trust, Series 04-3, Class A1, 144A, 1 mo. LIBOR + .37%, 0.63%, due 01/25/35 | 1,127,100 | |||||||||
2,133,919 | Bayview Commercial Asset Trust, Series 05-4A, Class A2, 144A, 1 mo. LIBOR + .39%, 0.65%, due 01/25/36 | 1,365,708 | |||||||||
9,000,000 | Bayview Commercial Asset Trust, Series 07-6A, Class A2, 144A, 1 mo. LIBOR + 1.30%, 1.56%, due 12/25/37 | 7,380,000 |
See accompanying notes to the financial statements.
2
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
Business Loans — continued | |||||||||||
1,387,638 | GE Business Loan Trust, Series 05-2A, Class A, 144A, 1 mo. LIBOR + .24%, 0.52%, due 11/15/33 | 1,151,740 | |||||||||
1,762,974 | Lehman Brothers Small Balance Commercial, Series 05-1A, Class A, 144A, 1 mo. LIBOR + .25%, 0.51%, due 02/25/30 | 1,304,601 | |||||||||
1,213,722 | Lehman Brothers Small Balance Commercial, Series 05-2A, Class 1A, 144A, 1 mo. LIBOR + .25%, 0.51%, due 09/25/30 | 873,880 | |||||||||
2,218,118 | Lehman Brothers Small Balance Commercial, Series 07-3A, Class 1A2, 144A, 1 mo. LIBOR + .85%, 1.11%, due 10/25/37 | 1,774,494 | |||||||||
Total Business Loans | 14,977,523 | ||||||||||
CMBS — 4.3% | |||||||||||
5,110,458 | Citigroup/Deutsche Bank Commercial Mortgage, Series 05-CD1, Class A2FL, 1 mo. LIBOR + .12%, 0.39%, due 07/15/44 | 5,048,621 | |||||||||
11,500,000 | Commercial Mortgage Pass-Through Certificates, Series 06-FL12, Class AJ, 144A, 1 mo. LIBOR + .13%, 0.41%, due 12/15/20 | 8,280,000 | |||||||||
4,812,769 | GE Capital Commercial Mortgage Corp., Series 05-C4, Class A2, 5.31%, due 11/10/45 | 4,826,244 | |||||||||
3,600,000 | GE Capital Commercial Mortgage Corp., Series 06-C1, Class A2, 5.51%, due 03/10/44 | 3,618,000 | |||||||||
441,273 | Greenwich Capital Commercial Funding Corp., Series 06-FL4A, Class A1, 144A, 1 mo. LIBOR + .09%, 0.39%, due 11/05/21 | 417,003 | |||||||||
5,380,483 | GS Mortgage Securities Corp., Series 06-GG6, Class A2, 5.51%, due 04/10/38 | 5,455,305 | |||||||||
5,400,000 | Merrill Lynch Mortgage Trust, Series 06-C1, Class A2, 5.79%, due 05/12/39 | 5,625,720 | |||||||||
2,700,000 | Morgan Stanley Capital I, Series 06-IQ11, Class A3, 5.90%, due 10/15/42 | 2,847,663 | |||||||||
5,317,337 | Wachovia Bank Commercial Mortgage Trust, Series 06-WL7A, Class A1, 144A, 1 mo. LIBOR + .09%, 0.36%, due 09/15/21 | 4,732,430 | |||||||||
Total CMBS | 40,850,986 | ||||||||||
CMBS Collateralized Debt Obligations — 0.8% | |||||||||||
6,777,455 | American Capital Strategies Ltd. Commercial Real Estate CDO Trust, Series 07-1A, Class A, 144A, 3 mo. LIBOR + .80%, 1.14%, due 11/23/52 | 304,986 | |||||||||
4,002,847 | Guggenheim Structured Real Estate Funding, Series 05-2A, Class A, 144A, 1 mo. LIBOR + .32%, 0.58%, due 08/26/30 | 2,922,078 | |||||||||
6,450,000 | Marathon Real Estate CDO, Series 06-1A, Class A1, 144A, 1 mo. LIBOR + .33%, 0.59%, due 05/25/46 | 4,321,500 | |||||||||
Total CMBS Collateralized Debt Obligations | 7,548,564 |
See accompanying notes to the financial statements.
3
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
Corporate Collateralized Debt Obligations — 1.7% | |||||||||||
4,800,000 | Morgan Stanley ACES SPC, Series 06-13A, Class A, 144A, 3 mo. LIBOR + .29%, 0.83%, due 06/20/13 | 3,913,920 | |||||||||
4,000,000 | Morgan Stanley ACES SPC, Series 05-15, Class A, 144A, 3 mo. LIBOR + .40%, 0.94%, due 12/20/10 | 3,959,200 | |||||||||
9,000,000 | Prism Orso Trust, Series 04-MAPL, Class CERT, 144A, 3 mo. LIBOR + .70%, 1.24%, due 08/01/11 | 8,018,100 | |||||||||
Total Corporate Collateralized Debt Obligations | 15,891,220 | ||||||||||
Credit Cards — 6.8% | |||||||||||
4,100,000 | American Express Credit Account Master Trust, Series 06-1, Class A, 1 mo. LIBOR + .03%, 0.31%, due 12/15/13 | 4,097,130 | |||||||||
7,100,000 | Cabela's Master Credit Card Trust, Series 08-4A, Class A2, 144A, 1 mo. LIBOR + 3.00%, 3.28%, due 09/15/14 | 7,282,328 | |||||||||
4,500,000 | Capital One Multi-Asset Execution Trust, Series 04-A7, Class A7, 3 mo. LIBOR + .15%, 0.53%, due 06/16/14 | 4,495,140 | �� | ||||||||
8,700,000 | Capital One Multi-Asset Execution Trust, Series 06-A14, Class A, 1 mo. LIBOR + .01%, 0.29%, due 08/15/13 | 8,696,868 | |||||||||
8,100,000 | Capital One Multi-Asset Execution Trust, Series 08-A6, Class A6, 1 mo. LIBOR + 1.10%, 1.38%, due 03/17/14 | 8,150,625 | |||||||||
7,700,000 | Charming Shoppes Master Trust, Series 07-1A, Class A1, 144A, 1 mo. LIBOR + 1.25%, 1.53%, due 09/15/17 | 7,518,742 | |||||||||
2,700,000 | Discover Card Master Trust I, Series 06-2, Class A2, 1 mo. LIBOR + .03%, 0.31%, due 01/16/14 | 2,693,520 | |||||||||
4,000,000 | Discover Card Master Trust I, Series 96-4, Class A, 1 mo. LIBOR + .38%, 0.65%, due 10/16/13 | 4,002,400 | |||||||||
4,100,000 | Discover Card Master Trust I, Series 05-4, Class A1, 1 mo. LIBOR + .06%, 0.34%, due 06/18/13 | 4,098,729 | |||||||||
3,900,000 | Discover Card Master Trust I, Series 05-4, Class A2, 1 mo. LIBOR + .09%, 0.37%, due 06/16/15 | 3,878,672 | |||||||||
4,600,000 | Household Credit Card Master Note Trust I, Series 07-2, Class A, 1 mo. LIBOR + .55%, 0.83%, due 07/15/13 | 4,602,156 | |||||||||
4,200,000 | National City Credit Card Master Trust, Series 08-3, Class A, 1 mo. LIBOR + 1.80%, 2.08%, due 05/15/13 | 4,238,052 | |||||||||
900,000 | World Financial Network Credit Card Master Trust, Series 06-A, Class A, 144A, 1 mo. LIBOR + .13%, 0.41%, due 02/15/17 | 870,354 | |||||||||
Total Credit Cards | 64,624,716 |
See accompanying notes to the financial statements.
4
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
Insured Auto Financing — 5.0% | |||||||||||
6,000,000 | Aesop Funding II LLC, Series 06-1A, Class A, 144A, MBIA, 1 mo. LIBOR + .22%, 0.49%, due 03/20/12 | 5,953,125 | |||||||||
1,892,113 | AmeriCredit Automobile Receivables Trust, Series 07-AX, Class A4, XL, 1 mo. LIBOR + .04%, 0.34%, due 10/06/13 | 1,873,192 | |||||||||
525,594 | AmeriCredit Automobile Receivables Trust, Series 07-CM, Class A3B, MBIA, 1 mo. LIBOR + .03%, 0.33%, due 05/07/12 | 524,423 | |||||||||
2,626,474 | AmeriCredit Automobile Receivables Trust, Series 07-DF, Class A4B, FSA, 1 mo. LIBOR + .80%, 1.10%, due 06/06/14 | 2,614,797 | |||||||||
6,000,000 | AmeriCredit Prime Automobile Receivable Trust, Series 07-2M, Class A4B, MBIA, 1 mo. LIBOR + .50%, 0.79%, due 03/08/16 | 5,979,000 | |||||||||
2,842,423 | Capital One Auto Finance Trust, Series 06-B, Class A4, MBIA, 1 mo. LIBOR + .02%, 0.29%, due 07/15/13 | 2,826,101 | |||||||||
6,541,522 | Capital One Auto Finance Trust, Series 07-A, Class A4, AMBAC, 1 mo. LIBOR + .02%, 0.30%, due 11/15/13 | 6,510,123 | |||||||||
314,124 | Capital One Auto Finance Trust, Series 07-C, Class A3B, FGIC, 1 mo. LIBOR + .51%, 0.79%, due 04/16/12 | 314,130 | |||||||||
900,000 | Hertz Vehicle Financing LLC, Series 05-2A, Class A5, 144A, AMBAC, 1 mo. LIBOR + .25%, 0.51%, due 11/25/11 | 898,945 | |||||||||
8,605,752 | Santander Drive Auto Receivables Trust, Series 07-3, Class A4B, FGIC, 1 mo. LIBOR + .65%, 0.93%, due 10/15/14 | 8,567,887 | |||||||||
11,000,000 | Triad Auto Receivables Owner Trust, Series 07-B, Class A4B, FSA, 1 mo. LIBOR + 1.20%, 1.49%, due 07/14/14 | 11,018,260 | |||||||||
Total Insured Auto Financing | 47,079,983 | ||||||||||
Insured Other — 1.4% | |||||||||||
5,000,000 | DB Master Finance LLC, Series 06-1, Class A2, 144A, AMBAC, 5.78%, due 06/20/31 | 4,956,250 | |||||||||
3,207,017 | Henderson Receivables LLC, Series 06-3A, Class A1, 144A, MBIA, 1 mo. LIBOR + .20%, 0.48%, due 09/15/41 | 2,823,804 | |||||||||
2,503,901 | Henderson Receivables LLC, Series 06-4A, Class A1, 144A, MBIA, 1 mo. LIBOR + .20%, 0.48%, due 12/15/41 | 2,214,485 | |||||||||
2,814,784 | TIB Card Receivables Fund, 144A, FGIC, 3 mo. LIBOR + .25%, 0.78%, due 01/05/14 | 2,308,123 | |||||||||
9,200,000 | Toll Road Investment Part II, Series C, 144A, MBIA, Zero Coupon, due 02/15/37 | 679,972 | |||||||||
Total Insured Other | 12,982,634 |
See accompanying notes to the financial statements.
