<PAGE>
Securities Act File No. 333-3013
Investment Company Act File No. 811-7607
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /___/
PRE-EFFECTIVE AMENDMENT No.1 /X/
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /___/
AMENDMENT No. 1 /X/
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MORGAN STANLEY UNIVERSAL FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
1221 Avenue of the Americas, New York, New York 10020
(Address of Principal Executive Office)
Registrant's Telephone Number (800) 548-7786
Harold J. Schaaff, Jr., Esquire
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas, New York, New York 10020
(Name and Address of Agent for Service)
--------------
Copies to:
Mr. Warren J. Olsen Richard W. Grant, Esquire
Morgan Stanley Asset Management Inc. Morgan, Lewis & Bockius LLP
1221 Avenue of the Americas 2000 One Logan Square
New York, NY 10020 Philadelphia, PA 19103
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Approximate Date of Proposed Public Offering: As soon as practicable
after effective date of this Registration Statement.
- --------------------------------------------------------------------------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
Title of Securities Amount Being Amount of
Being Registered Registered Registration Fee
- ------------------------- ------------ ----------------
Common Stock, par value Indefinite* $500**
$.001 per share
- --------------------------------------------------------------------------------
* Registrant elects to register an indefinite number of shares of its
Common Stock, par value $.001 per share, pursuant to Rule 24f-2 under
the Investment Company Act of 1940.
** Registrant has paid the Registration Fee upon the filing of its
Registration Statement.
--------------
Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
CROSS REFERENCE SHEET
Part A - Information Required in a Prospectus
- -------- ------------------------------------
Form N-1A
Item Number Location in Prospectus for the Money Market, Fixed Income, High
- ----------- Yield, Core Equity, Growth, Value, Mid Cap Growth, Mid Cap Value,
U.S. Real Estate, International Fixed Income, Emerging Markets
Debt, Global Equity, International Magnum, Emerging Markets Equity,
Asian Equity, Balanced and Multi-Asset-Class Portfolios
-------------------------------------------------------------------
Item 1. Cover Page -- Cover Page
Item 2. Synopsis -- The Fund At a Glance
Item 3. Condensed Financial Information -- *
Item 4. General Description of Registrant -- Portfolio Summaries; The
Portfolio's Investments; Securities and Investment Techniques;
Fundamental Investment Limits
Item 5. Management of the Fund -- Management; Management of the Fund
Item 5A. Management's Discussion of Fund Performance -- *
Item 6. Capital Stock and Other Securities -- Management of the Fund; Account
Policies
Item 7. Purchase of Securities Being Offered -- Cover Page; Offering of Shares;
Management of the Fund; Account Policies
Item 8. Redemption or Repurchase -- Account Policies
Item 9. Pending Legal Proceedings -- *
___________________
* Omitted since the answer is negative or the Item is not applicable.
<PAGE>
Part B - Information Required in a Statement of Additional Information
- -------- -------------------------------------------------------------
Form N-1A
Item Number Location in Statement of Additional Information
- ----------- -----------------------------------------------
Item 10. Cover Page -- Cover Page
Item 11. Table of Contents -- Cover Page
Item 12. General Information and History -- *
Item 13. Investment Objectives and Policies -- Securities and Investment
Techniques; Investment Limitations; Determining Maturities of Certain
Instruments; Description of Securities and Ratings
Item 14. Management of the Fund -- Management of the Fund
Item 15. Control Persons and Principal Holders of Securities -- Management of
the Fund; General Information
Item 16. Investment Advisory and Other Services -- Management of the Fund;
General Information
Item 17. Brokerage Allocation and Other Practices -- *
Item 18. Capital Stock and Other Securities -- General Information
Item 19. Purchase, Redemption and Pricing of Securities Being Offered --
Purchase of Shares; Redemption of Shares; Net Asset Value for the
Money Market Fund; General Information
Item 20. Tax Status -- Taxes; Special Tax Considerations Relating to Foreign
Investments; Taxes and Foreign Shareholders
Item 21. Underwriters -- Management of the Fund
Item 22. Calculation of Performance Data -- Performance Information
Item 23. Financial Statements -- Financial Statements
Part C - Other Information
- -------- -----------------
Part C contains the information required by the Items of the Form N-1A
under such Items as set forth in the Form N-1A.
- ------------------------------
* Omitted since the answer is negative or the Item is not applicable.
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
MORGAN STANLEY ASSET MANAGEMENT INC.
MILLER ANDERSON & SHERRERD, LLP
MORGAN STANLEY UNIVERSAL FUNDS, INC. (THE "FUND") IS A MUTUAL FUND DESIGNED TO
PROVIDE INVESTMENT VEHICLES FOR VARIABLE ANNUITY CONTRACTS AND VARIABLE LIFE
INSURANCE POLICIES AND FOR CERTAIN TAX-QUALIFIED INVESTORS. THE FUND OFFERS 17
PORTFOLIOS MANAGED BY EITHER MORGAN STANLEY ASSET MANAGEMENT INC. OR MILLER
ANDERSON & SHERRERD, LLP, THEREBY MAKING AVAILABLE IN A SINGLE PRODUCT THE
COMBINED STRENGTH OF THESE LEADING INVESTMENT MANAGEMENT FIRMS.
THIS PROSPECTUS CONTAINS IMPORTANT INFORMATION ABOUT THE FUND'S INVESTMENTS AND
SERVICES. YOU SHOULD READ IT BEFORE INVESTING, AND KEEP IT ON FILE FOR FUTURE
REFERENCE ALONG WITH THE PROSPECTUS OF THE SEPARATE ACCOUNT OF THE SPECIFIC
INSURANCE PRODUCT WHICH ACCOMPANIES THIS PROSPECTUS.
A STATEMENT OF ADDITIONAL INFORMATION DATED OCTOBER 1, 1996, HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC") AND IS INCORPORATED
HEREIN BY REFERENCE, AND, THEREFORE, LEGALLY FORMS A PART OF THE PROSPECTUS.
FOR A FREE COPY CONTACT THE FUND OR YOUR INSURANCE COMPANY.
SHARES OF EACH PORTFOLIO MAY BE PURCHASED ONLY BY THE SEPARATE ACCOUNTS OF
INSURANCE COMPANIES FOR THE PURPOSE OF FUNDING VARIABLE ANNUITY CONTRACTS AND
VARIABLE LIFE INSURANCE POLICIES AND BY CERTAIN TAX-QUALIFIED INVESTORS.
PARTICULAR PORTFOLIOS MAY NOT BE AVAILABLE IN YOUR STATE DUE TO VARIOUS
INSURANCE REGULATIONS. PLEASE CHECK WITH YOUR INSURANCE COMPANY FOR AVAILABLE
PORTFOLIOS. INCLUSION OF A PORTFOLIO IN THIS PROSPECTUS WHICH IS NOT AVAILABLE
IN YOUR STATE IS NOT TO BE CONSIDERED A SOLICITATION.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THE FUND'S PORTFOLIOS:
U.S. FIXED INCOME PORTFOLIOS
Money Market High Yield
Fixed Income
U.S. EQUITY PORTFOLIOS
Core Equity Mid Cap Growth
Growth Mid Cap Value
Value U.S. Real Estate
GLOBAL PORTFOLIOS
International Fixed Income International Magnum
Emerging Markets Debt Emerging Markets Equity
Global Equity Asian Equity
ASSET ALLOCATION PORTFOLIOS
Balanced Multi-Asset-Class
AN INVESTMENT IN ANY PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. YOU MAY RECEIVE MORE OR LESS THAN YOU INVESTED WHEN YOU REDEEM YOUR
SHARES. THE MONEY MARKET PORTFOLIO ATTEMPTS TO MAINTAIN A STABLE $1.00 NET
ASSET VALUE PER SHARE BUT THERE CAN BE NO ASSURANCE THAT IT WILL BE ABLE TO DO
SO.
THE HIGH YIELD AND EMERGING MARKETS DEBT PORTFOLIOS MAY INVEST WITHOUT
LIMITATION IN LOWER-QUALITY DEBT SECURITIES, SOMETIMES CALLED "JUNK BONDS." YOU
SHOULD CONSIDER THAT THESE SECURITIES CARRY GREATER RISKS, SUCH AS THE RISK OF
DEFAULT, THAN OTHER DEBT SECURITIES. REFER TO "SECURITIES AND INVESTMENT
TECHNIQUES--HIGH YIELD SECURITIES" FOR FURTHER INFORMATION.
THE EMERGING MARKETS DEBT AND EMERGING MARKETS EQUITY PORTFOLIOS MAY INVEST IN
EQUITY SECURITIES OF RUSSIAN COMPANIES. RUSSIA'S SYSTEM OF SHARE REGISTRATION
AND CUSTODY INVOLVES CERTAIN RISKS OF LOSS THAT ARE NOT NORMALLY ASSOCIATED
WITH INVESTMENTS IN OTHER SECURITIES MARKETS. SEE "SECURITIES AND INVESTMENT
TECHNIQUES--RUSSIAN SECURITIES."
Prospectus dated October 1, 1996
MORGAN STANLEY UNIVERSAL FUNDS, INC.
P.O. Box 2798, Boston, MA 02208-2798
<PAGE>
THE FUND
The Fund is an open-end management investment company, or mutual fund. At
present it offers 17 separate investment portfolios (each, a "Portfolio"), each
with a distinct investment objective. The following pages describe the types of
securities and investment techniques each Portfolio uses to seek its objective,
as well as the risks inherent in those types of securities and investment
techniques.
MANAGEMENT
Morgan Stanley Asset Management Inc. ("MSAM") advises the following Portfolios:
Money Market Global Equity
Growth International Magnum
U.S. Real Estate Emerging Markets Equity
Emerging Markets Debt Asian Equity
MSAM conducts a worldwide investment advisory business and currently (with its
affiliates other than MAS) manages assets of approximately $67.1 billion.
Miller Anderson & Sherrerd, LLP ("MAS") advises the following Portfolios:
Fixed Income Mid Cap Value
High Yield International Fixed Income
Core Equity Balanced
Value Multi-Asset-Class
Mid Cap Growth
MAS's institutional investment advisory business was established in 1969 and
recently became an affiliate of MSAM. MAS currently manages assets of
approximately $36.4 billion.
OFFERING OF SHARES
The Fund is intended to be a funding vehicle for all types of variable annuity
contracts and variable life insurance policies offered by various insurance
companies. Shares of the Fund may also be offered to certain tax-qualified
investors, including qualified pension and retirement plans. It is possible
that material conflicts among the various insurance companies and other
investors in the Fund may arise. The Fund's Board of Directors will monitor
events in order to identify the existence of any material conflicts and to
determine what action, if any, should be taken in response to any such
conflicts.
PROSPECTUS OUTLINE
- ------------------
PORTFOLIO SUMMARIES 3
- -------------------
For each Portfolio, the investment objective and a summary of strategy,
potential investors, and investment characteristics and risks.
THE PORTFOLIOS' INVESTMENTS 7
- ---------------------------
A more detailed review of how each Portfolio invests.
SECURITIES AND INVESTMENT TECHNIQUES 15
- ------------------------------------
More information about the types of investment strategies that may be
common to some or all of the Portfolios and information about investment risks
and limitations.
FUNDAMENTAL INVESTMENT LIMITS 31
- -----------------------------
Certain policies that may be changed only by shareholders.
MANAGEMENT OF THE FUND 31
- ----------------------
General information on organization and operations of the Fund, including
details about MSAM, MAS and the individual portfolio managers, as well as fees,
expenses and performance calculations.
ACCOUNT POLICIES 40
- ----------------
Information on net asset value calculation, income and gain distributions,
taxes and share purchases and redemptions.
APPENDIX 41
- --------
Summaries of ratings of the Fixed Income Securities in which the
Portfolios may invest.
2
<PAGE>
PORTFOLIO SUMMARIES
- -------------------
Certain investment terms used below have initial capital letters ("Money Market
Instruments," for example). These terms are further described under "Securities
and Investment Techniques" below.
U.S. FIXED INCOME PORTFOLIOS
MONEY MARKET PORTFOLIO
OBJECTIVE AND STRATEGY: Maximize current income and preserve capital while
maintaining high levels of liquidity through investing in high quality Money
Market Instruments with effective maturities of 397 days or less. While the
Portfolio is managed with the goal of keeping its share price stable at $1.00,
there can be no assurance this goal will be achieved. The rate of income will
vary from day-to-day, generally reflecting short-term interest rates.
INVESTOR PROFILE: The Portfolio may be appropriate for investors seeking to
earn income at current money market rates while preserving the value of their
investment.
RISK PROFILE: Low potential risk and reward. The Portfolio seeks a conservative
rate of return in exchange for capital preservation.
FIXED INCOME PORTFOLIO
OBJECTIVE AND STRATEGY: Above-average total return over a market cycle of three
to five years by investing primarily in a diversified portfolio of U.S.
Governments and Agencies, Corporate Bonds, Mortgage-Backed Securities ("MBSs"),
Foreign Bonds and other Fixed Income Securities and Derivatives. The
Portfolio's average weighted maturity will ordinarily exceed five years and
will usually be between five and fifteen years.
INVESTOR PROFILE: The Portfolio may be appropriate for investors seeking an
above-average return from a diversified portfolio of Fixed Income Securities.
RISK PROFILE: Moderate potential risk and reward. The Portfolio will focus on
medium- to high-quality investments and intermediate maturity. The level of
risk, and potential reward, depends on the quality and maturity of the
investments. The Portfolio's share price can be expected to vary inversely to
changes in prevailing interest rates. While securities with longer maturities
tend to produce higher yields, the prices of longer maturity securities are
also subject to greater market fluctuations as a result of changes in interest
rates.
HIGH YIELD PORTFOLIO
OBJECTIVE AND STRATEGY: Above-average total return over a market cycle of three
to five years by investing primarily in a diversified portfolio of High Yield
Securities, including Corporate Bonds and other Fixed Income Securities and
Derivatives. High Yield Securities are rated below investment grade and are
commonly referred to as "junk bonds." The Portfolio's average weighted maturity
will ordinarily exceed five years and will usually be between five and fifteen
years.
INVESTOR PROFILE: The Portfolio may be appropriate for long-term, aggressive
investors who understand the potential risks and rewards of investing in lower-
quality securities, including defaulted securities, and are willing to accept
their greater price movements and credit risks.
RISK PROFILE: High potential risk and reward. Securities rated below investment
grade, as well as unrated securities of lower quality usually entail greater
risk (including the possibility of default or bankruptcy of the issuers), and
generally involve greater price volatility and risk of principal and income,
and may be less liquid, than securities in higher rated categories.
U.S. EQUITY PORTFOLIOS
CORE EQUITY PORTFOLIO
OBJECTIVE AND STRATEGY: Above-average total return over a market cycle of three
to five years by investing primarily in a diversified portfolio of Common
Stocks and other Equity Securities of companies that are deemed by MAS to have
earnings growth potential greater than the economy in general and greater than
the expected rate of inflation.
INVESTOR PROFILE: The Portfolio may be appropriate for investors seeking an
above-average return from Common Stocks of companies that represent a well-
diversified exposure to the U.S. stock market.
RISK PROFILE: Moderate to high potential risk and reward. The Portfolio's share
price will fluctuate with changes in the stock market and economic conditions.
GROWTH PORTFOLIO
OBJECTIVE AND STRATEGY: Long-term capital appreciation by investing primarily
in Equity Securities of medium and large capitalization companies that, in
MSAM's judgment, provide above-average potential for capital growth.
INVESTOR PROFILE: The Portfolio is designed for those who want to be invested
in the stock market for its long-term growth potential and who want to
diversify over a large number of individual stocks.
3
<PAGE>
RISK PROFILE: Moderate to high potential risk and reward. An investor in the
Portfolio should be comfortable with the volatility of the U.S. stock market
and able to ride out market fluctuations in anticipation of greater long-term
growth.
VALUE PORTFOLIO
OBJECTIVE AND STRATEGY: Above-average total return over a market cycle of three
to five years by investing primarily in a diversified portfolio of Common
Stocks and other Equity Securities that are deemed by MAS to be relatively
undervalued based on various measures such as price/earnings ratios and
price/book ratios.
INVESTOR PROFILE: The Portfolio may be appropriate for investors seeking an
above-average return from Common Stocks of issuers with equity capitalizations
usually greater than $300 million that are deemed to be undervalued in the
marketplace.
RISK PROFILE: Moderate to high potential risk and reward. The Portfolio's share
price will fluctuate with changes in market, economic and foreign currency
exchange conditions.
MID CAP GROWTH PORTFOLIO
OBJECTIVE AND STRATEGY: Long-term capital growth by investing primarily in
Common Stocks and other Equity Securities of issuers with equity
capitalizations in the range of the companies represented in the Standard &
Poor's Ratings Group ("S&P") MidCap 400 Index. Such range is currently $100
million to $8 billion but the range fluctuates over time with changes in the
equity market.
INVESTOR PROFILE: The Portfolio may be appropriate for investors who are
willing to ride out stock market fluctuations in pursuit of potentially greater
long-term returns and who understand that investments in small- and medium-
size companies may result in greater price fluctuations than the stock market
in general.
RISK PROFILE: High potential risk and reward. The Portfolio's share price will
fluctuate with changes in market and economic conditions.
MID CAP VALUE PORTFOLIO
OBJECTIVE AND STRATEGY: Above-average total return over a market cycle of three
to five years by investing in Common Stocks and other Equity Securities of
issuers with equity capitalizations in the range of the companies represented
in the S&P MidCap 400 Index. Such range is currently $100 million to $8 billion
but the range fluctuates over time with changes in the equity market.
INVESTOR PROFILE: The Portfolio may be appropriate for investors seeking an
above-average total return from Common Stocks of medium-size companies that are
deemed to be undervalued in the marketplace.
RISK PROFILE: High potential risk and reward. The Portfolio's share price will
fluctuate with changes in market and economic conditions.
U.S. REAL ESTATE PORTFOLIO
OBJECTIVE AND STRATEGY: Above-average current income and long-term capital
appreciation by investing primarily in Equity Securities of U.S. and non U.S.
companies principally engaged in the U.S. real estate industry, including real
estate investment trusts ("REITs").
INVESTOR PROFILE: The Portfolio may be appropriate for investors who seek
above-average current income and long-term capital appreciation by investing in
Equity Securities of U.S. and non U.S. companies principally engaged in the
U.S. real estate industry, including REITs.
RISK PROFILE: High potential risk and reward. In addition to general risks
involved in equity investments, including fluctuations in the stock market and
changes in the economy, the Portfolio's investments may be subject to the risks
associated with the direct ownership of real estate and direct investments of
REITs.
GLOBAL PORTFOLIOS
INTERNATIONAL FIXED INCOME PORTFOLIO
OBJECTIVE AND STRATEGY: Above-average total return over a market cycle of three
to five years by investing primarily in investment grade Foreign Bonds and
other Fixed Income Securities of foreign issuers and Derivatives. The
Portfolio's average weighted maturity will ordinarily exceed five years and
will usually be between three and fifteen years.
INVESTOR PROFILE: The Portfolio may be appropriate for investors seeking an
above-average return from high-grade Foreign Bonds and willing to accept
currency risk.
RISK PROFILE: Moderate to high potential risk and reward. The Portfolio's share
price can be expected to vary inversely to changes in prevailing interest
rates. In addition, the performance of the Portfolio will be affected by
Foreign Currency values, the political and regulatory environment, greater
volatility of securities exchanges and overall political and economic factors
in the countries in which the Portfolio invests.
EMERGING MARKETS DEBT PORTFOLIO
OBJECTIVE AND STRATEGY: High total return by investing primarily in Fixed
Income Securities of government and government-related issuers located in
emerging market countries, which securities provide a high level of current
income, while at the same time holding the potential for capital appreciation
if the perceived creditworthiness of the issuer improves due to improving
economic, financial, political, social or other conditions in the country in
which the issuer is located.
INVESTOR PROFILE: The Portfolio is designed for those who seek a high level of
current income from Emerging Market Country Securities that are Fixed Income
Securities, while holding the potential for capital appreciation.
4
<PAGE>
RISK PROFILE: Very high potential risk and reward. The Portfolio's performance
is subject to high risk and will not be required to meet a minimum rating
standard and may purchase securities that are not rated for creditworthiness by
any internationally recognized credit rating organization. These types of debt
obligations are predominantly speculative with respect to the capacity to pay
interest and repay principal in accordance with their terms and generally
involve a greater risk of default and of volatility in price than securities in
higher rating categories. In addition, international investing involves
different or increased risks. The performance of the Portfolio will be affected
by Foreign Currency values, the political and regulatory environment, greater
volatility of securities exchanges, risks in connection with registration,
clearing and settlement of securities transactions and overall political and
economic factors in the countries in which the Portfolio invests.
GLOBAL EQUITY PORTFOLIO
OBJECTIVE AND STRATEGY: Long-term capital appreciation by investing primarily
in Equity Securities of issuers throughout the world, including U.S. issuers,
using an approach that is oriented to the selection of individual stocks that
the Adviser believes are undervalued.
INVESTOR PROFILE: The Portfolio may be appropriate for investors who seek to
pursue their investment goals in markets throughout the world, including the
United States. By including international investments in their portfolio,
investors can achieve additional diversification and participate in growth
opportunities around the world.
RISK PROFILE: High potential risk and reward. In addition to general risks
involved in equity investments, including fluctuations in the stock market and
changes in the economy, international investing involves different or increased
risks. The performance of the Portfolio will be affected by Foreign Currency
values, the political and regulatory environment, greater volatility of
securities exchanges and overall political and economic factors in the
countries in which the Portfolio invests.
INTERNATIONAL MAGNUM PORTFOLIO
OBJECTIVE AND STRATEGY: Long-term capital appreciation by investing primarily
in Equity Securities of non-U.S. issuers in accordance with the EAFE country
(defined herein) weightings determined by MSAM.
INVESTOR PROFILE: The Portfolio may be appropriate for investors who seek to
pursue their investment goals in markets outside the United States. By
including international investments in their portfolio, investors can achieve
additional diversification and participate in growth opportunities around the
world.
RISK PROFILE: High potential risk and reward. In addition to general risks
involved in equity investments, including fluctuations in the stock market and
changes in the economy, international investing involves different or increased
risks. The performance of the Portfolio will be affected by Foreign Currency
values, the political and regulatory environment, greater volatility of
securities exchanges and overall political and economic factors in the
countries in which the Portfolio invests.
EMERGING MARKETS EQUITY PORTFOLIO
OBJECTIVE AND STRATEGY: Long-term capital appreciation by investing primarily
in Equity Securities of emerging market country issuers with a focus on those
in which MSAM believes the economies are developing strongly and in which the
markets are becoming more sophisticated.
INVESTOR PROFILE: The Portfolio may be appropriate for investors who seek to
achieve long-term capital appreciation by investing in Emerging Market Country
Securities. By including emerging market country investments in their
portfolio, investors can achieve additional diversification and participate in
growth opportunities in emerging market countries.
RISK PROFILE: Very high potential risk and reward. In addition to the general
risks involved in Equity Securities, including fluctuations in the stock market
and changes in the economy, international investing involves different or
increased risks. The performance of the Portfolio will be affected by Foreign
Currency values, the political and regulatory environment, the greater
volatility of securities exchanges and overall political and economic factors
in the countries in which the Portfolio invests.
ASIAN EQUITY PORTFOLIO
OBJECTIVE AND STRATEGY: Long-term capital appreciation by investing primarily
in Equity Securities of Asian issuers (excluding Japan) using an approach that
is oriented to the selection of individual stocks that the Adviser believes are
undervalued. The Portfolio intends to invest in Equity Securities that are
traded on recognized stock exchanges of countries in Asia and in Equity
Securities of companies organized under the laws of an Asian country whose
business is conducted principally in Asia.
INVESTOR PROFILE: The Portfolio may be appropriate for investors who seek to
pursue their investment goals in markets of Asian countries other than Japan.
RISK PROFILE: High potential risk and reward. In addition to general risks
involved in equity investments, international investing involves different or
increased risks. The performance of the Portfolio will be affected by Foreign
Currency values, the political and regulatory environment, greater volatility
of securities exchanges and overall political and economic factors in the
countries in which the Portfolio invests.
5
<PAGE>
ASSET ALLOCATION PORTFOLIOS
BALANCED PORTFOLIO
OBJECTIVE AND STRATEGY: Above-average total return over a market cycle of three
to five years by investing primarily in a diversified portfolio of Equity and
Fixed Income Securities and Derivatives. The average weighted maturity of the
fixed income portion of the Portfolio ordinarily will exceed five years and
will usually be between three and fifteen years.
INVESTOR PROFILE: The Portfolio may be appropriate for investors seeking an
above-average return from a diversified portfolio of both Equity Securities and
a wide range of Fixed Income Securities.
When MAS judges the relative outlook for each asset class to be neutral, the
mix of assets will be 60% Equity Securities and 40% Fixed Income Securities,
although the Portfolio may hold between 45-75% Equity Securities and between
25-55% Fixed Income Securities.
The Adviser will continually review the Portfolio's holdings and rebalance the
securities held by the Portfolio to attempt to maintain the appropriate asset
mix.
RISK PROFILE: Moderate potential risk and reward. The Portfolio's equity
investments will fluctuate with changes in the stock market and changes in the
economy. The value of the Portfolio's Fixed Income Securities can be expected
to vary inversely to changes in prevailing interest rates. While securities
with longer maturities tend to produce higher yields, the prices of longer
maturity securities are also subject to greater market fluctuations as a result
of changes in interest rates.
MULTI-ASSET-CLASS PORTFOLIO
OBJECTIVE AND STRATEGY: Above-average total return over a market cycle of three
to five years by investing primarily in a diversified portfolio of Equity and
Fixed Income Securities (including High Yield Securities) of domestic and
foreign issuers and Derivatives. The average weighted maturity of the fixed
income portion of the Portfolio will ordinarily exceed five years and will
usually be between three and fifteen years.
INVESTOR PROFILE: The Portfolio may be appropriate for investors seeking an
above-average return from a diversified portfolio of both Equity Securities of
domestic and foreign issuers and a wide range of domestic and foreign Fixed
Income Securities ranging from high yield to high grade.
When MAS judges the relative outlook for each asset class to be neutral, the
mix of assets will be 50% in Equity Securities of domestic issuers, 14% in
Equity Securities of foreign issuers, 24% in Fixed Income Securities of
domestic issuers, 6% in Fixed Income Securities of foreign issuers, and 6% in
High Yield Securities. However, the normal ranges for these different asset
classes will be:
<TABLE>
<S> <C>
Equity Securities-domestic issuers 70%-30%
Equity Securities-foreign issuers 25%-5%
Fixed Income Securities-domestic issuers 60%-15%
Fixed Income Securities-foreign issuers 12%-0%
High Yield Securities 12%-0%
</TABLE>
The Adviser will continually review the Portfolio's holdings and actively
rebalance the securities held by the Portfolio.
RISK PROFILE: Moderate to high potential risk and reward. The Portfolio's
Equity Securities will fluctuate with changes in the stock market and changes
in the economy. The value of the Portfolio's Fixed Income Securities can be
expected to vary inversely to changes in prevailing interest rates. While
securities with longer maturities tend to produce higher yields, the prices of
longer maturity securities are also subject to greater market fluctuations as a
result of changes in interest rates. Securities rated below investment grade,
as well as unrated securities, usually entail greater risk (including the
possibility of default or bankruptcy of the issuers), and generally involve
greater price volatility and risk of principal and income, and may be less
liquid, than securities in higher rated categories. In addition, international
investing involves different or increased risks. The performance of the
Portfolio will be affected by currency values, the political and regulatory
environment, greater volatility of securities exchanges and overall political
and economic factors in the countries in which the Portfolio invests.
INVESTMENT CHARACTERISTICS AND RISKS
The value of each Portfolio's investments and the income they generate will
vary from day-to-day and generally reflect market conditions, interest rates,
and other company, political, or economic news both in the United States and
abroad.
Each Portfolio spreads investment risk by limiting its holdings in any one
company or industry. Nevertheless, each Portfolio, other than the Money Market
Portfolio, will experience price volatility the extent of which will be
affected by the types of securities and techniques the particular Portfolio
uses. (The Money Market Portfolio expects to maintain a net asset value ("NAV")
of $1.00 per share but there can be no assurance of that result.) In the short
term, stock prices can fluctuate dramatically in response to these factors.
Over time, however, stocks have shown greater growth potential than other types
of securities. The prices of bonds also fluctuate and generally move in the
opposite direction from interest rates.
Investments in foreign securities may involve risks in addition to those of
U.S. investments. The performance of the Portfolios investing in foreign
securities will be affected by foreign currency values, the political and
regulatory
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environment, and overall economic factors in the countries in which investments
are made.
Because the International Fixed Income, International Magnum, U.S. Real Estate,
Emerging Markets Equity and Emerging Markets Debt Portfolios are non-
diversified portfolios and are permitted greater flexibility to invest their
assets in the obligations of a single issuer, they are exposed to increased
risk of loss if such an investment underperforms expectations. See "Non-
Diversified Status" in this Prospectus and "Investment Limitations" in the
Statement of Additional Information ("SAI").
Investments in securities rated below investment grade, sometimes called high
risk or High Yield Securities or junk bonds, carry a high degree of risk and
are considered speculative. MSAM and MAS may use various investment techniques
to hedge risks, including the use of Derivatives, but there is no guarantee
that these strategies will work as intended. When Portfolio shares are
redeemed, they may be worth more or less than their original cost. An
investment in any one Portfolio is not in itself a balanced investment plan. As
with any mutual fund, there is no assurance that a Portfolio will achieve its
goal.
Each Portfolio will be invested according to its investment strategy. However,
the Portfolios also have the ability to invest without limitation in high
quality Money Market Instruments or Temporary Investments for temporary,
defensive purposes. See "Securities and Investment Techniques" below.
THE PORTFOLIOS' INVESTMENTS
- ---------------------------
U.S. FIXED INCOME PORTFOLIOS
MONEY MARKET PORTFOLIO
The Portfolio seeks to realize maximum current income and preserve capital
while maintaining high levels of liquidity through investing in high-quality
Money Market Instruments which have effective maturities of 397 days or less.
The Portfolio's average maturity (on a dollar-weighted basis) will not exceed
90 days. The Portfolio is expected to maintain a net asset value of $1.00 per
share, but there can be no assurance of this result.
The Portfolio utilizes the amortized cost method of valuation in accordance
with regulations issued by the SEC. Accordingly, the Portfolio will limit its
Portfolio investments to those instruments that present minimal credit risks
and are of "eligible quality" as determined by the Adviser under the
supervision of the Board of Directors in accordance with regulations of the
SEC, as they may from time to time be amended. For this purpose, "eligible
quality" means a security rated in one of the two highest rating categories
(i) by at least two nationally recognized statistical rating organizations
(each an "NRSRO") assigning a rating to the security or issuer, or (ii) if only
one NRSRO has assigned a rating, by that NRSRO, or if the security is unrated,
of comparable quality as determined by the Adviser. The Money Market Portfolio
will not purchase any bank or corporate obligation unless it is rated at least
Aa or Prime-1 by Moody's Investors Service, Inc. ("Moody's") or AA or A-1 by
S&P, or it is unrated, and in the determination of the Adviser, it is of
comparable quality.
The Portfolio may invest in Repurchase Agreements, Reverse Repurchase
Agreements to a limited extent, may purchase securities on a When-Issued or
Delayed Delivery basis, and may lend its Portfolio securities. For additional
investment information, see "Securities and Investment Techniques" below.
FIXED INCOME PORTFOLIO
The Portfolio seeks to achieve above-average total return over a market cycle
of three to five years by investing in a diversified portfolio of U.S.
Governments and Agencies, Corporate Bonds, Foreign Bonds, MBSs of domestic
issuers, and other Fixed Income Securities and Derivatives. The Portfolio's
average weighted maturity will ordinarily exceed five years and will usually be
between five and fifteen years.
Under normal circumstances, the Portfolio will invest at least 65% of its total
assets in Fixed Income Securities, not more than 20% of which will be below
investment grade (commonly referred to as High Yield Securities or junk bonds).
Permissible investments include Municipals, Loan Participations and
Assignments, Investment Company Securities, When-Issued and Delayed Delivery
Securities and Derivatives, including but not limited to CMOs, Structured
Notes, Foreign Currency, Forward Foreign Currency Exchange Contracts, Futures,
Options and Swaps. For additional investment information, see "Securities and
Investment Techniques" below.
The Adviser's approach is to actively manage the maturity and duration
structure of the Portfolio in anticipation of long-term trends in interest
rates and inflation. Investments are diversified among a wide variety of Fixed
Income Securities in all market sectors. For other information about strategies
employed in managing the Portfolio, see "Maturity and Duration Management,"
"Value Investing," "Mortgage Investing," "High Yield Investing," "Foreign Fixed
Income Investing" and "Foreign Investing" in "Securities and Investment
Techniques" below.
HIGH YIELD PORTFOLIO
The Portfolio seeks above-average total return over a market cycle of three to
five years by investing at least 65% of its total assets in High Yield
Securities of U.S. and foreign issuers including Corporate Bonds and other
Fixed Income Securities. High Yield Securities are rated below investment grade
and are commonly referred to as high yield bonds or junk bonds. The Portfolio
expects to achieve its objective
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through maximizing current income, although the Portfolio may seek capital
growth opportunities when consistent with its objective. The Portfolio's
average weighted maturity ordinarily will exceed five years and will usually be
between five and fifteen years.
Under normal circumstances, the Portfolio will invest at least 65% of its total
assets in High Yield Securities. The Portfolio may also invest in investment
grade Fixed Income Securities of domestic and foreign issuers, including
Eastern European and Emerging Market Country Securities, and in Foreign
Currency, Investment Company Securities, Foreign Equities, Loan Participations
and Assignments, Municipals, Brady Bonds, Asset-Backeds, When-Issued or Delayed
Delivery Securities, and Derivatives, including but not limited to SMBSs, CMOs,
Structured Notes, Forwards, Futures, Options and Swaps. For risks associated
with High Yield Securities and additional information about investments, see
"Securities and Investment Techniques" below.
The Adviser's approach is to use equity and fixed income valuation techniques
and analyses of economic and industry trends to determine portfolio structure.
Individual securities are selected and monitored by fixed income portfolio
managers who specialize in credit analysis of Fixed Income Securities and use
in-depth financial analysis to uncover opportunities in undervalued issues. For
other information about strategies employed in managing the Portfolio, see
"Maturity and Duration Management," "Value Investing," "Mortgage Investing,"
"High Yield Investing," "Foreign Fixed Income Investing," "Foreign Investing"
and "Emerging Markets Investing" in "Securities and Investment Techniques"
below.
U.S. EQUITY PORTFOLIOS
CORE EQUITY PORTFOLIO
The Portfolio seeks above-average total return over a market cycle of three to
five years by investing primarily in Common and Preferred Stocks, Convertible
Securities, Rights and Warrants to purchase Common Stocks, American Depositary
Receipts ("ADRs") and other Equity Securities.
Under normal circumstances, the Portfolio will invest at least 65% of its total
assets in Equity Securities. The Portfolio may invest up to 5% of its total
assets in Foreign Equities (other than ADRs). The Portfolio may also invest in
U.S. Governments and Agencies, Corporate Bonds, Foreign Bonds, Zero Coupons,
Repurchase Agreements, Cash Equivalents, Foreign Currency, Investment Company
Securities, securities purchased on a When-Issued and Delayed Delivery basis,
and Derivatives, including but not limited to Forwards, Futures, Options and
Swaps. For additional information about investments, see "Securities and
Investment Practices" below.
The Adviser's approach entails selecting Equity Securities of companies which
are deemed by the Adviser to demonstrate long-term earnings growth that is
greater than the economy in general and greater than the expected rate of
inflation. The Adviser evaluates both short-term and long-term economic trends
and their impact on corporate profits and the relative value offered by
different sectors and securities within the equity markets. Individual
securities are selected based on fundamental business and financial factors
(such as earnings growth, financial position, price volatility, and dividend
payment records) and the measurement of those factors relative to the current
market price of the security.
GROWTH PORTFOLIO
The Portfolio seeks long-term capital appreciation by investing primarily in
growth-oriented Common and Preferred Stocks, Convertible Securities, Rights and
Warrants to purchase Common Stocks, Depositary Receipts and other Equity
Securities.
Under normal circumstances, the Portfolio will invest at least 65% of its total
assets in Equity Securities. The Portfolio may also invest in Foreign Currency,
Non-Publicly Traded Securities, Private Placements, Restricted Securities,
Money Market Instruments, Investment Company Securities, Repurchase Agreements,
When-Issued and Delayed Delivery Securities, other Fixed Income Securities and
Derivatives, including but not limited to Forwards, Futures, Options and Swaps,
and may lend its portfolio securities. For additional information about
investments, see "Securities and Investment Techniques" below.