5
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
Insured Residential Asset-Backed Securities (United States) — 0.7% | |||||||||||
8,495,081 | Ameriquest Mortgage Securities, Inc., Series 04-R6, Class A1, XL, 1 mo. LIBOR + .21%, 0.47%, due 07/25/34 | 6,232,247 | |||||||||
Insured Residential Mortgage-Backed Securities (United States) — 0.1% | |||||||||||
1,157,253 | SBI Heloc Trust, Series 05-HE1, Class 1A, 144A, FSA, 1 mo. LIBOR + .19%, 0.45%, due 11/25/35 | 700,022 | |||||||||
Insured Time Share — 0.4% | |||||||||||
564,310 | Cendant Timeshare Receivables Funding LLC, Series 05-1A, Class A2, 144A, FGIC, 1 mo. LIBOR + .18%, 0.45%, due 05/20/17 | 539,974 | |||||||||
405,766 | Sierra Receivables Funding Co., Series 06-1A, Class A2, 144A, MBIA, 1 mo. LIBOR + .15%, 0.42%, due 05/20/18 | 380,964 | |||||||||
3,186,994 | Sierra Receivables Funding Co., Series 07-2A, Class A2, 144A, MBIA, 1 mo. LIBOR + 1.00%, 1.27%, due 09/20/19 | 3,006,157 | |||||||||
Total Insured Time Share | 3,927,095 | ||||||||||
Insured Transportation — 0.4% | |||||||||||
4,519,829 | CLI Funding LLC, Series 06-1A, Class A, 144A, AMBAC, 1 mo. LIBOR + .18%, 0.45%, due 08/18/21 | 3,796,656 | |||||||||
Residential Asset-Backed Securities (United States) — 9.8% | |||||||||||
467,549 | Accredited Mortgage Loan Trust, Series 07-1, Class A1, 1 mo. LIBOR + .05%, 0.31%, due 02/25/37 | 463,575 | |||||||||
2,692,463 | ACE Securities Corp., Series 06-CW1, Class A2B, 1 mo. LIBOR + .10%, 0.36%, due 07/25/36 | 2,308,787 | |||||||||
1,010,415 | ACE Securities Corp., Series 06-HE3, Class A2B, 1 mo. LIBOR + .09%, 0.35%, due 06/25/36 | 949,790 | |||||||||
1,175,187 | ACE Securities Corp., Series 06-SL4, Class A1, 1 mo. LIBOR + .12%, 0.38%, due 09/25/36 | 116,109 | |||||||||
140,064 | ACE Securities Corp., Series 05-SDI, Class A1, 1 mo. LIBOR + .40%, 0.66%, due 11/25/50 | 123,607 | |||||||||
825,030 | ACE Securities Corp., Series 06-SL1, Class A, 1 mo. LIBOR + .16%, 0.42%, due 09/25/35 | 203,370 | |||||||||
11,900,000 | ACE Securities Corp., Series 06-HE2, Class A2C, 1 mo. LIBOR + .16%, 0.42%, due 05/25/36 | 6,274,870 |
See accompanying notes to the financial statements.
6
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||
9,400,000 | ACE Securities Corp., Series 06-ASP5, Class A2C, 1 mo. LIBOR + .18%, 0.44%, due 10/25/36 | 3,548,500 | |||||||||
1,958,753 | ACE Securities Corp., Series 06-SL3, Class A1, 1 mo. LIBOR + .10%, 0.36%, due 06/25/36 | 237,989 | |||||||||
2,129,659 | ACE Securities Corp., Series 06-SL3, Class A2, 1 mo. LIBOR + .17%, 0.43%, due 06/25/36 | 207,216 | |||||||||
1,733,938 | ACE Securities Corp., Series 07-WM1, Class A2A, 1 mo. LIBOR + .07%, 0.33%, due 11/25/36 | 940,661 | |||||||||
4,433,486 | ACE Securities Corp., Series 07-ASL1, Class A2, 1 mo. LIBOR + .17%, 0.43%, due 12/25/36 | 352,906 | |||||||||
1,955,687 | Argent Securities, Inc., Series 06-W2, Class A2B, 1 mo. LIBOR + .19%, 0.45%, due 03/25/36 | 782,275 | |||||||||
10,507,452 | Argent Securities, Inc., Series 06-M1, Class A2C, 1 mo. LIBOR + .15%, 0.41%, due 07/25/36 | 4,314,623 | |||||||||
2,109,152 | Argent Securities, Inc., Series 06-W5, Class A2C, 1 mo. LIBOR + .15%, 0.41%, due 06/25/36 | 801,478 | |||||||||
5,918,039 | Argent Securities, Inc., Series 06-M2, Class A2B, 1 mo. LIBOR + .11%, 0.37%, due 09/25/36 | 2,293,240 | |||||||||
879,538 | Asset Backed Funding Certificates, Series 06-OPT2, Class A3B, 1 mo. LIBOR + .11%, 0.37%, due 10/25/36 | 871,183 | |||||||||
2,700,000 | Asset Backed Funding Certificates, Series 06-OPT2, Class A3C, 1 mo. LIBOR + .15%, 0.41%, due 10/25/36 | 1,788,750 | |||||||||
5,228,527 | Asset Backed Funding Certificates, Series 07-NC1, Class A1, 144A, 1 mo. LIBOR + .22%, 0.48%, due 05/25/37 | 4,339,677 | |||||||||
3,884,899 | Bayview Financial Acquisition Trust, Series 05-A, Class A1, 144A, 1 mo. LIBOR + .50%, 1.26%, due 02/28/40 | 2,464,969 | |||||||||
2,807,399 | Bear Stearns Asset Backed Securities, Inc., Series 07-AQ1, Class A1, 1 mo. LIBOR + .11%, 0.37%, due 11/25/36 | 2,010,378 | |||||||||
5,400,000 | Bear Stearns Asset Backed Securities, Inc., Series 07-AQ1, Class A2, 1 mo. LIBOR + .20%, 0.46%, due 11/25/36 | 1,115,100 | |||||||||
1,416,164 | Bear Stearns Mortgage Funding Trust, Series 07-SL2, Class 1A, 1 mo. LIBOR + .16%, 0.42%, due 02/25/37 | 148,556 | |||||||||
2,275,030 | Centex Home Equity, Series 06-A, Class AV3, 1 mo. LIBOR + .16%, 0.42%, due 06/25/36 | 1,833,469 | |||||||||
6,600,000 | Citigroup Mortgage Loan Trust, Inc., Series 06-WFH4, Class A3, 1 mo. LIBOR + .15%, 0.41%, due 11/25/36 | 4,021,446 |
See accompanying notes to the financial statements.
7
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||
2,600,000 | Citigroup Mortgage Loan Trust, Inc., Series 06-HE3, Class A2C, 1 mo. LIBOR + .16%, 0.42%, due 12/25/36 | 949,000 | |||||||||
978,732 | Countrywide Asset-Backed Certificates, Series 06-BC5, Class 2A1, 1 mo. LIBOR + .08%, 0.34%, due 03/25/37 | 968,456 | |||||||||
8,112,000 | Countrywide Asset-Backed Certificates, Series 06-BC3, Class 2A2, 1 mo. LIBOR + .14%, 0.40%, due 02/25/37 | 6,109,958 | |||||||||
4,400,000 | Fremont Home Loan Trust, Series 06-B, Class 2A3, 1 mo. LIBOR + .16%, 0.42%, due 08/25/36 | 1,562,000 | |||||||||
1,197,567 | Household Home Equity Loan Trust, Series 05-2, Class A2, 1 mo. LIBOR + .31%, 0.58%, due 01/20/35 | 1,014,938 | |||||||||
454,084 | Household Home Equity Loan Trust, Series 05-3, Class A2, 1 mo. LIBOR + .29%, 0.56%, due 01/20/35 | 394,059 | |||||||||
6,754,568 | J.P. Morgan Mortgage Acquisition Corp., Series 06-WMC4, Class A3, 1 mo. LIBOR + .12%, 0.38%, due 12/25/36 | 2,559,981 | |||||||||
4,301,153 | Master Asset-Backed Securities Trust, Series 06-FRE2, Class A4, 1 mo. LIBOR + .15%, 0.41%, due 03/25/36 | 2,150,576 | |||||||||
342,911 | Master Asset-Backed Securities Trust, Series 05-FRE1, Class A4, 1 mo. LIBOR + .25%, 0.51%, due 10/25/35 | 325,337 | |||||||||
2,700,000 | Master Asset-Backed Securities Trust, Series 06-HE2, Class A3, 1 mo. LIBOR + .15%, 0.41%, due 06/25/36 | 951,750 | |||||||||
5,808,227 | Master Asset-Backed Securities Trust, Series 06-HE3, Class A3, 1 mo. LIBOR + .15%, 0.41%, due 08/25/36 | 2,032,879 | |||||||||
3,100,000 | Master Asset-Backed Securities Trust, Series 06-NC3, Class A4, 1 mo. LIBOR + .16%, 0.42%, due 10/25/36 | 1,116,000 | |||||||||
1,301,613 | Master Second Lien Trust, Series 06-1, Class A, 1 mo. LIBOR + .16%, 0.42%, due 03/25/36 | 167,583 | |||||||||
2,649,328 | Merrill Lynch Mortgage Trust, Series 06-SD1, Class A, 1 mo. LIBOR + .28%, 0.54%, due 01/25/47 | 1,682,323 | |||||||||
2,300,000 | Morgan Stanley IXIS Real Estate Capital Trust, Series 06-2, Class A3, 1 mo. LIBOR + .15%, 0.41%, due 11/25/36 | 971,750 | |||||||||
8,800,000 | Nationstar Home Equity Loan Trust, Series 06-B, Class AV3, 1 mo. LIBOR + .17%, 0.43%, due 09/25/36 | 6,714,125 | |||||||||
9,100,000 | Nomura Home Equity Loan, Inc., Series 06-HE3, Class 2A3, 1 mo. LIBOR + .15%, 0.41%, due 07/25/36 | 3,864,656 | |||||||||
1,716,752 | People's Choice Home Loan Securities Trust, Series 05-4, Class 1A2, 1 mo. LIBOR + .26%, 0.52%, due 12/25/35 | 1,004,128 | |||||||||
5,078,914 | Saxon Asset Securities Trust, Series 06-3, Class A2, 1 mo. LIBOR + .11%, 0.37%, due 10/25/46 | 4,685,298 |
See accompanying notes to the financial statements.
8
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
Residential Asset-Backed Securities (United States) — continued | |||||||||||
9,100,000 | Securitized Asset-Backed Receivables LLC Trust, Series 06-HE1, Class A2C, 1 mo. LIBOR + .16%, 0.42%, due 07/25/36 | 3,412,500 | |||||||||
1,019,048 | Security National Mortgage Loan Trust, Series 06-2A, Class A1, 144A, 1 mo. LIBOR + .29%, 0.55%, due 10/25/36 | 998,667 | |||||||||
429,267 | SG Mortgage Securities Trust, Series 05-OPT1, Class A2, 1 mo. LIBOR + .26%, 0.52%, due 10/25/35 | 390,461 | |||||||||
2,287,942 | Soundview Home Equity Loan Trust, Series 07-NS1, Class A1, 1 mo. LIBOR + .12%, 0.38%, due 01/25/37 | 2,182,124 | |||||||||
3,600,000 | Specialty Underwriting & Residential Finance, Series 06-BC3, Class A2C, 1 mo. LIBOR + .15%, 0.41%, due 06/25/37 | 1,624,320 | |||||||||
1,820,524 | Structured Asset Investment Loan Trust, Series 06-1, Class A3, 1 mo. LIBOR + .20%, 0.46%, due 01/25/36 | 1,360,842 | |||||||||
720,564 | Structured Asset Securities Corp., Series 05-S6, Class A2, 1 mo. LIBOR + .29%, 0.55%, due 11/25/35 | 327,857 | |||||||||
Total Residential Asset-Backed Securities (United States) | 92,034,092 | ||||||||||
Residential Mortgage-Backed Securities (Australian) — 1.4% | |||||||||||
2,076,011 | Crusade Global Trust, Series 06-1, Class A1, 144A, 3 mo. LIBOR + .06%, 0.58%, due 07/20/38 | 1,997,857 | |||||||||
5,111,661 | Interstar Millennium Trust, Series 04-2G, Class A, 3 mo. LIBOR + .20%, 0.94%, due 03/14/36 | 4,673,592 | |||||||||
2,248,521 | Interstar Millennium Trust, Series 05-1G, Class A, 3 mo. LIBOR + .12%, 0.94%, due 12/08/36 | 2,167,891 | |||||||||
1,249,326 | Medallion Trust, Series 05-1G, Class A1, 3 mo. LIBOR + .08%, 0.49%, due 05/10/36 | 1,210,329 | |||||||||
3,244,590 | Puma Finance Ltd., Series G5, Class A1, 144A, 3 mo. LIBOR + .07%, 0.41%, due 02/21/38 | 3,091,445 | |||||||||
Total Residential Mortgage-Backed Securities (Australian) | 13,141,114 | ||||||||||
Residential Mortgage-Backed Securities (European) — 3.7% | |||||||||||
8,008,343 | Aire Valley Mortgages, Series 06-1A, Class 1A, 144A, 3 mo. LIBOR + .11%, 0.65%, due 09/20/66 | 6,630,107 | |||||||||
5,567,832 | Brunel Residential Mortgages, Series 07-1A, Class A4C, 144A, 3 mo. LIBOR + .10%, 0.63%, due 01/13/39 | 4,983,210 | |||||||||
527,260 | Gracechurch Mortgage Funding Plc, Series 1A, Class A2B, 144A, 3 mo. LIBOR + .07%, 0.60%, due 10/11/41 | 524,624 |
See accompanying notes to the financial statements.
9
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) | Description | Value ($) | |||||||||
Residential Mortgage-Backed Securities (European) — continued | |||||||||||
3,394,208 | Granite Master Issuer Plc, Series 06-3, Class A3, 1 mo. LIBOR + .04%, 0.31%, due 12/20/54 | 3,171,887 | |||||||||
5,680,920 | Kildare Securities Ltd., Series 07-1A, Class A2, 144A, 3 mo. LIBOR + .06%, 0.60%, due 12/10/43 | 5,432,095 | |||||||||
2,738,700 | Leek Finance Plc, Series 16A, Class A2B, 144A, 3 mo. LIBOR + .16%, 0.70%, due 09/21/37 | 2,706,383 | |||||||||
2,876,193 | Paragon Mortgages Plc, Series 12A, Class A2C, 144A, 3 mo. LIBOR + .11%, 0.49%, due 11/15/38 | 2,329,717 | |||||||||
2,618,217 | Paragon Mortgages Plc, Series 14A, Class A2C, 144A, 3 mo. LIBOR + .10%, 0.64%, due 09/15/39 | 2,159,505 | |||||||||
2,700,000 | Permanent Master Issuer Plc, Series 06-1, Class 5A, 3 mo. LIBOR + .11%, 0.64%, due 07/15/33 | 2,620,080 | |||||||||
4,500,000 | Permanent Master Issuer Plc, Series 07-1, Class 4A, 3 mo. LIBOR + .08%, 0.61%, due 10/15/33 | 4,399,200 | |||||||||
Total Residential Mortgage-Backed Securities (European) | 34,956,808 | ||||||||||
Residential Mortgage-Backed Securities (United States) — 0.0% | |||||||||||
165,176 | GreenPoint Mortgage Funding Trust, Series 05-HE4, Class 2A3C, 1 mo. LIBOR + .25%, 0.51%, due 07/25/30 | 160,504 | |||||||||
Student Loans — 1.0% | |||||||||||
2,741,903 | College Loan Corp. Trust, Series 07-1, Class A1, 3 mo. LIBOR + .01%, 0.51%, due 01/25/23 | 2,714,484 | |||||||||
3,100,000 | College Loan Corp. Trust, Series 07-2, Class A1, 3 mo. LIBOR + .25%, 0.75%, due 01/25/24 | 3,100,372 | |||||||||
154,139 | Goal Capital Funding Trust, Series 06-1, Class A1, 3 mo. LIBOR, 0.32%, due 08/25/20 | 153,753 | |||||||||
397,338 | Montana Higher Education Student Assistance Corp., Series 05-1, Class A, 3 mo. LIBOR + .04%, 0.58%, due 06/20/15 | 397,024 | |||||||||
3,073,134 | National Collegiate Student Loan Trust, Series 05-2, Class A2, 1 mo. LIBOR + .15%, 0.41%, due 02/25/26 | 3,038,561 | |||||||||
406,902 | National Collegiate Student Loan Trust, Series 06-1, Class A2, 1 mo. LIBOR + .14%, 0.40%, due 08/25/23 | 396,730 | |||||||||
Total Student Loans | 9,800,924 | ||||||||||
Total Asset-Backed Securities | 429,282,855 |
See accompanying notes to the financial statements.
10
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Par Value ($) / Principal Amount | Description | Value ($) | |||||||||
Foreign Government Obligations — 4.4% | |||||||||||
GBP | 25,000,000 | U.K. Treasury Bond, 4.25%, due 12/07/46(a) | 41,650,116 | ||||||||
U.S. Government — 45.9% | |||||||||||
121,622,328 | U.S. Treasury Inflation Indexed Note, 2.38%, due 04/15/11(b)(c) | 123,133,120 | |||||||||
150,000,000 | U.S. Treasury Note, 1.38%, due 01/15/13 | 152,812,500 | |||||||||
55,000,000 | U.S. Treasury Principal Strip Bond, due 11/15/21 | 39,552,865 | |||||||||
65,000,000 | U.S. Treasury Strip Coupon, due 05/15/22 | 45,586,060 | |||||||||
105,000,000 | U.S. Treasury Strip Coupon, due 08/15/22 | 72,902,655 | |||||||||
Total U.S. Government | 433,987,200 | ||||||||||
U.S. Government Agency — 0.1% | |||||||||||
800,000 | U.S. Department of Transportation, 144A, 6.00%, due 12/07/21 | 839,288 | |||||||||
TOTAL DEBT OBLIGATIONS (COST $996,263,851) | 905,759,459 | ||||||||||
OPTIONS PURCHASED — 9.3% | |||||||||||
Currency Options — 0.1% | |||||||||||
EUR | 3,000,000 | EUR Call/CHF Put, Expires 06/16/15, Strike 1.56 | 772,383 | ||||||||
Options on Interest Rate Swaps — 9.2% | |||||||||||
EUR | 450,000,000 | EUR Swaption Call, Expires 10/29/10, Strike 1.50% | 3,051,476 | ||||||||
EUR | 650,000,000 | EUR Swaption Call, Expires 12/13/10, Strike 1.30% | 2,816,274 | ||||||||
USD | 350,000,000 | USD Swaption Call, Expires 09/20/10, Strike 3.25% | 22,900,500 | ||||||||
USD | 350,000,000 | USD Swaption Call, Expires 09/20/10, Strike 4.00% | 45,957,800 | ||||||||
USD | 450,000,000 | USD Swaption Call, Expires 08/04/11, Strike 0.96% | 1,426,050 | ||||||||
USD | 450,000,000 | USD Swaption Put, Expires 08/04/11, Strike 0.96% | 910,800 | ||||||||
USD | 64,000,000 | USD Swaption Straddle, Expires 04/23/18, Strike TBD | 3,273,984 | ||||||||
USD | 64,000,000 | USD Swaption Straddle, Expires 04/10/18, Strike TBD | 3,277,888 | ||||||||
USD | 64,000,000 | USD Swaption Straddle, Expires 05/01/18, Strike TBD | 3,267,392 | ||||||||
Total Options on Interest Rate Swaps | 86,882,164 | ||||||||||
TOTAL OPTIONS PURCHASED (COST $39,746,935) | 87,654,547 |
See accompanying notes to the financial statements.