The Portfolio will focus its investments on Equity Securities of medium and
large capitalization U.S. corporations and, subject to an overall 25% limit,
Foreign Equities. The Portfolio may invest in securities of foreign issuers
directly or in the form of Depositary Receipts. Since the Portfolio invests in
both Common Stocks and Convertible Securities (when due to market conditions,
it is more advantageous to purchase Convertible Securities), the risks of
investing in the general equity markets may be tempered to a degree by the
Portfolio's investments in Convertible Securities which are often not as
volatile as Common Stock.
The Adviser employs a flexible and eclectic investment process in pursuit of
the Portfolio's investment objectives. In selecting stocks for the Portfolio,
the Adviser concentrates on a universe of rapidly growing, high-quality
companies and lower, but accelerating, earnings growth situations. The
Adviser's universe of potential investments generally comprises companies with
market capitalizations of $500 million or more. The Adviser concentrates on
companies with strong, communicative managements and clearly defined strategies
for growth. In addition, the Adviser rigorously assesses company developments,
including changes in strategic direction, management focus and current and
likely future earnings results. Valuation is important to the Adviser
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<PAGE>
but is viewed in the context of prospects for sustainable earnings growth and
the potential for positive earnings surprises vis-a-vis consensus expectations.
The Portfolio may invest in any Equity Security that, in the Adviser's
judgment, provides above-average potential for capital appreciation.
In selecting investments for the Portfolio, the Adviser emphasizes individual
security selection. The Portfolio's investments will generally be diversified
by number of issues but concentrated sector positions may result from the
investment process. The Portfolio has a long-term investment perspective;
however, the Adviser may take advantage of short-term opportunities that are
consistent with the Portfolio's objective by selling recently purchased
securities which have increased in value.
VALUE PORTFOLIO
The Portfolio seeks above-average total return over a market cycle of three to
five years by investing primarily in Common and Preferred Stocks, Convertible
Securities, Rights and Warrants to purchase Common Stocks, ADRs and other
Equity Securities of companies with equity capitalizations usually greater than
$300 million.
Under normal circumstances, the Portfolio will invest at least 65% of its total
assets in Equity Securities. The Portfolio may invest up to 5% of its total
assets in Foreign Equities (other than ADRs). The Portfolio may also invest in
U.S. Governments and Agencies, Corporate Bonds, Foreign Bonds, Zero Coupons,
Repurchase Agreements, Cash Equivalents, Foreign Currency, Investment Company
Securities, When-Issued or Delayed Delivery Securities and Derivatives,
including but not limited to Forwards, Futures, Options and Swaps. For
additional information about investments, see "Securities and Investment
Techniques" below.
The Adviser's approach is to select Equity Securities that are deemed to be
undervalued relative to the stock market in general as measured by the S&P 500
Index ("S&P 500"), based on value measures such as price/earnings ratios and
price/book ratios, as well as fundamental research. While capital return will
be emphasized somewhat more than income return, the Portfolio's total return
will consist of both capital and income returns. Stocks that are deemed to be
under-valued in the marketplace have, under most market conditions, provided
higher dividend income returns than stocks that are deemed to have long-term
earnings growth potential which normally sell at higher price/earnings ratios.
MID CAP GROWTH PORTFOLIO
The Portfolio seeks long-term capital growth by investing primarily in Common
and Preferred Stocks, Convertible Securities, Rights and Warrants to purchase
Common Stocks, ADRs and other Equity Securities of issuers with equity
capitalizations in the range of the companies represented in the S&P MidCap 400
Index. Such range is currently $100 million to $8 billion but the range
fluctuates over time with changes in the equity market. Due to its emphasis on
long-term capital growth, dividend income for the Portfolio may be lower than
for the other equity Portfolios.
Under normal circumstances, the Portfolio will invest at least 65% of its total
assets in Equity Securities of smaller and medium-size companies. The Portfolio
may invest up to 5% of its total assets in Foreign Equities (other than ADRs).
The Portfolio may also invest in U.S. Governments and Agencies, Corporate
Bonds, Foreign Bonds, Zero Coupons, Repurchase Agreements, Cash Equivalents,
Foreign Currency, Investment Company Securities, When-Issued and Delayed
Delivery Securities and Derivatives, including but not limited to Forwards,
Futures, Options and Swaps. For additional information about investments, see
"Securities and Investment Techniques" below.
The Adviser uses a four-part process combining quantitative, fundamental and
valuation analysis with a strict sales discipline. Equity Securities that pass
an initial screen based on estimate revisions undergo detailed fundamental
research. Valuation analysis is used to eliminate the most overvalued
securities. Holdings are sold when their estimate-revision scores fall to
unacceptable levels, when fundamental research uncovers unfavorable trends, or
when their valuations exceed the level that the Adviser believes is reasonable
given their growth prospects.
MID CAP VALUE PORTFOLIO
The Portfolio seeks above-average total return over a market cycle of three to
five years by investing primarily in Common and Preferred Stocks, Convertible
Securities, Rights and Warrants to purchase Common Stocks, ADRs and other
Equity Securities of issuers with equity capitalizations in the range of the
companies represented in the S&P MidCap 400 Index. Such range is currently $100
million to $8 billion but the range fluctuates over time with changes in the
equity market.
Under normal circumstances, at least 65% of the Portfolio's total assets will
be invested in Equity Securities of mid-cap companies deemed to be undervalued.
The Portfolio may invest up to 5% of its total assets in Foreign Equities
(other than ADRs). The Portfolio may also invest in U.S. Governments and
Agencies, Corporate Bonds, Foreign Bonds, Zero Coupons, Repurchase Agreements,
Cash Equivalents, Foreign Currency, Investment Company Securities, When-Issued
and Delayed Delivery Securities and Derivatives, including but not limited to
Forwards, Futures, Options and Swaps. For additional information about
investments, see "Securities and Investment Techniques" below.
The Adviser's approach is to select Common Stocks that are deemed to be
relatively undervalued at the time of purchase based on certain proprietary
measures of value. The Portfolio will typically exhibit a lower price/earnings
value ratio than
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the S&P MidCap 400 Index. The Portfolio will be structured taking into account
the economic sector weights of the S&P MidCap 400 Index, with sector weights
normally being within 5% of the sector weights of the Index.
U.S. REAL ESTATE PORTFOLIO
The Portfolio seeks above-average current income and long-term capital
appreciation by investing primarily in Equity Securities of companies in the
U.S. real estate industry. Such Equity Securities include Common Stocks, shares
or units of beneficial interest of REITs, limited partnership interests in
master limited partnerships, Rights or Warrants to purchase Common Stocks,
Convertible Securities, and Preferred Stock.
Under normal circumstances, at least 65% of the Portfolio's total assets will
be invested in income producing Equity Securities of U.S. and non-U.S.
companies principally engaged in the U.S. real estate industry. For purposes of
the Portfolio's investment policies, a company is "principally engaged" in the
real estate industry if (i) it derives at least 50% of its revenues or profits
from the ownership, construction, management, financing or sale of residential,
commercial or industrial real estate or (ii) it has at least 50% of the fair
market value of its assets invested in residential, commercial or industrial
real estate. Companies in the real estate industry may include among others:
REITs, master limited partnerships that invest in interests in real estate,
real estate operating companies, and companies with substantial real estate
holdings, such as hotel companies, residential builders and land-rich
companies.
The Portfolio may also invest in Fixed Income Securities issued or guaranteed
by real estate companies or secured by real estate assets and rated, at time of
purchase, in one of the four highest rating categories by an NRSRO or
determined by the Adviser to be of comparable quality at the time of purchase,
high-quality Money Market Instruments, such as notes, certificates of deposit
or bankers' acceptances issued by domestic or foreign insurers, or high-grade
debt securities, consisting of corporate debt securities and U.S. Governments
and Agencies. Securities rated in the lowest category of Investment Grade
Securities have speculative characteristics. Investment Grade Securities are
securities that are rated in one of the four highest rating categories by an
NRSRO. The Portfolio may also invest in certain securities or obligations,
including Non-Publicly Traded Securities, Private Placements, Restricted
Securities, Repurchase Agreements, When-Issued and Delayed Delivery Securities,
Temporary Investments and Derivatives, including but not limited to Options and
Futures and may lend its Portfolio securities. For additional information about
the Portfolio's investments, see "Securities and Investment Techniques" and
"Non-Diversified Status" below.
The Adviser's approach is to invest in Equity Securities of companies that it
believes will provide a dividend yield that exceeds the composite dividend
yield of securities comprising the S&P 500. A substantial portion of the
Portfolio's total assets will be invested in Equity Securities of REITs. REITs
pool investors' funds for investment primarily in income producing real estate
or real estate related loans or interests, with certain tax advantages if
regulatory requirements are met. Generally, REITs can be classified as Equity
REITs, Mortgage REITs or Hybrid REITs. Equity REITs invest the majority of
their assets directly in real property and derive their income primarily from
rents and capital gains from appreciation realized through property sales.
Equity REITs are further categorized according to the types of real estate
securities they own, e.g., apartment properties, retail shopping centers,
office and industrial properties, hotels, health-care facilities, manufactured
housing and mixed-property types. Mortgage REITs invest the majority of their
assets in real estate mortgages and derive their income primarily from interest
payments. Hybrid REITs combine the characteristics of both Equity and Mortgage
REITs. The Portfolio will invest primarily in Equity REITs. A shareholder in
the Portfolio investing in REITs indirectly through the Portfolio will bear not
only his or her proportionate share of the expenses of the Portfolio, but also
indirectly, the management expenses of underlying REITs.
GLOBAL PORTFOLIOS
INTERNATIONAL FIXED INCOME PORTFOLIO
The Portfolio seeks above-average total return over a market cycle of three to
five years by investing primarily in investment grade Foreign Bonds and other
Fixed Income Securities of foreign issuers. Under normal circumstances, at
least 95% of the Fixed Income Securities in which the Portfolio will invest
will be Investment Grade Securities. The Portfolio's average weighted maturity
ordinarily will exceed five years and will usually be between three and fifteen
years. Under normal circumstances, the Portfolio will invest at least 80% of
its total assets in Fixed Income Securities of issuers in at least three
countries other than the United States, including Emerging Market Country
Securities and Eastern European Securities. For these purposes, Derivatives may
be used to represent country investments.
The Portfolio may also invest in U.S. Fixed Income Securities, Foreign
Currency, Investment Funds, Investment Company Securities, Loan Participations
and Assignments, Preferred Stock, When-Issued and Delayed Delivery Securities
and Derivatives, including but not limited to, Structured Notes, Forwards,
Futures, Options and Swaps. For additional information about investments, see
"Securities and Investment Techniques" below.
The Adviser's approach is to manage the duration, country, and currency
exposure of the Portfolio by combining fundamental research on relative values
with analyses of economic, interest-rate, and exchange-rate trends. The Adviser
will invest in MBSs and Corporate Bonds when it believes they offer the most
value, although most Foreign Currency denominated investments are in Fixed
Income Securities
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issued by governments or supranational organizations. For other information
about strategies employed in managing the Portfolio, see "Maturity and Duration
Management," "Value Investing," "Foreign Fixed Income Investing," "Non-
Diversified Status," "Emerging Markets Investing," "Mortgage Investing" and
"Foreign Investing" in "Securities and Investment Techniques" below.
EMERGING MARKETS DEBT PORTFOLIO
The Portfolio seeks high total return by investing primarily in Fixed Income
Securities of issuers in emerging market countries. Under normal circumstances,
the Portfolio will invest at least 65% of its total assets in government Fixed
Income Securities, including Loan Participations and Assignments between
governments and financial institutions, securities issued by government owned,
controlled or sponsored entities and securities of entities organized to
restructure outstanding debt of such issuers.
The Portfolio may also invest in Fixed Income Securities of corporate issuers
located in or organized under the laws of emerging market countries, Fixed
Income Securities customarily referred to as "Brady Bonds" (bonds created
through the exchange of existing commercial bank loans to foreign entities for
new obligations in connection with debt restructuring under a plan introduced
by former U.S. Secretary of the Treasury Nicholas F. Brady), Zero Coupon, Pay-
In-Kind or Deferred Payment Securities, ADRs, Foreign Currency, Investment
Company Securities, Investment Funds, Loan Participations and Assignments,
Money Market Instruments, Repurchase Agreements, Reverse Repurchase Agreements,
Temporary Investments, Non-Publicly Traded Securities, Private Placements,
Restricted Securities, Short Sales, When-Issued or Delayed Delivery Securities,
Derivatives, including but not limited to Forwards, Futures and Options, and
may lend its Portfolio securities. The Portfolio may also invest up to 5% of
its total assets in MBSs, CMOs and in other Asset-Backeds issued by non-
governmental entities, such as banks and other financial institutions. Also,
the Portfolio is authorized to borrow up to 33 1/3% of its total assets
(including the amount borrowed), less all liabilities and indebtedness other
than the borrowing, for investment purposes to increase the opportunity for
greater return and for payment of dividends. Such borrowings would constitute
leverage, which is a speculative characteristic. Leveraging will magnify
declines as well as increases in the NAV of the Portfolio's shares and
increases in the yield on the Portfolio's investments. For additional
information about investments, see "Securities and Investment Practices" and
"Non-Diversified Status" below.
The Adviser's approach is to invest the Portfolio's assets in Emerging Market
Country Fixed Income Securities that provide a high level of current income,
while at the same time holding the potential for capital appreciation if the
perceived creditworthiness of the issuer improves due to improving economic,
financial, political, social or other conditions in the country in which the
issuer is located. Currently, investing in many emerging market countries is
not feasible or may involve unacceptable political risks. Initially, the
Portfolio expects that its investments in Emerging Market Country Fixed Income
Securities will be made primarily in some or all of the following emerging
market countries:
<TABLE>
<S> <C> <C>
Algeria India Philippines
Argentina Indonesia Poland
Brazil Ivory Coast Portugal
Bulgaria Jamaica Russia
Chile Jordan Slovakia
China Malaysia South Africa
Colombia Mexico Thailand
Costa Rica Morocco Trinidad &
Czech Republic Nicaragua Tobago
Dominican Republic Nigeria Tunisia
Ecuador Pakistan Turkey
Egypt Panama Uruguay
Greece Paraguay Venezuela
Hungary Peru Zaire
</TABLE>
In selecting Emerging Market Country Fixed Income Securities for investment by
the Portfolio, the Adviser will apply a market risk analysis contemplating
assessment of factors such as liquidity, volatility, tax implications, interest
rate sensitivity, counterparty risks and technical market considerations. As
opportunities to invest in debt securities in other countries develop, the
Portfolio expects to expand and further diversify the universe of emerging
market countries in which it invests. While the Portfolio generally is not
restricted in the portion of its assets which may be invested in a single
country or region, it is anticipated that, under normal conditions, the
Portfolio's assets will be invested in issuers in at least three countries.
Interests in issuers organized and operated for the purpose of restructuring
the investment characteristics of instruments issued by governments, government
agencies or instrumentalities, political subdivisions or government owned,
controlled or sponsored entities involves the deposit with or purchase by an
entity of specific instruments and the issuance by that entity of one or more
classes of securities backed by, or representing interests in, the underlying
instruments. Certain issuers of such structured securities may be deemed to be
"Investment Companies" as defined in the Investment Company Act of 1940, as
amended (the "1940 Act"). As a result, the Portfolio's investment in such
securities may be limited by certain investment restrictions contained in the
1940 Act.
The Portfolio's investments in Fixed Income Securities of governments, and
government-related and restructured Fixed Income Securities are subject to
special risks, including the inability or unwillingness of the issuer to repay
principal and interest, requests to reschedule or restructure outstanding debt
and requests to extend additional loan amounts. The Portfolio may have limited
recourse in the event of default on such Fixed Income Securities. Also, the
registration, clearing and
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settlement of securities transactions in Russia are subject to significant
risks not normally associated with securities transactions in the United States
and other more developed markets. See "Securities and Investment Techniques --
Russian Securities."
The portion of the Portfolio's assets invested in securities denominated in
currencies other than the U.S. dollar is not restricted and will vary depending
on market conditions. Although the Portfolio is permitted to engage in
investment practices to hedge against currency exchange rate risks with respect
to such assets, the Portfolio may be limited in its ability to hedge against
these risks.
Emerging Market Country Fixed Income Securities in which the Portfolio may
invest will be subject to high risk and will not be required to meet a minimum
rating standard and may not be rated for creditworthiness by any
internationally recognized credit rating organization. These types of Fixed
Income Securities are predominantly speculative and generally involve a greater
risk of default and of volatility in price than securities in higher rating
categories. Ratings of Fixed Income Securities of foreign issuers, to the
extent that those ratings are undertaken, are related to evaluations of the
country in which the issuer of the instrument is located and generally take
into account the currency in which the Fixed Income Securities of a foreign
issuer is denominated.
GLOBAL EQUITY PORTFOLIO
The Global Equity Portfolio seeks long-term capital appreciation by investing
primarily in Common and Preferred Stocks, Convertible Securities, and Rights
and Warrants to purchase Common Stocks, Depositary Receipts and other Equity
Securities of issuers throughout the world, including issuers in the United
States and emerging market countries. Under normal circumstances, at least 65%
of the total assets of the Portfolio will be invested in Equity Securities. In
addition, under normal circumstances, at least 20% of the Portfolio's total
assets will be invested in the Common Stocks of U.S. issuers and the remaining
equity position will be invested in at least three countries other than the
United States. Although the Portfolio intends to invest primarily in securities
listed on stock exchanges, it will also invest in Equity Securities that are
traded over the counter or that are not admitted to listing on a stock exchange
or dealt in on a regulated market. As a result of the absence of a public
trading market, such securities may pose liquidity risks.
The Portfolio may also invest in Forwards, Money Market Instruments, Repurchase
Agreements and When-Issued or Delayed Delivery Securities, and may lend its
Portfolio securities. For additional information about investments, see
"Securities and Investment Techniques" below.
The Adviser's approach is oriented to individual stock selection and is value
driven. In selecting stocks for the Portfolio, the Adviser initially identifies
those stocks that it believes to be undervalued in relation to the issuer's
assets, cash flow, earnings and revenues, and then evaluates the future value
of such stocks by running the results of an in-depth study of the issuer
through a dividend discount model. In selecting investments, the Adviser
utilizes the research of a number of sources, including Morgan Stanley Capital
International, an affiliate of the Adviser located in Geneva, Switzerland.
Portfolio holdings are regularly reviewed and subjected to fundamental analysis
to determine whether they continue to conform to the Adviser's value criteria.
Equity Securities that no longer conform to such investment criteria will be
sold.
Although the Portfolio will not invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the
length of time they have been held. Investing in foreign countries and emerging
market countries is subject to additional risk, see "Securities and Investment
Techniques" below.
INTERNATIONAL MAGNUM PORTFOLIO
The Portfolio seeks long-term capital appreciation by investing primarily in
Common and Preferred Stocks, Convertible Securities, Rights or Warrants to
purchase Common Stocks and other Equity Securities of non-U.S. issuers in
accordance with the EAFE country (defined below) weightings determined by the
Adviser. The production of any current income is incidental to this objective.
The Equity Securities in which the Portfolio may invest may be denominated in
any currency.
The countries in which the Portfolio will invest are those comprising the
Morgan Stanley Capital International EAFE Index (the "Index"), which includes
Australia, Japan, New Zealand, most nations located in Western Europe and
certain developed countries in Asia, such as Hong Kong and Singapore (each an
"EAFE country," and collectively the "EAFE countries"). Under normal
circumstances, at least 65% of the total assets of the Portfolio will be
invested in Equity Securities of issuers in at least three different EAFE
countries.
Although the Portfolio intends to invest primarily in Equity Securities listed
on a stock exchange in an EAFE country, the Portfolio may invest without limit
in Equity Securities that are traded over the counter or that are not admitted
to listing on a stock exchange or dealt in on a regulated market. As a result
of the absence of a public trading market, such securities may pose liquidity
risks.
The Portfolio may also invest in Private Placements or initial public offerings
in the form of oversubscriptions, certain short-term (less than twelve months
to maturity) and medium-term (not greater than five years to maturity) debt
securities, Foreign Currency, Investment Company Securities, Temporary
Investments, Money Market Instruments, Non-Publicly Traded Securities, Private
Placements, Restricted Securities,
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Repurchase Agreements, Cash or Cash Equivalents, When-Issued or Delayed
Delivery Securities, and Derivatives, including but not limited to Forwards,
Futures (including stock index futures) and Options, and may lend its Portfolio
securities. The Portfolio may also invest up to 10% of its total assets in (i)
Investment Company Securities with investment objectives similar to that of the
Portfolio and (ii) for temporary purposes, money market funds and pooled
investment vehicles. In addition, for temporary defensive purposes during
periods in which the Adviser believes changes in economic, financial or
political conditions make it advisable, the Portfolio may invest up to 100% of
its total assets in such short-term and medium-term Fixed Income Securities or
hold cash. The Portfolio will not invest in Fixed Income Securities that are
not rated at least investment grade by either Moody's or S&P. Although the
Portfolio will not invest for short-term trading purposes, investment
securities may be sold from time to time without regard to the length of time
they have been held. For additional information about investments, see
"Securities and Investment Techniques" and "Non-Diversified Status" below.
The Adviser's approach is to establish regional allocation strategies. By
analyzing a variety of macroeconomic and political factors, the Adviser
develops fundamental projections on comparative interest rates, currencies,
corporate profits and economic growth among the various regions represented in
the Index. These projections will be used to establish regional allocation
strategies. Within these regional allocations, the Adviser then selects Equity
Securities among issuers of a region.
The Adviser's approach in selecting among Equity Securities within a region
comprised of EAFE countries is oriented towards individual stock selection and
is value driven. The Adviser identifies those Equity Securities which it
believes to be undervalued in relation to the issuer's assets, cash flow,
earnings and revenues. In selecting investments, the Adviser utilizes the
research of a number of sources, including Morgan Stanley Capital
International, an affiliate of the Adviser located in Geneva, Switzerland.
Portfolio holdings are regularly reviewed and subjected to fundamental analysis
to determine whether they continue to conform to the Adviser's investment
criteria. Equity Securities which no longer conform to such investment criteria
will be sold.
EMERGING MARKETS EQUITY PORTFOLIO
The Portfolio seeks long-term capital appreciation by investing primarily in
Common and Preferred Stocks, Convertible Securities, Rights and Warrants to
purchase Common Stocks, sponsored or unsponsored ADRs and other Equity
Securities of emerging market country issuers. Under normal circumstances, at
least 65% of the Portfolio's total assets will be invested in Emerging Market
Country Equity Securities.
The Portfolio may also invest in Fixed Income Securities denominated in the
currency of an emerging market country or issued or guaranteed by an emerging
market country company or the government of an emerging market country, Equity
Securities or Fixed Income Securities of corporate or governmental issuers
located in industrialized countries, Foreign Currency, Investment Funds, Loan
Participations and Assignments, Money Market Instruments, Investment Company
Securities, Repurchase Agreements, Non-Publicly Traded Securities, Private
Placements, Restricted Securities, Temporary Investments When-Issued and
Delayed Delivery Securities, and Derivatives, including but not limited to
Forwards, Futures and Options and may engage in Loans of Portfolio Securities.
It is likely that many of the Fixed Income Securities in which the Portfolio
will invest will be unrated, and whether or not rated, such securities may have
speculative characteristics.
When deemed appropriate by the Adviser, the Portfolio may also invest up to 10%
of its total assets (measured at the time of the investment) in Fixed Income
Securities that are not Investment Grade Securities (commonly referred to as
High Yield Securities or junk bonds). For temporary defensive purposes, the
Portfolio may invest less than 65% of its total assets in Emerging Market
Country Equity Securities, in which case the Portfolio may invest in other
Equity Securities or may invest in Fixed Income Securities as described in
"Securities and Investment Techniques--Temporary Investments" below. The
Portfolio also has the ability to invest without limitation in high quality
Money Market Instruments or Temporary Investments for temporary defensive
purposes. For additional information about investments, see "Securities and
Investment Techniques" and "Non-Diversified Status" below.
The Adviser's approach is to focus the Portfolio's investments on those
emerging market countries in which it believes the economies are developing
strongly and in which the markets are becoming more sophisticated. There are
currently over 130 countries which, in the opinion of the Adviser, are
generally considered to be emerging or developing countries by the
international financial community, approximately 40 of which currently have
stock markets. Currently, investing in many emerging market countries is not
feasible or may involve unacceptable political risks.
The Portfolio intends to invest primarily in some or all of the following
emerging market countries:
<TABLE>
<S> <C> <C> <C>
Argentina Botswana Brazil Chile
China Colombia Greece Hong Kong
Hungary India Indonesia Jamaica
Jordan Kenya Malaysia Mexico
Nigeria Pakistan Peru Philippines
Poland Portugal Russia South Africa
South Korea Sri Lanka Taiwan Thailand
Turkey Venezuela Zimbabwe
</TABLE>
As markets in other countries develop, the Portfolio expects to expand and
further diversify the emerging market countries in which it invests. The
Portfolio does not intend to
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<PAGE>
invest in any security in a country where the currency is not freely
convertible to U.S. dollars, unless the Portfolio has obtained the necessary
governmental licensing to convert such currency or other appropriately licensed
or sanctioned contractual guarantees to protect such investment against loss of
that currency's external value, or the Portfolio has a reasonable expectation
at the time the investment is made that such governmental licensing or other
appropriately licensed or sanctioned guarantees would be obtained or that the
currency in which the security is quoted would be freely convertible at the
time of any proposed sale of the security by the Portfolio. The Adviser will
analyze assets, revenues and earnings of an issuer. In selecting industries and
particular issuers, the Adviser will evaluate costs of labor and raw materials,
access to technology, export of products and government regulation. Although
the Portfolio seeks to invest in larger companies, it may invest in small- and
medium-size companies that, in the Adviser's view, have potential for growth.
Emerging Market Country Securities pose greater liquidity risks and other risks
than securities of companies located in developed countries and traded in more
established markets. The Portfolio may not be able to hedge Foreign Currency
risk adequately. For a description of special considerations and certain risks
associated with investment in foreign issuers, see "Securities and Investment
Techniques." Also, the registration, clearing and settlement of securities
transactions in Russia are subject to significant risks not normally associated
with securities transactions in the United States and other more developed
markets. See "Securities and Investment Techniques--Russian Securities."
ASIAN EQUITY PORTFOLIO
The Portfolio seeks long-term capital appreciation by investing primarily in
Common and Preferred Stocks, Convertible Securities, Rights and Warrants to
purchase Common Stocks, Depositary Receipts and other Equity Securities that
are traded on recognized stock exchanges of the countries in Asia described
below and such Equity Securities of companies organized under the laws of any
such Asian country whose business is conducted principally in Asia ("Asian
Equity Securities"). The production of any current income is incidental to this
objective. The Portfolio does not intend to invest in Asian Equity Securities
that are principally traded in markets in Japan or in companies organized under
the laws of Japan. The Asian countries to be represented in the Portfolio,
which include the following countries, have the more established markets in the
region: Hong Kong, Singapore, Malaysia, Thailand, the Philippines and
Indonesia. The Portfolio may also invest in Common Stocks traded in markets in
Taiwan, South Korea, India, Pakistan, Sri Lanka and other developing markets
that are open to Foreign Investment. Under normal circumstances, the Portfolio
will invest at least 65% of the total assets of the Portfolio in such Asian
Equity Securities.
The Portfolio may also invest in Fixed Income Securities, bills and bonds of
governmental entities in Asia and the U.S., notes, debentures, and bonds of
companies in Asia, Money Market Instruments of the U.S., Foreign Currency,
Investment Company Securities and Repurchase Agreements, When-Issued or Delayed
Delivery Securities, and Derivatives, including but not limited to Forwards and
Futures, and may lend its portfolio securities. Although the Portfolio will not
invest for short-term trading purposes, investment securities may be sold from
time to time without regard to the length of time they have been held. Pending
investment or settlement, and for liquidity purposes, the Portfolio may invest
in domestic, Eurodollar and foreign short-term Money Market Instruments. The
Portfolio may also purchase such instruments to temporarily reduce its equity
holdings for defensive purposes in response to adverse market conditions.
Because of the lack of hedging facilities in the currency markets of Asia, no
active currency hedging strategy is anticipated currently. Instead, each
investment will be considered on a total currency adjusted basis with the U.S.
dollar as a base currency.
The Adviser's approach is oriented to individual stock selection and is value
driven, similar to the approach described for the International Magnum
Portfolio discussed above. There is no requirement that the Fund, at any given
time, invest in any or all of the countries listed above or in any other Asian
countries. The Fund has no set policy for allocating investments among the
various Asian countries. Allocation of investments will depend on the relative
attractiveness of the stocks of issuers in the respective countries. Government
regulation and restrictions in many of the countries of interest may limit the
amount, mode and extent of investment in companies of such countries. The
Adviser will analyze assets, revenues and earnings of an issuer. In selecting
industries and particular issuers, the Adviser will evaluate costs of labor and
raw materials, access to technology, export of products and government
regulation. Although the Portfolio seeks to invest in larger companies, it may
invest in small- and medium-size companies that, in the Adviser's view, have
potential for growth.
The Portfolio's investments will include Emerging Market Country Securities.
These securities pose greater liquidity risks and other risks than securities
of companies located in developed countries and traded in more established
markets. For a description of special considerations and certain risks
associated with investment in foreign issuers, see "Securities and Investment
Techniques--Emerging Market Country Securities."
ASSET ALLOCATION PORTFOLIOS
BALANCED PORTFOLIO
The Portfolio seeks above-average total return over a market cycle of three to
five years by investing in a diversified portfolio of Equity and Fixed Income
Securities. The average
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<PAGE>
weighted maturity of the Portfolio's Fixed Income Securities ordinarily will
exceed five years and will usually be between three and fifteen years.
When the Adviser judges the relative outlook for the equity and fixed income
markets to be neutral, the portfolio will be invested 60% in Equity Securities
and 40% in Fixed Income Securities. The asset mix may be changed, however, with
Equity Securities ordinarily representing between 45% and 75% of the total
investment.
The Portfolio may invest up to 25% of its total assets in Foreign Bonds and
foreign Equity Securities, other than ADRs, and an additional 10% of its total
assets in Brady Bonds. The Portfolio will invest at least 25% of its total
assets in senior Fixed Income Securities.
Subject to the foregoing limits, the Portfolio may invest in Foreign Currency,
High Yield Securities, Investment Company Securities, Investment Funds, Eastern
European Securities, Emerging Market Country Securities, Loan Participations
and Assignments, Municipals, When-Issued or Delayed Delivery Securities, and
Derivatives, including but not limited to Structured Notes, Forwards, Futures,
Options and Swaps. For additional information about investments, see
"Securities and Investment Techniques" below.
The Adviser's approach is to determine investment strategies for the equity and
fixed income portions of the Portfolio separately and then determine the mix of
those strategies expected to maximize the return available from both the stock
and bond markets. Strategic judgments on the equity/fixed income asset mix are
based on valuation disciplines and tools for analysis developed by the Adviser
over its twenty-six year history of managing balanced accounts. For other
information about strategies employed in managing the Portfolio, see "Asset
Allocation Management," "Maturity and Duration Management," "Value Investing,"
"Mortgage Investing," "High Yield Investing," "Foreign Fixed Income Investing"
and "Foreign Investing" in "Securities and Investment Techniques" below.
MULTI-ASSET-CLASS PORTFOLIO
The Portfolio seeks above average-total return over a market cycle of three to
five years by investing in a diversified portfolio of Equity Securities and
Fixed Income Securities of domestic and foreign issuers.
Under normal circumstances, the Portfolio will invest at least 65% of its total
assets in issuers located in at least three countries, including the United
States. The average weighted maturity of the fixed income portion of the
Portfolio ordinarily will exceed five years and will usually be between three
and fifteen years.
The Portfolio may also invest in Municipals, Loan Participations and
Assignments, Investment Funds, Investment Company Securities, Eastern European
Securities, Emerging Market Countries Securities, Foreign Currency, Forwards,
CMOs, Brady Bonds, Zero Coupons, Cash Equivalents, ADRs, When-Issued and
Delayed-Delivery Securities and Derivatives, including but not limited to
Futures and Options, Swaps, and Structured Notes. For additional information
about investments, see "Securities and Investment Techniques" below.
The Adviser's approach is to determine the mix of investments in domestic and
foreign Equity Securities, Fixed Income Securities and High Yield Securities
expected to maximize available total return. Strategic judgments on the asset
mix are based on valuation disciplines and tools for analysis which have been
developed by the Adviser to compare the relative potential returns and risks of
global stock and bond markets. For other information about strategies employed
in managing the Portfolio, see "Asset Allocation Management," "International
Equity Investing," "Maturity and Duration Management," "Value Investing,"
"Emerging Markets Investing," "High Yield Investing," "Foreign Fixed Income
Investing" and "Foreign Investing" in "Securities and Investment Techniques"
below.
SECURITIES AND INVESTMENT TECHNIQUES
The following pages contain more detailed information about types of
instruments in which a Portfolio may invest, and strategies each Adviser may
employ in pursuit of a portfolio's investment objective. A summary of risks and
restrictions associated with these instruments and investment practices is
included as well. A complete listing of each Portfolio's policies and
limitations and more detailed information about each Portfolio's investments is
contained in the SAI. Policies and limitations are considered at the time of
purchase; the sale of instruments is not required in the event of a subsequent
change in circumstances, for example, a rating's downgrade.
The investments of life insurance company separate accounts made under variable
annuity contracts and variable life insurance policies are subject to state
insurance laws and regulations. The Fund and its Portfolios will, when
required, comply with investment restrictions imposed under such laws and
regulations on life insurance company separate accounts investing in the
Portfolios.
The Advisers may not buy all of these instruments or use all of these
techniques to the full extent permitted unless they believe that doing so will
help a Portfolio achieve its investment objective. Current holdings and recent
investment strategies are described in the Portfolio's financial reports, which
will be sent to the Portfolios' shareholders twice a year. For a free SAI or
financial report, contact the Fund or your insurance company.
STRATEGIES
ASSET ALLOCATION MANAGEMENT: The Adviser's approach to Asset Allocation
Management is to determine investment strategies for each asset class in a
Portfolio separately, and then determine the mix of those strategies
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<PAGE>
expected to maximize the return available from each market. Strategic judgments
on the mix among asset classes are based on evaluation disciplines and tools
for analysis which have been developed over the Adviser's twenty-six year
history of managing balanced accounts.
Tactical asset-allocation shifts are based on comparisons of prospective risks,
returns, and the likely risk-reducing benefits derived from combining different
asset classes into a single Portfolio. Experienced teams of equity, fixed
income, and international investment professionals manage the investments of
each asset class.
EMERGING MARKETS INVESTING: The Adviser's approach to Emerging Markets
Investing is based on the Adviser's evaluation of both short-term and long-term
international economic trends and the relative attractiveness of emerging
markets and individual emerging market securities.
As used in this Prospectus, emerging markets describes any country which is
generally considered to be an emerging, or developing country by the
international financial community such as the International Bank for
Reconstruction and Development (more commonly known as the World Bank) and the
International Finance Corporation. There are currently over 130 countries which
are generally considered to be emerging or developing countries by the
international financial community, approximately 40 of which currently have
stock markets. Emerging markets can include every nation in the world except
the United States, Canada, Japan, Australia, New Zealand and most nations
located in Western Europe.
Currently, investing in many emerging market countries is either not feasible
or very costly, or may involve unacceptable political risks. Other special
risks include the possible increased likelihood of expropriation or the return
to power of a communist regime which would institute policies to expropriate,
nationalize or otherwise confiscate investments. A Portfolio will focus its
investments on those emerging market countries in which the Adviser believes
the potential for market appreciation outweighs these risks and/or the cost of
investment. Investing in emerging markets also involves an extra degree of
custodial and/or market risk, especially where the securities purchased are not
traded on an official exchange or where ownership records regarding the
securities are maintained by an unregulated entity (or even the issuer itself).
FOREIGN FIXED INCOME INVESTING: The Adviser seeks to invest in Foreign Bonds
and other Fixed Income Securities denominated in Foreign Currencies, where, in
the opinion of the Adviser, the combination of current yield and currency value
offer attractive expected returns. When the total return opportunities in a
foreign bond market appear attractive in local currency terms, but where in the
Adviser's judgment unacceptable currency risk exists, Foreign Currency Futures
Contracts and Options, Forwards and Swaps may be used to hedge the currency
risk.
FOREIGN INVESTING: Investing in securities issued by foreign companies or
governments involves certain special considerations which are not typically
associated with investing in U.S. Issuers. Since the securities of foreign
issuers may be denominated in Foreign Currencies, and since a Portfolio may
temporarily hold uninvested reserves in bank deposits of Foreign Currencies
prior to reinvestment or conversion to U.S. dollars, a Portfolio may be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations, and may incur costs in connection with conversions between
various currencies.
Because non-U.S. companies are not generally subject to uniform accounting,
auditing and financial reporting standards and practices comparable to those
applicable to U.S. companies, there may be less publicly available information
about certain foreign companies than about U.S. companies. Securities of some
non-U.S. companies may be less liquid and more volatile than securities of
comparable U.S. companies. There is generally less government supervision and
regulation of stock exchanges, brokers and listed companies than in the U.S.