11
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
August 31, 2010 (Unaudited)
Shares / Par Value ($) | Description | Value ($) | |||||||||
SHORT-TERM INVESTMENTS — 12.2% | |||||||||||
Money Market Funds — 7.4% | |||||||||||
46,331,907 | State Street Institutional Liquid Reserves Fund-Institutional Class | 46,331,907 | |||||||||
23,710,150 | State Street Institutional Treasury Plus Money Market Fund-Institutional Class | 23,710,150 | |||||||||
Total Money Market Funds | 70,042,057 | ||||||||||
U.S. Government — 4.8% | |||||||||||
10,000,000 | U.S. Treasury Bill, 0.15%, due 09/16/10(d) | 9,999,333 | |||||||||
35,000,000 | U.S. Treasury Bill, 0.13%, due 09/09/10(d) | 34,998,911 | |||||||||
Total U.S. Government | 44,998,244 | ||||||||||
TOTAL SHORT-TERM INVESTMENTS (COST $115,040,301) | 115,040,301 | ||||||||||
TOTAL INVESTMENTS — 117.4% (Cost $1,151,051,087) | 1,108,454,307 | ||||||||||
Other Assets and Liabilities (net) — (17.4%) | (164,490,555 | ) | |||||||||
TOTAL NET ASSETS — 100.0% | $ | 943,963,752 |
See accompanying notes to the financial statements.
12
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
A summary of outstanding financial instruments at August 31, 2010 is as follows:
Reverse Repurchase Agreements
Face Value | Description | Market Value | |||||||||
GBP | 26,972,500 | Barclays, 0.56%, dated 08/25/10, to be repurchased on demand at face value plus accrued interest with a stated maturity date of 10/08/10. | $ | (41,367,040 | ) | ||||||
$ | (41,367,040 | ) |
Average balance outstanding | $ | (30,986,254 | ) | ||||
Average interest rate | 0.61 | % | |||||
Maximum balance outstanding | $ | (41,664,414 | ) |
Average balance outstanding was calculated based on daily face value balances outstanding during the period that the Fund has entered into reverse repurchase agreements.
Forward Currency Contracts
Settlement Date | Counterparty | Deliver/ Receive | Units of Currency | Value | Net Unrealized Appreciation (Depreciation) | ||||||||||||||||||
Buys † | |||||||||||||||||||||||
9/21/10 | Deutsche Bank AG | NZD | 45,600,000 | $ | 31,749,721 | $ | 865,198 | ||||||||||||||||
9/21/10 | Royal Bank of Scotland PLC | NZD | 65,000,000 | 45,257,278 | (1,160,340 | ) | |||||||||||||||||
$ | 77,006,999 | $ | (295,142 | ) | |||||||||||||||||||
Sales # | |||||||||||||||||||||||
9/21/10 | Royal Bank of Scotland PLC | NZD | 55,300,000 | $ | 38,503,499 | $ | 348,580 | ||||||||||||||||
9/21/10 | Deutsche Bank AG | NZD | 55,300,000 | 38,503,500 | 368,206 | ||||||||||||||||||
$ | 77,006,999 | $ | 716,786 |
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.
See accompanying notes to the financial statements.
13
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Futures Contracts
Number of Contracts | Type | Expiration Date | Contract Value | Net Unrealized Appreciation (Depreciation) | |||||||||||||||
Buys | |||||||||||||||||||
12,960 | Euro Dollar 90 Day | March 2011 | $ | 3,224,610,000 | $ | 17,133,120 | |||||||||||||
Sales | |||||||||||||||||||
2,830 | Euro Dollar 90 Day | September 2011 | $ | 702,759,750 | $ | (670,951 | ) | ||||||||||||
12,960 | Euro Dollar 90 Day | March 2012 | 3,208,248,000 | (32,033,313 | ) | ||||||||||||||
2,800 | EuroSwiss Interest Rate 3 Months | December 2010 | 687,968,481 | 266,746 | |||||||||||||||
$ | 4,598,976,231 | $ | (32,437,518 | ) |
Written Options
A summary of open written option contracts for the Fund at August 31, 2010 is as follows:
Notional Amounts | Expiration Date | Description | Premiums | Market Value | |||||||||||||||||||||||
Call | 3,000,000 | 6/14/2013 | EUR | EUR Call/CHF Put, | |||||||||||||||||||||||
Strike 1.56% | $ | (1,097,998 | ) | $ | (592,872 | ) | |||||||||||||||||||||
Call | 350,000,000 | 9/20/2010 | USD | Interest Rate Swaption, Strike 3.50% | (8,435,000 | ) | (30,569,350 | ) | |||||||||||||||||||
Call | 350,000,000 | 9/20/2010 | USD | Interest Rate Swaption, Strike 3.75% | (13,510,000 | ) | (38,262,350 | ) | |||||||||||||||||||
Call | 450,000,000 | 10/29/2010 | EUR | Interest Rate Swaption, Strike 1.25% | (604,506 | ) | (1,677,142 | ) | |||||||||||||||||||
Call | 650,000,000 | 12/13/2010 | EUR | Interest Rate Swaption, Strike 1.15% | (451,685 | ) | (1,796,518 | ) | |||||||||||||||||||
$ | (24,099,189 | ) | $ | (72,898,232 | ) |
See accompanying notes to the financial statements.
14
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Swap Agreements
Credit Default Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay)^ | Annual Premium | Implied Credit Spread (1) | Deliverable on Default | Maximum Potential Amount of Future Payments by the Fund Under the Contract (2) | Market Value | |||||||||||||||||||||||||||||||||||
13,000,000 | USD | 9/20/2010 | Morgan Stanley | Receive | 0.40 | % | 0.16 | % | Eagle | 13,000,000 | USD | $ | 12,038 | ||||||||||||||||||||||||||||||
Creek | |||||||||||||||||||||||||||||||||||||||||||
CDO | |||||||||||||||||||||||||||||||||||||||||||
7,000,000 | USD | 3/20/2013 | Morgan Stanley | Receive | 0.25 | % | 1.9 | % | MS Synthetic 2006-1 | 7,000,000 | USD | (290,218 | ) | ||||||||||||||||||||||||||||||
100,000,000 | USD | 12/20/2012 | Morgan Stanley | (Pay) | 1.20 | % | 0.26 | % | Reference security within CDX Index | N/A | (2,407,190 | ) | |||||||||||||||||||||||||||||||
50,000,000 | USD | 12/20/2012 | Morgan Stanley | (Pay) | 1.93 | % | 0.85 | % | Reference security within CDX index | N/A | (1,416,666 | ) | |||||||||||||||||||||||||||||||
96,449,886 | USD | 12/20/2012 | Morgan Stanley | Receive | 0.71 | % | 0.16 | % | Reference security within CDX Index | 96,449,886 | USD | 1,362,562 | |||||||||||||||||||||||||||||||
250,769,703 | USD | 12/20/2012 | Morgan Stanley | Receive | 0.71 | % | 0.16 | % | Reference security within CDX Index | 250,769,703 | USD | 3,542,660 | |||||||||||||||||||||||||||||||
$ | 803,186 | ||||||||||||||||||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
^ Receive - Fund receives premium and sells credit protection.
(Pay) - Fund pays premium and buys credit protection.
See accompanying notes to the financial statements.
15
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
(1) Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on the reference security, as of August 31, 2010, serve as an indicator of the current status of the payment/performance risk and reflect the likelihood or risk of default for the reference entity. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection. Wider (i.e.. higher) credit spreads represent a deterioration of the referenced entity's credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.
(2) The maximum potential amount the Fund could be required to pay as a seller of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.
Interest Rate Swaps
Notional Amount | Expiration Date | Counterparty | Receive (Pay)# | Fixed Rate | Variable Rate | Market Value | |||||||||||||||||||||||||
105,000,000 | USD | 8/15/2022 | JP Morgan Chase Bank | (Pay) | 0.00 | % | 3 month LIBOR | $ | (17,726,812 | ) | |||||||||||||||||||||
65,000,000 | USD | 5/15/2022 | JP Morgan Chase Bank | (Pay) | 0.00 | % | 3 month LIBOR | (11,071,673 | ) | ||||||||||||||||||||||
55,000,000 | USD | 11/15/2021 | JP Morgan Chase Bank | (Pay) | 0.00 | % | 3 month LIBOR | (10,903,681 | ) | ||||||||||||||||||||||
600,000,000 | CHF | 5/27/2011 | Credit Suisse | (Pay) | 0.16 | % | 3 Month CHF LIBOR | 232,858 | |||||||||||||||||||||||
900,000,000 | USD | 11/12/2012 | Barclays | (Pay) | 0.88 | % | 3 Month USD LIBOR | (2,286,721 | ) | ||||||||||||||||||||||
378,000,000 | USD | 11/13/2015 | JP Morgan Chase Bank | Receive | 1.77 | % | 3 Month USD LIBOR | 1,729,255 | |||||||||||||||||||||||
907,000,000 | USD | 11/13/2012 | JP Morgan Chase Bank | (Pay) | 0.80 | % | 3 Month USD LIBOR | (797,175 | ) | ||||||||||||||||||||||
378,000,000 | USD | 11/12/2015 | Barclays | Receive | 1.89 | % | 3 Month USD LIBOR | 3,995,035 | |||||||||||||||||||||||
25,000,000 | GBP | 12/7/2046 | Merrill Lynch | (Pay) | 4.36 | % | 6 month GBP LIBOR | (6,314,403 | ) | ||||||||||||||||||||||
$ | (43,143,317 | ) | |||||||||||||||||||||||||||||
Premiums to (Pay) Receive | $ | — |
# Receive - Fund receives fixed rate and pays variable rate.
(Pay) - Fund pays fixed rate and receives variable rate.
As of August 31, 2010, for forward currency contracts, futures contracts, swap agreements and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
See accompanying notes to the financial statements.
16
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
August 31, 2010 (Unaudited)
Notes to Schedule of Investments:
144A - Securities 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.
AMBAC - Insured as to the payment of principal and interest by AMBAC Assurance Corporation.
CDO - Collateralized Debt Obligation
CHF LIBOR - London Interbank Offered Rate denominated in Swiss Franc.
CMBS - Commercial Mortgage Backed Security
FGIC - Insured as to the payment of principal and interest by Financial Guaranty Insurance Corporation.
FSA - Insured as to the payment of principal and interest by Financial Security Assurance.
GBP LIBOR - London Interbank Offered Rate denominated in British Pounds.
LIBOR - London Interbank Offered Rate
MBIA - Insured as to the payment of principal and interest by MBIA Insurance Corp.
TBD - To Be Determined
USD LIBOR - London Interbank Offered Rate denominated in United States Dollars.
XL - Insured as to the payment of principal and interest by XL Capital Assurance.
The rates shown on variable rate notes are the current interest rates at August 31, 2010, which are subject to change based on the terms of the security.
(a) All or a portion of this security has been pledged to cover collateral requirements on reverse repurchase agreements (Note 2).
(b) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic (Note 2).
(c) All or a portion of this security has been pledged to cover margin requirements on open financial futures contracts and/or collateral on open swap contracts (Note 4).
(d) Rate shown represents yield-to-maturity.
Currency Abbreviations:
CHF - Swiss Franc
EUR - Euro
GBP - British Pound
NZD - New Zealand Dollar
USD - United States Dollar
See accompanying notes to the financial statements.
17
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Statement of Assets and Liabilities — August 31, 2010 (Unaudited)
Assets: | |||||||
Investments, at value (cost $1,151,051,087) (Note 2) | $ | 1,108,454,307 | |||||
Receivable for investments sold | 1,216,943 | ||||||
Interest receivable | 2,102,026 | ||||||
Unrealized appreciation on open forward currency contracts (Note 4) | 1,581,984 | ||||||
Receivable for open swap contracts (Note 4) | 10,874,408 | ||||||
Receivable for expenses reimbursed by Manager (Note 5) | 27,311 | ||||||
Total assets | 1,124,256,979 | ||||||
Liabilities: | |||||||
Payable for investments purchased | 9,187,195 | ||||||
Payable to affiliate for (Note 5): | |||||||
Trustees and Chief Compliance Officer of GMO Trust fees | 1,552 | ||||||
Payable for variation margin on open futures contracts (Note 4) | 1,490,680 | ||||||
Unrealized depreciation on open forward currency contracts (Note 4) | 1,160,340 | ||||||
Interest payable for open swap contracts | 538,078 | ||||||
Payable for open swap contracts (Note 4) | 53,214,539 | ||||||
Payable for reverse repurchase agreements (Note 2) | 41,367,040 | ||||||
Written options outstanding, at value (premiums $24,099,189) (Note 4) | 72,898,232 | ||||||
Miscellaneous payable (Note 4) | 296,089 | ||||||
Accrued expenses | 139,482 | ||||||
Total liabilities | 180,293,227 | ||||||
Net assets | $ | 943,963,752 | |||||
Shares outstanding: | 42,581,196 | ||||||
Net asset value per share: | $ | 22.17 |
See accompanying notes to the financial statements.
18
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Statement of Operations — Six Months Ended August 31, 2010 (Unaudited)
Investment Income: | |||||||
Interest | $ | 8,408,590 | |||||
Dividends | 47,135 | ||||||
Total investment income | 8,455,725 | ||||||
Expenses: | |||||||
Interest expense (Note 2) | 110,353 | ||||||
Custodian, fund accounting agent and transfer agent fees | 72,220 | ||||||
Audit and tax fees | 52,624 | ||||||
Legal fees | 26,680 | ||||||
Trustees fees and related expenses (Note 5) | 9,785 | ||||||
Miscellaneous | 7,636 | ||||||
Total expenses | 279,298 | ||||||
Fees and expenses reimbursed by Manager (Note 5) | (151,800 | ) | |||||
Expense reductions (Note 2) | (1,331 | ) | |||||
Net expenses | 126,167 | ||||||
Net investment income (loss) | 8,329,558 | ||||||
Realized and unrealized gain (loss): | |||||||
Net realized gain (loss) on: | |||||||
Investments | 19,352,397 | ||||||
Closed futures contracts | 2,380,803 | ||||||
Closed swap contracts | 19,524,744 | ||||||
Written options | 3,161,020 | ||||||
Foreign currency, forward contracts and foreign currency related transactions | 1,385,243 | ||||||
Net realized gain (loss) | 45,804,207 | ||||||
Change in net unrealized appreciation (depreciation) on: | |||||||
Investments | 78,945,725 | ||||||
Open futures contracts | (15,950,905 | ) | |||||
Written options | (50,490,658 | ) | |||||
Open swap contracts | (33,826,781 | ) | |||||
Foreign currency, forward contracts and foreign currency related transactions | 4,714,761 | ||||||
Net unrealized gain (loss) | (16,607,858 | ) | |||||
Net realized and unrealized gain (loss) | 29,196,349 | ||||||
Net increase (decrease) in net assets resulting from operations | $ | 37,525,907 |
See accompanying notes to the financial statements.
19
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Statement of Changes in Net Assets
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||
Increase (decrease) in net assets: | |||||||||||
Operations: | |||||||||||
Net investment income (loss) | $ | 8,329,558 | $ | 16,695,839 | |||||||
Net realized gain (loss) | 45,804,207 | 50,943,742 | |||||||||
Change in net unrealized appreciation (depreciation) | (16,607,858 | ) | 131,254,348 | ||||||||
Net increase (decrease) in net assets from operations | 37,525,907 | 198,893,929 | |||||||||
Cash distributions to shareholders | — | (71,650,000 | ) | ||||||||
Net share transactions (Note 9): | (19,358,545 | ) | 8,072,776 | ||||||||
Total increase (decrease) in net assets | 18,167,362 | 135,316,705 | |||||||||
Net assets: | |||||||||||
Beginning of period | 925,796,390 | 790,479,685 | |||||||||
End of period | $ | 943,963,752 | $ | 925,796,390 |
See accompanying notes to the financial statements.
20
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Financial Highlights
(For a share outstanding throughout each period)
Six Months Ended August 31, 2010 | Year Ended February 28/29, | ||||||||||||||||||||||||||
(Unaudited) | 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||
Net asset value, beginning of period | $ | 21.30 | $ | 18.35 | $ | 25.68 | $ | 25.99 | $ | 25.23 | $ | 25.17 | |||||||||||||||
Income (loss) from investment operations: | |||||||||||||||||||||||||||
Net investment income (loss)† | 0.19 | 0.39 | 0.76 | 1.41 | 1.36 | 0.96 | |||||||||||||||||||||
Net realized and unrealized gain (loss) | 0.68 | 4.24 | (8.09 | ) | (1.72 | ) | (0.60 | ) | (0.90 | ) | |||||||||||||||||
Total from investment operations | 0.87 | 4.63 | (7.33 | ) | (0.31 | ) | 0.76 | 0.06 | |||||||||||||||||||
Less distributions to shareholders: | |||||||||||||||||||||||||||
From cash distributions | — | (1.68 | ) | — | — | — | — | ||||||||||||||||||||
Total distributions | — | (1.68 | ) | — | — | — | — | ||||||||||||||||||||
Net asset value, end of period | $ | 22.17 | $ | 21.30 | $ | 18.35 | $ | 25.68 | $ | 25.99 | $ | 25.23 | |||||||||||||||
Total Return(a) | 4.08 | %** | 27.20 | % | (28.54 | )% | (1.19 | )% | 3.01 | % | 0.24 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||||
Net assets, end of period (000's) | $ | 943,964 | $ | 925,796 | $ | 790,480 | $ | 1,478,176 | $ | 1,750,067 | $ | 1,012,277 | |||||||||||||||
Net operating expenses to average daily net assets | 0.00 | %*(c) | 0.00 | %(b)(c) | 0.00 | %(b) | 0.00 | %(b) | 0.00 | %(b) | 0.00 | %(b) | |||||||||||||||
Interest expense to average daily net assets(d) | 0.03 | %* | 0.05 | % | — | 0.07 | % | 0.00 | % | — | |||||||||||||||||
Total net expenses to average daily net assets | 0.03 | %*(c) | 0.05 | %*(c) | 0.00 | %(b) | 0.07 | % | 0.00 | %(b) | 0.00 | %(b) | |||||||||||||||
Net investment income (loss) to average daily net assets | 1.77 | %* | 1.98 | % | 3.19 | % | 5.38 | % | 5.36 | % | 3.84 | % | |||||||||||||||
Portfolio turnover rate | 16 | %** | 55 | % | 59 | % | 41 | % | 93 | % | 31 | % | |||||||||||||||
Fees and expenses reimbursed by the Manager to average daily net assets | 0.03 | %* | 0.04 | % | 0.04 | % | 0.02 | % | 0.03 | % | 0.03 | % | |||||||||||||||
Redemption fees consisted of the following per share amounts:† | $ | 0.00 | (e) | $ | 0.00 | (e) | $ | 0.01 | — | — | — |
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. Calculation excludes redemption fees which are borne by the shareholder.
(b) Ratio is less than 0.01%.
(c) The net expense ratio does not include the effect of expense reductions (Note 2).
(d) Interest expense incurred as a result of entering into reverse repurchase agreements and/or payables owed to Lehman Brothers in connection with the termination of derivative contracts in 2008 is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income.
(e) There were no redemption fees during the period.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.
See accompanying notes to the financial statements.
21
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements
August 31, 2010 (Unaudited)
1. Organization
GMO World Opportunity Overlay Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of The Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees of the Trust ("Trustees") to create an unlimited number of series of shares ("Funds") and to subdivide Funds into classes.
The Fund seeks total return greater than that of its benchmark, the J.P. Morgan U.S. 3 Month Cash Index. The Fund's investment program has two principal components. One component of the Fund's investment program involves the use of derivatives to seek to exploit misvaluations in world interest rates, currencies, and credit markets, and to add value relative to the Fund's benchmark. The other component of the Fund's investment program involves direct investments, primarily in asset-backed securities and other fixed income securities (including Treasury Separately Traded Registered Interest and Principal Securities ("STRIPS"), Inflation-Protected Securities issued by the U.S. Treasury ("TIPS"), Treasury Securities, and global bonds).
To add value relative to the Fund's benchmark, the Manager employs proprietary quantitative and other models to seek to identify and estimate the relative misvaluation of interest rate, currency, and credit markets. Based on such estimates, the Fund establishes its positions, mainly by using derivatives, across global interest rate, currency, and credit markets. Derivative positions taken by the Fund are implemented primarily through interest rate swaps and/or futures contracts, currency forwards and/or options, and credit default swaps on single-issuers or indexes. As a result of its derivative positions, the Fund typically will have a net notional value in excess of its net assets and will have a higher tracking error, along with concomitant volatility, relative to its benchmark. The Fund is not limited in the extent to which it may use derivatives or in the absolute face value of its derivatives positions, and, as a result, t he Fund may be leveraged in relation to its assets.