With respect to certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments which could affect U.S. investments in those countries.
Additionally, there may be difficulty in obtaining and enforcing judgments
against foreign issuers.
Although a Portfolio will endeavor to achieve the most favorable execution
costs in its Portfolio transactions in foreign securities, fixed commissions on
many foreign stock exchanges are generally higher than negotiated commissions
on U.S. exchanges. In addition, it is expected that the expenses for custodial
arrangements of a Portfolio's foreign securities will be greater than the
expenses for the custodial arrangements for handling U.S. securities of equal
value. Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income a portfolio receives from the companies comprising the portfolio's
investments.
GROWTH STOCK INVESTING: The Adviser seeks to invest in Equity Securities
generally characterized by higher growth rates of revenues and earnings. These
stocks tend to have higher price volatility, higher price/earnings ratios, and
lower yields than the stock market in general as measured by the S&P 500.
HIGH YIELD INVESTING: The Adviser seeks to invest in High Yield Securities
based on the Adviser's analysis of economic and industry trends and individual
security characteristics. The Adviser conducts credit analysis for each
security considered for investment to evaluate its attractiveness relative to
its risk. A high level of
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<PAGE>
diversification is also maintained to limit credit exposure to individual
issuers.
To the extent a Portfolio invests in High Yield Securities it will be exposed
to a substantial degree of credit risk. Lower-rated bonds are considered
speculative by traditional investment standards. High Yield Securities may be
issued as a consequence of corporate restructuring or similar events. Also,
High Yield Securities are often issued by smaller, less credit worthy
companies, or by highly leveraged (indebted) firms, which are generally less
able than more established or less leveraged firms to make scheduled payments
of interest and principal. The risks posed by securities issued under such
circumstances are substantial.
The market for High Yield Securities is still relatively new. Because of this,
a long-term track record for bond default rates does not exist. In addition,
the secondary market for High Yield Securities is generally less liquid than
that for investment-grade corporate securities. In periods of reduced market
liquidity, High Yield Security prices may become more volatile, and both the
high yield market and a Portfolio may experience sudden and substantial price
declines. This lower liquidity might have an effect on a Portfolio's ability to
value or dispose of such securities. Also, there may be significant disparities
in the prices quoted for High Yield Securities by various dealers. Under such
conditions, a Portfolio may find it difficult to value its securities
accurately. A Portfolio may also be forced to sell securities at a significant
loss in order to meet shareholder redemptions. These factors add to the risks
associated with investing in High Yield Securities.
High Yield Securities may also present risks based on payment expectations. For
example, High Yield Securities may contain redemption or call provisions. If an
issuer exercises these provisions in a declining interest rate market, a
Portfolio would have to replace the security with a lower yielding security,
resulting in a decreased return for investors. Conversely, a High Yield
Security's value will decrease in a rising interest rate market.
Certain types of High Yield Securities are non-income paying securities. For
example, Zero Coupons pay interest only at maturity and Pay-In-Kind Securities
pay interest in the form of additional securities. Payment in the form of
additional securities, or interest income recognized through discount
accretion, will, however, be treated as ordinary income which will be
distributed to shareholders even though the Portfolio does not receive periodic
cash flow from these investments.
INTERNATIONAL EQUITY INVESTING: The Adviser's approach to International Equity
Investing is based on its evaluation of both short-term and long-term
international economic trends and the relative attractiveness of non-U.S.
equity markets and individual securities.
The Adviser considers fundamental investment characteristics, the principles of
valuation and diversification, and a relatively long-term investment time
horizon. Since liquidity will also be a consideration, emphasis will likely be
influenced by the relative market capitalizations of different non-U.S. stock
markets and individual securities. Portfolios seek to diversify investments
broadly among both developed and newly industrializing foreign countries. Where
appropriate, a Portfolio may also invest in regulated Investment Companies or
Investment Funds which invest in such countries to the extent allowed by
applicable law.
MATURITY AND DURATION MANAGEMENT: One of two primary components of the
Adviser's fixed income investment strategy is Maturity and Duration Management.
The second primary component of fixed income strategy is Value Investing. See
"Value Investing" below.
The maturity and duration structure of a Portfolio investing in Fixed Income
Securities is actively managed in anticipation of cyclical interest rate
changes. Adjustments are not made in an effort to capture short-term, day-to-
day movements in the market, but instead are implemented in anticipation of
longer term shifts in the levels of interest rates. Adjustments made to shorten
Portfolio maturity and duration are made to limit capital losses during periods
when interest rates are expected to rise. Conversely, adjustments made to
lengthen maturity are intended to produce capital appreciation in periods when
interest rates are expected to fall. The foundation for maturity and duration
strategy lies in analysis of the U.S. and global economies, focusing on levels
of real interest rates, monetary and fiscal policy actions, and cyclical
indicators.
Most Fixed Income Securities provide interest (coupon) payments in addition to
a final (par) payment at maturity. Some securities also have call provisions.
Depending on the relative magnitude of these payments and the nature of the
call provisions, the market values of Fixed Income Securities may respond
differently to changes in the level and structure of interest rates.
Traditionally, a Fixed Income Security's term-to-maturity has been used as a
proxy for the sensitivity of the security's price to changes in interest rates
(which is the interest rate risk or volatility of the security). However, term-
to-maturity measures only the time until a Fixed Income Security provides its
final payment, taking no account of the pattern of the security's payments
prior to maturity.
Duration is a measure of the expected life of a Fixed Income Security on a
present value basis that was developed as a more precise alternative to the
concept of term-to-maturity. Duration incorporates a bond's yield, coupon
interest payments, final maturity and call features into one measure. Duration
is one of the fundamental tools used by the Adviser in the selection of Fixed
Income Securities.
Duration takes the length of the time intervals between the present time and
the time that the interest and principal payments are scheduled or, in the case
of a callable bond, expected to be received, and weights them by the present
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values of the cash to be received at each future point in time. For any Fixed
Income Security with interest payments occurring prior to the payment of
principal, duration is always less than maturity. In general, all other factors
being the same, the lower the stated or coupon rate of interest of a Fixed
Income Security, the longer the duration of the security; conversely, the
higher the stated or coupon rate of interest of a Fixed Income Security, the
shorter the duration of the security.
There are some situations where even the standard duration calculation does not
properly reflect the interest rate exposure of a security. For example,
Floaters often have final maturities of ten or more years; however, their
interest rate exposure corresponds to the frequency of the coupon reset.
Another example where the interest rate exposure is not properly captured by
duration is the case of mortgage pass-through securities. The stated final
maturity of such securities is generally 30 years, but current prepayment rates
are more critical in determining the securities' interest rate exposure. In
these and other similar situations, the Adviser's analysis of interest rate
exposure incorporates the economic life of a security.
MORTGAGE INVESTING: At times it is anticipated that greater than 50% of a fixed
income Portfolio's assets may be invested in MBSs. These include securities
which represent pools of mortgage loans made by lenders such as commercial
banks, savings and loan associations, mortgage bankers and others. The pools
are assembled by various Governmental, Government-related and private
organizations. A Portfolio will invest in securities issued by the Government
National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation
(FHLMC), Federal National Mortgage Association (FNMA), other government
agencies, and private issuers. It is expected that the Portfolio's primary
emphasis will be in MBSs issued by the various Government-related
organizations. However, a Portfolio may invest, without limit, in MBSs issued
by private issuers when the Adviser deems that the quality of the investment,
the quality of the issuer, and market conditions warrant such investments.
Securities issued by private issuers will be rated investment grade by Moody's
or S&P or be deemed by the Adviser to be of comparable investment quality.
VALUE INVESTING: One of two primary components of the Adviser's fixed income
strategy is Value Investing, whereby the Adviser seeks to identify undervalued
sectors and securities through analysis of credit quality, option
characteristics and liquidity. Quantitative models are used in conjunction with
judgement and experience to evaluate and select securities with embedded put or
call options which are attractive on a risk- and option-adjusted basis.
Successful Value Investing will permit a Portfolio to benefit from the price
appreciation of individual securities during periods when interest rates are
unchanged. See "Maturity and Duration Management" for a description of the
other key component of the Adviser's fixed income investment strategy.
INSTRUMENTS AND INVESTMENTS
AGENCIES. Agencies are securities which are not guaranteed by, or backed by the
full faith and credit of, the U.S. Government, but which are issued, sponsored
or guaranteed by a federal agency or federally sponsored agency such as the
Student Loan Marketing Association, Resolution Funding Corporation, or any of
several other agencies. For further information on these securities, see
"Description of U.S. Government Securities" in the SAI.
ASSET-BACKEDS. Asset-backed securities ("Asset-Backeds") are securities
collateralized by shorter term loans such as automobile loans, home equity
loans, computer leases or credit card receivables. The payments from the
collateral are passed through to the security holder. The collateral behind
Asset-Backeds tends to have prepayment rates that usually do not vary with
interest rates. In addition the short-term nature of the loans reduces the
impact of any change in prepayment level. Due to amortization, the average life
for Asset-Backeds is also the conventional proxy for maturity.
Due to the possibility that prepayments (on automobile loans and other
collateral) will alter the cash flow on Asset-Backeds, it is not possible to
determine in advance the actual final maturity date or average life. Faster
prepayment will shorten the average life and slower prepayments will lengthen
it. However, it is possible to determine what the range of that movement could
be and to calculate the effect that it will have on the price of the security.
In selecting these securities, the Adviser will look for those securities that
offer a higher yield to compensate for any variation in average maturity.
BRADY BONDS. Brady Bonds are Fixed Income Securities which are created through
the exchange of existing commercial bank loans to foreign entities for new
obligations in connection with debt restructuring under a plan introduced by
Nicholas F. Brady when he was the U.S. Secretary of the Treasury (the "Brady
Plan"). Brady Bonds have been issued only in relatively recent years, and,
accordingly, do not have a long payment history. They may be collateralized or
uncollateralized and issued in various currencies (although most are dollar-
denominated) and they are actively traded in the over-the-counter secondary
market. For further information on these securities, see the SAI. A Portfolio
will invest in Brady Bonds only if they are consistent with quality
specifications.
CASH EQUIVALENTS. Cash Equivalents are short-term Fixed Income Securities
comprising:
(1)Time deposits, certificates of deposit (including marketable variable rate
certificates of deposit) and bankers' acceptances issued by a commercial bank
or savings and loan association. Time deposits are non-negotiable deposits
maintained in a banking institution for a specified period of time at a stated
interest rate. Certificates of deposit are negotiable short-term obligations
issued by commercial banks
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or savings and loan associations against funds deposited in the issuing
institution. Variable rate certificates of deposit are certificates of deposit
on which the interest rate is periodically adjusted prior to their stated
maturity based upon a specified market rate. A bankers' acceptance is a time
draft drawn on a commercial bank by a borrower, usually in connection with an
international commercial transaction (to finance the import, export, transfer
or storage of goods).
A Portfolio may invest in obligations of U.S. banks, obligations of foreign
branches of U.S. banks ("Eurodollars") and obligations of U.S. branches of
foreign banks ("Yankee dollars"). Investments in Eurodollars and Yankee dollars
involve some of the same risks of investing in international securities that
are discussed in "Foreign Investment" below.
A Portfolio will not invest in any security issued by a commercial bank unless
(i) the bank has total assets of at least $1 billion, or the equivalent in
other currencies, or, in the case of domestic banks which do not have total
assets of at least $1 billion, the aggregate investment made in any one such
bank is limited to $100,000 and the principal amount of such investment is
insured in full by the Federal Deposit Insurance Corporation ("FDIC"), (ii) in
the case of U.S. banks, it is a member of the FDIC, and (iii) in the case of
foreign branches of U.S. banks, the security is deemed by the Adviser to be of
an investment quality comparable with other Fixed Income Securities which may
be purchased by the Portfolio.
(2)Commercial paper rated at time of purchase by one or more nationally
recognized statistical rating organization ("NRSRO") to be in one of their two
highest categories, (e.g., A-1 or A-1+ by S&P or Prime 1 by Moody's, or, if not
rated, issued by a corporation having an outstanding unsecured debt issue rated
high-grade by an NRSRO (e.g., A or better by Moody's, S&P or Fitch Investors
Service, Inc. ("Fitch")).
(3)Short-term corporate obligations rated high-grade at the time of purchase by
an NRSRO (e.g., A or better by Moody's, S&P or Fitch).
(4)U.S. Governments and Agencies.
(5)Repurchase Agreements collateralized by securities listed above.
CMOS. Collateralized Mortgage Obligations ( "CMOs") are Derivatives which are
collateralized by mortgage pass-through securities. Cash flows from the
mortgage pass-through securities are allocated to various tranches (a "tranche"
is essentially a separate security) in a predetermined, specified order. Each
tranche has a stated maturity--the latest date by which the tranche can be
completely repaid, assuming no prepayments--and has an average life--the
average of the time to receipt of a principal payment weighted by the size of
the principal payment. The average life is typically used as a proxy for
maturity because the debt is amortized (repaid a portion at a time), rather
than paid off entirely at maturity, as would be the case in a straight debt
instrument.
Due to the possibility that prepayments (on home mortgages and other
collateral) will alter the cash flow on CMOs, it is not possible to determine
in advance the actual final maturity date or average life. Faster prepayment
will shorten the average life and slower prepayments will lengthen it. However,
it is possible to determine what the range of that movement could be and to
calculate the effect that it will have on the price of the security. In
selecting these securities, the Adviser will look for those securities that
offer a higher yield to compensate for any variation in average maturity.
Prepayment risk has two important effects. First, like Fixed Income Securities
in general, MBSs will generally decline in price when interest rates rise. Due
to prepayment risk, rising interest rates also tend to discourage refinancings
of home mortgages with the result that the average life of MBSs held by a
Portfolio may be lengthened. This extension of average life causes the market
price of the MBSs to decrease further than if their average lives were fixed.
However, when interest rates fall, MBSs may not enjoy as large a gain in market
value due to prepayment risk. Second, when interest rates fall, additional
mortgage prepayments must be reinvested at lower interest rates. In part to
compensate for these risks, MBSs will generally offer higher yields than
comparable bonds.
COMMON STOCKS. Common Stocks are Equity Securities which represent an ownership
interest in a corporation, entitling the shareholder to voting rights and
receipt of dividends paid based on proportionate ownership.
CONVERTIBLE SECURITIES. Convertible Securities are securities, such as
convertible Corporate Bonds, convertible Preferred Stocks. Warrants or other
securities which may be exchanged under certain circumstances for a fixed
number of shares of Common Stock.
CORPORATE BONDS. Corporate Bonds are Fixed Income Securities issued by private
corporations. Bondholders, as creditors, have a prior legal claim over common
and preferred stockholders of the corporation as to both income and assets for
the principal and interest due to the bondholder. A Portfolio will buy
Corporate Bonds subject to any quality constraints. If a security held by a
Portfolio is down-graded, the Portfolio may retain the security.
DEPOSITARY RECEIPTS. Depositary Receipts are securities representing ownership
interests in securities of foreign companies (an "underlying issuer") and are
deposited with the depositary. Depositary Receipts are not necessarily
denominated in the same currency as the underlying securities. Depositary
Receipts include ADRs, Global Depositary Receipts ("GDRs") and other types of
Depositary Receipts (which, together with ADRs and GDRs,
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are hereinafter collectively referred to as "Depositary Receipts"). ADRs are
dollar-denominated Depositary Receipts typically issued by a U.S. financial
institution which evidence ownership interests in a security or pool of
securities issued by a foreign issuer. ADRs are listed and traded in the United
States. GDRs and other types of Depositary Receipts are typically issued by
foreign banks or trust companies, although they also may be issued by U.S.
financial institutions, and evidence ownership interests in a security or pool
of securities issued by either a foreign or a U.S. corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities market and Depositary Receipts in bearer form are designed for use
in securities markets outside the United States.
Depositary Receipts may be "sponsored" or "unsponsored". Sponsored Depositary
Receipts are established jointly by a depositary and the underlying issuer,
whereas unsponsored Depositary Receipts may be established by a depositary
without participation by the underlying issuer. Holders of an unsponsored
Depositary Receipt generally bear all the costs associated with establishing
the unsponsored Depositary Receipt. In addition, the issuers of the securities
underlying unsponsored Depositary Receipts are not obligated to disclose
material information in the U.S. and, therefore, there may be less information
available regarding such issuers and there may not be a correlation between
such information and the market value of the Depositary Receipts. For purposes
of a Portfolio's investment policies, the Portfolio's investments in Depositary
Receipts will be deemed to be investments in the underlying securities except
as noted.
DERIVATIVES. Derivatives are financial products or instruments that derive
their value from the value of an underlying asset, reference rate or index.
Derivatives include, but are not limited to, the following: CMOs, SMBSs (i.e.,
Stripped Mortgage-Backed Securities), Convertible Securities, Warrants,
Forwards, Futures, Options, Structured Notes, structured investments and Swaps.
The Adviser will use Derivatives only in circumstances where they offer the
most economic means of improving the risk/reward profile of a Portfolio. The
Adviser will not use Derivatives to increase Portfolio risk above the level
that could be achieved in the Portfolio using only traditional investment
securities. In addition, the Adviser will not use Derivatives to acquire
exposure to changes in the value of assets or indexes of assets that are not
listed in the applicable allowable investments for the Portfolio. A Portfolio
may enter into over-the-counter derivative transactions (Swaps, Caps, Floors,
etc., but excluding CMOs, Forwards, Futures, Options, and SMBSs) with
counterparties approved by the Adviser in accordance with guidelines
established by the Fund's Board of Directors. These guidelines provide for a
minimum credit rating for each counterparty and various credit enhancement
techniques (for example, collateralization of amounts due from counterparties)
to limit exposure to counterparties with ratings below AA.
See elsewhere in this "Securities and Investment Techniques" section for
descriptions of these various Derivatives, and see the SAI for more information
regarding any investment policies or limitations applicable to their use.
EASTERN EUROPEAN SECURITIES. The economies of Eastern European countries are
currently suffering both from the stagnation resulting from centralized
economic planning and control and the higher prices and unemployment associated
with the transition to market economics. Unstable economic and political
conditions may adversely affect security values. Upon the accession to power of
Communist regimes approximately 40 years ago, the governments of a number of
Eastern European countries expropriated a large amount of property. The claims
of many property owners against those governments were never finally settled.
In the event of the return to power of the Communist Party, there can be no
assurance that a Portfolio's investments in Eastern Europe would not be
expropriated, nationalized or otherwise confiscated.
EMERGING MARKET COUNTRY SECURITIES. An Emerging Market Country Security is one
issued by a company that has one or more of the following characteristics: (i)
its principal securities trading market is in an emerging market, (ii) alone or
on a consolidated basis it derives 50% or more of its annual revenue from
either goods produced, sales made or services performed in emerging markets, or
(iii) it is organized under the laws of, and has a principal office in, an
emerging market country. The Adviser will base determinations as to eligibility
on publicly available information and inquiries made to the companies.
The economies of individual emerging market countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product, rate of inflation, currency depreciation, capital reinvestment,
resource self-sufficiency and balance of payments position. Further, the
economies of developing countries generally are heavily dependent upon
international trade and, accordingly, have been, and may continue to be,
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been, and may
continue to be, adversely affected by economic conditions in the countries with
which they trade.
Investing in emerging market countries may entail purchasing securities issued
by or on behalf of entities that are insolvent, bankrupt, in default or
otherwise engaged in an attempt to reorganize or reschedule their obligations,
and in entities that have little or no proven credit rating or credit history.
In any such case, the issuer's poor or deteriorating financial condition may
increase the likelihood that the investing fund will experience losses or
diminution in available gains due to bankruptcy, insolvency or fraud.
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With respect to any emerging market country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) that could affect adversely the economies of such countries or the value
of a Portfolio's investments in those countries. In addition, it may be
difficult to obtain and enforce a judgment in a court outside of the United
States.
EQUITY SECURITIES. Equity Securities commonly include, but are not limited to,
Common Stocks, Preferred Stocks, Depositary Receipts, Rights, Warrants, and
Foreign Equities. Preferred Stock is contained in both the definition of Equity
Securities and Fixed Income Securities because it exhibits characteristics
commonly associated with each type of security. See the "The Portfolio's
Investments" section applicable to a particular Portfolio to determine in which
of the above a Portfolio may invest.
FIXED INCOME SECURITIES. Fixed Income Securities commonly include, but are not
limited to, debentures, U.S. Governments, Zero Coupons, Agencies, Corporate
Bonds, High Yield Securities, MBSs, SMBSs, CMOs, Asset-Backeds, Convertible
Securities, Brady Bonds, Floaters, Inverse Floaters, Cash Equivalents,
Municipals, Repurchase Agreements, Preferred Stocks and Foreign Bonds.
Preferred Stock is contained in both the definition of Equity Securities and
Fixed Income Securities since it exhibits characteristics commonly associated
with each type of security. See the "The Portfolios' Investments" section
applicable to a particular Portfolio to determine in which of the above a
Portfolio may invest.
The short-term and medium-term Fixed Income Securities in which the
International Magnum Portfolio may invest consist of (a) obligations of
governments, agencies or instrumentalities of any member state of the
Organization for Economic Cooperation and Development ("OECD"), including the
United States; (b) bank deposits and bank obligations (including certificates
of deposit, time deposits and bankers' acceptances) of banks organized under
the laws of any member state of the OECD, including the United States,
denominated in any currency; (c) finance company and corporate commercial paper
and other short-term corporate debt obligations of corporations organized under
the laws of any member state of the OECD, including the United States, meeting
the Portfolio's credit quality standards, provided that no more than 20% of the
Portfolio's assets is invested in any one of such issuers. The short-term and
medium-term securities in which the Portfolio may invest will be rated
investment grade by an NRSRO (e.g., rated A or higher by Moody's or S&P), or if
unrated, will be determined to be of comparable quality by the Adviser.
FLOATERS. Floaters are Fixed Income Securities with a floating or variable
rate of interest, i.e. the rate of interest varies with changes in specified
market rates or indices, such as the prime rate, or at specified intervals.
Certain Floaters may carry a demand feature that permits the holder to tender
them back to the issuer of the underlying instrument, or to a third party, at
par value prior to maturity. When the demand feature of certain Floaters
represents an obligation of a foreign entity, the demand feature will be
subject to certain risks discussed under "Foreign Investment".
FOREIGN BONDS. Foreign Bonds are Fixed Income Securities denominated in Foreign
Currency and issued and traded primarily outside the United States, including:
(1) obligations issued or guaranteed by foreign national governments, their
agencies, instrumentalities, or political subdivisions; (2) Fixed Income
Securities issued, guaranteed or sponsored by supranational organizations
established or supported by several national governments, including the World
Bank, the European Community, the Asian Development Bank and others; (3) non-
government foreign corporate debt securities; (4) foreign MBSs and various
other MBSs and Asset-Backeds denominated in Foreign Currency; and (5) Brady
Bonds. Investing in foreign companies involves certain special considerations
that are not typically associated with investing in U.S. companies. See
"Foreign Investment" below.
FOREIGN CURRENCY. Portfolios investing in foreign securities will regularly
transact security purchases and sales in Foreign Currencies. These Portfolios
may hold Foreign Currency or purchase or sell Foreign Currency on a forward
basis (see "Forwards").
FOREIGN CURRENCY FUTURES CONTRACTS AND OPTIONS. As another means of reducing
the risks associated with investing in securities denominated in Foreign
Currencies, a Portfolio may enter into contracts for the future acquisition or
delivery of Foreign Currencies and may purchase Foreign Currency Options
("Forex Options"). These investment techniques are designed primarily to hedge
against anticipated future changes in currency prices, that otherwise might
adversely affect the value of the Portfolio's investments.
Foreign Currency Futures Contracts ("Forex Futures") are standardized contracts
for the future delivery of a specified amount of a Foreign Currency at a future
date at a price set at the time of the contract. Forex Futures traded in the
United States are traded on regulated futures exchanges. A Portfolio will incur
brokerage fees when it purchases or sells Forex Futures or Forex Options, and
it will be required to maintain margin deposits. Parties to a Forex Future must
make initial margin deposits to secure performance of the contract, which
generally range from 2% to 5% of the contract price. There also are
requirements to make "variation" margin deposits as the value of the Futures
contract fluctuates. In addition, a Portfolio may enter into a Futures contract
only if immediately thereafter not more than 5% of its total assets are
required as deposit to secure obligations under such contracts. The Portfolio
also will be required to segregate assets to cover its Futures contracts
obligations.
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At the maturity of a Forex Future, a Portfolio may either accept or make
delivery of the currency specified in the contract or, prior to maturity, enter
into a closing purchase transaction involving the purchase or sale of an
offsetting contract. Closing purchase transactions with respect to Forex
Futures are effected on a regulated futures exchange. A Portfolio will only
enter into such a Forex Future if it is expected that there will be a liquid
market in which to close out such contract. There can, however, be no assurance
that such a liquid market will exist in which to close a Forward or Futures
contract, in which case the Portfolio may suffer a loss.
A Portfolio may also purchase put or call Forex Options on Foreign Currencies
on exchanges. A put Option gives the Portfolio the right to sell a currency at
the exercise price until the expiration of the option. A call Option gives the
Portfolio the right to purchase a currency at the exercise price until the
expiration of the Option.
Purposes for which such Forex Futures and Forex Options may be used include
protecting against a decline in a Foreign Currency against the U.S. dollar
between the trade date and settlement date when the Portfolio purchases or
sells securities, locking in the U.S. dollar value of dividends declared on
securities held by the Portfolio and generally protecting the U.S. dollar value
of securities held by the Portfolio against exchange rate fluctuations. Such
contracts will be used only as a protective measure against the effects of
fluctuating rates of currency exchange and exchange control regulations. While
Forex Futures and Forex Options may limit losses to the Portfolio as a result
of exchange rate fluctuation, they will also limit any gains that may otherwise
have been realized.
The primary risks associated with the use of Forex Futures and Forex Options
are (i) failure to predict accurately the direction of currency movements and
(ii) market risks (e.g., lack of liquidity or lack of correlation between the
change in value of underlying currencies and that of the value of the
Portfolio's Futures or Options contracts). The risk that a Portfolio will be
unable to close out a Futures position or Options contract will be minimized by
the Portfolio only entering into Futures Contracts or Options transactions for
which there appears to be a liquid secondary market. For more detailed
information about Futures transactions, see "Investment Objectives and
Policies" in the SAI.
FOREIGN EQUITIES. Foreign Equity Securities ("Foreign Equities") include, but
are not limited to, Common Stock, Preferred Stock, Depositary Receipts, Rights,
Warrants and Convertible Securities of foreign issuers. Investing in foreign
companies involves certain special considerations which are not typically
associated with investing in U.S. companies. See "Foreign Investment" below.
FOREIGN INVESTMENT. Investment in securities and obligations of foreign issuers
and in foreign branches of domestic banks involves somewhat different
investment risks than those affecting obligations of U.S. issuers. There may be
limited publicly available information with respect to foreign issuers, and
foreign issuers are not generally subject to uniform accounting, auditing and
financial standards and requirements comparable to those applicable to U.S.
companies. There may also be less government supervision and regulation of
foreign securities exchanges, brokers and listed companies than in the U.S.
Many foreign securities markets have substantially less volume than U.S.
national securities exchanges, and securities of some foreign issuers are less
liquid and more volatile than securities of comparable domestic issuers.
Brokerage commissions and other transaction costs on foreign securities
exchanges are generally higher than in the United States. Dividends and
interest paid by foreign issuers may be subject to withholding and other
foreign taxes, which may decrease the net return on Foreign Investments as
compared to dividends and interest paid by U.S. companies. Additional risks
include future political and economic developments, the possibility that a
foreign jurisdiction will impose or change withholding taxes on income payable
with respect to foreign securities, and the possible adoption of foreign
governmental restrictions such as exchange controls.
Prior governmental approval for Foreign Investments may be required under
certain circumstances in some emerging countries, and the extent of Foreign
Investment in certain Fixed Income Securities and domestic companies may be
subject to limitation in other emerging countries. Foreign ownership
limitations also may be imposed by the charters of individual companies in
emerging countries to prevent, among other concerns, violation of Foreign
Investment limitations.
Repatriation of investment income, capital and the proceeds of sales by foreign
investors may require governmental registration and/or approval in some
emerging countries. A Portfolio could be adversely affected by delays in, or a
refusal to grant, any required governmental registration or approval for such
repatriation. Any investment subject to such repatriation controls will be
considered illiquid if it appears reasonably likely that this process will take
more than seven days.
Investments in securities of foreign issuers are frequently denominated in
Foreign Currencies. Because a Portfolio may temporarily hold uninvested
reserves in bank deposits in Foreign Currencies, the value of the Portfolio's
assets, as measured in U.S. dollars, may be affected favorably or unfavorably
by changes in currency rates and in exchange control regulations and a
Portfolio may incur costs in connection with conversions between various
currencies.
FORWARDS. Forward Foreign Currency exchange contracts ("Forwards" or "forward
contracts") are obligations to purchase or sell an amount of a specified
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the
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time of the contract. Forwards are traded in the interbank market conducted
directly between currency traders (usually large commercial banks).
A Portfolio may use currency exchange contracts in the normal course of
business to lock in an exchange rate in connection with purchases and sales of
securities (transaction hedge) or to lock in the dollar value of portfolio
positions (position hedge). In addition a Portfolio may cross-hedge currencies
by entering into a transaction to purchase or sell one or more currencies that
are expected to decline in value relative to other currencies to which a
Portfolio has or expects to have portfolio exposure. A Portfolio may also
engage in proxy hedging which is defined as entering into positions in one
currency to hedge investments denominated in another currency, where the two
currencies are economically linked. Forwards will be used only as a protective
measure against the effects of fluctuating rates of currency exchange and
exchange control regulations. While such contracts may limit losses to the
Portfolio as a result of exchange rate fluctuation, they will also limit any
gains that may otherwise have been realized.
A Portfolio may also combine forward contracts with investments in securities
denominated in other currencies in order to achieve desired credit and currency
exposures. Such combinations are generally referred to as synthetic securities.
For example, in lieu of purchasing a Foreign Bond, a Portfolio may purchase a
U.S. dollar-denominated security and at the same time enter into a forward
contract to exchange U.S. dollars for the contract's underlying currency at a
future date. By matching the amount of U.S. dollars to be exchanged with the
anticipated value of the U.S. dollar-denominated security, a Portfolio may be
able to lock in the Foreign Currency value of the security and adopt a
synthetic investment position reflecting the credit quality of the U.S. dollar-
denominated security.
There is a risk in adopting a synthetic investment position to the extent that
the value of a security denominated in the U.S. dollar or other Foreign
Currency is not exactly matched with a Portfolio's obligation under the forward
contract. On the date of maturity, a Portfolio may be exposed to some risk of
loss from fluctuations in that currency. Although the Adviser will attempt to
hold such mismatching to a minimum, there can be no assurance that the Adviser
will be able to do so. When a Portfolio enters into a forward contract for
purposes of creating a synthetic security, it will generally be required to
hold liquid assets in a segregated account with a daily value at least equal to
its obligation under the forward contract.
Except in circumstances where segregated accounts are not required by the 1940
Act and the rules adopted thereunder, a Portfolio's entry into Forwards, as
well as any use of cross or proxy hedging techniques, will generally require
the Portfolio's custodian to place liquid assets into a segregated account of
the Portfolio in an amount equal to the value of the Portfolio's total assets
committed to the consummation of forward contracts. If the value of the
securities placed in the segregated account declines, additional liquid assets
will be placed in the account on a daily basis so that the value of the account
will be at least equal to the amount of the Portfolio's commitments with
respect to such contracts. See "Investment Objectives and Policies Forward
Foreign Currency Exchange Contracts" in the SAI.
At the maturity of a forward contract, a Portfolio may either accept or make
delivery of the currency specified in the contract or, prior to maturity, enter
into a closing purchase transaction involving the purchase or sale of an
offsetting contract. Closing purchase transactions with respect to Forwards are
usually effected with the currency trader who is a party to the original
forward contract. A Portfolio will only enter into such a forward contract if
it is expected that there will be a liquid market in which to close out such
contract. There can, however, be no assurance that such a liquid market will
exist in which to close a forward contract, in which case the Portfolio may
suffer a loss.
FUTURES. The term "Futures" includes futures contracts and Options on futures
contracts. Futures contracts provide for the sale by one party and purchase by
another party of a specified amount of a specific security, at a specified
future time and price. An Option on a futures contract gives the purchaser the
right (in return for the premium paid) to assume a position in a futures
contract (a long position if the Option is a call and a short position if the
Option is a put) at a specified exercise price at any time during the term of
the Option. Upon exercise of the Option, the delivery of the accumulated
balance in the writer's Futures margin account, which represents the amount by
which the market price of the futures contract at the time of exercise exceeds,
in the case of a call, or is less than, in the case of a put, the exercise
price of the Option on the futures contract.
In addition, a Portfolio may enter into a Futures contract only if immediately
thereafter not more than 5% of its total assets are required as deposit to
secure obligations under such contracts. The Portfolio also will be required to
segregate assets to cover its Futures contracts obligations.
Futures are derivative securities, in which the Portfolio may invest for
hedging purposes, as well as to remain fully invested and to reduce transaction
costs. Investing for the latter two purposes may be considered speculative. The
primary risks associated with the use of Futures are (i) imperfect correlation
between the change in market value of the stocks held by the Portfolio and the
prices of Futures and Options relating to the stocks purchased or sold by the
Portfolio and (ii) possible lack of a liquid secondary market for an Option or
a futures contract and the resulting inability to close a Futures position
which could have an adverse impact on the Portfolio's ability to hedge.
Additional risks associated with Options transactions are (i) the risk that an
Option will expire worthless; (ii) the risk that the issuer of an
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over-the-counter Option will be unable to fulfill its obligation to the
Portfolio due to bankruptcy or related circumstances; (iii) the risk that
Options may exhibit greater short-term price volatility than the underlying
security; and (iv) the risk that a Portfolio may be forced to forego
participation in the appreciation of the value of underlying securities,
futures contracts or currency due to the writing of a call Option.
HIGH YIELD SECURITIES. High Yield Securities are generally considered to
include Corporate Bonds, Preferred Stocks and Convertible Securities rated Ba
through C by Moody's or BB through D by S&P, and unrated securities considered
to be of equivalent quality. Securities rated less than Baa by Moody's or BBB
by S&P are classified as non-Investment Grade Securities and are commonly
referred to as junk bonds or High Yield Securities. Such securities carry a
high degree of risk and are considered speculative by the major credit rating
agencies. The following are excerpts from the Moody's and S&P definitions for
speculative-grade debt obligations:
Moody's: Ba-rated bonds have "speculative elements" so their future
"cannot be considered assured," and protection of principal and interest
is "moderate" and "not well safeguarded during both good and bad times in
the future." B-rated bonds "lack characteristics of a desirable
investment" and the assurance of interest or principal payments "may be
small." Caa-rated bonds are "of poor standing," and "may be in default"
or may have "elements of danger with respect to principal or interest."
Ca-rated bonds represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked
shortcomings. C-rated bonds are the "lowest rated" class of bonds, and
issues so rated can be regarded as having "extremely poor prospects" of
ever attaining any real investment standing.
S&P: BB-rated bonds have "less near-term vulnerability to default" than
B- or CCC-rated securities but face major ongoing uncertainties . . .
which may lead to inadequate capacity" to pay interest or principal. B-
rated bonds have a "greater vulnerability to default than BB-rated bonds
and the ability to pay interest or principal will likely be impaired by
adverse business conditions." CCC-rated bonds have a currently
identifiable "vulnerability to default" and, without favorable business
conditions, will be "unable to repay interest and principal." The rating
C is reserved for income bonds on which "no interest is being paid." Debt
rated D is in default," and "payment of interest and/or repayment of
principal is in arrears."
While such securities offer high yields, they also normally carry with them a
greater degree of risk than securities with higher ratings. Lower-rated bonds
are considered speculative by traditional investment standards. High Yield
Securities may be issued as a consequence of corporate restructuring or similar
events. Also, High Yield Securities are often issued by smaller, less credit
worthy companies, or by highly leveraged (indebted) firms, which are generally
less able than more established or less leveraged firms to make scheduled
payments of interest and principal. The price movement of these securities is
influenced less by changes in interest rates and more by the financial and
business position of the issuing corporation when compared to Investment Grade
Securities.
The risks posed by securities issued under such circumstances are substantial.
If a security held by a Portfolio is down-graded, the Portfolio may retain the
security.
INVERSE FLOATERS. Inverse floating rate obligations ("Inverse Floaters") are
Fixed Income Securities, which have coupon rates that vary inversely at a
multiple of a designated floating rate, such as LIBOR (London Inter-Bank
Offered Rate). Any rise in the reference rate of an Inverse Floater (as a
consequence of an increase in interest rates) causes a drop in the coupon rate
while any drop in the reference rate of an Inverse Floater causes an increase
in the coupon rate. Inverse Floaters may exhibit substantially greater price
volatility than fixed rate obligations having similar credit quality,
redemption provisions and maturity, and Inverse Floater CMOs exhibit greater
price volatility than the majority of mortgage pass-through securities or CMOs.
In addition, some Inverse Floater CMOs exhibit extreme sensitivity to changes
in prepayments. As a result, the yield to maturity of an Inverse Floater CMO is
sensitive not only to changes in interest rates but also to changes in
prepayment rates on the related underlying mortgage assets.
INVESTMENT COMPANY SECURITIES. Investments in investment companies are
securities of other open-end or closed-end investment companies. The 1940 Act,
generally prohibits a Portfolio from acquiring more than 3% of the outstanding
voting shares of an investment company and limits such investments to no more
than 5% of the Portfolio's total assets in any one investment company and no
more than 10% in any combination of investment companies. The 1940 Act also
prohibits a Portfolio from acquiring in the aggregate more than 10% of the
outstanding voting shares of any registered close-end investment company.
To the extent a Portfolio invests a portion of its assets in Investment Company
Securities, those assets will be subject to the expenses of the purchased
investment company as well as to the expenses of the Portfolio itself. A
Portfolio may not purchase shares of any affiliated investment company except
as permitted by a rule or order of the Securities and Exchange Commission
("SEC").
INVESTMENT FUNDS. Some emerging market countries have laws and regulations that
currently preclude direct investment in the securities of their companies.
However,
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indirect investment in the securities of companies listed and traded on the
stock exchanges in these countries is permitted by certain emerging market
countries through Investment Funds that have been specifically authorized. A
Portfolio may invest in these Investment Funds subject to the provisions of the
1940 Act, as applicable, and other applicable laws as discussed in "Investment
Limitations" in the SAI. The Emerging Markets Equity Portfolio will invest in
such Investment Funds only where appropriate given that the Portfolio's
shareholders will bear not only their proportionate share of the expenses of
the Portfolio (including operating expenses and the fees of the Adviser), but
also will indirectly bear similar expenses of the underlying Investment Funds.
Certain Investment Funds are advised by an Adviser. These Portfolios may, to
the extent permitted under the 1940 Act and other applicable law, invest in
these Investment Funds. If a Portfolio does elect to make an investment in such
an Investment Fund, it will only purchase the securities of such Investment
Fund in the secondary market.
INVESTMENT GRADE SECURITIES. Investment Grade Securities are those rated by one
or more NRSRO in one of the four highest rating categories at the time of
purchase (e.g., AAA, AA, A or BBB by S&P or Fitch, or Aaa, Aa, A or Baa by
Moody's). Securities rated BBB or Baa represent the lowest of four levels of
Investment Grade Securities and are regarded as borderline between definitely
sound obligations and those in which the speculative element begins to
predominate. MBSs, including mortgage pass-throughs and CMOs, deemed investment
grade by the Adviser, will either carry a guarantee from an agency of the U.S.
Government or a private issuer of the timely payment of principal and interest
(such guarantees do not extend to the market value of such securities or the
net asset value per share of the Portfolio) or, in the case of unrated
securities, be sufficiently seasoned that they are considered by the Adviser to
be investment grade quality. The Adviser may retain a security if its rating
falls below investment grade if it deems retention of the security to be in the
best interests of the Portfolio. Any Portfolio permitted to hold Investment
Grade Securities may hold unrated securities if the Adviser considers the risks
involved in owning that security to be equivalent to the risks involved in
holding an Investment Grade Security.
LOAN PARTICIPATIONS AND ASSIGNMENTS. Loan Participations are loans or other
direct debt instruments which are interests in amounts owed by a corporate,
governmental or other borrower to another party. They may represent amounts
owed to lenders or lending syndicates, to suppliers of goods or services (trade
claims or other receivables), or to other parties. A Portfolio may invest in
fixed rate and floating rate loans ("Loans") arranged through private
negotiations between an issuer of sovereign debt obligations and one or more
financial institutions ("Lenders"). A Portfolio's investments in Loans are
expected in most instances to be in the form of participation in Loans
("Participations") and assignments of all or a portion of Loans ("Assignments")
from third parties. A Portfolio will have the right to receive payments of
principal, interest and any fees to which it is entitled only from the Lender
selling the Participation and only upon receipt by the Lender of the payments
from the borrower. In the event of the insolvency of the Lender selling a
Participation, a Portfolio may be treated as a general creditor of the Lender
and may not benefit from any set-off between the Lender and the borrower.
Certain Participations may be structured in a manner designed to avoid
purchasers of Participations being subject to the credit risk of the Lender
with respect to the Participation. Even under such a structure, in the event of
the Lender's insolvency, the Lender's servicing of the Participation may be
delayed and the assignability of the Participation may be impaired. A Portfolio
will acquire Participations only if the Lender interpositioned between a
Portfolio and the borrower is determined by the Adviser to be creditworthy.
When a Portfolio purchases Assignments from Lenders it will acquire direct
rights against the borrower on the Loan. However, because Assignments are
arranged through private negotiations between potential assignees and potential
assignors, the rights and obligations acquired by a Portfolio as the purchaser
of an Assignment may differ from, and be more limited than, those held by the
assigning Lender. Because there is no liquid market for such securities, a
Portfolio anticipates that such securities could be sold only to a limited
number of institutional investors. The lack of a liquid secondary market may
have an adverse impact on the value of such securities and a Portfolio's
ability to dispose of particular Assignments or Participations when necessary
to meet a Portfolio's liquidity needs or in response to a specific economic
event such as a deterioration in the creditworthiness of the borrower. The lack
of a liquid secondary market for Assignments and Participations also may make
it more difficult for a Portfolio to assign a value to these securities for
purposes of valuing a Portfolio's securities and calculating its NAV.
Direct debt instruments involve the risk of loss in case of default or
insolvency of the borrower. Direct debt instruments may offer less legal
protection to a Portfolio in the event of fraud or misrepresentation and may
involve a risk of insolvency of the lending bank or other financial
intermediary. Direct debt instruments may also include standby financing
commitments that obligate the investing Portfolio to supply additional cash to
the borrower on demand. Participations involving emerging market country
issuers may relate to loans as to which there has been or currently exists an
event of default or other failure to make payment when due, and may represent
amounts owed to financial institutions that are themselves subject to political
and economic risks, including the risk of currency devaluation, expropriation,
or failure. Such Participations present additional risks of default or loss.
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LOANS OF PORTFOLIO SECURITIES. Each Portfolio may lend its securities to
brokers, dealers, domestic and foreign banks or other financial institutions
for the purpose of increasing its net investment income. These loans must be
secured continuously by cash or equivalent collateral, or by a letter of credit
at least equal to the market value of the securities loaned plus accrued
interest or income. There may be a risk of delay in recovery of the securities
or even loss of rights in the collateral should the borrower of the securities
fail financially. A Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of its total assets. For more detailed
information about securities lending, see "Securities and Investment
Techniques" in the SAI.
MONEY MARKET INSTRUMENTS. Each Portfolio may invest in Money Market
Instruments, although the Portfolios intend to stay invested in securities
satisfying their primary investment objective to the extent practical. Each
Portfolio may invest in Money Market Instruments pending other investment or
settlement for liquidity, or in adverse market conditions. The Money Market
Instruments permitted for the Portfolios include obligations of the U.S.
Government and its agencies and instrumentalities; obligations of foreign
sovereignties; obligations of the International Bank for Reconstruction and
Development; other debt securities; commercial paper, including bank
obligations; certificates of deposit (including Eurodollar certificates of
deposit); and Repurchase Agreements. For more detailed information about these
Money Market Instruments, see "Description of Certain Securities and Ratings"
in the SAI.
MORTGAGE-BACKED SECURITIES. Mortgage-Backed Securities ("MBSs") are instruments
that entitle the holder to a share of all interest and principal payments from
pools of residential and commercial mortgage loans underlying the instruments,
and may take the form of pass-through securities or CMOs. Generally, these
securities are designed to provide monthly payments of interest and principal
to the investor.
Pass-Through Securities. The mortgagee's monthly payments to his or her lending
institution are passed through to investors such as the Portfolio. Most issuers
or poolers provide guarantees of payments, regardless of whether the mortgagor
actually makes the payment. The guarantees made by issuers or poolers are
supported by various forms of credit, collateral, guarantees or insurance,
including individual loan, title, pool and hazard insurance purchased by the
issuer. The pools are assembled by various governmental, Government-related and
private organizations. A Portfolio may invest in securities issued or
guaranteed by the Government National Mortgage Association ("GNMA"), Federal
Home Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage Association
("FNMA"), private issuers and other government agencies. There can be no
assurance that the private insurers can meet their obligations under the
policies. MBSs issued by non-agency issuers, whether or not such securities are
subject to guarantees, may entail greater risk. If there is no guarantee
provided by the issuer, MBSs purchased by a Portfolio will be those which at
time of purchase are rated investment grade by one or more NRSRO, or, if
unrated, are deemed by the Advisers to be of investment grade quality.
Due to the possibility that prepayments on home mortgages will alter cash flow
on MBSs, it is not possible to determine in advance the actual final maturity
date or average life. Like Fixed Income Securities in general, MBSs will
generally decline in price when interest rates rise. Due to prepayment risk,
rising interest rates also tend to discourage refinancings of home mortgages,
with the result that the average life of MBSs held by a Portfolio may be
lengthened. This extension of average life causes the market price of the MBSs
to decrease further than if their average lives were fixed. However, when
interest rates fall, mortgages may not enjoy as large a gain in market value
due to prepayment risk because additional mortgage prepayments must be
reinvested at lower interest rates. Faster prepayment will shorten the average
life and slower prepayments will lengthen it. However, it is possible to
determine what the range of that movement could be and to calculate the effect
that it will have on the price of the MBS. In selecting these MBSs, the Adviser
will look for those that offer a higher yield to compensate for any variation
in average maturity.
There are two methods of trading MBSs. A specified pool transaction is a trade
in which the pool number of the security to be delivered on the settlement date
is known at the time the trade is made. This is in contrast with the typical
MBS transaction, called a TBA (to be announced) transaction, in which the type
of MBS to be delivered is specified at the time of trade but the actual pool
numbers of the securities that will be delivered are not known at the time of
the trade. The pool numbers of the pools to be delivered at settlement will be
announced shortly before settlement takes place. The terms of the TBA trade may
be made more specific if desired. Generally, agency pass-through MBSs are
traded on a TBA basis.
CMOs. CMOs are debt securities that are issued by a thrift or other financial
institution and are collateralized as follows. The bondholder has a first
priority perfected security interest in collateral, usually consisting of
agency mortgage pass-through securities, although other assets, including U.S.
Treasuries (including Zero Coupons), Agencies, Cash Equivalents, whole loans
and Corporate Bonds, may qualify. The amount of collateral must be continuously
maintained at levels from 115% to 150% of the principal amount of the bonds
issued, depending on the specific issue structure and collateral type. See
"CMOs" above.
MUNICIPALS. Municipal securities ("Municipals") are debt obligations issued by
local, state and regional governments that provide interest income that is
exempt from federal income taxes. Municipals include both municipal bonds
(those securities with maturities of five years or more) and
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municipal notes (those with maturities of less than five years). Municipal
bonds are issued for a wide variety of reasons: to construct public facilities,
such as airports, highways, bridges, schools, hospitals, mass transportation,
streets, water and sewer works; to obtain funds for operating expenses; to
refund outstanding municipal obligations; and to loan funds to various public
institutions and facilities. Certain industrial development bonds are also
considered municipal bonds if their interest is exempt from federal income tax.
Industrial development bonds are issued by or on behalf of public authorities
to obtain funds for various privately-operated manufacturing facilities,
housing, sports arenas, convention centers, airports, mass transportation
systems and water, gas or sewer works. Industrial development bonds are
ordinarily dependent on the credit quality of a private user, not the public
issuer.
NON-DIVERSIFIED STATUS. The International Fixed Income, International Magnum,
U.S. Real Estate, Emerging Markets Equity and Emerging Markets Debt Portfolios
are non-diversified portfolios under the 1940 Act, which means that the
Portfolios are not limited by the 1940 Act in the proportion of their assets
that may be invested in the obligations of a single issuer. Thus, the
Portfolios may invest a greater proportion of their assets in the securities of
a small number of issuers and as a result will be subject to greater risk with
respect to their portfolio securities. However, the Portfolios intend to comply
with diversification requirements imposed by the Internal Revenue Code of 1986,
as amended (the "Code"), for qualification as regulated investment companies.
See "Investment Limitations" and "Taxes" in the SAI.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Growth, U.S. Real Estate, International Magnum, Emerging
Markets Equity, Fixed Income, High Yield, Core Equity, Value, Mid Cap Growth,
Mid Cap Value, International Fixed Income, Balanced and Multi-Asset-Class
Portfolios may invest in securities that are neither listed on a stock exchange
nor traded over-the-counter, including privately placed securities. Such
unlisted Equity Securities may involve a higher degree of business and
financial risk that can result in substantial losses. As a result of the
absence of a public trading market for these securities, they may be less
liquid than publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices realized from these sales
could be less than those originally paid by the Portfolio or less than what may
be considered the fair value of such securities. Furthermore, companies whose
securities are not publicly traded may not be subject to the disclosure and
other investor protection requirements which might be applicable if their
securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Portfolio may be required to bear the expenses of registration.
As a general matter, a Portfolio may not invest more than 15% of its net assets
in illiquid securities, including securities for which there is no readily
available secondary market and securities that are restricted from sale to the
public without registration ("Restricted Securities") under the Securities Act
of 1933, as amended (the "1933 Act") and are deemed to be illiquid. Restricted
Securities that can be offered and sold to qualified institutional buyers under
Rule 144A under the 1933 Act ("144A Securities") may be deemed to be liquid
under guidelines adopted by the Fund's Board of Directors. The U.S. Real Estate
Portfolio may invest up to 15% of its total assets, each of the Emerging
Markets Debt, International Magnum, and Emerging Markets Equity Portfolios may
invest up to 25% of its total assets, and the Growth Portfolio may invest up to
35% of its total assets, in 144A Securities that are deemed to be liquid.
The Fund's Board of Directors has adopted guidelines and delegated to each
Adviser, subject to the supervision of the Board of Directors, the daily
function of determining and monitoring the liquidity of Rule 144A Securities.
Rule 144A Securities may become illiquid if qualified institutional buyers are
not interested in acquiring the securities. Investors should note that
investment of 5% of a Portfolio's total assets in Restricted Securities may be
considered a speculative activity and may involve greater risk and expense to
that Portfolio.
OPTIONS. Options are legal contracts that give the holder the right to buy or
sell a specified amount of the underlying security or futures contract at a
fixed or determinable price upon the exercise of the Option. A call Option
conveys the right to buy and a put Option conveys the right to sell a specified
quantity of the underlying security.
A Portfolio may write (i.e., sell) covered call Options on portfolio securities
which give the purchaser the right to buy the underlying security covered by
the Option from the Portfolio at the stated exercise price. A "covered" call
Option means that so long as a Portfolio is obligated as the writer of the
Option, it will own (i) the underlying securities subject to the Option, or
(ii) securities convertible or exchangeable without the payment of any
consideration into the securities subject to the Option. By selling a covered
call Option, a Portfolio would become obligated during the term of the Option
to deliver the securities underlying the Option should the Option holder choose
to exercise the Option before the Option's termination date. In return for the
call it has written, a Portfolio will receive from the purchaser (or Option
holder) a premium which is the price of the Option, less a commission charged
by a broker. A Portfolio will keep the premium regardless of whether the Option
is exercised. When a Portfolio writes covered call Options, it augments its
income by the premiums received and is thereby hedged to the extent of that
amount against a decline in the price of the underlying securities. The
premiums received will offset a portion of the potential loss incurred by a
Portfolio if the securities underlying the Options are ultimately sold by the
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Portfolio at a loss. However, during the Option period, a Portfolio has, in
return for the premium on the Option, given up the opportunity for capital
appreciation above the exercise price should the market price of the underlying
security increase, but has retained the risk of loss should the price of the
underlying security decline. As a matter of operating policy, the value of the
underlying securities on which stock Options will be written at any one time
will not exceed 5% of a Portfolio's total assets.
A Portfolio may also write (i.e., sell) covered put Options. Generally, a put
Option is "covered" if a Portfolio maintains cash, U.S. Governments or other
high grade debt obligations equal to the exercise price of the Option or if a
Portfolio holds a put Option on the same underlying security with a similar or
higher exercise price.
By selling a covered put Option, a Portfolio incurs an obligation to buy the
security underlying the Option from the purchaser of the put at the Option's
exercise price at any time during the Option period, at the purchaser's
election (certain Options written by a Portfolio will be exercisable by the
purchaser only on a specific date). A Portfolio may sell put Options to receive
the premiums paid by purchasers and to close out a long put Option position. In
addition, when the Adviser wishes to purchase a security at a price lower than
its current market price, a Portfolio may write a covered put Option at an
exercise price reflecting the lower purchase price sought.
A Portfolio may also purchase put or call Options on individual securities or
baskets of securities. When a Portfolio purchases a call Option it acquires the
right to buy a designated security at a designated price ("exercise price"),
and when a Portfolio purchases a put Option it acquires the right to sell a
designated security at the exercise price, in each case on or before a
specified date ("termination date"), usually not more than nine months from the
date the Option is issued. A Portfolio may purchase call Options to close out a
covered call position or to protect against an increase in the price of a
security it anticipates purchasing. A Portfolio may purchase put Options on
securities which it holds in its portfolio to protect itself against a decline
in the value of the security. If the value of the underlying security were to
fall below the exercise price of the put purchased in an amount greater than
the premium paid for the Option, a Portfolio would incur no additional loss. A
Portfolio may also purchase put Options to close out written put positions in a
manner similar to call Option closing purchase transactions.
PREFERRED STOCKS. Preferred Stocks are non-voting securities which evidence
ownership in a corporation and which pay a fixed or variable stream of
dividends.
RIGHTS. Rights represent a preemptive right of stockholders to purchase
additional shares of a stock at the time of a new issuance, before the stock is
offered to the general public, allowing the stockholder to retain the same
ownership percentage after the new stock offering.
REPURCHASE AGREEMENTS. Repurchase Agreements are transactions in which a
Portfolio purchases a security and simultaneously commits to resell that
security to the seller (a bank, broker or dealer) at a mutually agreed upon
date and price. The term of these agreements is usually from overnight to one
week, and never exceeds one year. Repurchase Agreements may be viewed as a
fully collateralized loan of money by the Portfolio to the seller. The resale
price reflects the purchase price plus an agreed upon market rate of interest
which is unrelated to the coupon rate or date of maturity of the purchased
security.
In these transactions, the securities received by a Portfolio have a market
value at least equal to the purchase price (including accrued interest) of the
Repurchase Agreement as collateral, and this value is maintained during the
term of the agreement. These securities are held by the Portfolio's custodian
or an approved third party for the benefit of the Portfolio until repurchased.
Repurchase Agreements permit a Portfolio to keep all its assets invested while
retaining overnight flexibility in pursuit of investments of a longer term
nature. If the seller defaults and the collateral value declines, the Portfolio
might incur a loss. If bankruptcy proceedings are commenced with respect to the
seller, the Portfolio's realization upon the collateral may be delayed or
limited.
Pursuant to an order expected to be issued by the SEC, the Portfolios may pool
their daily uninvested cash balances in order to invest in Repurchase
Agreements on a joint basis. By entering into Repurchase Agreements on a joint
basis, it is expected that the Portfolios will incur lower transaction costs
and potentially obtain higher rates of interest on such Repurchase Agreements.
Each Portfolio's participation in the income from jointly purchased Repurchase
Agreements will be based on that Portfolio's percentage share in the total
Repurchase Agreement. The Portfolio's ability to invest in Repurchase
Agreements on a joint basis will be contingent upon issuance of the order by
the SEC described above.
REVERSE REPURCHASE AGREEMENTS. A Portfolio may enter into Reverse Repurchase
Agreements with brokers, dealers, domestic and foreign banks or other financial
institutions. In a Reverse Repurchase Agreement, the Portfolio sells a security
and agrees to repurchase it at a mutually agreed upon date and price,
reflecting the interest rate effective for the term of the agreement. It may
also be viewed as the borrowing of money by the Portfolio. The Portfolio's
investment of the proceeds of a Reverse Repurchase Agreement is the speculative
factor known as leverage. The Portfolio may enter into a Reverse Repurchase
Agreement only if the interest income from investment of the proceeds is
greater than the interest expense of the transaction and the proceeds are
invested for a period no longer than the term of the agreement. The Portfolio
will maintain with the custodian a separate account with a segregated portfolio
of unencumbered liquid assets in an amount at least equal to its purchase
obligations under these
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agreements. If interest rates rise during a Reverse Repurchase Agreement, it
may adversely affect the Portfolio's ability to maintain a stable NAV.
RUSSIAN SECURITIES. The registration, clearing and settlement of securities
transactions involving Russian issuers are subject to significant risks not
normally associated with securities transactions in the United States and other
more developed markets. Ownership of Equity Securities in Russian companies is
evidenced by entries in a company's share register (except where shares are
held through depositories that meet the requirements of the 1940 Act) and the
issuance of extracts from the register or, in certain limited cases, by formal
share certificates. However, Russian share registers are frequently unreliable
and a Portfolio could possibly lose its registration through oversight,
negligence or fraud. Moreover, Russia lacks a centralized registry to record
securities transactions and registrars located throughout Russia or the
companies themselves maintain share registers. Registrars are under no
obligation to provide extracts to potential purchasers in a timely manner or at
all and are not necessarily subject to effective state supervision. In
addition, while registrars are liable under law for losses resulting from their
errors, it may be difficult for a Portfolio to enforce any rights it may have
against the registrar or issuer of the securities in the event of loss of share
registration. Although Russian companies with more than 1,000 shareholders are
required by law to employ an independent company to maintain share registers,
in practice, such companies have not always followed this law. Because of this
lack of independence of registrars, management of a Russian company may be able
to exert considerable influence over who can purchase and sell the company's
shares by illegally instructing the registrar to refuse to record transactions
on the share register. Furthermore, these practices may prevent a Portfolio
from investing in the securities of certain Russian companies deemed suitable
by the Adviser and could cause a delay in the sale of Russian Securities by the
Portfolio if the company deems a purchaser unsuitable, which may expose the
Portfolio to potential loss on its investment.
In light of the risks described above, the Board of Directors of the Fund has
approved certain procedures concerning the Fund's investments in Russian
Securities. Among these procedures is a requirement that a Portfolio will not
invest in the securities of a Russian company unless that issuer's registrar
has entered into a contract with the Fund's sub-custodian containing certain
protective conditions, including, among other things, the sub-custodian's right
to conduct regular share confirmations on behalf of the Portfolio. This
requirement will likely have the effect of precluding investments in certain
Russian companies that a Portfolio would otherwise make.
SMBSS. Stripped Mortgage-Backed Securities ("SMBSs") are Derivatives in the
form of multi-class mortgage securities. SMBSs may be issued by agencies or
instrumentalities of the U.S. Government and private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose entities of the
foregoing.
SMBSs are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. One type of SMBS will have one class receiving some of the interest and
most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In some cases,
one class will receive all of the interest ("IO class"), while the other class
will receive all of the principal ("principal-only" or "PO class"). The yield
to maturity on IO classes and PO classes is extremely sensitive to the rate of
principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on a portfolio yield to maturity. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, a Portfolio may
fail to fully recoup its initial investment in these securities, even if the
security is in one of the highest rating categories.
Although SMBSs are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, certain of these securities may be deemed
illiquid and subject to a Portfolio's limitations on investment in illiquid
securities.
STRUCTURED NOTES. Structured Notes are Derivatives on which the amount of
principal repayment and/or interest payments is based upon the movement of one
or more factors. These factors include, but are not limited to, currency
exchange rates, interest rates (such as the prime lending rate and LIBOR) and
stock indices such as the S&P 500. In some cases, the impact of the movements
of these factors may increase or decrease through the use of multipliers or
deflators. The use of Structured Notes allows a Portfolio to tailor its
investments to the specific risks and returns the Adviser wishes to accept
while avoiding or reducing certain other risks.
SWAPS. Swap Contracts are Derivatives in the form of a contract or other
similar instrument which is an agreement to exchange the return generated by
one instrument for the return generated by another instrument. The payment
streams are calculated by reference to a specified index and agreed upon
notional amount. The term "specified index" includes, but is not limited to,
currencies, fixed interest rates, prices and total return on interest rate
indices, fixed income indices, stock indices and commodity indices (as well as
amounts derived from arithmetic operations on these indices). For example, a
Portfolio may agree to swap the return generated by a fixed income index for
the return generated by a second fixed income index. The currency Swaps in
which a Portfolio
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may enter will generally involve an agreement to pay interest streams in one
currency based on a specified index in exchange for receiving interest streams
denominated in another currency. Such Swaps may involve initial and final
exchanges that correspond to the agreed upon notional amount.
A Portfolio will usually enter into Swaps on a net basis, i.e., the two return
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a Portfolio receiving or paying, as the case
may be, only the net amount of the two returns. A Portfolio's obligations under
a Swap agreement will be accrued daily (offset against any amounts owing to the
Portfolio) and any accrued but unpaid net amounts owed to a swap counterparty
will be covered by the maintenance of a segregated account consisting of cash,
U.S. Governments, or liquid debt obligations. A Portfolio will not enter into
any Swap agreement unless the counterparty meets the rating requirements set
forth in guidelines established by the Fund's Board of Directors.
Interest rate and total rate of return Swaps do not involve the delivery of
securities, other underlying assets, or principal. Accordingly, the risk of
loss with respect to interest rate and total rate of return Swaps is limited to
the net amount of interest payments that a Portfolio is contractually obligated
to make. If the other party to an interest rate or total rate of return Swap
defaults, a Portfolio's risk of loss consists of the net amount of interest
payments that a Portfolio is contractually entitled to receive. In contrast,
currency Swaps usually involve the delivery of the entire principal value of
one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency Swap is subject to the risk
that the other party to the Swap will default on its contractual delivery
obligations. If there is a default by the counterparty, a Portfolio may have
contractual remedies pursuant to the agreements related to the transaction. The
Swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the Swap market has
become relatively liquid. Swaps that include caps, floors, and collars are more
recent innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than "traditional" Swaps.
The use of Swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Adviser is incorrect in its forecasts of market
values, interest rates, and currency exchange rates, the investment performance
of a Portfolio would be less favorable than it would have been if this
investment technique was not used.
TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes in
economic, financial or political conditions make it advisable, each Portfolio
may reduce its holdings for temporary defensive purposes and may invest in
certain short-term (less than twelve months to maturity) and medium-term (not
greater than five years to maturity) debt securities or may hold cash. The
short-term and medium-term debt obligations in which a Portfolio may invest
consist of (a) obligations of the U.S. or foreign country governments, their
respective agencies or instrumentalities; (b) bank deposits and bank
obligations (including certificates of deposit, time deposits and bankers'
acceptances) of U.S. or foreign country banks denominated in any currency; (c)
Floaters and other instruments denominated in any currency issued by
international development agencies; (d) finance company and corporate
commercial paper and other short-term corporate debt obligations of U.S. and
foreign country corporations meeting a Portfolio's credit quality standards;
and (e) Repurchase Agreements with banks and broker-dealers with respect to
such securities. For temporary defensive purposes, the Portfolios intend to
invest only in short-term and medium-term debt obligations that its Adviser
believes to be of high quality, i.e., subject to relatively low risk of loss of
interest or principal (there is currently no rating system for foreign debt
obligations).
U.S. GOVERNMENTS. U.S. Governments are Fixed Income Securities that are backed
by the full faith and credit of the U.S. Government as to the payment of both
principal and interest. U.S. Governments may include securities issued by the
U.S. Treasury and securities issued by federal agencies and U.S. Government
sponsored instrumentalities. For further information on these securities, see
"Description of U.S. Government Securities" in the SAI.
WARRANTS. Warrants are instruments giving holders the right, but not the
obligation, to buy shares of a company at a given price during a specified
period.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. When-Issued and Delayed Delivery
Securities are securities purchased with payment and delivery taking place in
the future in order to secure what is considered to be an advantageous yield or
price at the time of the transaction. Delivery of and payment for these
securities may take as long as a month or more after the date of the purchase
commitment, but will take place no more than 120 days after the trade date. The
payment obligation and the interest rates that will be received are each fixed
at the time a Portfolio enters into the commitment and no interest accrues to
the Portfolio until settlement. Thus, it is possible that the market value at
the time of settlement could be higher or lower than the purchase price if the
general level of interest rates has changed. The Portfolio will maintain with
the custodian a separate account with a segregated portfolio of liquid debt
securities or cash in an amount at least equal to these commitments. The Money
Market, Growth, U.S. Real Estate, Emerging Markets Debt, Global Equity,
International Magnum, Emerging Markets Equity and Asian Equity Portfolios will
not enter into When-Issued or Delayed
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Delivery Securities commitments exceeding, in the aggregate, 15% of the
Portfolio's total assets other than the obligations created by these
commitments.
ZERO COUPONS, PAY-IN-KIND SECURITIES OR DEFERRED PAYMENT SECURITIES. Zero
Coupons are Fixed Income Securities that do not make regular interest payments.
Instead, Zero Coupons are sold at substantial discounts from their face value.
The difference between a Zero Coupon's issue or purchase price and its face
value represents the imputed interest an investor will earn if the obligation
is held until maturity. Zero Coupons may offer investors the opportunity to
earn higher yields than those available on ordinary interest-paying obligations
of similar credit quality and maturity. However, Zero Coupon prices may also
exhibit greater price volatility than ordinary Fixed Income Securities because
of the manner in which their principal and interest are returned to the
investor. Pay-In-Kind Securities are securities that have interest payable by
delivery of additional securities. Upon maturity, the holder is entitled to
receive the aggregate par value of the securities. Deferred Payment Securities
are securities that remain Zero Coupons until a predetermined date, at which
time the stated coupon rate becomes effective and interest becomes payable at
regular intervals. Zero Coupon, Pay-In-Kind and Deferred Payment Securities may
be subject to greater fluctuation in value and lesser liquidity in the event of
adverse market conditions than comparably rated securities paying cash interest
at regular interest payment periods.
FUNDAMENTAL INVESTMENT LIMITS
- -----------------------------
The investment objective of each Portfolio discussed on the preceding pages is
a fundamental policy, that is, a policy subject to change only by shareholder
approval. The following policy for each Portfolio is also fundamental. All
policies stated throughout this prospectus, other than those identified as
fundamental, can be changed without shareholder approval. For additional
fundamental and nonfundamental investment limits, see "Investment Limitations"
in the SAI.
EACH PORTFOLIO (excluding the International Fixed Income, International Magnum,
U.S. Real Estate, Emerging Markets Equity and Emerging Markets Debt Portfolios)
is a diversified investment company and is therefore subject to the following
fundamental limitations: as to 75% of its total assets, a Portfolio may not (a)
invest more than 5% of its total assets in the securities of any one issuer,
except obligations of the U.S. Government, its agencies and instrumentalities,
or (b) own more than 10% of the outstanding voting securities of any one
issuer.
INTERNAL REVENUE SERVICE (IRS) LIMITATIONS. In addition to the above, each
Portfolio also follows certain limitations imposed by the IRS on separate
accounts of insurance companies relating to the tax-deferred status of variable
annuity contracts and variable life insurance policies. More specific
information may be contained in the insurance company's separate account
prospectus.
MANAGEMENT OF THE FUND
The Fund is governed by a Board of Directors which is responsible for the
management of the business and affairs of the Fund as provided in the laws of
the State of Maryland and the Fund's Articles of Incorporation and By-Laws. The
Board of Directors of the Fund has undertaken to monitor the Fund for the
existence of any material irreconcilable conflict among the interests of
variable annuity contract owners, variable life insurance policy owners and
qualified plans that invest in the Fund due to differences in tax treatment and
other considerations, and shall report any such conflict to the boards of the
respective life insurance companies that use the Fund as an investment vehicle
for their respective variable annuity contracts and variable life insurance
policies and to qualified plans. The Boards of Directors of those life
insurance companies and the fiduciaries of certain qualified plans and the
Adviser, have agreed or will agree to be responsible for reporting any
potential or existing conflicts to the Directors of the Fund. If a material
irreconcilable conflict exists that affects those life insurance companies,
they will be required, at their own cost, to remedy such conflict up to and
including establishing a new registered management investment company and
segregating the assets underlying the variable annuity contracts and the
variable life insurance policies. Qualified plans which acquire more than 10%
of the assets of the Fund will be required to report any potential or existing
conflicts to the Directors of the Fund, and if a material irreconcilable
conflict exists, to remedy such conflict, up to and including redeeming shares
of the Portfolios held by the qualified plans. The majority of the Fund's
Directors are not affiliated with MSAM, MAS, any of their affiliates, any of
the other companies that provide services to the Fund or any of their
affiliates. The officers of the Fund conduct and supervise its daily business
operations.
THE FUND MAY HOLD SPECIAL MEETINGS. The Fund will not hold annual shareholder
meetings, but may call special meetings when required by law, when requested by
a sufficient number of shareholders or for other reasons. An insurance company
issuing a variable annuity contract or variable life insurance policy that
participates in the Portfolios will vote shares held in its separate account as
required by law and interpretations thereof, as may be amended or changed from
time to time. In accordance with current law and interpretations thereof, a
participating insurance company is required to request voting instructions from
contract or policy owners and must vote shares in the separate account in
proportion to the voting instructions received. For a further discussion,
please refer to your insurance company's separate account prospectus.
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INVESTMENT MANAGEMENT
INVESTMENT ADVISERS. The Investment Adviser (the "Adviser") assigned to a
Portfolio provides investment advice and portfolio management services,
pursuant to an Investment Advisory Agreement and, subject to the supervision of
the Fund's Board of Directors, makes the Portfolio's day-to-day investment
decisions, arranges for the execution of portfolio transactions and generally
manages the Portfolio's investments. MSAM serves as the Adviser for the Money
Market, Emerging Markets Debt, Growth, U.S. Real Estate, Global Equity,
International Magnum, Emerging Markets Equity and Asian Equity Portfolios. MAS
serves as the adviser for the Fixed Income, High Yield, International Fixed
Income, Balanced, Multi-Asset-Class, Value, Core Equity, Mid Cap Growth and Mid
Cap Value Portfolios. MSAM, with principal offices at 1221 Avenue of the
Americas, New York, New York 10020, conducts a worldwide investment management
business, providing a broad range of portfolio management services to customers
in the United States and abroad. MSAM is a wholly owned subsidiary of Morgan
Stanley Group Inc., which is a publicly owned financial services corporation
listed on the New York, London and Pacific stock exchanges. MSAM, a registered
Investment Adviser under the Investment Advisers Act of 1940, as amended,
serves as Investment Adviser to numerous open-end and closed-end investment
companies. MAS is a Pennsylvania limited liability partnership founded in 1969
with principal offices at One Tower Bridge, West Conshohocken, Pennsylvania
19428. As of January 1996, MAS is also indirectly wholly-owned by MSGI. MAS
provides investment services to employee benefit plans, endowment funds,
foundations and other institutional investors and has served as Investment
Adviser to several open-end investment companies since 1984. At June 30, 1996,
MSAM, together with its affiliated asset management companies (other than MAS),
managed investments totaling approximately $67.1 billion, including
approximately $50.6 billion under active management and $16.5 billion as Named
Fiduciary or Fiduciary Advisers. At June 30, 1996, MAS managed investments
totalling approximately $36.4 billion. See "Management of the Fund" in the SAI.
PORTFOLIO MANAGERS. The following individuals have primary responsibility for
the Portfolios as indicated below.
MONEY MARKET PORTFOLIO -- Abigail Jones Feder and Kenneth R. Holley. Abigail
Feder is a Principal in MSAM's Fixed Income Group. She is responsible for
managing short-term taxable and tax-exempt portfolios. Ms. Feder joined Morgan
Stanley & Co. Incorporated's ("Morgan Stanley") Corporate Finance Department in
1985. In 1987 she joined MSAM as a Marketing Analyst and was promoted to a
Marketing Director in 1988. She joined the Fixed Income Group as a Portfolio
Manager in 1989 and she became a Vice President in 1992 and a Principal in
1996. Ms. Feder holds a B.A. from Vassar College. Kenneth R. Holley joined MSAM
as a short-term fixed income portfolio manager in July, 1993. Prior thereto, he
worked for 2 1/2 years as a Finance Officer for the African Development Bank
("ADB") implementing trading strategies for the bank's $1 billion short to
intermediate U.S. dollar portfolio. Prior to joining the ADB, Mr. Holley spent
1 1/2 years with Ward and Associates Asset Management as a Vice President
responsible for fixed income strategy. Before Ward and Associates he worked in
the fixed income department of Salomon Brothers, Inc. Mr. Holley holds a B.S.
degree in Engineering from University of Pennsylvania and an M.B.A. from the
Wharton School. Ms. Feder and Mr. Holley have shared primary responsibility for
managing the Portfolio's assets since inception.