The Fund has a substantial investment in asset-backed securities, including, but not limited to, securities backed by pools of residential and commercial mortgages, credit-card receivables, home equity loans, automobile loans, educational loans, corporate and sovereign bonds, and bank loans made to corporations. In addition, the Fund may invest in government securities, corporate debt securities, money market instruments, and commercial paper and enter into credit default swaps, reverse repurchase agreements, and repurchase agreements. The Fund's fixed income securities may include all types of interest rate, payment, and reset terms, including fixed rate, zero coupon, contingent, deferred, payment-in-kind, and auction rate features. Because of the deterioration in credit markets that became acute in 2008, the Fund currently has and may continue to have material exposure to below investment grade securities. If deemed prudent by the Manager, the Fund will take temporary defensive measures until the Manager has determined that normal conditions have returned or that it is otherwise prudent to resume investing in accordance with the Fund's normal investment strategies. The Fund may not achieve its investment objective while it is taking temporary defensive measures.
22
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
As of the date of this report, shares of the Fund are principally available for purchase by other GMO Funds and certain accredited investors.
2. Significant accounting policies
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
Portfolio valuation
Securities listed on a securities exchange (other than exchange-listed options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange ("NYSE") or, (iii) if there is no such reported sale or official closing price, at the most recent quoted bid price or broker bid in the event the Manager deems the over-the-counter ("OTC") market to be a better indicator of market value. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not rea dily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. During the period ended August 31, 2010, the Manager has evaluated the Fund's OTC derivatives contracts and determined that no reduction in value was warranted on account of the creditworthiness of a counterparty. See note 4 for a further discussion on valuation of derivative financial instruments.
Typically the Fund values debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. Although alternative prices are available for securities held by the Fund, those alternative sources are not typically part of the valuation process and would not necessarily confirm the security price used by the Fund. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fund.
23
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
As of August 31, 2010, the total value of securities held for which no alternative pricing source was available represented 5.1% of the net assets of the Fund.
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund's investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
Level 1 – Valuations based on quoted prices for identical securities in active markets.
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves and similar data. The Fund also used third party valuation services (which use industry models and market data from pricing vendors) to value certain credit default swaps.
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund used the following fair value techniques on Level 3 investments: The Fund valued certain debt securities using indicative bids received from primary pricing sources. The Fund used non-conventional models to value certain derivative contracts. The Fund also used third party valuation services to value certain credit default swaps using unobservable inputs.
The following is a summary of the inputs used as of August 31, 2010 in valuing the Fund's investments:
ASSET VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Debt Obligations | |||||||||||||||||||
Asset-Backed Securities | $ | — | $ | 103,030,959 | $ | 326,251,896 | $ | 429,282,855 | |||||||||||
Foreign Government Obligations | — | 41,650,116 | — | 41,650,116 | |||||||||||||||
U.S. Government | 152,812,500 | 281,174,700 | — | 433,987,200 | |||||||||||||||
U.S. Government Agency | — | 839,288 | — | 839,288 | |||||||||||||||
TOTAL DEBT OBLIGATIONS | 152,812,500 | 426,695,063 | 326,251,896 | 905,759,459 | |||||||||||||||
Options Purchased | — | 77,835,283 | 9,819,264 | 87,654,547 | |||||||||||||||
Short-Term Investments | 70,042,057 | 44,998,244 | — | 115,040,301 | |||||||||||||||
Total Investments | 222,854,557 | 549,528,590 | 336,071,160 | 1,108,454,307 |
24
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
ASSET VALUATION INPUTS — continued
Description | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Swap Agreements | |||||||||||||||||||
Credit Risk | $ | — | $ | 4,905,222 | $ | 12,038 | $ | 4,917,260 | |||||||||||
Interest Rate Risk | — | 5,957,148 | — | 5,957,148 | |||||||||||||||
Futures Contracts | |||||||||||||||||||
Interest Rate Risk | 17,399,866 | — | — | 17,399,866 | |||||||||||||||
Forward Currency Contracts | |||||||||||||||||||
Foreign Exchange Risk | — | 1,581,984 | — | 1,581,984 | |||||||||||||||
Total | $ | 240,254,423 | $ | 561,972,944 | $ | 336,083,198 | $ | 1,138,310,565 |
LIABILITY VALUATION INPUTS
Description | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||
Derivatives | |||||||||||||||||||
Written Options | |||||||||||||||||||
Foreign Exchange Risk | $ | — | $ | (592,872 | ) | $ | — | $ | (592,872 | ) | |||||||||
Interest Rate Risk | — | (72,305,360 | ) | — | (72,305,360 | ) | |||||||||||||
Swap Agreements | |||||||||||||||||||
Credit Risk | — | (3,823,856 | ) | (290,218 | ) | (4,114,074 | ) | ||||||||||||
Interest Rate Risk | — | (49,100,465 | ) | — | (49,100,465 | ) | |||||||||||||
Futures Contracts | |||||||||||||||||||
Interest Rate Risk | (32,704,264 | ) | — | — | (32,704,264 | ) | |||||||||||||
Forward Currency Contracts | |||||||||||||||||||
Foreign Exchange Risk | — | (1,160,340 | ) | — | (1,160,340 | ) | |||||||||||||
Total | $ | (32,704,264 | ) | $ | (126,982,893 | ) | $ | (290,218 | ) | $ | (159,977,375 | ) |
25
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The aggregate net values of the Fund's direct investments in securities and other financial instruments using Level 3 inputs were 35.6% and less than 0.1% of total net assets, respectively.
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
Balances as of February 28, 2010 | Net Purchases/ (Sales) | Accrued Discounts/ Premiums | Total Realized Gain/(Loss) | Change in Unrealized Appreciation (Depreciation) | Transfer into Level 3* | Transfers out of Level 3* | Balances as of August 31, 2010 | ||||||||||||||||||||||||||||
Debt Obligations | |||||||||||||||||||||||||||||||||||
Asset-Backed Securities | $ | 393,274,023 | $ | (86,416,733 | ) | $ | (7,716 | ) | $ | (158,960 | ) | $ | 22,955,490 | $ | — | $ | (3,394,208 | )** | $ | 326,251,896 | |||||||||||||||
Purchased Options | — | — | — | — | 632,064 | 9,187,200 | ** | — | 9,819,264 | ||||||||||||||||||||||||||
Swaps | 1,615,442 | — | (186,934 | ) | 186,934 | (812,255 | ) | — | (1,081,367 | )** | (278,180 | ) | |||||||||||||||||||||||
Total | $ | 394,889,465 | $ | (86,416,733 | ) | $ | (194,650 | ) | $ | 27,974 | $ | 22,775,299 | $ | 9,187,200 | $ | (4,475,575 | ) | $ | 335,792,980 |
* The Fund recognizes investments and derivatives transferred into Level 3 at the value at the beginning of the period and transferred out of Level 3 at the value at the end of the period.
** Financial assets transferred between Level 2 and Level 3 were due to a change in observable and/or unobservable inputs.
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are translated to U.S. dollars based on 4 p.m. New York time exchange rates each business day. Income and expenses denominated in foreign currencies are translated at 4 p.m. New York time exchange rates on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are inclu ded with the net realized and unrealized gain or loss on investment securities.
Repurchase agreements
The Fund may enter into repurchase agreements. Under a repurchase agreement the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities it acquired under the repurchase agreement. The value of the securities acquired is required by contract to be marked to market daily so that their market value is at least equal to the amount owed to the Fund by the seller. If the seller of a repurchase agreement defaults or enters into insolvency proceedings and/or the value of the
26
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
securities subject to the repurchase agreement is insufficient, the Fund's recovery of cash from the seller may be delayed and the Fund may incur a loss equal to the difference between the cash it paid and the value of the securities. The Fund had no repurchase agreements outstanding at the end of the period.
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at an agreed upon price and date. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which generally causes the Fund's portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the even t of a buyer's bankruptcy or insolvency, the Fund's use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund's right to repurchase the securities. As of August 31, 2010, the Fund had received $26,972,500 from reverse repurchase agreements relating to securities with a market value, plus accrued interest, of $42,033,005. Reverse repurchase agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Inflation-indexed bonds
The Fund may invest in inflation indexed bonds. Inflation indexed bonds are fixed income securities whose principal value is adjusted periodically according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that reflects inflation in the principal value of the bond. Most other issuers pay out any inflation related accruals as part of a semiannual coupon.
The value of inflation indexed bonds is expected to change in response to changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal interest rates (i.e., stated interest rates) and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate than nominal interest rates, real interest rates (i.e. nominal interest rate minus inflation) might decline, leading to an increase in value of inflation indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation indexed bonds. There can be no assurance, however, that the value of inflation indexed bonds will be directly correlated to changes in nominal interest rates, and short term increases in inflation may lead to a decline in their value. Coupon payments received by the Fund from inflation indexed bonds are included in the Fund's gross income for the period in which they accrue. In addition, any increase or decrease in the principal amount of an inflation indexed bond will increase or decrease taxable ordinary income to the Fund, even though
27
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
principal is not paid until maturity. Inflation-indexed bonds outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Taxes
The Fund has elected to be treated as a partnership for U.S. federal income tax purposes. As a partnership, the Fund is not itself subject to federal income tax. Instead, each shareholder is required to take into account in determining its tax liability, its distributive share of items of Fund income, gain, loss, deduction, credit, and tax preference for each taxable year substantially as though such items have been realized directly by the shareholder and without regard to whether any distribution by the Fund has been or will be received. Accordingly, no provision (benefit) for U.S. federal and state income taxes is reflected in the accompanying financial statements.
Taxes on foreign interest and dividend income are generally withheld at the statutory rate. The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Transaction based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
As of August 31, 2010, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
Aggregate Cost | Gross Unrealized Appreciation | Gross Unrealized (Depreciation) | Net Unrealized Appreciation (Depreciation) | ||||||||||||
$ | 1,151,051,087 | $ | 78,193,833 | $ | (120,790,613 | ) | $ | (42,596,780 | ) |
The Fund is subject to authoritative guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the period ended August 31, 2010 that would materially impact it s operations or financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2007 through the current year.
28
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
Distributions
Because the Fund has elected to be treated as a partnership for U.S. federal income tax purposes, it is not required to make distributions to its shareholders. It is the policy of the Fund to declare and pay distributions as determined by the Trustees (or their delegates). Distributions made by the Fund, in any, other than distributions made in partial or complete redemption of shareholders' interests in the Fund, are reported in the Fund's financial statements as cash distributions to shareholders.
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund's policy is that security transactions are accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which co llection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis for purposes of determining the cost basis.
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds.