FIXED INCOME PORTFOLIO -- Thomas L. Bennett, Kenneth B. Dunn and Richard B.
Worley. Thomas L. Bennett, a Managing Director of Morgan Stanley, joined MAS in
1984. He assumed responsibility for the MAS Funds Fixed Income Portfolio in
1984, the MAS Funds Domestic Fixed Income Portfolio 1987, the MAS Funds High
Yield Portfolio in 1985, the MAS Funds Fixed Income Portfolio II in 1990, the
MAS Funds Special Purpose Fixed Income and Balanced Portfolios in 1992 and the
MAS Funds Multi- Asset-Class Portfolio in 1994. Kenneth B. Dunn, a Managing
Director of Morgan Stanley, joined MAS in 1987. He assumed responsibility for
the MAS Funds Fixed Income and Domestic Fixed Income Portfolios in 1987, the
MAS Funds Fixed Income II Portfolio in 1990, the MAS Funds Mortgage-Backed
Securities and Special Purpose Fixed Income Portfolios in 1992, and the MAS
Funds Municipal and PA Municipal Portfolios in 1994. Richard B. Worley, a
Managing Director of Morgan Stanley, joined MAS in 1978. He assumed
responsibility for the MAS Funds Fixed Income Portfolio in 1984, the MAS Funds
Domestic Fixed Income Portfolio in 1987, the MAS Funds Fixed Income Portfolio
II in 1990, the MAS Funds Balanced and Special Purpose Fixed Income Portfolios
in 1992, the MAS Funds Global Fixed Income and International Fixed Income
Portfolios in 1993 and the MAS Funds Multi-Asset-Class Portfolio in 1994.
Messrs. Bennett, Dunn, and Worley have shared primary responsibility for
managing the Portfolio's assets since inception.
HIGH YIELD PORTFOLIO -- Robert E. Angevine, Thomas L. Bennett, and Stephen F.
Esser. Robert Angevine is a Principal of Morgan Stanley and the Portfolio
Manager for high yield investments. Prior to joining MSAM in October 1988, he
spent over eight years at Prudential Insurance where he was responsible for the
largest open-end high yield mutual fund in the country. His other experience
includes international treasury operations at a major pharmaceutical company
and commercial banking. Mr. Angevine received an M.B.A. from Fairleigh
Dickinson University and a B.A. in Economics from Lafayette College. He served
two years as a Lieutenant in the U.S. Army. Mr. Angevine has had primary
responsibility for managing the Portfolio's assets since inception. Information
about Thomas L. Bennett is included under Fixed Income Portfolio above. Stephen
F. Esser, a Managing Director of Morgan Stanley, joined MAS in 1988. He assumed
responsibility for the MAS Funds High Yield
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Portfolio in 1989. Messrs. Bennett, Angevine and Esser have shared primary
responsibility for managing the Portfolio's assets since inception.
CORE EQUITY PORTFOLIO -- Arden C. Armstrong, John D. Connolly, Timothy G.
Connors, Nicholas J. Kovich, Robert J. Marcin and Gary G. Schlarbaum. Arden C.
Armstrong, a Managing Director of Morgan Stanley, joined MAS in 1986. She
assumed responsibility for the MAS Funds Mid Cap Growth Portfolio in 1990, the
MAS Funds Growth Portfolio in 1993 and the MAS Funds Equity Portfolio in 1994.
John D. Connolly joined MAS in 1990. Mr. Connolly served as Senior Vice
President and Chief Investment Strategist at Dean Witter Reynolds from 1984 to
1990. He assumed responsibility for the MAS Funds Equity Portfolio in 1990,
Balanced Portfolio in 1992 and Growth and Multi-Asset-Class Portfolios in 1994.
Timothy G. Connors joined MAS in 1994. Mr. Connors served as Vice President and
Managing Director of CoreStates Investment Advisers from 1986 to 1994. He
assumed responsibility for the MAS Funds Equity and Growth Portfolios in 1994.
Nicholas J. Kovich, a Managing Director of Morgan Stanley, joined MAS in 1988.
He assumed responsibility for the MAS Funds Equity Portfolio in 1994. Robert J.
Marcin, a Managing Director of Morgan Stanley, joined MAS in 1988. He assumed
responsibility for the MAS Funds Value Portfolio in 1990 and the MAS Funds
Equity Portfolio in 1994. Gary G. Schlarbaum, a Managing Director of Morgan
Stanley, joined MAS in 1987. He assumed responsibility for the MAS Funds Equity
and Small Cap Value Portfolios in 1987, the MAS Funds Balanced Portfolio in
1992 and the MAS Funds Multi-Asset-Class and Mid Cap Value Portfolios in 1994.
Ms. Armstrong, Mr. Connolly, Mr. Connors, Mr. Kovich, Mr. Marcin and Mr.
Schlarbaum have shared primary responsibility for managing the Portfolio's
assets since inception.
GROWTH PORTFOLIO -- Kurt Feuerman, Margaret K. Johnson, and Daniel Lascano.
Kurt Feuerman is a Managing Director of MSAM and heads MSAM's Equity Group. He
joined MSAM in July 1993 after spending three years as a Managing Director of
Morgan Stanley's Research Department, where he was responsible for emerging
growth stocks, gaming and restaurants. Before joining Morgan Stanley, Mr.
Feuerman was a Managing Director of Drexel Burnham Lambert, where he had been
an equity analyst since 1984. Over the years he has been ranked highly in the
Institutional Investor All American Research Poll in four separate categories:
packaged food, tobacco, emerging growth and gaming. Mr. Feuerman earned an
M.B.A. from Columbia University in 1982, an M.A. from Syracuse University in
1980, and a B.A. from McGill University in 1977. Margaret Johnson is a
Principal of MSAM and a Portfolio Manager in the Institutional Equity Group.
She joined MSAM in 1984 as an analyst in the Market and Fiduciary Adviser areas
and became a Portfolio Manager in 1989. She was promoted to Vice President in
1991 and to Principal in 1995. Prior to joining Morgan Stanley, she worked for
the New York City PBS affiliate, WNET, Channel 13. She holds a B.A. degree from
Yale College and is a Chartered Financial Analyst. Daniel Lascano is a Vice
President of MSAM. He joined MSAM in 1993 as an equity analyst. Prior to
joining MSAM, Mr. Lascano worked at Morgan Stanley as a research assistant to
Kurt Feuerman. Mr. Lascano graduated from the University of California at
Berkeley, with a B.A. in Economics and Statistics. Mr. Feuerman, Ms. Johnson
and Mr. Lascano have shared primary responsibility for managing the Portfolio's
assets since inception.
VALUE PORTFOLIO -- Richard M. Behler and Robert J. Marcin. Richard M. Behler, a
Principal of Morgan Stanley, joined MAS in 1995. He served as a Portfolio
Manager from 1992 through 1995 for Moore Capital Management and as Senior Vice
President for Merrill Lynch Economics from 1987 through 1992. He assumed
responsibility for the MAS Fund's Value Portfolio in 1996. Information about
Robert J. Marcin is included under Core Equity Portfolio above. Mr. Behler and
Mr. Marcin have shared primary responsibility for managing the Portfolio's
assets since inception.
MID CAP GROWTH PORTFOLIO -- Arden C. Armstrong and Abhi Y. Kanitkar.
Information about Arden C. Armstrong is included under Core Equity Portfolio
above. Abhi Y. Kanitkar, a Vice-President of Morgan Stanley, joined MAS in
1994. He served as an Investment Analyst from 1993 through 1994 for Newbold's
Asset Management and as Director & Investment Analyst from 1990 through 1993
for Kanitkar Investment Services, Inc. He assumed responsibility for the MAS
Fund's Mid Cap Growth Portfolio in 1996. Ms. Armstrong and Mr. Kanitkar have
shared primary responsibility for managing the Portfolio's assets since
inception.
MID CAP VALUE PORTFOLIO -- Bradley S. Daniels, Gary D. Haubold and Gary G.
Schlarbaum. Bradley S. Daniels, a Vice President of Morgan Stanley, joined MAS
in 1985. He assumed responsibility for the MAS Funds Small Cap Value Portfolio
in 1986 and the MAS Funds Mid Cap Value Portfolio in 1994. Gary D. Haubold, a
Principal of Morgan Stanley, joined MAS in 1993. Mr. Haubold served as Senior
Vice President at Wood, Struthers & Winthrop in 1993. He assumed responsibility
for the MAS Funds Small Cap Value Portfolio in 1993 and the MAS Funds Mid Cap
Value Portfolio in 1994. Information about Gary G. Schlarbaum is included under
Core Equity Portfolio above. Messrs. Daniels, Haubold and Schlarbaum have
shared primary responsibility for managing the Portfolio's assets since
inception.
U.S. REAL ESTATE PORTFOLIO -- Theodore R. Bigman and Russell Platt. Mr. Bigman
joined MSAM in 1995 as a Vice President. Together with Russell Platt, he is
responsible for MSAM's real estate securities research. Prior to joining MSAM,
he was a Director at CS First Boston, where he worked for eight years in the
Real Estate Group. Since 1992,
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Mr. Bigman established and managed the REIT effort at CS First Boston including
primary responsibility for $2.5 billion of initial public offerings by real
estate investment trusts. Previously, Mr. Bigman had extensive real estate
experience in a wide variety of transactions involving the financing and sale
of both individual assets and portfolios of real estate assets as well as the
acquisition and sale of several real estate companies. Mr. Bigman graduated
from Brandeis University in 1983 with a B.A. in Economics and received his
M.B.A. from Harvard University in 1987. He is a member of the National
Association of Real Estate Investment Trusts and International Council of
Shopping Centers. Russell Platt joined MSAM in 1994 as a Principal. In
addition, Mr. Platt previously served as a Director of the General Partner of
The Morgan Stanley Real Estate Fund I ("MSREF I"), where he is involved in
capital raising, acquisitions, oversight of investments and investor relations.
MSREF I is a privately held limited partnership engaged in the acquisition of
real estate assets, portfolios and real estate operating companies with gross
assets of approximately $3.5 billion as of December, 1994. From 1991 to 1993,
Mr. Platt was head of Morgan Stanley Realty's Transaction Development Group. As
such, he was actively involved in Morgan Stanley's worldwide real estate
business. These activities included corporate and lender restructurings, merger
and acquisition advice and public debt and equity financings for Morgan Stanley
Realty's real estate clients. As part of these responsibilities, Mr. Platt
directed Morgan Stanley Realty's activities in Latin America and served as U.S.
liaison for Morgan Stanley Realty's Japanese real estate clients. From 1990 to
1991, Mr. Platt was based in Morgan Stanley Realty's London office, where he
was responsible for European transaction development. Prior to this, he had
extensive transaction responsibilities involving specific portfolio, retail,
office, hotel and apartment sales and financings. Mr. Platt joined Morgan
Stanley's Investment Banking Division in 1982 and moved to Morgan Stanley
Realty in 1983. He rejoined Morgan Stanley in 1986 after receiving his M.B.A
from Harvard Business School. Mr. Platt graduated from Williams College in 1982
with a B.A. in Economics. Mr. Platt is a member of the Board of Trustees of the
National MultiHousing Council and the Wharton Real Estate Center, and a member
of the Urban Land Institute (International Council), the National Association
of Real Estate Investment Trusts and the Pension Real Estate Association. Mr.
Bigman and Mr. Platt has had primary responsibility for managing the
Portfolio's assets since inception.
INTERNATIONAL FIXED INCOME PORTFOLIO -- J. David Germany, Michael Kushma, Paul
F. O'Brien and Richard B. Worley. J. David Germany, a Managing Director of
Morgan Stanley, joined MAS in 1991. He served as Vice President & Senior
Economist for Morgan Stanley from 1989 to 1991. He assumed responsibility for
the MAS Funds Global Fixed Income and International Fixed Income Portfolios in
1993 and the MAS Funds Multi-Asset-Class Portfolio in 1994. Michael Kushma
joined Morgan Stanley in 1988. He assumed responsibility for the Morgan Stanley
Institutional Fund, Inc. ("MSIF") Global Fixed Income and MSIF International
Fixed Income Portfolio in 1996. Paul F. O'Brien, a Principal of Morgan Stanley,
joined MAS in 1996. He served as Head of European Economics from 1993 through
1995 for JP Morgan and as Principal Administrator from 1991 through 1992 for
the Organization for Economic Cooperation and Development. He assumed
responsibility for the Global Fixed Income and International Fixed Income
Portfolios in 1996. Information about Richard B. Worley is included under Fixed
Income Portfolio above. Messrs. Germany, Kushma, O'Brien and Worley have shared
primary responsibility for managing the Portfolio's assets since inception.
EMERGING MARKETS DEBT PORTFOLIO -- Paul Ghaffari. Paul Ghaffari is a Principal
of Morgan Stanley. He joined MSAM in June 1993 as a Vice President and
Portfolio Manager for the Morgan Stanley Emerging Markets Debt Fund Inc. (a
closed-end investment company). Prior to joining MSAM, Mr. Ghaffari was a Vice
President in the Fixed Income Division of the Emerging Markets Sales and
Trading Department at Morgan Stanley. From 1983 to 1992, he worked in LDC Sales
and Trading Department and the Mortgage-Backed Securities Department at J.P.
Morgan & Co. Inc. and worked in the Treasury Department at the Morgan Guaranty
Trust Co. He holds a B.A. in International Relations from Pamona College and an
M.S. in Foreign Service from Georgetown University. Mr. Ghaffari has had
primary responsibility for managing the Portfolio's assets since inception.
GLOBAL EQUITY PORTFOLIO -- Frances Campion. Frances Campion joined MSAM in
January 1990 as a Global Equity Fund Manager, became a Vice President, and is
now a Principal of Morgan Stanley. Her responsibilities include day-to-day
management of the Global Equity product. Prior to joining MSAM, Ms. Campion was
a U.S. equity analyst with Lombard Odler Limited where she had responsibility
for the management of global portfolios. Ms. Campion has ten years global
investment experience. She is a graduate of University of College, Dublin. Ms.
Campion has had primary responsibility for managing the Portfolio's assets
since inception.
INTERNATIONAL MAGNUM PORTFOLIO -- Francine J. Bovich. Francine Bovich joined
Morgan Stanley as a Principal in 1993. She is responsible for product
development, portfolio management and communication of MSAM's asset allocation
strategy to institutional investor clients. Previously, Ms. Bovich was a
Principal and Executive Vice President of Westwood Management Corp.
("Westwood"), a registered investment adviser. Before joining Westwood, she was
a Managing Director of Citicorp Investment Management, Inc. (now Chancellor
Capital Management), where she was responsible for the Institutional Investment
Management group. Ms. Bovich began her investment career with Banker's Trust
Company. She holds a B.A. in Economics
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from Connecticut College and an M.B.A. in Finance from New York University. Ms.
Bovich has had primary responsibility for managing the Portfolio's assets since
inception.
EMERGING MARKETS EQUITY PORTFOLIO -- Madhav Dhar. Madhav Dhar is a Managing
Director of MSAM and Morgan Stanley. He joined MSAM in 1984 to focus on global
asset allocation and investment strategy and now heads MSAM's emerging markets
group and serves as the group's principal Portfolio Manager. Mr. Dhar also
coordinates MSAM's developing country funds effort and has been involved in the
launching of MSAM's country funds. He is a Director of the Morgan Stanley
Emerging Markets Fund, Inc. (a closed-end investment company). He holds a B.S.
(honors) from St. Stephens College, Delhi University (India), and an M.B.A.
from Carnegie-Mellon University. Mr. Dhar has had primary responsibility for
managing the Portfolio's assets since inception.
ASIAN EQUITY PORTFOLIO -- Ean Wah Chin and Seah Kiat Seng. Ean Wah Chin is a
Managing Director of Morgan Stanley, and is responsible for MSAM's regional
Asia ex-Japan operations based in Singapore. Prior to joining Morgan Stanley in
1986, Ms. Chin spent eight years with the Monetary Authority of Singapore and
the Government of Singapore Investment Corporation, where she was a portfolio
manager of one of the largest portfolios in Asia. Ms. Chin was an ASEAN scholar
educated at the University of Singapore. Seah Kiat Seng joined the Adviser's
Singapore office in 1990 as a portfolio manager/analyst specializing in the
Southeast Asian markets. He is currently a Vice President, responsible for
investments in Thailand. He has had primary management responsibility for the
Investment Fund since its inception. Previously, Kiat Seng worked at Barclays
de Zoete Wedd (BZW), where he was a senior investment analyst who helped
pioneer BZW's research effort in Singapore. Kiat Seng is a Chartered Financial
Analyst and a qualified real estate valuer who has worked for the Singapore
Ministry of Finance. He was a Colombo Plan Scholar educated in New Zealand. Ms.
Chin and Mr. Seng have shared primary responsibility for managing the
Portfolio's assets since inception.
BALANCED PORTFOLIO -- Thomas L. Bennett, John D. Connolly, Gary G. Schlarbaum,
Horacio A. Valeiras and Richard B. Worley. Information about Thomas L. Bennett
and Richard B. Worley is included under Fixed Income Portfolio above.
Information about John D. Connolly and Gary G. Schlarbaum is included under
Core Equity Portfolio above and information about Horacio A. Valeiras is
included under Multi-Asset-Class Portfolio below. Messrs. Bennett, Connolly,
Schlarbaum, Valeiras and Worley have shared primary responsibility for managing
the Portfolio's assets since inception.
MULTI-ASSET-CLASS PORTFOLIO -- Thomas L. Bennett, John D. Connolly, J. David
Germany, Gary G. Schlarbaum, Horacio A. Valeiras and Richard B. Worley.
Information about Thomas L. Bennett and Richard B. Worley is included under
Fixed Income Portfolio above. Information about John D. Connolly and Gary G.
Schlarbaum is included under Core Equity Portfolio above. Information about J.
David Germany is included under International Fixed Income Portfolio above.
Horacio A. Valeiras, a Principal of Morgan Stanley, joined MAS in 1992. He
served as an International Strategist from 1989 through 1992 for Credit Suisse
First Boston and as Director-Equity Research in 1992. He assumed responsibility
for the International Equity Portfolio in 1992, the MAS Funds Emerging Markets
Portfolio in 1993 and the MAS Funds Multi-Asset-Class Portfolio in 1994 and the
Balanced Portfolio in 1996. Messrs. Bennett, Connolly, Germany, Schlarbaum,
Valeiras and Worley have shared primary responsibility for managing the
Portfolio's assets since inception.
OTHER SERVICES
DISTRIBUTOR. Under its Distribution Agreement with the Fund, Morgan Stanley
serves as the exclusive Distributor of the Fund and sells shares of each
Portfolio upon the terms and at the current offering price described in this
Prospectus. Morgan Stanley is not obligated to sell any certain number of
shares of any Portfolio. Morgan Stanley, as principal underwriter, or the
insurance companies whose variable products are funded by the Fund, will bear
all of the Fund's marketing expenses. This includes the cost of reproducing
prospectuses, statements of additional information or any other Fund documents
(such as semiannual reports) used as sales materials.
ADMINISTRATION. MSAM and MAS also provide the respective Portfolios of the Fund
which they manage with administrative services pursuant to an Administration
Agreement. The services provided under the respective Administration Agreements
are subject to the supervision of the officers and the Board of Directors of
the Fund, and include day-to-day administration of matters related to the
corporate existence of the Fund, maintenance of its records, preparation of
reports, supervision of the Fund's arrangements with its custodian, and
assistance in the preparation of the Fund's registration statements under
federal and state laws. The Administration Agreements also provide that each
Administrator through its agents will provide the Fund with dividend disbursing
and transfer agent services. For its services under the Administration
Agreement, the Fund pays MSAM and MAS a monthly fee which on an annual basis
equals 0.25% of the average daily net assets of each Portfolio that they
administer.
MSAM and MAS have each entered into a Sub-Administration Agreement with Chase
Global Funds Services Company ("Chase Global"), a subsidiary of The Chase
Manhattan Bank ("Chase"), pursuant to which Chase Global has agreed to provide
certain administrative services to the Fund. MSAM and MAS supervise and monitor
such
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administrative services provided by Chase Global. The services provided under
the Administration Agreements and the Sub-Administration Agreements are also
subject to the supervision of the Board of Directors of the Fund. The Board of
Directors of the Fund has approved the provision of services described above
pursuant to the Administration Agreements and the Sub-Administration Agreements
as being in the best interests of the Fund. Chase Global's business address is
73 Tremont Street, Boston, Massachusetts 02108-3913. For additional information
regarding the Administration Agreement or the Sub-Administration Agreement, see
"Management of the Fund" in the SAI.
Chase Global calculates the NAV and dividends, maintains the general accounting
records and administers the securities lending program for each Portfolio.
CUSTODIANS. Chase serves as the Custodian of domestic securities and cash of
the Portfolios. Chase is not an affiliate of either of the Advisers or the
Distributor. Morgan Stanley Trust Company, Brooklyn, New York ("MSTC"), an
affiliate of MSAM, MAS and the Distributor, acts as the Fund's Custodian for
foreign assets held outside the United States (including, through sub-
custodians, securities held in Russia) and employs sub-custodians approved by
the Board of Directors of the Fund in accordance with regulations of the SEC
for the purpose of providing custodial services for such assets. MSTC may also
hold certain domestic assets for the Fund. For more information on the
Custodians, see "General Information -- Custody Arrangements" in the SAI.
DIVIDEND DISBURSING AND TRANSFER AGENT. Chase Global acts as dividend
disbursing and transfer agent for the Fund.
INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP serves as independent accountants
for the Fund and will audit the annual financial statements of each Portfolio.
LEGAL COUNSEL. Morgan, Lewis & Bockius LLP serves as legal counsel to the Fund.
BREAKDOWN OF EXPENSES
The Portfolios pay fees and other costs related to their daily operations.
Expenses paid out of a Portfolio's assets are reflected in its share price.
Each Portfolio pays a management fee to its Adviser for managing its
investments and business affairs. MSAM and MAS pay fees to affiliates who
provide assistance with these services. Each Portfolio also pays other
expenses, which are explained below. The Advisers may, from time to time,
reduce their fees or reimburse the Portfolios for expenses above a specified
limit. These fee reductions or expense reimbursements, which may be terminated
at any time without notice, can decrease a Portfolio's expenses and boost its
performance.
MANAGEMENT FEE
The Adviser assigned to a Portfolio is entitled to receive from such Portfolio
a management fee, payable quarterly, at an annual rate as a percentage of
average daily net assets as set forth in the tables below.
36
<PAGE>
U.S. FIXED INCOME PORTFOLIO ADVISORY FEES
<TABLE>
<CAPTION>
=======================================================================
Assets Money Market Fixed Income High Yield
- -----------------------------------------------------------------------
<S> <C> <C> <C>
First $500 million 0.30% 0.40% 0.50%
- -----------------------------------------------------------------------
From $500 million to $1 billion 0.25% 0.35% 0.45%
- -----------------------------------------------------------------------
More than $1 billion 0.20% 0.30% 0.40%
</TABLE>
U.S. EQUITY PORTFOLIO ADVISORY FEES
<TABLE>
<CAPTION>
================================================================================
Mid Cap Mid Cap U.S. Real
Assets Core Equity Growth Value Growth Value Estate
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First $500 million 0.55% 0.55% 0.55% 0.75% 0.75% 0.80%
- --------------------------------------------------------------------------------
From $500 million to $1
billion 0.50% 0.50% 0.50% 0.70% 0.70% 0.75%
- --------------------------------------------------------------------------------
More than $1 billion 0.45% 0.45% 0.45% 0.65% 0.65% 0.70%
</TABLE>
GLOBAL PORTFOLIO ADVISORY FEES
<TABLE>
<CAPTION>
===========================================================================================================
International Emerging
Fixed Emerging Global International Markets Asian
Assets Income Markets Debt Equity Magnum Equity Equity
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First $500 million 0.50% 0.75% 0.80% 0.80% 1.25% 0.80%
- ------------------------------------------------------------------------------------------------------------
From $500 million to $1
billion 0.45% 0.70% 0.75% 0.75% 1.20% 0.75%
- ------------------------------------------------------------------------------------------------------------
More than $1 billion 0.40% 0.65% 0.70% 0.70% 1.15% 0.70%
</TABLE>
ASSET ALLOCATION PORTFOLIO ADVISORY FEES
<TABLE>
<CAPTION>
================================================================================
Assets Balanced Multi-Asset-Class
- --------------------------------------------------------------------------------
<S> <C> <C>
First $500 million 0.50% 0.65%
- --------------------------------------------------------------------------------
From $500 million to $1 billion 0.45% 0.60%
- --------------------------------------------------------------------------------
More than $1 billion 0.40% 0.55%
</TABLE>
37
<PAGE>
However, the Advisers, with respect to certain of the Portfolios, have agreed
to a reduction in their management fees and to reimburse the Portfolio, if
necessary, if such fees would cause the total annual operating expenses of the
Portfolio to exceed the respective percentage of average daily net assets set
forth in the table below.
<TABLE>
<CAPTION>
Maximum Total Annual
Operating Expenses After
Portfolio Fee Waivers
- --------- ------------------------
<S> <C>
Money Market 0.55%
Fixed Income 0.70%
High Yield 0.80%
International Fixed Income 0.80%
Emerging Markets Debt 1.25%
Balanced 0.80%
Multi-Asset-Class 0.95%
Growth 0.85%
Value 0.85%
Core Equity 0.85%
Mid Cap Growth 1.05%
Mid Cap Value 1.05%
U.S. Real Estate 1.10%
Global Equity 1.15%
International Magnum 1.15%
Emerging Markets Equity 1.75%
Asian Equity 1.20%
</TABLE>
OTHER EXPENSES
In addition to investment advisory and certain administrative expenses charged
by the administrator of each Portfolio, which is either MSAM or MAS, each
Portfolio pays all expenses not assumed by MSAM or MAS. Such expenses include
or could include investment-related expenses, such as brokers' commissions,
transfer taxes and fees related to the purchase, sale, or loan of securities;
fees and expenses for Directors not affiliated with MSAM or MAS; fees and
expenses of its independent accountants and legal counsel; costs of Director
and shareholder meetings; SEC fees; expenses of preparing and filing
registration statements; the cost of providing proxy statements, prospectuses
and statements of additional information to existing variable annuity contract
and variable life insurance policy owners; expenses of preparing and printing
the annual and semiannual shareholder reports to variable annuity contract and
variable life insurance policy owners; bank transaction charges and certain
custodians' fees and expenses; federal, state or local income or other taxes;
costs of maintaining the Portfolio's corporate existence; membership fees for
the Investment Company Institute and similar organizations; fidelity bond and
Directors' liability insurance premiums; and any extraordinary expenses such as
indemnification payments or damages awarded in litigation or settlements made.
All these expenses that are incurred by the Portfolio will be passed on to the
shareholders through a daily charge made to the assets held in the Portfolios,
which will be reflected in share prices.
PORTFOLIO TURNOVER
Under certain market conditions, a Portfolio may experience high portfolio
turnover as a result of its investment strategies. For example, the purchase or
sale of securities by a Portfolio in anticipation of a rise or decline in
interest rates or to take advantage of yield disparities among different issues
of Fixed Income Securities could result in high portfolio turnover. As a result
of their investment strategies, the Fixed Income, Mid Cap Value, U.S. Real
Estate and Emerging Markets Debt Portfolios' annual portfolio turnover rates
are expected to be as high as 200%. The High Yield, Mid Cap Growth and
International Fixed Income Portfolios' rates are expected to be as high as
150%. The International Fixed Income Portfolio and the fixed income portion of
the Balanced Portfolio will ordinarily exceed annual portfolio turnover rates
of 100%. Higher portfolio turnover rates for the Portfolios can result in
corresponding increases in expenses such as brokerage commissions and
transaction costs. Although none of the Portfolios other than the Money Market
Portfolio will invest for short-term trading purposes, investment securities
may be sold from time to time without regard to the length of time they have
been held and the Portfolios will not consider portfolio turnover rate a
limiting factor in making investment decisions consistent with their respective
objectives and policies. The tables that will be set forth in "Financial
Highlights" will present the Portfolios' historical turnover rates.
PERFORMANCE OF PORTFOLIOS
Each Portfolio's total return and yield may be quoted in advertising if
accompanied by performance of your insurance company's separate account.
Performance is based on historical results and is not intended to indicate
future performance. For additional performance information, contact your
insurance company for a free annual report.
TOTAL RETURN is the change in value of an investment in a Portfolio over a
given period, assuming reinvestment of any dividends and capital gains. A
cumulative total return reflects actual performance over a stated period of
time. An average annual total return is a hypothetical rate of return that, if
achieved annually, would have produced the same cumulative total return if
performance had been constant over the entire period. Average annual total
returns smooth out variations in performance; they are not the same as actual
year-by-year results.
Average annual total returns covering periods of less than one year assume that
performance will remain constant for the rest of the year.
YIELD refers to the income generated by an investment in a Portfolio over a
given period of time, expressed as an annual
38
<PAGE>
percentage rate. When a yield assumes that income is reinvested, it is called
an effective yield.
Seven-day yield illustrates the income earned by an investment in the Money
Market Portfolio over a recent seven-day period. Since the Money Market
Portfolio attempts to maintain a stable $1.00 share price, current seven-day
yields are the most common illustration of the Money Market Portfolio
performance.
Total returns and yields quoted for the Portfolios include each Portfolio's
expenses, but may not include charges and expenses attributable to any
particular insurance product. Since shares of the Portfolios may be purchased
only through variable annuity contracts and variable life insurance policies
and by tax qualified investors, such as qualified pension and retirement plans,
you should carefully review the prospectus of the insurance product you have
chosen for information on relevant charges and expenses. Excluding these
charges from quotations of each Portfolio's performance has the effect of
increasing the performance quoted. You should bear in mind the effect of these
charges when comparing a Portfolio's performance to that of other mutual funds.
PERFORMANCE OF INVESTMENT ADVISERS
The Advisers manage portfolios of Morgan Stanley Institutional Fund, Inc.
("MSIF") and MAS Funds, which served as the models for the Portfolios of the
Fund. The portfolios of MSIF and MAS Funds have substantially the same
investment objectives and policies of the Portfolios of the Fund. In addition,
the Advisers intend the Portfolios of the Fund and the corresponding portfolios
of MSIF and MAS Funds to be managed by the same personnel and to continue to
have closely similar investment strategies, techniques and characteristics. The
following table sets forth the name of each Portfolio of the Fund and the name
of the corresponding portfolio of MSIF or MAS Funds from which the Portfolio is
cloned.
<TABLE>
<CAPTION>
Corresponding MSIF Corresponding MAS Funds
Fund Portfolio portfolio portfolio
-------------- --------------------- --------------------------
<S> <C> <C>
Money Market Money Market
Fixed Income Fixed Income
High Yield High Yield
Core Equity Equity
Growth Equity Growth
Value Value
Mid Cap Growth Mid Cap Growth
Mid Cap Value Mid Cap Value
U.S. Real Estate U.S. Real Estate
International Fixed
Income International Fixed Income
Emerging Markets Debt Emerging Markets Debt
Global Equity Global Equity
International Magnum International Magnum
Emerging Markets Equity Emerging Markets
Asian Equity Asian Equity
Balanced Balanced
Multi-Asset-Class Multi-Asset-Class
</TABLE>
39
<PAGE>
Past investment performance of the portfolios of MSIF and MAS Funds, as shown
in the table below, may be relevant to your consideration of the Portfolios.
The investment performance of the portfolios of MSIF and MAS Funds is not
necessarily indicative of future performance of the Fund. Also, the operating
expenses of each of the Portfolios of the Fund will be different from, and may
be higher than, the operating expenses of the corresponding portfolio of the
MSIF or MAS Funds. The investment performance of the portfolios of MSIF and MAS
Funds is provided merely to indicate the experience of the Advisers in managing
similar portfolios.
<TABLE>
<CAPTION>
TOTAL RETURN
Six Months One Year Five Years Ten Years
(cumulative) (cumulative) (cumulative) (cumulative) 5 Year 10 Year
Ended Ended Ended Ended Average Average
Fund Name 6/30/96 6/30/96 6/30/96 6/30/96 Annualized Annualized
- --------- ------------ ------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
MSIF:
Equity Growth 16.64% 37.47% 117.78% NA 16.84% NA
Asian Equity 5.75% 5.58% 157.56% NA 20.83% NA
Global Equity 13.42% 20.05% NA NA NA NA
International Magnum(1) 4.40% NA NA NA NA NA
U.S. Real Estate 11.10% 24.20% NA NA NA NA
Emerging Markets Debt 18.39% 36.37% NA NA NA NA
Emerging Markets 20.24% 13.34% NA NA NA NA
MAS Funds:
Value 9.48% 22.83% 137.79% 266.89% 18.92% 13.88%
Equity 10.39% 24.05% 102.83% 235.45% 15.19% 12.87%
Mid Cap Growth 20.79% 44.04% 146.02% NA 19.73% NA
Mid Cap Value 16.42% 26.95% NA NA NA NA
Fixed Income 0.96% 8.44% 61.27% 146.13% 10.03% 9.43%
High Yield 4.93% 12.73% 94.42% NA 14.22% NA
International Fixed
Income 0.22% 2.33% NA NA NA NA
Multi-Asset-Class 7.90% 17.81% NA NA NA NA
Balanced 6.83% 18.13% NA NA NA NA
</TABLE>
- -------
(1)Since inception 3/15/96.
ACCOUNT POLICIES
- ----------------
DISTRIBUTIONS AND TAXES
The Fund intends each of its Portfolios to qualify as a separate entity under
the Internal Revenue Code of 1986, as amended (the "Code"), and to qualify as a
"regulated investment company" under Subchapter M of the Code. As a regulated
investment company under the Code, net income and net realized gains of each
Portfolio will be distributed to shareholders at least once a year (except
distributions from the Money Market Portfolio which will be made monthly).
As stated on the cover of this prospectus, shares of the Portfolios will be
purchased by life insurance companies for their separate accounts under
variable annuity contracts and variable life insurance policies and by other
entities under qualified pension and retirement plans. Under the provisions of
the Code currently in effect, net income and realized capital gains are not
currently taxable when left to accumulate within a variable annuity contract or
variable life insurance policy or under a qualified pension or retirement plan.
For information on federal income taxation of a life insurance company with
respect to its receipt of distributions from the Fund and federal income
taxation of owners of variable annuity contracts or variable life insurance
policies, refer to the life insurance company's variable annuity contract or
variable life insurance policy prospectus.
TRANSACTION DETAILS
THE PORTFOLIOS ARE OPEN FOR BUSINESS each day the New York Stock Exchange
("NYSE") is open. Each of the Core Equity, Growth, Value, Mid Growth, Mid Cap
Value, U.S. Real Estate, Emerging Markets Debt, Global Equity, International
Magnum, Emerging Markets Equity and Asian Equity Portfolio's NAV is determined
as of the close of business of the NYSE (normally 4:00 p.m. Eastern time) on
each day that the NYSE is open for business. The NYSE is currently scheduled to
be closed on New Year's Day, Washington's Birthday, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day, and on the
preceding Friday or subsequent Monday when any of these holidays falls on a
Saturday or Sunday, respectively.
Each of the Fixed Income, High Yield and International Fixed Income Portfolio's
NAV is determined as of one hour after the close of the bond markets (normally
4:00 p.m. Eastern time) on each day that the Portfolios are open for business.
40
<PAGE>
Each of the Balanced and Multi-Asset-Class Portfolio's NAV is determined as of
the later of the close of the NYSE or one hour after the close of the bond
markets on each day the Portfolios are open for business.
EACH PORTFOLIO'S NAV is the value of a single share. The NAV is computed by
adding the value of the Portfolio's investments, cash and other assets,
subtracting its liabilities, and then dividing the result by the number of
shares outstanding.
Except for the Money Market Portfolio, each Portfolio's assets are valued
primarily on the basis of market quotations. The Money Market Portfolio values
its assets by the amortized cost method, as described in the SAI, which
approximates market value. Foreign securities are valued on the basis of
quotations from the primary market in which they are traded, and are translated
from the local currency into U.S. dollars using current exchange rates. If
quotations are not readily available or if the values have been materially
affected by events occurring after the closing of a foreign market, assets are
valued by a method that the Fund's Board of Directors believes accurately
reflects fair value.
EACH PORTFOLIO'S OFFERING PRICE (price to buy one share) and REDEMPTION PRICE
(price to sell one share) are its NAV.
EACH PORTFOLIO RESERVES THE RIGHT TO SUSPEND THE OFFERING OF SHARES for a
period of time. Each Portfolio also reserves the right to reject any specific
order. Purchase orders may be refused if, in the Adviser's opinion, they would
disrupt management of a Portfolio.
INVESTMENTS AND REDEMPTIONS Investments may be made only by separate accounts
established and maintained by insurance companies for the purpose of funding
variable annuity contracts and variable life insurance policies and by tax
qualified investors, such as qualified pension and retirement plans. Please
refer to the prospectus of your insurance company's separate account or the
qualified plan documents for information on how to invest in and redeem shares
of each Portfolio.
Each participating insurance company receives orders from its variable annuity
contract and variable life insurance policy owners to purchase or redeem shares
of the Portfolios each business day. That night, all orders received by that
insurance company on that business day are aggregated, and the insurance
company places a net purchase or redemption order for shares of one or more
Portfolios the morning of the next business day. These orders are normally
executed at the NAV that was computed at the close of the previous business day
in order to provide a match between the variable contract and policy owners'
orders to the insurance companies and the insurance companies' orders to a
Portfolio. In some cases, an insurance company's orders for Portfolio shares
may be executed at the NAV next computed after the order is actually
transmitted to a Portfolio.
Redemption proceeds will normally be wired to the insurance company on the next
business day after receipt of the redemption instructions by a Portfolio but in
no event later than seven days following receipt of instructions. Each
Portfolio may suspend redemptions or postpone payment dates on days when the
NYSE is closed (other than weekends or holidays), when trading on the NYSE is
restricted, or as permitted by the SEC.
APPENDIX
- --------
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:
Aaa -- Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt-
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa -- Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as for Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds rated Baa are considered as medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds rated Ba are judged to have speculative elements. Their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B -- Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
41
<PAGE>
Caa -- Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca -- Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short-comings.
C -- Bonds rated C are the lowest-rated class of bonds and issued so rated can
be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Moody's applies numerical modifiers 1, 2 and 3, in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF S&P'S CORPORATE BOND RATINGS:
AAA -- Debt rated AAA has the highest rating assigned by S&P's to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher-rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB -- Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions that could lead to
inadequate capacity to meet timely interest and principal payments.
B -- Debt rated B has greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB- rating.
CCC -- Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal.
CC -- Debt rated CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C -- The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed but debt
service payments are continued.
CI -- The rating CI is reserved for income bonds on which no interest is being
paid.
D -- Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating will also be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
42
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
P.O. BOX 2798, BOSTON, MA 02208-2798
STATEMENT OF ADDITIONAL INFORMATION
MORGAN STANLEY UNIVERSAL FUNDS, INC. (THE "FUND") IS A NO-LOAD, OPEN-END
MANAGEMENT INVESTMENT COMPANY WITH DIVERSIFIED AND NON-DIVERSIFIED SERIES
("PORTFOLIOS"). THE FUND CURRENTLY CONSISTS OF SEVENTEEN PORTFOLIOS OFFERING A
BROAD RANGE OF INVESTMENT CHOICES. SHARES OF EACH PORTFOLIO ARE OFFERED WITH NO
SALES CHARGE OR EXCHANGE OR REDEMPTION FEE. SHARES OF EACH PORTFOLIO MAY BE
PURCHASED ONLY BY THE SEPARATE ACCOUNTS OF INSURANCE COMPANIES FOR THE PURPOSE
OF FUNDING VARIABLE ANNUITY CONTRACTS AND VARIABLE LIFE INSURANCE POLICIES AND
BY CERTAIN TAX-QUALIFIED INVESTORS. THE VARIABLE ANNUITY CONTRACT AND VARIABLE
LIFE INSURANCE POLICY HOLDERS INCUR FEES AND EXPENSES SEPARATE FROM THE FEES
AND EXPENSES CHARGED BY THE PORTFOLIOS. THIS STATEMENT OF ADDITIONAL
INFORMATION ADDRESSES INFORMATION OF THE FUND APPLICABLE TO EACH OF THE
SEVENTEEN PORTFOLIOS. THE FUND WAS INCORPORATED UNDER THE LAWS OF THE STATE OF
MARYLAND ON MARCH 26, 1996. THE FUND FILED A REGISTRATION STATEMENT WITH THE
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") REGISTERING ITSELF AS AN
OPEN-END MANAGEMENT INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF
1940, AS AMENDED (THE "1940 ACT"), AND ITS SHARES UNDER THE SECURITIES ACT OF
1933, AS AMENDED.
THE PORTFOLIOS ARE MANAGED BY EITHER MORGAN STANLEY ASSET MANAGEMENT INC.
("MSAM" OR AN "ADVISER") OR MILLER ANDERSON & SHERRERD, LLP ("MAS" OR AN
"ADVISER") THEREBY MAKING AVAILABLE IN A SINGLE PRODUCT THE COMBINED STRENGTH
OF THESE LEADING INVESTMENT MANAGEMENT FIRMS.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS BUT SHOULD BE READ
IN CONJUNCTION WITH THE PROSPECTUS FOR THE FUND'S PORTFOLIO(S) (THE
"PROSPECTUS"). THIS STATEMENT OF ADDITIONAL INFORMATION IS INCORPORATED BY
REFERENCE INTO THE PROSPECTUS IN ITS ENTIRETY. TO OBTAIN THE PROSPECTUS, PLEASE
CONTACT THE FUND OR YOUR INSURANCE COMPANY.
Table of Contents
<TABLE> Page
----
<S> <C>
Securities and Investment Techniques 2
- ------------------------------------
Taxes 12
- -----
Purchase of Shares 14
- ------------------
Redemption of Shares 14
- --------------------
Investment Limitations 14
- ----------------------
Determining Maturities of Certain Instruments 16
- ---------------------------------------------
Management of The Fund 17
- ----------------------
Net Asset Value for the Money Market Portfolio 21
- ----------------------------------------------
Performance Information 21
- -----------------------
General Information 25
- -------------------
Description of Certain Securities and Ratings 25
- ---------------------------------------------
Financial Statements 30
- --------------------
</TABLE>
Statement of Additional Information dated October 1, 1996, relating to:
Prospectus, dated October 1, 1996 for the Money Market, Fixed Income, High
Yield Equity, Core Equity, Growth, Value, Mid Cap Growth, Mid Cap Value, U.S.
Real Estate, International Fixed Income, Emerging Markets Debt, Global Equity,
International Magnum, Emerging Markets Equity, Asian Equity, Balanced and
Multi-Asset-Class Portfolios.
<PAGE>
SECURITIES AND INVESTMENT
- -------------------------
TECHNIQUES
- ----------
MSAM provides overall investment management for the following Portfolios: Money
Market, Growth, U.S. Real Estate, Emerging Markets Debt, Global Equity,
International Magnum, Emerging Markets Equity and Asian Equity Portfolios.
MAS provides overall investment management for the following Portfolios: Fixed
Income, High Yield, Core Equity, Value, Mid Cap Growth, Mid Cap Value,
International Fixed Income, Balanced and Multi-Asset-Class Portfolios.
The following discussion of the securities and investment techniques
supplements the discussion of investment policies, securities and investment
techniques set forth in the Fund's Prospectus:
Emerging Market Country Securities:
Equity Securities and Fixed Income Securities
GENERAL. Each of the Emerging Markets Equity and Emerging Markets Debt
Portfolio's definition of Emerging Market Country Equity Securities or Fixed
Income Securities includes securities of companies that may have
characteristics and business relationships common to companies in a country or
countries other than an emerging market country. As a result, the value of the
securities of such companies may reflect economic and market forces applicable
to other countries, as well as to an emerging market country. The Adviser
believes, however, that investment in such companies will be appropriate
because each Portfolio will invest only in those companies which, in its view,
have sufficiently strong exposure to economic and market forces in an emerging
market country such that their value will tend to reflect developments in such
emerging market country to a greater extent than developments in another
country or countries. For example, each of these Portfolios may invest in
companies organized and located in countries other than an emerging market
country, including companies having their entire production facilities outside
of an emerging market country, when securities of such companies meet one or
more elements of the Portfolio's definition of an Emerging Market Country
Equity Security or Fixed Income Security and so long as the Adviser believes at
the time of investment that the value of the company's securities will reflect
principally conditions in such emerging market country.
The Emerging Markets Debt Portfolio is subject to no restrictions on the
maturities of the Emerging Market Country Fixed Income Securities it holds. The
value of Fixed Income Securities held by each Portfolio generally will vary
inversely to changes in prevailing interest rates. Each Portfolio's investments
in fixed-rated Fixed Income Securities with longer terms to maturity are
subject to greater volatility than the Portfolio's investments in shorter-term
obligations. Debt obligations acquired at a discount are subject to greater
fluctuations of market value in response to changing interest rates than debt
obligations of comparable maturities which are not subject to such discount.
Investments in emerging market country government Fixed Income Securities
involve special risks. Certain emerging market countries have historically
experienced, and may continue to experience, high rates of inflation, high
interest rates, exchange rate fluctuations, large amounts of external debt,
balance of payments and trade difficulties and extreme poverty and
unemployment. The issuer or governmental authority that controls the repayment
of an emerging market country's debt may not be able or willing to repay the
principal and/or interest when due in accordance with the terms of such debt.
As a result of the foregoing, a government obligor may default on its
obligations. If such an event occurs, the Portfolio may have limited legal
recourse against the issuer and/or guarantor. Remedies must, in some cases, be
pursued in the courts of the defaulting party itself, and the ability of the
holder of foreign government Fixed Income Securities to obtain recourse may be
subject to the political climate in the relevant country. In addition, no
assurance can be given that the holders of commercial bank debt will not
contest payments to the holders of other foreign government debt obligations in
the event of default under their commercial bank loan agreements.
BRADY BONDS. The Fixed Income, High Yield, International Fixed Income,
Balanced, Multi-Asset-Class, Emerging Markets Equity and Emerging Markets Debt
Portfolios may invest in certain Fixed Income Securities customarily referred
to as "Brady Bonds," which are created through the exchange of existing
commercial bank loans to foreign entities for new obligations in connection
with debt restructuring under a plan introduced by former U.S. Secretary of the
Treasury Nicholas F. Brady (the "Brady Plan"). Brady Bonds have been issued
only in recent years, and, accordingly, do not have a long payment history.
They may be collateralized or uncollateralized and issued in various currencies
(although most are U.S. dollar-denominated) and they are actively traded in the
over-the- counter secondary market. The Portfolio may purchase Brady Bonds
either in the primary or secondary markets. The price and yield of Brady Bonds
purchased in the secondary market will reflect the market conditions at the
time of purchase, regardless of the stated face amount and the stated interest
rate. With respect to Brady Bonds with no or limited collateralization, each
Portfolio will rely for payment of interest and principal primarily on the
willingness and ability of the issuing government to make payment in accordance
with the terms of the bonds.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed rate
par bonds or floating rate discount bonds, are generally collateralized in full
as to principal due at maturity by U.S. Treasury zero coupon obligations which
have the same maturity as the Brady Bonds. Interest payments on these Brady
Bonds generally are collateralized
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by cash or securities in an amount that, in the case of fixed rate bonds, is
equal to at least one year of rolling interest payments or, in the case of
floating rate bonds, initially is equal to at least one year's rolling interest
payments based on the applicable interest rate at that time and is adjusted at
regular intervals thereafter. Certain Brady Bonds are entitled to "value
recovery payments" in certain circumstances, which in effect constitute
supplemental interest payments but generally are not collateralized. Brady
Bonds are often viewed as having three or four valuation components: (i) the
collateralized repayment of principal at final maturity; (ii) the
collateralized interest payments; (iii) the uncollateralized interest payments;
and (iv) any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk"). In the event of a
default with respect to collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury zero
coupon obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held to the scheduled maturity of the
defaulted Brady Bonds by the collateral agent, at which time the face amount of
the collateral will equal the principal payments which would have then been due
on the Brady Bonds in the normal course. In addition, in light of the residual
risk of the Brady Bonds and, among other factors, the history of defaults with
respect to commercial bank loans by public and private entities of countries
issuing Brady Bonds, investments in Brady Bonds should be viewed as
speculative.
EURODOLLAR AND YANKEE DOLLAR OBLIGATIONS
Eurodollar bank obligations are dollar-denominated certificates of deposit and
time deposits issued outside the U.S. capital markets by foreign branches of
U.S. banks and by foreign banks. Yankee dollar bank obligations are dollar-
denominated obligations issued in the U.S. capital markets by foreign banks.
Eurodollar and Yankee dollar obligations are subject to the same risks that
pertain to domestic issues, notably credit risk, market risk and liquidity
risk. Additionally, Eurodollar (and to a limited extent, Yankee dollar)
obligations are subject to certain sovereign risks. One such risk is the
possibility that a sovereign country might prevent capital, in the form of
dollars, from flowing across their borders. Other risks include adverse
political and economic developments; the extent and quality of government
regulation of financial markets and institutions; the imposition of foreign
withholding taxes; and the expropriation or nationalization of foreign issuers.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The U.S. dollar value of the assets of the Global Equity, International Fixed
Income, Asian Equity, International Magnum, Emerging Markets Equity and
Emerging Markets Debt Portfolios and, to the extent they invest in securities
denominated in foreign currencies, the assets of the Balanced, Multi-Asset-
Class, Fixed Income, High Yield, Value, Core Equity, Mid Cap Growth and Mid Cap
Value Portfolios may be affected favorably or unfavorably by changes in foreign
currency exchange rates and exchange control regulations, and each Portfolio
may incur costs in connection with conversions between various currencies. The
Portfolios will conduct their foreign currency exchange transactions either on
a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market, or through entering into forward contracts to purchase or sell
foreign currencies. A forward currency exchange contract involves an obligation
to purchase or sell a specific currency at a future date, which may be any
fixed number of days from the date of the contract agreed upon by the parties,
at a price set at the time of the contract. These contracts are traded in the
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. A forward contract generally has no
deposit requirement, and no commissions are charged at any stage for such
trades.
The Portfolios may enter into forward foreign currency exchange contracts in
several circumstances. When a Portfolio enters into a contract for the purchase
or sale of a security denominated in a foreign currency, or when a Portfolio
anticipates the receipt in a foreign currency of dividends or interest payments
on a security which it holds, the Portfolio may desire to "lock-in" the U.S.
dollar price of the security or the U.S. dollar equivalent of such dividend or
interest payment, as the case may be. By entering into a forward contract for a
fixed amount of dollars, for the purchase or sale of the amount of foreign
currency involved in the underlying transactions, each Portfolio will be able
to protect itself against a possible loss resulting from an adverse change in
the relationship between the U.S. dollar and the subject foreign currency
during the period between the date on which the security is purchased or sold,
or on which the dividend or interest payment is declared, and the date on which
such payments are made or received.
Additionally, when any of these Portfolios anticipates that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract for a fixed amount of dollars, to
sell the amount of foreign currency approximating the value of some or all of
such Portfolio's securities denominated in such foreign currency. The precise
matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of securities in
foreign currencies will change as a consequence of market movements in the
value of these securities between the date on which the forward contract is
entered into and the date it matures. The projection of short-term currency
market movement is extremely difficult, and the successful execution of a
short-term hedging strategy is highly uncertain. None of the Portfolios intend
to enter into such forward contracts to protect the value of portfolio
securities on a continuous basis.
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Under normal circumstances, consideration of the prospect for currency parities
will be incorporated into the long-term investment decisions made with regard
to overall diversification strategies. However, the management of the Fund
believes that it is important to have the flexibility to enter into such
forward contracts when it determines that the best interests of the performance
of each Portfolio will thereby be served. Except under circumstances where a
segregated account is not required under the 1940 Act or the rules adopted
thereunder, the Fund's custodian will place liquid, unencumbered assets, the
value of which is marked to market daily, into a segregated account of a
Portfolio in an amount equal to the value of such Portfolio's total assets
committed to the consummation of forward currency exchange contracts. If the
value of the securities placed in the segregated account declines, additional
cash or securities will be placed in the account on a daily basis so that the
value of the account will be equal to the amount of such Portfolio's
commitments with respect to such contracts.
The Portfolios generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, a Portfolio may
either sell the portfolio security and make delivery of the foreign currency,
or it may retain the security and terminate its contractual obligation to
deliver the foreign currency by purchasing an "offsetting" contract with the
same currency trader obligating it to purchase, on the same maturity date, the
same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly,
it may be necessary for a Portfolio to purchase additional foreign currency on
the spot market (and bear the expense of such purchase) if the market value of
the security is less than the amount of foreign currency that such Portfolio is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency.
If a Portfolio retains the portfolio security and engages in an offsetting
transaction, such Portfolio will incur a gain or a loss (as described below) to
the extent that there has been movement in forward contract prices. Should
forward prices decline during the period between a Portfolio entering into a
forward contract for the sale of a foreign currency and the date it enters into
an offsetting contract for the purchase of the foreign currency, such Portfolio
will realize a gain to the extent that the price of the currency it has agreed
to sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, such Portfolio would suffer a loss to the extent that
the price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
The Portfolios are not required to enter into such transactions with regard to
their foreign currency-denominated securities. It also should be realized that
this method of protecting the value of portfolio securities against a decline
in the value of a currency does not eliminate fluctuations in the underlying
prices of the securities. It simply establishes a rate of exchange which one
can achieve at some future point in time. Additionally, although such contracts
tend to minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might
result should the value of such currency increase.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Fixed Income, High Yield, International Fixed Income, Emerging Markets
Debt, Balanced, Multi-Asset-Class, Growth, Value, Core Equity, Mid Cap Growth,
Mid Cap Value, U.S. Real Estate, International Magnum and Emerging Markets
Equity Portfolios may enter into futures contracts and options on futures
contracts for the purpose of remaining fully invested and reducing transactions
costs. The Money Market, Emerging Markets Debt, Growth, Emerging Markets
Equity, International Magnum and U.S. Real Estate Portfolios may also enter
into futures contracts for hedging purposes. Futures contracts provide for the
future sale by one party and purchase by another party of a specified amount of
a specific security at a specified future time and at a specified price.
Futures contracts, which are standardized as to maturity date and underlying
financial instrument, are traded on national futures exchanges. Futures
exchanges and trading are regulated under the Commodity Exchange Act by the
Commodity Futures Trading Commission ("CFTC"), a U.S. government agency.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities or currencies, in most cases the
contracts are closed out before the settlement date without the making or
taking of delivery. Closing out an open futures position is done by taking an
opposite position ("buying" a contract which has previously been "sold" or
"selling" a contract previously "purchased") in an identical contract to
terminate the position. Brokerage commissions are incurred when a futures
contract is bought or sold.
Futures contracts on securities indices or other indices do not require the
physical delivery of securities, but merely provide for profits and losses
resulting from changes in the market value of a contract to be credited or
debited at the close of each trading day to the respective accounts of the
parties to the contract. On the contract's expiration date a final cash
settlement occurs and the futures position is simply closed out. Changes in the
market value of a particular futures contract reflect changes in the level of
the index on which the futures contract is based.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion
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of the contract (delivery or acceptance of the underlying security) if it is
not terminated prior to the specified delivery date. Minimal initial margin
requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold for prices that
may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent
that the margin on deposit does not satisfy margin requirements, payment of an
additional "variation" margin will be required. Conversely, a change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The
Portfolios expect to earn interest income on their margin deposits. With
respect to each long position in a futures contract or option thereon, the
underlying commodity value of such contract will always be covered by cash and
cash equivalents set aside plus accrued profits held at the futures commission
merchant.
The Portfolios may purchase and write call and put options on futures contracts
which are traded on a U.S. exchange and enter into closing transactions with
respect to such options to terminate an existing position. In addition, the
Growth, Fixed Income, High Yield, Core Equity, Value, Mid Cap Growth, Mid Cap
Value, International Fixed Income, Balanced and Multi-Asset-Class Portfolios
may purchase and write call and put options on futures that are traded on an
international exchange, traded over-the-counter or which are synthetic options
or futures or equity swaps, and may enter into closing transactions with
respect to such options to terminate an existing position. An option on a
futures contract gives the purchaser the right (in return for the premium paid)
to assume a position in a futures contract (a long position if the option is a
call and a short position if the option is a put) at a specified exercise price
at any time during the term of the option. Upon exercise of the option, the
accumulated balance in the writer's futures margin account is delivered to the
option holder, which represents the amount by which the market price of the
futures contract at the time of exercise exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option on the
futures contract.
The Portfolios will purchase and write options on futures contracts for
identical purposes to those set forth above for the purchase of a futures
contract (purchase of a call option or sale of a put option) and the sale of a
futures contract (purchase of a put option or sale of a call option), or to
close out a long or short position in futures contracts.
Traders in futures contracts may be broadly classified as either "hedgers" or
"speculators". Hedgers use the futures markets primarily to offset unfavorable
changes in the value of securities otherwise held for investment purposes or
expected to be acquired by them. Speculators are less inclined to own the
underlying securities with futures contracts which they trade, and use futures
contracts with the expectation of realizing profits from market fluctuations.
Regulations of the CFTC applicable to the Portfolios permit the use of futures
transactions for bona fide hedging purposes without regard to the percentage of
assets committed to futures margins and for options premiums. In addition, CFTC
regulations also allow the Portfolios to employ futures transactions for other
non-hedging purposes to the extent that aggregate initial futures margins and
options premiums do not exceed 5% of the liquidation value of a Portfolio's
total assets. The Portfolios will only sell futures contracts to protect
securities owned against declines in price or purchase futures contracts to
protect against an increase in the price of securities intended for purchase.
As evidence of this hedging interest, each of the Portfolios expect that
approximately 75% of its futures contracts will be "completed"; that is,
equivalent amounts of related securities will have been purchased or are being
purchased by the Portfolios upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts could
be used to control the Portfolios' exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
the Portfolios will incur commission expenses in both opening and closing out
futures positions, these costs are lower than transaction costs incurred in the
purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. A Portfolio will not enter into
futures contract transactions to the extent that, immediately thereafter, the
sum of its initial margin deposits on open contracts exceeds 5% of the market
value of its total assets. The Fixed Income, High Yield, International Fixed
Income, Balanced, Multi-Asset-Class, Value, Core Equity, Mid Cap Growth and Mid
Cap Value Portfolios will not enter into futures contracts to the extent that
their outstanding obligations to purchase securities under these contracts in
combination with their outstanding obligations with respect to options
transactions would exceed 50% of their respective total assets, or in the case
of the Emerging Markets Debt, Growth, U.S. Real Estate, International Magnum
and Emerging Markets Equity Portfolios, outstanding obligations would not
exceed 20% of their respective total assets. In addition, the Emerging Markets
Equity Portfolio will not enter into any futures contract or option if
immediately thereafter the value of all the foreign currencies underlying its
futures contracts and foreign currency options would exceed 10% of the value of
its total assets. The Portfolios will maintain assets sufficient to meet their
respective obligations under such contracts in a segregated account with the
custodian bank or will otherwise comply with the SEC's position on asset
coverage.
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RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contracts at any specific time. Thus, it may
not be possible to close a futures position. In the event of adverse price
movements, the Portfolios would continue to be required to make daily cash
payments to maintain their required margin. In such situations, if a Portfolio
has insufficient cash, it may have to sell portfolio securities to meet its
daily margin requirement at a time when it may be disadvantageous to do so. In
addition, a Portfolio may be required to make delivery of the instruments
underlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on a Portfolio's ability to
effectively hedge.
The Portfolios will minimize the risk that they will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if, at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit if the contract
were closed out. Thus, a purchase or sale of a futures contract may result in
losses in excess of the amount invested in the contract. However, because the
Portfolios may engage in futures strategies only for hedging purposes, the
Advisers do not believe that the Portfolios are subject to the risks of loss
frequently associated with futures transactions. A Portfolio would presumably
have sustained comparable losses if, instead of the futures contract, it had
invested in the underlying security or currency and sold it after the decline.
Utilization of futures transactions by the Portfolios does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities or currencies being
hedged. It is also possible that a Portfolio could both lose money on futures
contracts and also experience a decline in value of its portfolio securities.
There is also the risk of loss by a Portfolio of margin deposits in the event
of bankruptcy of a broker with whom the Portfolio has an open position in a
futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades
may be made on that day at a price beyond that limit. The daily limit governs
only price movement during a particular trading day and therefore does not
limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
LOAN PARTICIPATIONS AND ASSIGNMENTS
The Balanced, Emerging Markets Debt, Emerging Markets Equity, Fixed Income,
High Yield and Multi-Asset-Class Portfolios may invest in loans and other
direct debt instruments ("Loans") from third parties ("Lenders"). A Portfolio's
investments in Loans are expected in most instances to be in the form of
participations in Loans ("Participations") and assignments of all or portions
of Loans ("Assignments") from third parties. Each Portfolio's investment in
Participations typically will result in each Portfolio having a contractual
relationship only with the Lender and not with the borrower. Each Portfolio
will have the right to receive payments of principal, interest and any fees to
which it is entitled only from the Lender selling the Participation and only
upon receipt by the Lender of the payments from the borrower. In connection
with purchasing Participations, each Portfolio generally will have no right to
enforce compliance by the borrower with the terms of the loan agreement
relating to the Loan, nor any rights of set-off against the borrower, and each
Portfolio may not directly benefit from any collateral supporting the Loan in
which it has purchased the Participation. As a result, each Portfolio may be
subject to the credit risk of both the borrower and the Lender that is selling
the Participation. In the event of the insolvency of the Lender selling a
Participation, each Portfolio may be treated as a general creditor of the
Lender and may not benefit from any set-off between the Lender and the
borrower. Certain Participations may be structured in a manner designed to
avoid purchasers of Participations being subject to the credit risk of the
Lender with respect to the Participation, but even under such a structure, in
the event of the Lender's insolvency, the Lender's servicing of the
Participation may be delayed and the assignability of the Participation
impaired. Each Portfolio will acquire Participations only if the Lender
interpositioned between the Portfolio and the borrower is determined by the
Adviser to be creditworthy. The Emerging Markets Equity and Emerging Markets
Debt Portfolio may invest in fixed and floating rate loans arranged through
private negotiations between an issuer of sovereign debt obligations and one or
more financial institutions.
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When a Portfolio purchases Assignments from Lenders it will acquire direct
rights against the borrower on the Loan. Because Assignments are arranged
through private negotiations between potential assignees and potential
assignors, however, the rights and obligations acquired by each Portfolio as
the purchaser of an Assignment may differ from, and be more limited than, those
held by the assigning Lender. The assignability of certain sovereign debt
obligations is restricted by the governing documentation as to the nature of
the assignee such that the only way in which each Portfolio may acquire an
interest in a loan is through a Participation and not an Assignment. Each
Portfolio may have difficulty disposing of Assignments and Participations
because to do so it will have to assign such securities to a third party.
Because there is no liquid market for such securities, the Portfolio
anticipates that such securities could be sold only to a limited number of
institutional investors. The lack of a liquid secondary market may have an
adverse impact on the value of such securities and each Portfolio's ability to
dispose of particular Assignments or Participations when necessary to meet each
Portfolio's liquidity needs or in response to a specific economic event such as
a deterioration in the creditworthiness of the borrower. The lack of a liquid
secondary market for Assignments and Participations also may make it more
difficult for each Portfolio to assign a value to these securities for purposes
of valuing the Portfolio's securities and calculating its net asset value.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX
The International Magnum Portfolio uses the Morgan Stanley Capital
International EAFE (Europe, Australia and the Far East) Index (the "EAFE
Index") as a tool for investment decisions. The investment objective of the
International Magnum Portfolio is to provide long-term capital appreciation.
The International Magnum Portfolio seeks to achieve its objective by investing
primarily in Equity Securities of non-U.S. issuers in accordance with the EAFE
country (defined below) weightings determined by the Adviser. After
establishing regional allocation strategies, the Adviser then selects Equity
Securities among issuers of a region. The International Magnum Portfolio
invests in countries comprising the EAFE Index (each, an "EAFE country").
The EAFE Index is one of seven international indices, twenty national indices
and thirty-eight international industry indices making up the Morgan Stanley
Capital International Indices. The Morgan Stanley Capital International EAFE
Index is based on the share prices of 1,066 companies listed on the stock
exchanges of Europe, Australia, New Zealand and the Far East. "Europe" includes
Austria, Belgium, Denmark, Finland, France, Germany, Italy, The Netherlands,
Norway, Spain, Sweden, Switzerland and the United Kingdom. "Far East" includes
Japan, Hong Kong and Singapore/Malaysia.
OPTIONS
GENERAL INFORMATION. As stated in the Prospectus, the Portfolios may purchase
and sell options on Equity Securities. Additional information with respect to
option transactions is set forth below. Call and put options on Equity
Securities are listed on various U.S. and foreign securities exchanges ("listed
options") and are written in over-the-counter transaction ("OTC options").
Listed options are issued or guaranteed by the exchange on which they trade or
by a clearing corporation, such as Options Clearing Corporation ("OCC") in the
United States. Ownership of a listed call option gives the fund the right to
buy from the clearing corporation or exchange, the underlying security covered
by the option at the stated exercise price (the price per unit of the
underlying security or currency) by filing an exercise notice prior to the
expiration date of the option. The writer (seller) of the option would then
have the obligation to sell to the clearing corporation or exchange, the
underlying security or currency at that exercise price prior to the expiration
date of the option, regardless of its current market price. Ownership of a
listed put option would give each Portfolio the right to sell the underlying
security or currency to the clearing corporation or exchange at the stated
exercise price. Upon notice of exercise of the put option, the writer of the
option would have the obligation to purchase the underlying security from the
clearing corporation or exchange at the exercise price.
OTC options are purchased from or sold (written) to dealers or financial
institutions which have entered into direct agreements with each Portfolio.
With OTC options, such variables as expiration date exercise price and premium
will be agreed upon between each Portfolio and the transactions dealer, without
the intermediary of a third party such as a clearing corporation or exchange.
If the transacting dealer fails to make or take delivery of the securities
underlying an option it has written, in accordance with the terms of that
option, each Portfolio would lose the premium paid for the option as well as
any anticipated benefit of the transaction.
COVERED CALL WRITING. Each of the Portfolios may write (i.e., sell) covered
call options on portfolio securities. By doing so, the Portfolio would become
obligated during the terms of the option to deliver the securities underlying
the option should the option holder choose to exercise the option before the
option's termination date. In return for the call it has written, each
Portfolio will receive from the purchaser (or option holder) a premium which is
the price of the option, less a commission charged by a broker. Each Portfolio
will keep the premium regardless of whether the option is exercised. A call
option is "covered" if the Portfolio owns the security underlying the option it
has written or has an absolute or immediate right to acquire the security by
holding a call option on such security, or maintains in a segregated account a
sufficient amount of cash, cash equivalents or liquid securities to purchase
the underlying security. When
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the Portfolio writes covered call options, it augments its income by the
premiums received and is thereby hedged to the extent of that amount against a
decline in the price of the underlying securities and the premiums received
will offset a portion of the potential loss incurred by the Portfolio if the
securities underlying the options are ultimately sold by the Portfolio at a
loss. However, during the option period, each Portfolio has, in return for the
premium on the option, given up the opportunity for capital appreciation above
the exercise price should the market price of the underlying security increase,
but has retained the risk of loss should the price of the underlying security
decline. The size of premiums will fluctuate with varying market conditions.
COVERED PUT WRITING. Each of the Portfolios may write covered put options on
portfolio securities. By doing so, the Portfolio incurs an obligation to buy
the security underlying the option from the purchaser of the put at the
option's exercise price at any time during the option period, at the
purchaser's election (certain listed and OTC options written by the Portfolio
will be exercisable by the purchaser only on a specific date). Generally, a put
option is "covered" if the Portfolio maintains in a segregated account an
amount of cash, U.S. Government securities or other high grade debt obligations
equal to the exercise price of the option or if the Portfolio holds a put
option on the same underlying security with a similar or higher exercise price.
Each of the Portfolios will write put options (i) to receive the premiums paid
by purchasers; (ii) when the Adviser wishes to purchase the security underlying
the option at a price lower than its current market price, in which case it
will write the covered put at an exercise price reflecting the lower purchase
price sought; and (iii) to close out a long put option position.
PURCHASE OF PUT AND CALL OPTIONS. Each of the Portfolios may purchase listed or
OTC put or call options on its portfolio securities in amounts exceeding no
more than 5% of its total assets. When each Portfolio purchases a call option
it acquires the right to purchase a designated security at a designated price
(the "exercise price"), and when each Portfolio purchases a put option it
acquires the right to sell a designated security at the exercise price, in each
case on or before a specified date (the "termination date"), usually not more
than nine months from the date the option is issued.
Each Portfolio may purchase call options to close out a covered call position
or to protect against an increase in the price of a security it anticipates
purchasing. Each Portfolio may purchase put options on securities which it
holds in its portfolio only to protect itself against a decline in the value of
the security. If the value of the underlying security were to fall below the
exercise price of the put purchased in an amount greater than the premium paid
for the option, each Portfolio would incur no additional loss. Each Portfolio
may also purchase put options to close out written put positions in a manner
similar to call option closing purchase transactions.
The amount each Portfolio pays to purchase an option is called a "premium," and
the risk assumed by the Portfolio when it purchases an option is the loss of
this premium. Because the price of an option tends to move with that of its
underlying security, if a Portfolio is to make a profit, the price of the
underlying security must change and the change must be sufficient to cover the
premium and commissions paid. A price change in the security underlying the
option does not assure a profit since prices in the options market may not
always reflect such a change.
SPECIAL RISKS ASSOCIATED WITH FORWARD CONTRACTS, FOREIGN CURRENCY FUTURES
CONTRACTS AND OPTIONS THEREON AND OPTIONS ON FOREIGN CURRENCIES.
Transactions in forward contracts, as well as futures and options on foreign
currencies, are subject to the risk of governmental actions affecting trading
in or the prices of currencies underlying such contracts, which could restrict
or eliminate trading and could have a substantial adverse effect on the value
of positions held by each Portfolio permitted to engage in such hedging
transactions. In addition, the value of such positions could be adversely
affected by a number of other complex political and economic factors applicable
to the countries issuing the underlying currencies.
Furthermore, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying forward contracts, futures contracts and options. As a
result, the available information on which a Portfolio's trading systems will
be based may not be as complete as the comparable data on which such Portfolio
makes investment and trading decisions in connection with other securities and
transactions. Moreover, because the foreign currency market is a global,
twenty-four hour market, events could occur on that market which will not be
reflected in the forward, futures or options markets until the following day,
thereby preventing a Portfolio from responding to such events in a timely
manner.
Settlements of over-the-counter forward contracts or of the exercise of foreign
currency options generally must occur within the country issuing the underlying
currency, which in turn requires parties to such contracts to accept or make
delivery of such currencies in conformity with any United States or foreign
restrictions and regulations regarding the maintenance of foreign banking
relationships, fees, taxes or other charges.
Unlike currency futures contracts and exchange-traded options, options on
foreign currencies and forward contracts are not traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency
options) the Securities and Exchange Commission (the "Commission"). In an over-
the-counter trading environment, many of the protections associated with
transactions on exchanges will
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not be available. For example, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Although the purchaser of an option cannot lose more than the
amount of the premium plus related transaction costs, this entire amount could
be lost. Moreover, an option writer could lose amounts substantially in excess
of its initial investment due to the margin and collateral requirements
associated with such option positions. Similarly, there is no limit on the
amount of potential losses on forward contracts to which a Portfolio is a
party.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of a
Portfolio's position unless the institution acts as broker and is able to find
another counterparty willing to enter into the transaction with such Portfolio.
Where no such counterparty is available, it will not be possible to enter into
a desired transaction. There also may be no liquid secondary market in the
trading of over-the-counter contracts, and a Portfolio may be unable to close
out options purchased or written, or forward contracts entered into, until
their exercise, expiration or maturity. This in turn could limit a Portfolio's
ability to realize profits or to reduce losses on open positions and could
result in greater losses.
Furthermore, over-the-counter transactions are not backed by the guarantee of
an exchange's clearing corporation. A Portfolio will therefore be subject to
the risk of default by, or the bankruptcy of, the financial institution serving
as its counterparty. One or more of such institutions also may decide to
discontinue its role as market-maker in a particular currency, thereby
restricting a Portfolio's ability to enter into desired hedging transactions. A
Portfolio will enter into over-the-counter transactions only with parties whose
creditworthiness has been reviewed and found satisfactory by the Adviser.
Over-the-counter options on foreign currencies, like exchange-traded commodity
futures contracts and commodity option contracts, are within the exclusive
regulatory jurisdiction of the CFTC. The CFTC currently permits the trading of
such options, but only subject to a number of conditions regarding the
commercial purpose of the purchaser of such options. Forward contracts and
currency swaps are not presently subject to regulation by the CFTC, although
the CFTC may in the future assert or be granted authority to regulate such
instruments. In such event, a Portfolio's ability to utilize forward contracts
and currency swaps in the manner set forth above and in the applicable
Prospectus could be restricted.
Options on foreign currencies traded on a national securities exchange are
within the jurisdiction of the Commission, as are other securities traded on
such exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency options positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation ("OCC"), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national securities
exchange may be more readily available than in the over-the-counter market,
potentially permitting a Portfolio to liquidate open positions at a profit
prior to exercise or expiration, or to limit losses in the event of adverse
market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effect of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For
example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures for
exercise and settlement, such as technical changes in the mechanics of delivery
of currency, the fixing of dollar settlement prices or prohibitions on
exercise.