State Street Bank and Trust Company ("State Street") serves as the Fund's custodian, fund accounting agent and transfer agent. State Street's fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
Purchases and redemptions of Fund shares
For the period ended August 31, 2010, the Fund did not charge a premium on cash purchases or fee on cash redemptions of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by a Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of a Fund regardless of how the shares were acquired
29
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
(e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund's shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund's shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder's securities to the Fund. In-kind redemptions are g enerally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with the GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
3. Investment risks
The value of the Fund's shares changes with the value of the Fund's investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund's performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
• Market Risk — Fixed Income Securities — Typically, the value of fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.
• Leveraging Risk — The Fund's use of reverse repurchase agreements and other derivatives and securities lending may cause its portfolio to be leveraged. Leverage increases the Fund's portfolio losses when the value of its investments decline.
• Credit and Counterparty Risk — The Fund runs the risk that the issuer or guarantor of a fixed income security, the counterparty to an over-the-counter derivatives contract, a borrower of the Fund's securities or the obligor of an obligation underlying an asset-backed security will be unable or unwilling to make timely principal, interest, or settlement payments or otherwise honor its obligations. This risk is particularly pronounced for the Fund because it typically uses OTC derivatives, including swap contracts
30
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
with longer term maturities, and may have significant exposure to a single counterparty. The risk of counterparty default is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions.
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
• Derivatives Risk — The use of derivatives involves the risk that their value may not correlate with the value of the relevant underlying assets, rates or indices. Derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk.
• Focused Investment Risk — Focusing investments in countries, regions, sectors or companies with high positive correlations to one another creates additional risk. This risk may be particularly pronounced for the Fund because of its exposure to asset-backed securities secured by different types of consumer debt (e.g., credit-card receivables, automobile loans and home equity loans).
Other principal risks of an investment in the Fund include Foreign Investment Risk (risk that the market prices of foreign securities will fluctuate more rapidly and to a greater extent than those of U.S. securities, which may adversely affect the value of the Fund's foreign investments); Currency Risk (risk that fluctuations in exchange rates will adversely affect the value of the Fund's foreign currency holdings and investments denominated in foreign currencies); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund's operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Management and Operational Risk (risk that the Manager's strategies and techniques will fail to produce the desired results and that deficiencies in the Manager's or a service provider's internal systems or controls will cause losses for the Fund or hinder Fund operations).
The most significant market risk for Funds investing in fixed income securities is that the securities in which they invest experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. These risks apply to the Fund because it invests in asset-backed securities. Asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as "collateralized debt obligations" or "collateralized loan obligations") and by the fees earned by service
31
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
providers. Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. Many asset-ba cked securities owned by the Fund that were once rated investment grade are now rated below investment grade as of the date of this Report.
With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e .g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and a Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.
The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution's business may have a material impact on multiple investments.
32
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
4. Derivative financial instruments
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund's portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
The Fund may use derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps or other derivatives on an index, a single security or a basket of securities to gain investment exposures (e.g., by selling protection under a credit default swap). The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). For example, the Fund may use credit default swaps to take a short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
In addition, the Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund's exposure to the credit of an issuer through the debt instrument, but adjust the Fund's interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed versus variable rates and shorter duration versus longer duration exposure. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative
33
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty's obligations to be secured by collateral (e.g., foreign currency forwards; see "Currency Risk" below), that require collateral but the Fund's security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative's intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty's obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund's third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund's net asset value. At August 31, 2010, amounts reported as a miscellaneous payable include amounts that were ca lculated by the Fund as being owed to Lehman Brothers upon the termination of the contracts pursuant to the terms of those contracts. The amounts reported as payable are subject to settlement discussions with Lehman Brothers' bankruptcy estate and may vary significantly upon final settlement with the estate.
There can be no assurance that the Fund's use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is
34
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the manager may decide not to use derivatives to hedge or otherwise reduce the Fund's risk exposures.
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund's forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. During the period ended August 31, 2010, the Fund used forward currency contracts to adjust exposure to foreign currencies and otherwise adjust currency exchange rate risk. Forward currency contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund's futures contracts is marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk
35
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
that it may not be able to enter into a closing transaction due to an illiquid market. During the period ended August 31, 2010, the Fund used futures contracts to adjust interest-rate exposure and enhance the diversity and liquidity of the portfolio. Futures contracts outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. During the period ended August 31, 2010, the Fund used purchased option contracts to adjust exposure to currencies and otherwise adjust currency exchange rate risk, as well as to enha nce the diversity and liquidity of the portfolio and to adjust interest rate exposure. Option contracts purchased by the Fund and outstanding at the end of the period are listed in the Fund's Schedule of Investments.
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund's exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g. index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an of fsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. During the period ended August 31, 2010, the Fund used written option contracts to adjust exposure to currencies and otherwise adjust currency exchange rate risk, as well as to enhance the diversity and liquidity of the portfolio and to adjust interest rate exposure. Written options outstanding at the end of the period are listed in the Fund's Schedule of Investments.
When an option contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in
36
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
For the period ended August 31, 2010, investment activity in options contracts written by the Fund was as follows:
Puts | Calls | ||||||||||||||||||||||||||
Principal Amount of Contracts | Number of Future Contracts | Premiums | Principal Amount of Contracts | Number of Future Contracts | Premiums | ||||||||||||||||||||||
Outstanding, beginning of period | (1,023,000,000 | ) | (6,000 | ) | $ | (18,989,081 | ) | (4,838,000,000 | ) | (16,000 | ) | $ | (15,976,151 | ) | |||||||||||||
Options written | (167,750,000 | ) | — | (3,773,236 | ) | (760,000,000 | ) | — | (25,465,498 | ) | |||||||||||||||||
Options bought back | 925,750,000 | 2,000 | 14,699,190 | 2,045,000,000 | 16,000 | 16,635,551 | |||||||||||||||||||||
Options expired | 265,000,000 | 4,000 | 8,063,127 | 1,750,000,000 | — | 706,909 | |||||||||||||||||||||
Options sold | — | — | — | — | — | — | |||||||||||||||||||||
Outstanding, end of period | — | — | $ | — | (1,803,000,000 | ) | — | $ | (24,099,189 | ) |
Exchange-listed options are valued at the most recent bid price for long positions and most recent ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
37
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer's failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer's bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a "fixed rate" or strike price payment for the "floating rate" or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to mak e a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
Swap agreements generally are not traded on financial markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type
38
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the period ended August 31, 2010, the Fund used swap agreements to adjust interest rate exposure, achieve exposure to a reference entity's credit, and/or provide a measure of protection against default loss. Swap agreements outstanding at the end of the period are listed in the Fund's Schedule of Investments.
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund's ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
Fair values of derivative instruments on the Statement of Assets and Liabilities as of August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Assets: | |||||||||||||||||||||||||||
Investments, at value (purchased options) | $ | 86,882,164 | $ | 772,383 | $ | — | $ | — | $ | — | $ | 87,654,547 | |||||||||||||||
Unrealized appreciation on futures contracts* | 17,399,866 | — | — | — | — | 17,399,866 | |||||||||||||||||||||
Unrealized appreciation on forward currency contracts | — | 1,581,984 | — | — | — | 1,581,984 | |||||||||||||||||||||
Unrealized appreciation on swap agreements | 5,957,148 | — | 4,917,260 | — | — | 10,874,408 | |||||||||||||||||||||
Total | $ | 110,239,178 | $ | 2,354,367 | $ | 4,917,260 | $ | — | $ | — | $ | 117,510,805 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||||||
Written options outstanding | $ | (72,305,360 | ) | $ | (592,872 | ) | $ | — | $ | — | $ | — | $ | (72,898,232 | ) | ||||||||||||
Unrealized depreciation on futures contracts* | (32,704,264 | ) | — | — | — | — | (32,704,264 | ) | |||||||||||||||||||
Unrealized depreciation on forward currency contracts | — | (1,160,340 | ) | — | — | — | (1,160,340 | ) | |||||||||||||||||||
Unrealized depreciation on swap agreements | (49,100,465 | ) | — | (4,114,074 | ) | — | — | (53,214,539 | ) | ||||||||||||||||||
Total | $ | (154,110,089 | ) | $ | (1,753,212 | ) | $ | (4,114,074 | ) | $ | — | $ | — | $ | (159,977,375 | ) |
39
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
The Effect of Derivative Instruments on the Statement of Operations for the period ended August 31, 2010^:
Interest rate contracts | Foreign exchange contracts | Credit contracts | Equity contracts | Other contracts | Total | ||||||||||||||||||||||
Net Realized Gain (Loss) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | 22,786,311 | $ | (3,218,212 | ) | $ | — | $ | — | $ | — | $ | 19,568,099 | ||||||||||||||
Written options | (6,063,386 | ) | 9,224,406 | — | — | — | 3,161,020 | ||||||||||||||||||||
Futures contracts | 2,380,803 | — | — | — | — | 2,380,803 | |||||||||||||||||||||
Forward currency contracts | — | 2,269,773 | — | — | — | 2,269,773 | |||||||||||||||||||||
Swap contracts | 19,337,810 | — | 186,934 | — | — | 19,524,744 | |||||||||||||||||||||
Total | $ | 38,441,538 | $ | 8,275,967 | $ | 186,934 | $ | — | $ | — | $ | 46,904,439 | |||||||||||||||
Change in Unrealized Appreciation (Depreciation) on: | |||||||||||||||||||||||||||
Investments (purchased options) | $ | (21,511,512 | ) | $ | 49,244,208 | $ | — | $ | — | $ | — | $ | 27,732,696 | ||||||||||||||
Written options | 27,384,975 | (77,875,633 | ) | — | — | — | (50,490,658 | ) | |||||||||||||||||||
Futures contracts | (15,950,905 | ) | — | — | — | (15,950,905 | ) | ||||||||||||||||||||
Forward currency contracts | — | 4,445,470 | — | — | — | 4,445,470 | |||||||||||||||||||||
Swap contracts | (33,014,525 | ) | — | (812,256 | ) | — | — | (33,826,781 | ) | ||||||||||||||||||
Total | $ | (43,091,967 | ) | $ | (24,185,955 | ) | $ | (812,256 | ) | $ | — | $ | — | $ | (68,090,178 | ) |
^ As the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund's investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
* The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments.
The volume of derivative activity, based on absolute values (forward currency contracts and futures contracts), or notional amounts (swap agreements), or principal amounths (options) outstanding at each month-end, was as follows for the period ended August 31, 2010:
Forward Currency Contracts | Futures Contracts | Swap Agreements | Options | ||||||||||||||||
Average amount outstanding | $ | 267,054,646 | $ | 4,282,269,146 | $ | 2,973,451,654 | $ | 7,425,563,016 |
40
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
5. Fees and other transactions with affiliates
GMO does not charge the Fund any management or service fees for its services. The Manager has contractually agreed to reimburse the Fund for the portion of the Fund's total annual operating expenses that exceed 0.00% of the Fund's average daily net assets (the "Expense Reimbursement Amount") exclusive of "Excluded Fund Fees and Expenses." "Excluded Fund Fees and Expenses" means fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust's Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities-lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an invest ment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). The Fund's contractual expense limitation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund's Board of Trustees.
The Fund's portion of the fees paid by the Trust to the Trust's independent Trustees and their legal counsel and CCO during the period ending August 31, 2010 was $9,785 and $3,496, respectively. The compensation and expenses of the CCO are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
6. Purchases and sales of securities
For the period ended August 31, 2010, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases | Sales | ||||||||||
U.S. Government securities | $ | 110,382,227 | $ | — | |||||||
Investments (non-U.S. Government securities) | 34,627,353 | 176,639,389 |
7. Guarantees
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund's indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
41
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Notes to Financial Statements — (Continued)
August 31, 2010 (Unaudited)
8. Principal shareholders and related parties
As of August 31, 2010, 55.83% of the outstanding shares of the Fund were held by one shareholder. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund. The shareholder is another fund of the Trust.
As of August 31, 2010, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and all of the Fund's shares were held by accounts for which the Manager had investment discretion.
9. Share transactions
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Six Months Ended August 31, 2010 (Unaudited) | Year Ended February 28, 2010 | ||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||
Shares sold | 245,567 | $ | 5,450,000 | 1,866,157 | $ | 38,085,686 | |||||||||||||
Shares repurchased | (1,138,842 | ) | (24,808,545 | ) | (1,477,996 | ) | (30,012,910 | ) | |||||||||||
Net increase (decrease) | (893,275 | ) | $ | (19,358,545 | ) | 388,161 | $ | 8,072,776 |
42
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement
August 31, 2010 (Unaudited)
In determining to approve the renewal of the investment management agreement of the Fund for an additional twelve month period commencing June 30, 2010, the Trustees, all but one of whom is not an "interested person" of GMO Trust (the "Trust"), considered information that they believed, in light of the legal advice furnished to them, to be relevant. The Trustees considered separately the investment management agreement for each fund of the Trust but also noted that the interests of the funds overlapped to a considerable extent.
As discussed below, at meetings throughout the year, the Trustees considered information relevant to renewal of the Fund's investment management agreement. At a meeting held on May 18, 2010, the full Board of Trustees met with representatives of the Manager to discuss, among other things, the strengths and limitations of various methods for evaluating fund performance. At a meeting on May 19, 2010 with their independent legal counsel and the Trust's independent Chief Compliance Officer, the Trustees who are not "interested persons" of the Trust (the "Independent Trustees") discussed extensive materials provided by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager") to the Trustees for purposes of their considering the renewal of the Fund's investment management agreement. At the conclusion of this meeting, the Independent Trustees instructed their independent legal counsel to request additional information from the Manage r, and the Manager responded at or prior to a meeting of the Trustees on June 10, 2010. In addition, at the meeting of the Trustees on June 10, 2010, representatives of the Manager, including executive and investment personnel, met with the Trustees to answer questions and provide additional information.
The Trustees met over the course of the year with the Manager's investment advisory personnel and considered information provided by the Manager relating to the education, experience, and number of investment professionals and other personnel providing services under the Fund's investment management agreement. The Trustees also considered information concerning the investment philosophy of, and investment process applied by, the Manager in managing the Fund's portfolio and the level of skill required. In evaluating that information, the Trustees focused particularly on the Manager's internal resources and the time and attention devoted by the Manager's senior management to the Fund. The Trustees also considered the business reputation of the Manager and its professional liability insurance coverage.
The Trustees also considered the Fund's investment performance relative to its performance benchmark, and as compared to funds managed by other managers deemed by third-party data services to have similar objectives. The Trustees reviewed the Fund's performance, including information as to performance in relation to risk, over various periods, including one-, three- and five-year periods and for the life of the Fund, information prepared by the third-party data services, various statistical measures of the Fund's performance, as well as factors identified by the Manager as contributing to the Fund's performance. The Trustees also considered the qualifications and experience of the personnel responsible for managing the Fund, the support those personnel received from the Manager, the investment techniques used to manage the Fund, and the overall competence of the Manager.
The Trustees gave substantial consideration to the fact that the Fund does not pay a management fee to the Manager under the Fund's investment management agreement. The Trustees also considered so-called "fallout benefits" to the Manager, primarily the possible reputational value derived from serving as
43
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Board Review of Investment Management Agreement — (Continued)
August 31, 2010 (Unaudited)
investment manager to the Fund. The Trustees considered the ability of the funds of the Trust to establish a public record of their performance also to be a potential fallout benefit to the Manager because of the opportunity that record might create for the Manager to increase assets under management by, for example, attracting new clients, entering into sub-advisory relationships with other fund groups, and/or expanding existing client relationships. The Trustees also considered that the fee charged under the Fund's investment management agreement is based on services provided by the Manager that are in addition to, rather than duplicative of, services provided under the investment management agreements of exchange-traded funds ("ETFs") and other funds in which it may invest.
In assessing the nature and quality of the services provided by the Manager, the Trustees considered a range of factors in addition to performance. The Trustees considered the rigor and discipline with which the Manager manages the Fund and the extent and quality of the resources, including human resources, brought to bear by the Manager. The Trustees evaluated the Manager's record with respect to regulatory compliance and compliance with the investment policies of the Fund and other funds of the Trust. The Trustees also evaluated the procedures of the Manager designed to fulfill the Manager's fiduciary duty to the Fund with respect to possible conflicts of interest, including the Manager's code of ethics (regulating the personal trading of its officers and employees), the procedures by which the Manager allocates trades among its investment advisory clients, the systems in place to ensure compliance with the foregoing, and the record of the Manager in these matters. The Trustees also received information concerning the Manager's practices with respect to the execution of portfolio transactions. Finally, the Trustees also considered the Manager's practices and record with respect to the resolution of trading, net asset value determination, and other similar errors.
The Trustees considered the scope of the services provided by the Manager to the Fund under the investment management agreement. The Trustees noted that legal counsel had advised that, in their experience, the standard of care set forth in the investment management agreement was typical for mutual fund investment management agreements. The Trustees noted that the scope of the Manager's services to the Fund was consistent with the Fund's operational requirements, including, in addition to seeking to achieve the Fund's investment objective, compliance with the Fund's investment restrictions, tax and reporting requirements, and shareholder services. The Trustees considered the Manager's oversight of non-advisory services provided by persons other than the Manager, considering, among other things, the Fund's total expenses, the Manager's reimbursement of certain expenses pursuant to its contractual expense reimbursement arrangement in place with the Fund, and the reputation of the Fund's other service providers.
After reviewing these factors, among others, the Trustees concluded, within the context of their overall conclusions regarding the agreement, that the nature, extent, and quality of services provided supported the renewal of the Fund's investment management agreement.
Following their review, on June 10, 2010, the Independent Trustees in their capacity as such, and then all Trustees voting together, based on their evaluation of all factors that they deemed to be material, including those factors described above, approved the renewal of the Fund's investment management agreement for an additional twelve-month period commencing June 30, 2010.
44
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Fund Expenses
August 31, 2010 (Unaudited)
Expense Examples: The following information is in relation to expenses for the six month period ended August 31, 2010.
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including redemption fees; and (2) ongoing costs. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, March 1, 2010 through August 31, 2010.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled "Net Expense Incurred" to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Annualized Net Expense Ratio | Beginning Account Value | Ending Account Value | Net Expense Incurred* | ||||||||||||||||
1) Actual | 0.03 | % | $ | 1,000.00 | $ | 1,040.80 | $ | 0.15 | |||||||||||
2) Hypothetical | 0.03 | % | $ | 1,000.00 | $ | 1,025.05 | $ | 0.15 |
* Expenses are calculated using the annualized net expense ratio (including interest expense) for the six months ended August 31, 2010, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
45
Item 2. Code of Ethics.
Not applicable to this filing.
Item 3. Audit Committee Financial Expert.
Not applicable to this filing.
Item 4. Principal Accountant Fees and Services.
Not applicable to this filing.
Item 5. Audit Committee of Listed Registrants.
Not applicable to this filing.
Item 6. Schedule of Investments.
The complete schedule of investments for each series of the registrant is included as part of the semiannual reports to shareholders filed under Item 1 of this Form N-CSR.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable to this registrant.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable to this registrant.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable to this registrant.
Item 10. Submission of Matters to a Vote of Security Holders.
There were no material changes to the procedures by which shareholders may recommend nominees to the registrant’s Board of Trustees.
Item 11. Controls and Procedures.
(a) The registrant’s Principal Executive Officer and Principal Financial Officer have concluded as of a date within 90 days of the filing of this report, based on their evaluation of the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) that the design and operation of such procedures are effective to provide reasonable assurance that information required to be disclosed by the registrant on Form N-CSR is recorded, processed, summarized, and reported within the time periods specified in the Commission’s rules and forms.
(b) There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
Item 12. Exhibits.
(a)(1) Not applicable to this filing.
(a)(2) Certifications by the Principal Executive Officer and Principal Financial Officer of the registrant as required by Rule 30a-2(a) under the Investment Company Act of 1940 are attached hereto as EX-99.CERT.
(a)(3) Not applicable to this registrant.
(b) Certifications by the Principal Executive Officer and Principal Financial Officer of the registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and required by Rule 30a-2(b) under the Investment Company Act of 1940 are attached hereto as EX-99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) | GMO Trust |
| |
|
|
|
|
By (Signature and Title): | /s/ J.B. Kittredge |
| |
| J.B. Kittredge, Chief Executive Officer |
| |
|
|
|
|
| Date: | November 4, 2010 |
|
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By (Signature and Title): | /s/ J.B. Kittredge |
| |
| J.B. Kittredge, Principal Executive Officer |
| |
|
|
| |
| Date: | November 4, 2010 |
|
|
|
|
|
|
|
|
|
By (Signature and Title): | /s/ Sheppard N. Burnett |
| |
| Sheppard N. Burnett, Principal Financial Officer |
| |
|
|
|
|
| Date: | November 4, 2010 |
|
|
|
|
|