PORTFOLIO TURNOVER
The portfolio turnover rate for a year is calculated by dividing the lesser of
the value of the purchases or sales for the year by the average monthly market
value of the Portfolio for the year, excluding from this calculation securities
with maturities of one year or less. The rate of portfolio turnover will not be
a limiting factor when a Portfolio deems it appropriate to purchase or sell
securities for the Portfolio. However, the U.S. federal tax requirement that a
Portfolio derive less than 30% of its gross income from the sale or disposition
of securities held less than three months may limit a Portfolio's ability to
dispose of its securities. For additional information, see "Taxes".
REPURCHASE AGREEMENTS
Each Portfolio may invest in repurchase agreements collateralized by liquid,
unencumbered assets, the value of which is marked to market daily. Repurchase
agreements are transactions by which a Portfolio purchases a security and
simultaneously commits to resell that security to the seller (a bank or
securities dealer) at an agreed upon price on an agreed upon date (usually
within seven days of purchase). The resale price reflects the purchase price
plus an agreed upon market rate of interest which is unrelated to the coupon
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rate or date of maturity of the purchased security. In these transactions, the
securities purchased by a Portfolio have a total value in excess of the value
of the repurchase agreement and are held by the Portfolio's custodian bank
until repurchased. Such agreements permit a Portfolio to keep all its assets at
work while retaining "overnight" flexibility in pursuit of investments of a
longer- term nature. The Portfolio's Adviser and the Administrator will
continually monitor the value of the underlying securities to ensure that their
value always equals or exceeds the repurchase price.
The use of repurchase agreements involves certain risks. For example, if the
seller of the agreements defaults on its obligation to repurchase the
underlying securities at a time when the value of these securities has
declined, a Portfolio may incur a loss upon disposition of them. If the seller
of the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a bankruptcy court may determine that
the underlying securities are collateral not within the control of a Portfolio
and therefore subject to sale by the trustee in bankruptcy. Finally, it is
possible that a Portfolio may not be able to substantiate its interest in the
underlying securities. While the Fund's management acknowledges these risks, it
is expected that they can be controlled through stringent security selection
criteria and careful monitoring procedures.
SECURITIES LENDING
Each Portfolio may lend its investment securities to qualified institutional
investors who need to borrow securities in order to complete certain
transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending its investment
securities, a Portfolio attempts to increase its net investment income through
the receipt of interest on the loan. Any gain or loss in the market price of
the securities loaned that might occur during the term of the loan would be for
the account of the Portfolio. Each Portfolio may lend its investment securities
to qualified brokers, dealers, domestic and foreign banks or other financial
institutions, so long as the terms, structure and the aggregate amount of such
loans are not inconsistent with the 1940 Act or the Rules and Regulations or
interpretations of the Commission thereunder, which currently require that (a)
the borrower pledge and maintain with the Portfolio collateral consisting of
liquid, unencumbered assets having a value at all times not less than 100% of
the value of the securities loaned, (b) the borrower add to such collateral
whenever the price of the securities loaned rises (i.e., the borrower "marks to
the market" on a daily basis), (c) the loan be made subject to termination by
the Portfolio at any time, and (d) the Portfolio receive reasonable interest on
the loan (which may include the Portfolio investing any cash collateral in
interest bearing short-term investments), any distributions on the loaned
securities and any increase in their market value. There may be risks of delay
in recovery of the securities or even loss of rights in the collateral should
the borrower of the securities fail financially. However, loans will only be
made to borrowers deemed by the Adviser to be of good standing and when, in the
judgment of the Adviser, the consideration which can be earned currently from
such securities loans justifies the attendant risk. All relevant facts and
circumstances, including the creditworthiness of the broker, dealer or
institution, will be considered in making decisions with respect to the lending
of securities, subject to review by the Board of Directors of the Fund.
At the present time, the staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Board of Directors. In addition, voting
rights may pass with the loaned securities, but if a material event will occur
affecting an investment on loan, the loan must be called and the securities
voted.
SHORT SALES
The Emerging Markets Debt, Fixed Income, High Yield, Core Equity, Value, Mid
Cap Growth, Mid Cap Value, International Fixed Income, Balanced and Multi-
Asset-Class Portfolios may from time to time sell securities short without
limitation but consistent with applicable legal requirements. A short sale is a
transaction in which the Portfolio would sell securities it owns or has the
right to acquire at no added cost (i.e., "against the box") or does not own
(but has borrowed) in anticipation of a decline in the market price of the
securities. When the Portfolio makes a short sale of borrowed securities, the
proceeds it receives from the sale will be held on behalf of a broker until the
Portfolio replaces the borrowed securities. To deliver the securities to the
buyer, the Portfolio will need to arrange through a broker to borrow the
securities and, in so doing, the Portfolio will become obligated to replace the
securities borrowed at their market price at the time of replacement, whatever
that price may be. The Portfolio may have to pay a premium to borrow the
securities and must pay any dividends or interest payable on the securities
until they are replaced.
The Portfolio's obligation to replace the securities borrowed in connection
with a short sale will be secured by collateral deposited with the broker that
consists of liquid unencumbered assets. In addition, if the short sale is not
"against the box," the Portfolio will place in a segregated account with its
custodian, or designated sub-custodian, an amount of unencumbered liquid assets
equal to the difference, if any, between (1) the market value of the securities
sold at the time they were sold short and (2) any unencumbered liquid assets
deposited as collateral with the broker in connection with the short sale (not
including the proceeds of the short sale). Until it replaces the borrowed
securities, the Portfolio will maintain the segregated account daily at a level
so that (1) the amount deposited in the account plus the amount deposited with
the broker (not including the proceeds from the short sale) will equal the
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current market value of the securities sold short and (2) the amount deposited
in the account plus the amount deposited with the broker (not including the
proceeds from the short sale) will not be less than the market value of the
securities at the time they were sold short.
Short sales by the Portfolio involve certain risks and special considerations.
Possible losses from short sales differ from losses that could be incurred from
a purchase of a security, because losses from short sales may be unlimited,
whereas losses from purchases can equal only the total amount invested.
STRUCTURED SECURITIES
Each of the Fixed Income, Balanced, International Fixed Income, Multi-Asset-
Class, High Yield and Emerging Markets Debt Portfolios may invest a portion of
its assets in interests in entities organized and operated solely for the
purpose of restructuring the investment characteristics of sovereign debt
obligations. This type of restructuring involves the deposit with or purchase
by an entity, such as a corporation or trust, of specified instruments (such as
commercial bank loans or Brady Bonds) and the issuance by that entity of one or
more classes of securities ("Structured Securities") backed by, or representing
interests in, the underlying instruments. The cash flow on the underlying
instruments may be apportioned among the newly issued Structured Securities to
create securities with different investment characteristics such as varying
maturities, payment priorities and interest rate provisions, and the extent of
the payments made with respect to Structured Securities is dependent on the
extent of the cash flow on the underlying instruments. Because Structured
Securities of the type in which each Portfolio anticipates it will invest
typically involve no credit enhancement, their credit risk generally will be
equivalent to that of the underlying instruments. Each Portfolio is permitted
to invest in a class of Structured Securities that is either subordinated or
unsubordinated to the right of payment of another class. Subordinated
Structured Securities typically have higher yields and present greater risks
than unsubordinated Structured Securities. Certain issuers of Structured
Securities may be deemed to be "investment companies" as defined in the 1940
Act. As a result, each Portfolio's investment in these Structured Securities
may be limited by restrictions contained in the 1940 Act. Structured Securities
are typically sold in private placement transactions, and there currently is no
active trading market for Structured Securities.
SWAP CONTRACTS
The Fixed Income, High Yield, Value, Core Equity, Mid Cap Growth, Mid Cap
Value, International Fixed Income, Emerging Markets Debt, Emerging Markets
Equity, Balanced and Multi-Asset-Class Portfolios may enter into Swap
Contracts. A swap is an agreement to exchange the return generated by one
instrument for the return generated by another instrument. The payment streams
are calculated by reference to a specified index and agreed upon notional
amount. The term "specified index" includes currencies, fixed interest rates,
prices, total return on interest rate indices, fixed income indices, stock
indices and commodity indices (as well as amounts derived from arithmetic
operations on these indices). For example, a Portfolio may agree to swap the
return generated by a fixed income index for the return generated by a second
fixed income index. The currency swaps in which the Portfolios may enter will
generally involve an agreement to pay interest streams in one currency based on
a specified index in exchange for receiving interest streams denominated in
another currency. Such swaps may involve initial and final exchanges that
correspond to the agreed upon notional amount.
The swaps in which the Portfolios may engage also include rate caps, floors and
collars under which one party pays a single or periodic fixed amount(s) (or
premium), and the other party pays periodic amounts based on the movement of a
specified index. Swaps do not involve the delivery of securities, other
underlying assets, or principal. Accordingly, the risk of loss with respect to
swaps is limited to the net amount of payments that a Portfolio is
contractually obligated to make. If the other party to a swap defaults, a
Portfolio's risk of loss consists of the net amount of payments that a
Portfolio is contractually entitled to receive. Currency swaps usually involve
the delivery of the entire principal value of one designated currency in
exchange for the other designated currency. Therefore, the entire principal
value of a currency swap is subject to the risk that the other party to the
swap will default on its contractual delivery obligations. If there is a
default by the counterparty, the Portfolios may have contractual remedies
pursuant to the agreements related to the transaction. The swap market has
grown substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid.
Caps, floors, and collars are more recent innovations for which standardized
documentation has not yet been fully developed and, accordingly, they are less
liquid than swaps.
The Portfolios will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or
dates specified in the instrument, with a Portfolio receiving or paying, as the
case may be, only the net amount of the two payments. A Portfolio's obligations
under a swap agreement will be accrued daily (offset against any amounts owing
to the Portfolio) and any accrued but unpaid net amounts owed to a swap
counterparty will be covered by the maintenance of a segregated account
consisting of unencumbered liquid assets, to avoid any potential leveraging of
the Portfolio. To the extent that these swaps, caps, floors, and collars are
entered into for hedging purposes, the Adviser believes such obligations do not
constitute "senior securities" under the
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1940 Act and, accordingly, will not treat them as being subject to a
Portfolio's borrowing restrictions. The Fixed Income, High Yield, International
Fixed Income, Balanced, Value, Core Equity, Mid Cap Growth, Mid Cap Value and
Multi-Asset-Class Portfolios may enter into OTC Derivatives transactions
(swaps, caps, floors, puts, etc., but excluding foreign exchange contracts)
with counterparties that are approved by the Adviser in accordance with
guidelines established by the Board of Directors. These guidelines provide for
a minimum credit rating for each counterparty and various credit enhancement
techniques (for example, collateralization of amounts due from counterparties)
to limit exposure to counterparties that have a rating below AA.
The use of swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Adviser is incorrect in its forecasts of market
values, interest rates, and currency exchange rates, the investment performance
of the Portfolios would be less favorable than it would have been if this
investment technique were not used.
ZERO COUPONS
The Portfolios may invest in zero coupon bonds. Zero coupon bonds is a term
used to describe notes and bonds which have been stripped of their unmatured
interest coupons, or the coupons themselves, and also receipts or certificates
representing interest in such stripped debt obligations and coupons. With
respect to U.S. Governments, as defined in the Prospectus, the timely payment
of coupon interest and principal on these instruments remains guaranteed by the
"full faith and credit" of the United States Government.
A zero coupon bond does not pay interest. Instead, it is issued at a
substantial discount to its "face value" (what it will be worth at maturity).
The difference between a security's issue or purchase price and its face value
represents the accreted interest an investor will earn if the security is held
until maturity. For tax purposes, a portion of this accreted interest is deemed
as income received by zero coupon bondholders each year. The Fund, which
expects to qualify as a regulated investment company, intends to pass along
such interest as a component of a Portfolio's distributions of net investment
income.
Zero coupon bonds may offer investors the opportunity to earn higher yields
than those available on U.S. Treasury bonds of similar maturity. However, zero
coupon bond prices may also exhibit greater price volatility than ordinary
Fixed Income Securities because of the manner in which their principal and
interest is returned to the investor.
With respect to U.S. Governments, Zero Coupon Bonds are sold under a variety of
different names, such as: Certificate of Accrual on Treasury Securities (CATS),
Treasury Receipts (TRs), Separate Trading of Registered Interest and Principal
of Securities (STRIPS) and Treasury Investment Growth Receipts (TIGERS).
TAXES
The following discussion of federal income tax consequences is based on the
Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
issued thereunder as in effect on the date of this Statement of Additional
Information. New legislation, as well as administrative changes or court
decisions, may significantly change the conclusions expressed herein, and may
have a retroactive effect with respect to the transactions contemplated herein.
Each Portfolio within the Fund is generally treated as a separate corporation
for federal income tax purposes, and thus the provisions of the Code generally
will be applied to each Portfolio separately, rather than to the Fund as a
whole.
The Fund intends that each of its Portfolios qualify and elect to be treated
for each taxable year as a regulated investment company ("RIC") under
Subchapter M of the Code. Accordingly, each Portfolio must, among other things,
(a) derive at least 90% of its gross income each taxable year from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock, securities or foreign currencies, and certain other
related income, including, generally, certain gains from options, futures and
forward contracts; (b) derive less than 30% of its gross income each taxable
year from the sale or other disposition of the following items if held less
than three months (A) stock or securities, (B) options, futures or forward
contracts (other than options, futures or forward contracts on foreign
currencies), and (C) foreign currencies (or options, futures, or forward
contracts on foreign currencies) that are not directly related to the
Portfolio's principal business of investing in stocks or securities (or options
or futures with respect to stock or securities) (the "short-short test") and
(c) diversify its holdings so that, at the end of each fiscal quarter of the
Portfolio's taxable year, (i) at least 50% of the market value of the
Portfolio's total assets is represented by cash and cash items, United States
Government securities, securities of other RICs, and other securities, with
such other securities limited, in respect to any one issuer, to an amount not
greater than 5% of the value of the Portfolio's total assets or 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its total assets is invested in the securities (other than United
States Government securities or securities of other RICs) of any one issuer or
two or more issuers which the Portfolio controls and which are engaged in the
same, similar, or related trades or business. For purposes of the 90% of gross
income requirement described above, foreign currency gains which are not
directly related to a Portfolio's principal business of investing in stock or
securities (or options or futures with respect to stock or securities) may be
excluded from income that qualifies under the 90% requirement.
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In addition to the requirements described above, in order to qualify as a RIC,
each Portfolio must distribute at least 90% of each Portfolio's net investment
income (which generally includes dividends, taxable interest, and the excess of
net short-term capital gains over net long-term capital losses less operating
expenses) and at least 90% of its net tax-exempt interest income, if any, to
shareholders. If a Portfolio meets all of the RIC requirements, it will not be
subject to federal income tax on any of its net investment income or capital
gains that it distributes to shareholders.
If a Portfolio fails to qualify as a RIC for any year, all of its income will
be subject to tax at corporate rates.
Each Portfolio will generally be subject to a nondeductible 4% federal excise
tax to the extent it fails to distribute by the end of any calendar year at
least 98% of its ordinary income for that year and 98% of its capital gain net
income (the excess of short- and long-term capital gains over short- and long-
term capital losses) for the one-year period ending on October 31 of that year,
plus certain other amounts.
Dividends declared by the Fund in October, November, or December of any year
and payable to shareholders of record on a date in such month will be deemed to
have been paid by the Fund and received by the shareholders on December 31 of
that year if paid by the Fund at any time during the following January.
For certain transactions, each Portfolio is required for federal income tax
purposes to recognize as gain or loss its net unrealized gains and losses on
forward currency and futures contracts as of the end of each taxable year, as
well as those actually realized during the year. In most cases, any such gain
or loss recognized with respect to a regulated futures contract is considered
to be 60% long-term capital gain or loss and 40% short-term capital gain or
loss, without regard to the holding period of the contract. Realized gain or
loss attributable to a foreign currency forward contract is treated as 100%
ordinary income. Furthermore, foreign currency futures contracts which are
intended to hedge against a change in the value of securities held by a
Portfolio may affect the holding period of such securities and, consequently,
the nature of the gain or loss on such securities upon disposition.
As discussed above, in order for each Portfolio to continue to qualify for
federal income tax treatment as a RIC, at least 90% of its gross income for a
taxable year must be derived from certain qualifying income, including
dividends, interest, income derived from loans of securities, and gains from
the sale or other disposition of stock, securities or foreign currencies, or
other related income, including gains from options, futures and forward
contracts, derived with respect to its business of investing in stock,
securities or currencies. Any net gain realized from the closing out of futures
contracts will therefore generally be qualifying income for purposes of the 90%
requirement. Qualification as a RIC also requires that less than 30% of a
Portfolio's gross income be derived from the sale or other disposition of
stock, securities, options, futures or forward contracts (including certain
foreign currencies not directly related to the Portfolio's business of
investing in stock or securities) held less than three months. In order to
avoid realizing excessive gains on futures contracts held less than three
months, the Portfolio may be required to defer the closing out of futures
contracts beyond the time when it would otherwise be advantageous to do so.
Short sales engaged in by a Portfolio may reduce the holding period of property
held by a Portfolio which is substantially identical to the property sold
short. This rule may make it more difficult for the Portfolio to satisfy the
short-short test. This rule may also have the effect of converting capital
gains recognized by the Portfolio from long-term to short-term as well as
converting capital losses recognized by the Portfolio from short-term to long-
term.
FOREIGN INVESTMENTS
Gains or losses attributable to foreign currency contracts, or to fluctuations
in exchange rates that occur between the time a Portfolio accrues interest or
other receivables or accrues expenses or other liabilities denominated in a
foreign currency and the time the Portfolio actually collects such receivables
or pays such liabilities are treated as ordinary income or ordinary loss to the
Portfolio. Similarly, gains or losses on disposition of debt securities
denominated in a foreign currency attributable to fluctuations in the value of
the foreign currency between the date of acquisition of the security and the
date of disposition also are treated as ordinary gain or loss to the Portfolio.
These gains or losses increase or decrease the amount of a Portfolio's net
investment income available to be distributed to its shareholders as ordinary
income.
Each Portfolio that invests in foreign securities may be subject to foreign
withholding taxes with respect to its dividend and interest income from foreign
countries, and a Portfolio may be subject to foreign income taxes with respect
to other income. So long as more than 50% in value of a Portfolio's total
assets at the close of the taxable year consists of stock or securities of
foreign corporations, the Fund may elect to treat certain foreign income taxes
imposed on a Portfolio for United States federal income tax purposes as paid
directly by its shareholders. The Fund will make such an election for a
Portfolio only if it deems it to be in the best interest of its shareholders
and will notify shareholders in writing each year if it makes an election and
of the amount of foreign income taxes, if any, to be treated as paid by the
shareholders. If a Portfolio makes the election, shareholders will be required
to include in income their proportionate shares of the amount of foreign income
taxes treated as imposed on the Portfolio and will be entitled to claim either
a credit (subject to the limitations discussed below) or, if they
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itemize deductions, a deduction, for their shares of the foreign income taxes.
The foregoing is a summary of certain additional federal income tax
considerations generally affecting the Fund and its shareholders. It does not
constitute a detailed explanation of the federal, state or local tax treatment
of the Fund or its shareholders, and the discussion here and in the Fund's
Prospectus is not intended as a substitute for careful tax planning.
Shares of the Portfolios will be purchased by life insurance companies for
their separate accounts under variable annuity contracts and variable life
insurance policies and by other entities under qualified pension and retirement
plans. Under the provisions of the Code currently in effect, net income and
realized capital gains of Portfolios of the Fund are not currently taxable when
left to accumulate within a variable annuity contract or variable life
insurance policy or under a qualified pension or retirement plan.
For information on federal income taxation of a life insurance company's with
respect to its receipt of distributions from the Fund and federal income
taxation of owners of the company's variable annuity contracts or variable life
insurance policies, refer to the life insurance company's variable annuity
contract or variable life insurance policy prospectus.
PURCHASE OF SHARES
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The purchase price of each Portfolio of the Fund, except the Money Market
Portfolio, is the net asset value next determined after the order is received.
For each Portfolio of the Fund other than the Money Market Portfolio, an order
received prior to the regular close of the New York Stock Exchange (the "NYSE")
will be executed at the price computed on the date of receipt; and an order
received after the regular close of the NYSE will be executed at the price
computed on the next day the NYSE is open as long as the Fund's transfer agent
receives payment by check or in Federal Funds prior to the regular close of the
NYSE on such day. Shares of the Money Market Portfolio may be purchased at the
net asset value per share at the price next determined after Federal Funds are
available to such Portfolio. Shares of the Fund may be purchased on any day the
NYSE is open. The NYSE will be closed on the following days: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day, and on the preceding Friday or subsequent
Monday when any of these holidays falls on a Saturday or Sunday, respectively.
Each Portfolio reserves the right in its sole discretion to suspend the
offering of its shares and to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Portfolio.
REDEMPTION OF SHARES
- --------------------
REDEMPTIONS. Each Portfolio may suspend redemption privileges or postpone the
date of payment (i) during any period that the NYSE is closed, or trading on
the NYSE is restricted as determined by the Commission, (ii) during any period
when an emergency exists as defined by the rules of the Commission as a result
of which it is not reasonably practicable for a Portfolio to dispose of
securities owned by it, or fairly to determine the value of its assets, and
(iii) for such other periods as the Commission may permit.
DISTRIBUTIONS IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the shareholders of a Portfolio to make a
redemption payment wholly in cash, and subject to applicable agreements with
life insurance companies and entities qualified under qualified pension and
profit sharing plans, the Fund may pay any portion of a redemption by
distribution in kind of portfolio securities in lieu of cash. Securities issued
in a distribution in kind will be readily marketable, although shareholders
receiving distributions in kind may incur brokerage commissions when
subsequently redeeming shares of those securities.
INVESTMENT LIMITATIONS
- ----------------------
FUNDAMENTAL LIMITATIONS
Each current Portfolio has adopted the following restrictions, which are
fundamental policies and may not be changed without the approval of the lesser
of: (1) at least 67% of the voting securities of the Portfolio present at a
meeting if the holders of more than 50% of the outstanding voting securities of
the Portfolio are present or represented by proxy, or (2) more than 50% of the
outstanding voting securities of the Portfolio. Each Portfolio of the Fund will
not:
(1)purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (except this shall not prevent the
Portfolio from purchasing or selling options or futures contracts or from
investing in securities or other instruments backed by physical commodities);
(2)purchase or sell real estate, although it may purchase and sell securities
of companies that deal in real estate and may purchase and sell securities that
are secured by interests in real estate;
(3)lend any security or make any other loan if, as a result, more than 33 1/3%
of its total assets would be lent to other parties, but this limitation does
not apply to purchases of debt securities or repurchase agreements;
(4)except with respect to the International Fixed Income, Emerging Markets
Equity, Emerging Markets Debt, International Magnum and U.S. Real Estate
Portfolios
14
<PAGE>
(i) purchase more than 10% of any class of the outstanding voting securities of
any issuer and (ii) purchase securities of an issuer (except obligations of the
U.S. Government and its agencies and instrumentalities) if as a result, with
respect to 75% of its total assets, more than 5% of the Portfolio's total
assets, at market value, would be invested in the securities of such issuer;
(5)issue senior securities and will not borrow, except from banks and as a
temporary measure for extraordinary or emergency purposes and then, in no
event, in excess of 33 1/3% of its total assets (including the amount borrowed)
less liabilities (other than borrowings), except that the Emerging Markets Debt
Portfolio may borrow from banks and other entities in amount not in excess of
33 1/3% of its total assets (including the amount borrowed) less liabilities in
accordance with its investment objectives and policies;
(6)underwrite securities issued by others, except to the extent that the
Portfolio may be considered an underwriter within the meaning of the Securities
Act of 1933, as amended (the "1933 Act") in the disposition of restricted
securities;
(7)acquire any securities of companies within one industry if, as a result of
such acquisition, more than 25% of the value of the Portfolio's total assets
would be invested in securities of companies within such industry; provided,
that (i) there shall be no limitation on the purchase of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or (in the
case of the Money Market Portfolio) instruments issued by U.S. Banks; (ii)
utility companies will be divided according to their services, for example,
gas, gas transmission, electric and telephone will each be considered a
separate industry; (iii) financial service companies will be classified
according to the end users of their services, for example, automobile finance,
bank finance and diversified finance will each be considered a separate
industry; and (iv) Asset-Backeds will be classified according to the underlying
assets securing such securities; and provided further that the U.S. Real Estate
Portfolio may invest more than 25% of its total assets in the U.S. real estate
industry; and
(8)write or acquire options or interests in oil, gas or other mineral
exploration or development programs.
NON-FUNDAMENTAL LIMITATIONS
In addition, each current Portfolio of the Fund has adopted non-fundamental
investment limitations as stated below. Such limitations may be changed without
shareholder approval. Each current Portfolio of the Fund will not:
(1)except for the Fixed Income, High Yield, Core Equity, Value, Mid Cap Growth,
Mid Cap Value, International Fixed Income, Balanced and Multi-Asset-Class
Portfolios, purchase on margin or sell short, except (i) that the Emerging
Markets Debt Portfolio may from time to time sell securities short without
limitation but consistent with applicable legal requirements as stated in the
Prospectus, (ii) that the Growth Portfolio may enter into option transactions
to the extent that not more than 5% of the Portfolio's total assets are
required as deposits to secure obligations under options and not more than 20%
of its total assets are invested in options, futures contracts and options on
futures contracts at any time, and (iii) as specified above in Fundamental
Restriction No. (1);
(2)enter into futures contracts to the extent that its outstanding obligations
to purchase securities under these contracts in combination with its
outstanding obligations with respect to options transactions would exceed 50%
of its total assets (except 20% of total assets in the case of Emerging Markets
Debt, Growth, U.S. Real Estate, International Magnum and Emerging Markets
Equity Portfolios), and, with respect to the Fixed Income, High Yield,
International Fixed Income, Balanced, Value, Core Equity, Mid Cap Growth, Mid
Cap Value and Multi-Asset-Class Portfolios, will maintain assets sufficient to
meet its obligations under such contracts in a segregated account with the
custodian bank or will otherwise comply with the Commission's position on asset
coverage;
(3)purchase or retain securities of an issuer if those Officers and Directors
of the Fund or its investment advisers owning more than 1/2 of 1% of such
securities together own more than 5% of such securities;
(4)with respect to the Emerging Markets Debt, Growth, International Magnum,
Emerging Markets Equity, Asian Equity, Global Equity and U.S. Real Estate
Portfolios, pledge, mortgage, or hypothecate any of its assets to an extent
greater than 10% of its total assets at fair market value;
(5)with respect to the Fixed Income, High Yield, Core Equity, Value, Mid Cap
Growth, Mid Cap Value, International Fixed Income, Balanced and Multi-Asset-
Class Portfolios, pledge, mortgage or hypothecate assets in an amount up to 50%
of its total assets, provided that each Portfolio may also segregate assets
without limit in order to comply with the requirements of Section 18(f) of the
1940 Act, and applicable interpretations thereof published from time to time by
the Commission and its staff;
(6)invest for the purpose of exercising control over management of any company;
(7)invest its assets in securities of any investment company, except by
purchase in the open market involving only customary brokers' commissions or in
connection with mergers, acquisitions of assets or consolidations and except as
may otherwise be permitted by the 1940 Act;
(8)invest more than an aggregate of 15% of the net assets of the Portfolio (10%
of the net assets of the Money Market Portfolio), determined at the time of
investment, in securities subject to legal or contractual restrictions on
resale
15
<PAGE>
or securities for which there are no readily available markets, including
repurchase agreements having maturities of more than seven days and OTC options
provided that there is no limitation with respect to or arising out of
investment in (i) securities that have legal or contractual restrictions on
resale but have a readily available market, or (ii) securities that are not
registered under the 1933 Act but which can be sold to qualified institutional
investors in accordance with Rule 144A under the 1933 Act;
(9)invest more than 5% of its total assets in securities of companies which
have (with predecessors) a record of less than three years' continuous
operation;
(10)purchase warrants if, by reason of such purchase, more than 5% of the value
of the Portfolio's net assets (taken at market value) would be invested in
warrants, valued at the lower of cost or market. Included within this amount,
but not to exceed 2% of the value of the Portfolio's net assets, may be
warrants that are not listed on a recognized stock exchange;
(11)except for the U.S. Real Estate Portfolio, invest in real estate limited
partnership interests, and the U.S. Real Estate Portfolio may not invest in
such interests that are not publicly traded;
(12)make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitations as
described in the prospectus) that are publicly distributed, and (ii) by lending
its portfolio securities to banks, brokers, dealers and other financial
institutions so long as such loans are not inconsistent with the 1940 Act or
the Rules and Regulations or interpretations of the Commission thereunder;
(13)invest in oil, gas or other mineral leases;
(14)purchase puts, calls, straddles, spreads and any combination thereof if for
any reason the value of its aggregate investment in such classes of securities
will exceed 5% of their respective total assets, except as described above in
(2);
(15)purchase on margin, except for use of short-term credit as may be necessary
for the clearance of purchases and sales of securities, but it may make margin
deposits in connection with transactions in options, futures, and options on
futures; or sell short unless, by virtue of its ownership of other securities,
it has the right to obtain securities equivalent in kind and amount to the
securities sold and, if the right is conditional, the sale is made upon the
same conditions. Transactions in futures contracts and options are not deemed
to constitute selling securities short (relating to the Fixed Income, High
Yield, International Fixed Income, Balanced, Value, Core Equity, Mid Cap
Growth, Mid Cap Value and Multi-Asset-Class Portfolio);
(16)borrow money (other than from banks or other Portfolios of the Fund,
provided such borrowing is not inconsistent with the 1940 Act, as amended, or
the Rules and Regulations or interpretations or orders of the Commission
thereunder) or purchase additional securities when borrowings exceed 5% of
total (gross) assets.
Each of the International Fixed Income, Emerging Markets Debt, Emerging Markets
Equity, International Magnum and U.S. Real Estate Portfolios will diversify its
holdings so that, at the close of each quarter of its taxable year, (i) at
least 50% of the market value of the Portfolio's total assets is represented by
cash (including cash items and receivables), U.S. Government securities, and
other securities, with such other securities limited, in respect of any one
issuer, for purposes of this calculation to an amount not greater than 5% of
the value of the Portfolio's total assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
assets is invested in the securities of any one issuer (other than U.S.
Government securities).
The percentage limitations contained in these restrictions apply at the time of
purchase of securities. Future Portfolios of the Fund may adopt different
limitations.
The investments of life insurance company separate accounts made under variable
annuity contracts and variable life insurance policies are subject to state
insurance laws and regulations. The Fund and its Portfolios will, when
required, comply with investment restrictions imposed under such laws and
regulations on life insurance company separate accounts investing in the
Portfolios.
DETERMINING MATURITIES OF
- -------------------------
CERTAIN INSTRUMENTS
- -------------------
Generally, the maturity of a portfolio instrument shall be deemed to be the
period remaining until the date noted on the face of the instrument as the date
on which the principal amount must be paid, or in the case of an instrument
called for redemption, the date on which the redemption payment must be made.
However, instruments having variable or floating interest rates or demand
features may be deemed to have remaining maturities as follows: (a) a
government obligation with a variable rate of interest readjusted no less
frequently than annually may be deemed to have a maturity equal to the period
remaining until the next readjustment of the interest rate; (b) an instrument
with a variable rate of interest, the principal amount of which is scheduled on
the face of the instrument to be paid in one year or less, may be deemed to
have a maturity equal to the period remaining until the next readjustment of
the interest rate; (c) an instrument with a variable rate of interest that is
subject to a demand feature may be deemed to have a maturity equal to the
longer of the period remaining until the next readjustment of the interest rate
or the period remaining until the principal amount can be recovered through
demand; (d) an instrument with a floating rate of interest that is subject to a
demand feature may be deemed to have a maturity equal to the period remaining
until the principal amount can be recovered
16
<PAGE>
through demand; and (e) a repurchase agreement may be deemed to have a maturity
equal to the period remaining until the date on which the repurchase of the
underlying securities is scheduled to occur, or where no date is specified, but
the agreement is subject to demand, the notice period applicable to a demand
for the repurchase of the securities. In addition, for securities that are
subject to prepayments, the weighted average life of the security will be used
in the weighted average maturity calculation instead of the stated maturity
date on the instrument. The weighted average life of a security takes into
consideration the impact of prepayments on the length of time the security will
be outstanding and typically indicates an actual maturity that is shorter than
the maturity date stated on the face of the instrument.
MANAGEMENT OF THE FUND
- ----------------------
OFFICERS AND DIRECTORS
The Fund's officers, under the supervision of the Board of Directors, manage
the day-to-day operations of the Fund. The Directors set broad policies for the
Fund and choose its officers. Directors and officers of the Fund are also
directors and officers of some or all of the other investment companies
managed, administered, advised or distributed by Morgan Stanley Asset
Management Inc., Miller Anderson & Sherrerd, LLP or their affiliates. Three
Directors and all of the officers of the Fund are directors, officers or
employees of the Fund's advisers, distributor or administrators. The other
Directors have no affiliation with the Fund's advisers, distributor or
administrators. A list of the Directors and officers of the Fund and a brief
statement of their present positions and principal occupations during the past
five years is set forth below:
<TABLE>
<CAPTION>
Name, Address and
Date of Birth Position with Fund Principal Occupation During Past Five Years
----------------- ---------------------------- -------------------------------------------
<S> <C> <C>
Barton M. Biggs* Chairman and Director Chairman and Director of Morgan Stanley
1221 Avenue of the Asset Management Inc. and Morgan Stanley
Americas Asset Management Limited; Managing Director
New York, NY 10020 of Morgan Stanley & Co. Incorporated;
11/26/32 Director of Morgan Stanley Group Inc.;
Member of Investment Advisory Counsel of
the Thailand Fund; Director of the Rand
McNally Company; Member of the Yale
Development Board; Director and Officer of
various investment companies managed by
Morgan Stanley Asset Management Inc.
Thomas L. Bennett* Director Chairman of the Board of Trustees, MAS
One Tower Bridge Funds; Member of the Executive Committee,
West Conshohocken, PA Miller Anderson & Sherrerd, LLP; Managing
19428 Director of Morgan Stanley Asset Management
10/4/47 Inc.; Director, MAS Fund Distribution, Inc.
Warren J. Olsen* Director and President Principal of Morgan Stanley Asset
1221 Avenue of the Management Inc.; President and Director of
Americas various investment companies managed by
New York, NY 10020 Morgan Stanley Asset Management Inc.
12/21/56
John D. Barrett, II Director Chairman and Director of Barrett
521 Fifth Avenue Associates, Inc. (investment counseling);
New York, NY 10135 Director of the Ashforth Company (real
8/21/35 estate); Director of the Morgan Stanley
Fund, Inc., Morgan Stanley Institutional
Fund, Inc. and PCS Cash Fund, Inc.
Gerard E. Jones Director Partner in Richards & O'Neil LLP (law
43 Arch Street firm); Director of the Morgan Stanley Fund,
Greenwich, CT 06830 Inc., Morgan Stanley Institutional Fund,
1/23/37 Inc. and PCS Cash Fund, Inc.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Name, Address and
Date of Birth Position with Fund Principal Occupation During Past Five Years
----------------- ---------------------------- -------------------------------------------
<S> <C> <C>
Andrew McNally IV Director Chairman and Chief Executive Officer of
8255 North Central Rand McNally (publication); Director of
Park Avenue Allendale Insurance Co., Mercury Finance
Skokie, IL 60076 (consumer finance); Zenith Electronics,
11/11/39 Hubbell, Inc. (industrial electronics);
Director of the Morgan Stanley Fund, Inc.,
Morgan Stanley Institutional Fund, Inc. and
PCS Cash Fund, Inc.
Samuel T. Reeves Director Chairman of the Board and CEO, Pinacle
8211 North Fresno Street Trading L.L.C. (investment firm); Director,
Fresno, CA 93720 Pacific Gas and Electric and PG&E
7/28/34 Enterprises (utilities); Director of the
Morgan Stanley Fund, Inc., Morgan Stanley
Institutional Fund, Inc. and PCS Cash Fund,
Inc.
Fergus Reid Director Chairman and Chief Executive Officer of
85 Charles Colman Blvd LumeLite Corporation (injection molding
Pawling, NY 12564 firm); Trustee and Director of Vista Mutual
8/12/32 Fund Group; Director of the Morgan Stanley
Fund, Inc., Morgan Stanley Institutional
Fund, Inc. and PCS Cash Fund, Inc.
Frederick O. Robertshaw Director Of Counsel, Copple, Chamberlin & Boehm,
2800 North Central P.C. and Rake, Copple, Downey & Black, P.C.
Avenue (law firms); Director of the Morgan Stanley
Phoenix, AZ 85004 Fund, Inc., Morgan Stanley Institutional
1/24/34 Fund, Inc. and PCS Cash Fund, Inc.
Frederick B. Whittemore* Director Advisory Director of Morgan Stanley & Co.
1221 Avenue of the Incorporated; Vice-Chairman and Director of
Americas, various investment companies managed by
30th Flr. Morgan Stanley Asset Management Inc.
New York, NY 10020
11/12/30
Michael F. Klein* Vice President Vice President of Morgan Stanley Asset
1221 Avenue of the Management Inc.; Officer of various
Americas investment companies managed by Morgan
New York, NY 10020 Stanley Asset Management Inc. Previously
12/12/58 practiced law with the New York law firm of
Rogers & Wells.
Douglas W. Kugler* Vice President Treasurer, MAS Funds; Manager of Mutual
One Tower Bridge Fund Administration, Miller Anderson &
West Conshohocken, PA Sherrerd, LLP; Vice President of Morgan
19428 Stanley Asset Management Inc.; formerly
11/19/61 Assistant Vice President, Provident
Financial Processing Corporation.
Harold J. Schaaff, Jr.* Vice President Principal of Morgan Stanley & Co.
1221 Avenue of the Amer- Incorporated; General Counsel and Secretary
icas of Morgan Stanley Asset Management Inc.;
New York, NY 10020 Officer of various investment companies
6/10/60 managed by Morgan Stanley Asset Management
Inc.
Joseph P. Stadler* Vice President Vice President of Morgan Stanley Asset
1221 Avenue of the Amer- Management Inc.; Previously with Price
icas Waterhouse LLP (accounting); Officer of
New York, NY 10020 various investment companies managed by
6/7/54 Morgan Stanley Asset Management Inc.
Lorraine Truten* Vice President Vice President, MAS Funds; Head of Mutual
One Tower Bridge Fund Administration, Miller Anderson &
West Conshohocken, PA Sherrerd, LLP; Principal of Morgan Stanley
19428 Asset Management Inc.; President, MAS Fund
5/11/61 Distribution, Inc.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Name, Address and
Date of Birth Position with Fund Principal Occupation During Past Five Years
----------------- ---------------------------- -------------------------------------------
<S> <C> <C>
Valerie Y. Lewis* Secretary Vice President of Morgan Stanley Asset
1221 Avenue of the Amer- Management Inc.; Previously with Citicorp
icas (banking); Officer of various investment
New York, NY 10020 companies managed by Morgan Stanley Asset
3/26/56 Management Inc.
Karl O. Hartmann* Assistant Secretary Senior Vice President, Secretary and
73 Tremont Street General Counsel of Chase Global Funds
Boston, MA 02108-3913 Services Company; Previously with Leland,
3/7/55 O'Brien, Rubinstein Associates, Inc.
(investments).
James R. Rooney* Treasurer Vice President, Chase Global Funds Services
73 Tremont Street Company; Director of Fund Administration;
Boston, MA 02108-3913 Officer of various investment companies
10/21/58 managed by Morgan Stanley Asset Management
Inc.; Previously with Scudder, Stevens &
Clark, Inc. (investments) and Ernst & Young
LLP (accounting).
Joanna Haigney* Assistant Treasurer Supervisor of Fund Administration and
73 Tremont Street Compliance, Chase Global Funds Services
Boston, MA 02108-3913 Company; Previously with Coopers & Lybrand
10/10/66 LLP; Officer of various investment
companies managed by Morgan Stanley Asset
Management Inc.
</TABLE>
- -------
* "Interested Person" within the meaning of the 1940 Act.
19
<PAGE>
REMUNERATION OF DIRECTORS AND OFFICERS
The Directors who are not "interested persons" within the meaning of the 1940
Act receive compensation from the Fund and from other investment companies
advised by MSAM or MAS (or by affiliated companies) (the Fund and such other
investment companies are referred to as the "Fund Complex"). The allocation of
such fees will be among the portfolios in the Fund Complex, in direct
proportion to their respective average net assets. For the fiscal year ending
December 31, 1996, the Fund will pay approximately $25,500 in Directors' fees
and expenses. Directors who are officers or otherwise "interested persons"
receive no renumeration for their services as Directors. The Compensation Table
below sets forth compensation expected to be paid to each Director in 1996.
COMPENSATION TABLE
<TABLE>
<CAPTION>
(5)
Total
(3) (4) Compensation
(2) Pension or Estimated From Registrant
(1) Aggregate Retirement Annual and Fund
Name of Compensation Benefits Accrued Benefits Complex
Person From as Part of Fund Upon Paid to
Position Registrant(a) Expenses Retirement Directors
-------- ------------- ---------------- ---------- ---------------
<S> <C> <C> <C> <C>
Barton M. Biggs $ 0 $0 $0 $ 0
Director and Chairman
of the Board
Warren J. Olsen 0 0 0 0
Director and President
Thomas L. Bennett
Director 0 0 0 0
John D. Barrett, II(b) 5,500 0 0 77,199(c)
Director
Gerard E. Jones,(b) 5,500 0 0 85,900(c)
Director
Andrew McNally, IV 3,000 0 0 66,206(c)
Director
Samuel T. Reeves 3,000 0 0 72,400(c)
Director
Fergus Reid(b) 5,500 0 0 84,293(c)
Director
Frederick O. Robertshaw 3,000 0 0 72,531(c)
Director
Frederick B. Whittemore 0 0 0 0
Director
</TABLE>
- -------
(a) Estimated amounts for the current fiscal year of the Fund ending December
31, 1996. Inclusive of $55,000, $55,000 and $65,000 of deferred
compensation for McNally, Reeves and Reid, respectively, assuming these
Directors will continue to defer for the remainder of 1996.
(b) Member of Audit Committee of the Board of Directors of the Fund. Members of
the Audit Committee are not "interested persons" of the Fund. Each member
receives an additional annual aggregate fee of $10,000.
(c) Number of other investment companies in Fund Complex from whom Director is
expected to receive compensation: Mr. Barrett--(3); Mr. Jones--(4); Mr.
McNally--(3); Mr. Reeves--(3); Mr. Reid--(4); Mr. Robertshaw--(3).
20
<PAGE>
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule 17j-
1 of the 1940 Act which incorporates the Code of Ethics of each Adviser
(together, the "Codes"). The Codes restrict the personal investing activities
of all employees of each Adviser and, as described below, impose additional,
more onerous, restrictions on the Fund's investment personnel.
The Codes require that all employees of each Adviser preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Adviser include a ban on acquiring any securities in a "hot" initial public
offering and a prohibition from profiting on short-term trading in securities.
In addition, no employee may purchase or sell any security that at the time is
being purchased or sold (as the case may be), or to the knowledge of the
employee is being considered for purchase or sale, by any fund advised by that
Adviser. Furthermore, the Codes provide for trading "blackout periods" that
prohibit trading by investment personnel of the Fund within periods of trading
by the Fund in the same (or equivalent) security.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of the date of this statement of additional information, MSAM, 1221 Avenue
of the Americas, New York, New York 10020, a Delaware corporation, is the
record and beneficial owner of 100% of the outstanding shares of the Emerging
Markets Equity Portfolio of the Fund. MSAM is a wholly owned subsidiary of
Morgan Stanley Group Inc., which is a publicly owned financial service
corporation listed on the New York, London and Pacific stock exchanges.
NET ASSET VALUE FOR THE MONEY MARKET PORTFOLIO
- ----------------------------------------------
The Money Market Portfolio seeks to maintain a stable net asset value per share
of $1.00. The Portfolio uses the amortized cost method of valuing its
securities, which does not take into account unrealized gains or losses. The
use of amortized cost and the maintenance of the Portfolio's per share net
asset value at $1.00 is based on the Portfolio's election to operate under the
provisions of Rule 2a-7 under the 1940 Act. As a condition of operating under
that Rule, the Money Market Portfolio must maintain a dollar-weighted average
portfolio maturity of 90 days or less, purchase only instruments having
remaining maturities of 397 days or less, and invest only in securities which
are of "eligible quality" as determined in accordance with regulations of the
Commission.
The Rule also requires that the Directors, as a particular responsibility
within the overall duty of care owed to shareholders, establish procedures
reasonably designed, taking into account current market conditions and the
Portfolio's investment objectives, to stabilize the net asset value per share
as computed for the purposes of sales and redemptions at $1.00. These
procedures include periodic review, as the Directors deem appropriate and at
such intervals as are reasonable in light of current market conditions, of the
relationship between the amortized cost value per share and a net asset value
per share based upon available indications of market value. In such review,
investments for which market quotations are readily available are valued at the
most recent bid price or quoted yield available for such securities or for
securities of comparable maturity, quality and type as obtained from one or
more of the major market makers for the securities to be valued. Other
investments and assets are valued at fair value, as determined in good faith by
the Directors.
In the event of a deviation of over 1/2 of 1% between the Portfolio's net asset
value based upon available market quotations or market equivalents and $1.00
per share based on amortized cost, the Directors will promptly consider what
action, if any, should be taken. The Directors will also take such action as
they deem appropriate to eliminate or to reduce to the extent reasonably
practicable any material dilution or other unfair results which might arise
from differences between the two. Such action include redemption in kind,
selling instruments prior to maturity to realize capital gains or losses or to
shorten the average maturity, withholding dividends, paying distributions from
capital or capital gains or utilizing a net asset value per share as determined
by using available market quotations.
There are various methods of valuing the assets and of paying dividends and
distributions from a money market fund. The Money Market Portfolio values its
assets at amortized cost while also monitoring the available market bid price,
or yield equivalents. Since dividends from net investment income will be
declared daily and paid monthly, the net asset value per share of the Portfolio
will ordinarily remain at $1.00, but the Portfolio's daily dividends will vary
in amount. Net realized gains, if any, will normally be declared and paid
monthly.
PERFORMANCE INFORMATION
- -----------------------
The Fund may from time to time quote various performance figures to illustrate
a Portfolios' past performance.
Performance quotations by investment companies are subject to rules adopted by
the Commission, which require the use of standardized performance quotations.
In the case of total return, non-standardized performance quotations may be
furnished by the Fund but must be accompanied by certain standardized
performance information computed as required by the Commission. Current yield
and average annual
21
<PAGE>
compounded total return quotations used by the Fund are based on the
standardized methods of computing performance mandated by the Commission. An
explanation of those and other methods used by the Fund to compute or express
performance follows.
TOTAL RETURN
From time to time each Portfolio may advertise total return for the shares of
the Portfolio. Total return figures are based on historical earnings and are
not intended to indicate future performance. The average annual total return
is determined by finding the average annual compounded rates of return over 1-
, 5-, and 10-year periods (or over the life of the Portfolio) that would
equate an initial hypothetical $1,000 investment to its ending redeemable
value. The calculation assumes that all dividends and distributions are
reinvested when paid. The quotation assumes the amount was completely redeemed
at the end of each 1-, 5-, and 10-year period (or over the life of the
Portfolio) and the deduction of all applicable Fund expenses on an annual
basis.
These total returns are calculated according to the following formula:
P(1 + T)/n/ = ERV
where:
P=a hypothetical initial payment of $1,000
T=average annual total return
n=number of years
ERV= ending redeemable value of hypothetical $1,000 payment made at the
beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or
10-year periods (or fractional portion thereof).
CALCULATION OF YIELD FOR NON-MONEY MARKET PORTFOLIOS
From time to time certain of the Fund's Portfolios may advertise yield.
Current yield reflects the income per share earned by a Portfolio's
investments.
Current yield is determined by dividing the net investment income per share
earned during a 30-day base period by the maximum offering price per share on
the last day of the period and annualizing the result. Expenses accrued for
the period include any fees charged to all shareholders during the base
period.
Yield is obtained using the following formula:
Yield = 2[(a--b + 1)/6/--1]
--------
cd
where:
a= dividends and interest earned during the period
b= expenses accrued for the period (net of reimbursements)
c= the average daily number of shares outstanding during the period that were
entitled to receive income distributions
d= the maximum offering price per share on the last day of the period.
CALCULATION OF YIELD FOR THE MONEY MARKET PORTFOLIO
The current yield of the Money Market Portfolio is calculated daily on a base
period return for a hypothetical account having a beginning balance of one
share for a particular period of time (generally 7 days). The return is
determined by dividing the net change (exclusive of any capital changes in
such account) by its average net asset value for the period, and then
multiplying it by 365/7 to determine the annualized current yield. The
calculation of net change reflects the value of additional shares purchased
with the dividends by the Portfolio, including dividends on both the original
share and on such additional shares. An effective yield, which reflects the
effects of compounding and represents an annualization of the current yield
with all dividends reinvested, may also be calculated for the Portfolio by
dividing the base period return by 7, adding 1 to the quotient, raising the
sum to the 365th power, and subtracting 1 from the result.
The yield of a Portfolio will fluctuate. The annualization of a week's
dividend is not a representation by the Portfolio as to what an investment in
the Portfolio will actually yield in the future. Actual yields will depend on
such variables as investment quality, average maturity, the type of
instruments the Portfolio invests in, changes in interest rates on
instruments, changes in the expenses of the Fund and other factors. Yields are
one basis investors may use to analyze the Portfolios of the Fund, and other
investment vehicles; however, yields of other investment vehicles may not be
comparable because of the factors set forth in the preceding sentence,
differences in the time periods compared, and differences in the methods used
in valuing portfolio instruments, computing net asset value and calculating
yield.
COMPARISONS
To help investors better evaluate how an investment in a Portfolio of Morgan
Stanley Universal Funds, Inc. might satisfy their investment objective,
advertisements regarding the Fund may discuss various measures of Fund
performance as reported by various financial publications. Advertisements may
also compare performance (as calculated above) to performance as reported by
other investments, indices and averages. The following publications may be
used:
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(a)CDA Mutual Fund Report, published by CDA Investment Technologies, Inc.
analyzes price, current yield, risk, total return and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
(b)Financial publications: Business Week, Changing Times, Financial World,
Forbes, Fortune, Money, Barron's, Consumer's Digest, Financial Times, Global
Investor, Investor's Daily, Lipper Analytical Services, Inc., Morningstar,
Inc., New York Times, Personal Investor, Wall Street Journal and Weisenberger
Investment Companies Service--publications that rate fund performance over
specified time periods.
(c)Historical data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch,
Pierce, Fenner & Smith, Lehman Brothers and Bloomberg L.P.
(d)Lipper--Mutual Fund Performance Analysis and Lipper--Fixed Income Fund
Performance Analysis--measures total return and average current yield for the
mutual fund industry. Ranks individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
(e)Mutual Fund Source Book, published by Morningstar, Inc.--analyzes price,
yield, risk and total return for equity funds.
(f)Savings and Loan Historical Interest Rates--as published in the U.S. Savings
& Loan League Fact Book.
(g)Stocks, Bonds, Bills and Inflation, published by Hobson Associates--
historical measure of yield, price and total return for common and small
company stock, long-term government bonds, U.S. Treasury bills and inflation.
The following indices and averages may also be used:
(a)Composite Indices--70% Standard & Poor's 500 Stock Index and 30% NASDAQ
Industrial Index; 35% Standard & Poor's 500 Stock Index and 65% Salomon
Brothers High Grade Bond Index; and 65% Standard & Poor's 500 Stock Index and
35% Salomon Brothers High Grade Bond Index.
(b)Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics--a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
(c)Donoghue's Money Fund Average--an average of all major money market fund
yields, published weekly for 7 and 30-day yields.
(d)Dow Jones Composite Average or its component averages--an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial
Average), 15 utilities company stocks and 20 transportation stocks. Comparisons
of performance assume reinvestment of dividends.
(e)EMBI+--Expanding on the EMBI, which includes only Bradys, the EMBI+ includes
a broader group of Brady Bonds, loans, Eurobonds and the U.S. Dollar local
markets instruments. A more comprehensive benchmark than the EMBI, the EMBI+
covers 49 instruments from 14 countries. At $96 billion, its market cap is
nearly 50% higher than the EMBI's. The EMBI+ is not, however, intended to
replace the EMBI but rather to complement it. The EMBI continues to represent
the most liquid, most easily traded segment of the market, including more of
the assets that investors typically hold in their portfolios. Both of these
indices are published daily.
(f)First Boston High Yield Index--generally includes over 180 issues with an
average maturity range of seven to ten years with a minimum capitalization of
$100 million. All issues are individually trader-priced monthly.
(g)First Boston Upper/Middle Tier High Yield Index--an unmanaged index of bonds
rated B to BBB.
(h)Goldman Sachs 100 Convertible Bond Index--currently includes 67 bonds and 33
preferred stocks. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
(i)IFC Global Total Return Composite Index--an unmanaged index of common stocks
and includes 18 developing countries in Latin America, East and South Asia,
Europe, the Middle East and Africa (net of dividends reinvested).
(j)Indata Balanced-Median Index--an unmanaged index and includes an asset
allocation of 7% cash, 39% bonds and 54% equity based on $37.8 billion in
assets among 538 portfolios for the year ended December 31, 1995 (assumes
dividends reinvested).
(k)Indata Equity-Median Stock Index--an unmanaged index which includes an
average asset allocation of 5% cash and 95% equity based on $30.6 billion in
assets among 562 portfolios for the year ended December 31, 1995.
(l)J.P. Morgan Emerging Markets Bond Index--a market-weighted index composed of
all Brady bonds outstanding and includes Argentina, Brazil, Bulgaria, Mexico,
Nigeria, the Philippines, Poland and Venezuela.
(m)J.P. Morgan Traded Global Bond Index--an unmanaged index of securities which
includes Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan,
The Netherlands, Spain, Sweden, United Kingdom and the United States.
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<PAGE>
(n)Lehman Brothers Aggregate Bond Index--an unmanaged index made up of the
Government/Corporate Index, the Mortgage Backed Securities Index and the Asset-
Backed Securities Index.
(o)Lehman Brothers LONG-TERM Treasury Bond--composed of all bonds covered by
the Lehman Brothers Treasury Bond Index with maturities of 10 years or greater.
(p)The Lehman 7 Year Municipal Bond Index--an unmanaged index which consists of
investment grade bonds with maturities between 6-8 years rated Baa or better.
All bonds have been taken from deals done within the last 5 years, with assets
of $50 million or greater.
(q)Lipper Capital Appreciation Index--a composite of mutual funds managed for
maximum capital gains.
(r)Morgan Stanley Capital International Combined Far East Free ex-Japan Index--
a market-capitalization weighted index comprising stocks in Hong Kong,
Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand. Korea
is included in the MSCI Combined Far East Free ex-Japan Index at 20% of its
market capitalization.
(s)Morgan Stanley Capital International EAFE Index--an arithmetic, market
value-weighted average of the performance of over 900 securities on the stock
exchanges of countries in Europe, Australia and the Far East.
(t)Morgan Stanley Capital International Emerging Markets Global Latin American
Index--an unmanaged, arithmetic, market value-weighted average of the
performance of over 196 securities on the stock exchanges of Argentina, Brazil,
Chile, Colombia, Mexico, Peru and Venezuela (assumes reinvestment of
dividends).
(u)Morgan Stanley Capital International Europe Index-- an unmanaged index of
common stocks and includes 14 countries throughout Europe.
(v)Morgan Stanley Capital International Japan Index--an unmanaged index of
common stocks.
(w)Morgan Stanley Capital International Latin America Index--a broad-based
market capitalization-weighted composite index covering at least 60% of markets
in Mexico, Argentina, Brazil, Chile, Colombia, Peru and Venezuela (assumes
dividends reinvested).
(x)Morgan Stanley Capital International World Index--an arithmetic, market
value-weighted average of the performance of over 1,470 securities listed on
the stock exchanges of countries in Europe, Australia, the Far East, Canada and
the United States.
(y)NASDAQ Composite Index--an unmanaged index of common stocks.
(z)NASDAQ Industrial Index--a capitalization-weighted index composed of more
than 3,000 domestic stocks taken from the following industry sectors:
agriculture, mining, construction, manufacturing, electronic components,
services and public administration enterprises. It is a value-weighted index
calculated on price change only and does not include income.
(aa)National Association of Real Estate Investment Trusts ("NAREIT") Index--an
unmanaged market-weighted index of tax qualified REITs (excluding healthcare
REITs) listed on the New York Stock Exchange, American Stock Exchange and the
NASDAQ National Market System including dividends.
(bb)The New York Stock Exchange composite or component indices--unmanaged
indices of all industrial, utilities, transportation and finance company stocks
listed on the New York Stock Exchange.
(cc)Russell 2500 Index--comprised of the bottom 500 stocks in the Russell 1000
Index which represents the universe of stocks from which most active money
managers typically select; and all the stocks in the Russell 2000 Index. The
largest security in the index has a market capitalization of approximately $1.3
billion.
(dd)Salomon Brothers GNMA Index--includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
(ee)Salomon Brothers High Grade Corporate Bond Index--consists of publicly
issued, non-convertible corporate bonds rated AA or AAA. It is a value-
weighted, total return index, including approximately 800 issues with
maturities of 12 years or greater.
(ff)Salomon Brothers Broad Investment Grade Bond Index--a market-weighted index
that contains approximately 4700 individually priced investment grade corporate
bonds rated BBB or better, U.S. Treasury/agency issues and mortgage pass-
through securities.
(gg)Standard & Poor's 500 Stock Index or its component indices--unmanaged index
composed of 400 industrial stocks, 40 financial stocks, 40 utilities company
stocks and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
(hh)Standard & Poor's Small Cap 600 Index--a capitalization-weighted index of
600 domestic stocks having market capitalizations which reside within the 50th
and the 83rd percentiles of the market capitalization of the entire stock
market, chosen for certain liquidity characteristics and for industry
representation.
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<PAGE>
(ii) Wilshire 5000 Equity Index or its component indices--represents the return
on the market value of all common equity securities for which daily pricing is
available. Comparisons of performance assume reinvestment of dividends.
In assessing such comparisons of performance an investor should keep in mind
that the composition of the investments in the reported indices and averages is
not identical to the composition of investments in the Fund's Portfolios, that
the averages are generally unmanaged, and that the items included in the
calculations of such averages may not be identical to the formula used by the
Fund to calculate its futures. In addition, there can be no assurance that the
Fund will continue this performance as compared to such other averages.
GENERAL INFORMATION
- -------------------
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Fund's Articles of Incorporation permit the Directors to issue nine billion
shares of common stock, par value $.001 per share, from an unlimited number of
classes ("Portfolios") of shares. Currently the Fund consists of shares of
seventeen Portfolios.
The shares of each Portfolio of the Fund are fully paid and nonassessable, and
have no preference as to conversion, exchange, dividends, retirement or other
features. The shares of each Portfolio of the Fund have no pre-emptive rights.
The shares of the Fund have non-cumulative voting rights, which means that the
holders of more than 50% of the shares voting for the election of Directors can
elect 100% of the Directors if they choose to do so. A shareholder is entitled
to one vote for each full share held (and a fractional vote for each fractional
share held), then standing in his name on the books of the Fund.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The Fund's policy is to distribute substantially all of each Portfolio's net
investment income, if any. The Fund may also distribute any net realized
capital gains in the amount and at the times that will avoid both income
(including taxable gains) taxes on it and the imposition of the federal excise
tax on income and capital gains (see discussion under "Taxes" in this Statement
of Additional Information). However, the Fund may also choose to retain net
realized capital gains and pay taxes on such gains. The amounts of any income
dividends or capital gains distributions cannot be predicted.
Any dividend or distribution paid shortly after the purchase of shares of a
Portfolio by an investor may have the effect of reducing the per share net
asset value of that Portfolio by the per share amount of the dividend or
distribution. Furthermore, such dividends or distributions, although in effect
a return of capital, are subject to income taxes for shareholders subject to
tax as set forth herein and in the applicable Prospectus.
As set forth in the Prospectus, unless the shareholder elects otherwise in
writing, all dividends and capital gains distributions for a class of shares
are automatically received in additional shares of such class of that Portfolio
of the Fund at the net asset value as of the business day following the record
date. This automatic reinvestment of dividends and distributions will remain in
effect until the Fund is notified by the shareholder in writing at least three
days prior to the record date that either the Income Option (income dividends
in cash and capital gains distributions in additional shares at net asset
value) or the Cash Option (both income dividends and capital gains
distributions in cash) has been elected.
CUSTODY ARRANGEMENTS
The Chase Manhattan Bank ("Chase") serves as the Fund's domestic custodian.
Chase is not affiliated with Morgan Stanley & Co. Incorporated. Morgan Stanley
Trust Company, Brooklyn, New York, acts as the Fund's custodian for foreign
assets held outside the United States and employs sub-custodians who have been
or will be approved by the Directors of the Fund in accordance with Rule 17f-5
adopted by the Commission under the 1940 Act. Morgan Stanley Trust Company is
an affiliate of Morgan Stanley & Co. Incorporated. In the selection of foreign
sub-custodians, the Directors consider a number of factors, including, but not
limited to, the reliability and financial stability of the institution, the
ability of the institution to provide efficiently the custodial services
required for the Fund, and the reputation of the institution in the particular
country or region.
DESCRIPTION OF CERTAIN
- ----------------------
SECURITIES AND RATINGS
- ----------------------
I. DESCRIPTION OF COMMERCIAL PAPER--RATINGS
DESCRIPTION OF MOODY'S RATINGS OF STATE AND MUNICIPAL NOTES: Moody's ratings
for state and municipal notes and other short-term obligations are designated
Moody's Investment Grade ("MIG"). Symbols used are as follows: MIG-1--best
quality, enjoying strong protection from established cash flows of funds for
their servicing or from established broad-based access to the market for
refinancing, or both; MIG-2--high quality with margins of protection ample
although not so large as in the preceding group; MIG-3--favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades.
DESCRIPTION OF MOODY'S HIGHEST COMMERCIAL PAPER RATING: Prime-1 ("P1")--Judged
to be of the best quality. Their short-term debt obligations carry the smallest
degree of investment risk.
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EXCERPT FROM S&P'S RATING OF MUNICIPAL NOTE ISSUES: S-1+ --very strong capacity
to pay principal and interest; SP-2--strong capacity to pay principal and
interest.
DESCRIPTION OF S&P'S HIGHEST COMMERCIAL PAPER RATINGS: A-1+ --this designation
indicates the degree of safety regarding timely payment is overwhelming. A-1--
this designation indicates the degree of safety regarding timely payment is
very strong.
II. DESCRIPTION OF U.S. GOVERNMENT SECURITIES
The term "U.S. Government securities" refers to a variety of securities which
are issued or guaranteed by the U.S. Government, and by various
instrumentalities which have been established or sponsored by the U.S.
Government.
U.S. Treasury securities are backed by the "full faith and credit" of the
United States. Securities issued or guaranteed by Federal agencies and U.S.
Government sponsored instrumentalities may or may not be backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the United States, the investor must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim
against the United States itself in the event the agency or instrumentality
does not meet its commitment. Agencies which are backed by the full faith and
credit of the United States include the Export-Import Bank, Farmers Home
Administration, Federal Financing Bank, and others. Certain agencies and
instrumentalities, such as the Government National Mortgage Association, are,
in effect, backed by the full faith and credit of the United States through
provisions in their charters that they may make "indefinite and unlimited"
drawings on the Treasury, if needed to service debt. Debt from certain other
agencies and instrumentalities, including the Federal Home Loan Bank and
Federal National Mortgage Association, are not guaranteed by the United States,
but those institutions are protected by the discretionary authority for the
U.S. Treasury to purchase certain amounts of their securities to assist the
institution in meeting its debt obligations. However, the U.S. Treasury has no
lawful obligation to assume the financial liabilities of these agencies or
others. Finally, other agencies and instrumentalities, such as the Farm Credit
System and the Federal Home Loan Mortgage Corporation, are federally chartered
institutions under Government supervision, but their debt securities are backed
only by the creditworthiness of those institutions, not the U.S. Government.
Some of the U.S. Government agencies that issue or guarantee securities include
the Export-Import Bank of the United States, Farmers Home Administration,
Federal Housing Administration, Maritime Administration, Small Business
Administration, and the Tennessee Valley Authority.
An instrumentality of the U.S. Government is a Government agency organized
under Federal charter with Government supervision. Instrumentalities issuing or
guaranteeing securities include, among others, Federal Home Loan Banks, the
Federal Land Banks, Central Bank for Cooperatives, Federal Immediate Credit
Banks, and the Federal National Mortgage Association.
III. DESCRIPTION OF MUNICIPAL BONDS
Municipal Bonds generally include debt obligations issued by states and their
political subdivisions, and duly constituted authorities and corporations, to
obtain funds to construct, repair or improve various public facilities such as
airports, bridges, highways, hospitals, housing, schools, streets and water and
sewer works. Municipal Bonds may also be issued to refinance outstanding
obligations as well as to obtain funds for general operating expenses and for
loans to other public institutions and facilities.
The two principal classifications of Municipal Bonds are "general obligation"
and "revenue" or "special tax" bonds. General obligation bonds are secured by
the issuer's pledge of its full faith, credit and taxing power for the payment
of principal and interest. Revenue or special tax bonds are payable only from
the revenues derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special excise or other tax, but not from
general tax revenues.
Industrial revenue bonds (i.e., private activity bonds) in most cases are
revenue bonds and generally do not have the pledge of the credit of the issuer.
The payment of the principal and interest on such industrial revenue bonds is
dependent solely on the ability of the user of the facilities financed by the
bonds to meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for such payment. Short-term
municipal obligations issued by states, cities, municipalities or municipal
agencies include Tax Anticipation Notes, Revenue Anticipation Notes, Bond
Anticipation Notes, Construction Loan Notes and Short-Term Discount Notes.
Project Notes are instruments guaranteed by the Department of Housing and Urban
Development but issued by a state or local housing agency. While the issuing
agency has the primary obligation on such Project notes, they are also secured
by the full faith and credit of the United States.
Note obligations with demand or put options may have a stated maturity in
excess of one year, but allow any holder to demand payment of principal plus
accrued interest upon a specified number of days' notice. Frequently, such
obligations are secured by letters of credit or other credit support
arrangements provided by banks. The issuer of such notes normally has a
corresponding right, after a given period, to repay in its discretion the
outstanding principal of the notes plus accrued interest upon a specific number
of days' notice to the bondholders. The interest rate on a
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<PAGE>
demand note may be based upon a known lending rate, such as a bank's prime
rate, and be adjusted when such rate changes, or the interest rate on a demand
note may be a market rate that is adjusted at specified intervals.
The yields of Municipal Bonds depend on, among other things, general money
market conditions, conditions in the Municipal Bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of Moody's and S&P represent their opinions of the quality
of the Municipal Bonds. It should be emphasized that such ratings are general
and are not absolute standards of quality. Consequently, Municipal Bonds with
the same maturity, coupon and rating may have different yields, while Municipal
Bonds of the same maturity and coupon, but with different ratings, may have the
same yield.
Municipal Bonds are sometimes purchased on a "when issued" basis meaning the
buyer has committed to purchasing certain specified securities at an agreed-
upon price when they are issued. The period between commitment date and
issuance date can be a month or more. It is possible that the securities will
never be issued and the commitment canceled.
From time to time proposals have been introduced before Congress to restrict or
eliminate the Federal income tax exemption for interest on Municipal Bonds.
Similar proposals may be introduced in the future.
Similarly, from time to time proposals have been introduced before State and
local legislatures to restrict or eliminate the State and local income tax
exemption (to the extent such an exemption applies, which may not apply in all
cases) for interest on Municipal Bonds. Similar proposals may be introduced in
the future.
IV. DESCRIPTION OF MORTGAGE-BACKED SECURITIES
"Mortgage-Backed Securities" are securities that, directly or indirectly,
represent a participation in, or are secured by and payable from, mortgage
loans on real property. Mortgage-backed securities include collateralized
mortgage obligations, mortgage pass-through securities issued or guaranteed by
agencies or instrumentalities of the U.S. government or by private sector
entities.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized mortgage obligations
("CMOs") are debt obligations or multiclass pass-through certificates issued by
agencies or instrumentalities of the U.S. government or by private originators
or investors in mortgage loans. They are backed by Mortgage Pass-Through
Securities (discussed below) or whole loans (all such assets, the "Mortgage
Assets") and are evidenced by a series of bonds or certificates issued in
multiple classes or "tranches." The principal and interest on the underlying
Mortgage Assets may be allocated among the several classes of a series of CMOs
in many ways.
CMOs may be issued by agencies or instrumentalities of the U.S. government, or
by private originators of, or investors in, mortgage loans, including savings
and loan associations, mortgage bankers, commercial banks, investment banks and
special purpose subsidiaries of the foregoing. CMOs that are issued by private
sector entities and are backed by assets lacking a guarantee of an entity
having the credit status of a governmental agency or instrumentality are
generally structured with one or more types of credit enhancement as described
below. An issuer of CMOs may elect to be treated, for federal income tax
purposes, as a Real Estate Mortgage Investment Conduit (a "REMIC"). An issuer
of CMOs issued after 1991 must elect to be treated as a REMIC or it will be
taxable as a corporation under rules regarding taxable mortgage pools.
In a CMO, a series of bonds or certificates are issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," may be issued with a
specific fixed or floating coupon rate and has a stated maturity or final
scheduled distribution date. Principal prepayments on the underlying Mortgage
Assets may cause the CMOs to be retired substantially earlier than their stated
maturities or final scheduled distribution dates. Interest is paid or accrues
on CMOs on a monthly, quarterly or semi-annual basis. The principal of and
interest on the Mortgage Assets may be allocated among the several classes of a
CMO in many ways. The general goal in allocating cash flows on Mortgage Assets
to the various classes of a CMO is to create certain tranches on which the
expected cash flows have a higher degree of predictability than the underlying
Mortgage Assets. As a general matter, the more predictable the cash flow is on
a particular CMO tranche, the lower the anticipated yield will be on that
tranche at the time of issuance relative to prevailing market yields on Assets.
As part of the process of creating more predictable cash flows on certain
tranches of a CMO, one or more tranches generally must be created that absorb
most of the changes in the cash flows on the underlying Mortgage Assets. The
yields on these tranches are generally higher than prevailing market yields on
Mortgage-Backed Securities with similar average lives. Because of the
uncertainty of the cash flows on these tranches, the market prices of and
yields on these tranches are more volatile.
Included within the category of CMOs are PAC Bonds. PAC Bonds are a type of CMO
tranche or series designed to provide relatively predictable payments of
principal provided that, among other things, the actual prepayment experience
on the underlying mortgage loans falls within a predefined range. If the actual
prepayment experience on the underlying mortgage loans is at a rate faster or
slower than the predefined range or if deviations from other assumptions occur,
principal payments on the PAC Bond may be earlier or later than predicted. The
magnitude of the predefined range varies from one PAC Bond to another; a
narrower
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<PAGE>
range increases the risk that prepayments on the PAC Bond will be greater or
smaller than predicted. Because of these features, PAC Bonds generally are less
subject to the risks of prepayment than are other types of mortgage-backed
securities.
MORTGAGE PASS-THROUGH SECURITIES. Mortgage pass-through securities issued or
guaranteed by private sector originators of or investors in mortgage loans and
are structured similarly to governmental pass-through securities. Because
private pass-throughs typically lack a guarantee by an entity having the credit
status of a governmental agency or instrumentality, they are generally
structured with one or more types of credit enhancement described below. FNMA
and FHLMC obligations are not backed by the full faith and credit of the U.S.
government as GNMA certificates are, but FNMA and FHLMC securities are
supported by the instrumentalities' right to borrow from the United States
Treasury. Each of GNMA, FNMA and FHLMC guarantees timely distributions of
interest to certificate holders. Each of GNMA and FNMA also guarantees timely
distributions of scheduled principal. FHLMC has in the past guaranteed only the
ultimate collection of principal of the underlying mortgage loan; however,
FHLMC has now issued Mortgage-Backed Securities (FHLMC Gold PCs) which also
guarantee timely payment of monthly principal reductions. REFCORP obligations
are backed, as to principal payments, by zero coupon U.S. Treasury bonds, and
as to interest payment, ultimately by the U.S. Treasury. Obligations issued by
such U.S. governmental agencies and instrumentalities are described more fully
below.
GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate instrumentality
of the United States within the Department of Housing and Urban Development.
The National Housing Act of 1934, as amended (the "Housing Act"), authorizes
Ginnie Mae to guarantee the timely payment of the principal of and interest on
certificates that are based on and backed by a pool of mortgage loans insured
by the Federal Housing Administration under the Housing Act, or Title V of the
Housing Act of 1949 ("FHA Loans"), or guaranteed by the Department of Veterans
Affairs under the Servicemen's Readjustment Act of 1944, as amended ("VA
Loans"), or by pools of other eligible mortgage loans. The Housing Act provides
that the full faith and credit of the United States government is pledged to
the payment of all amounts that may be required to be paid under any guaranty.
In order to meet its obligations under such guaranty, Ginnie Mae is authorized
to borrow from the United States Treasury with no limitations as to amount.
Each Ginnie Mae Certificate will represent a pro rata interest in one or more
of the following types of mortgage loans: (i) fixed rate level payment mortgage
loans; (ii) fixed rate graduated payment mortgage loans; (iii) fixed rate
growing equity mortgage loans; (iv) fixed rate mortgage loans secured by
manufactured (mobile) homes; (v) mortgage loans on multi-family residential
properties under construction; (vi) mortgage loans on completed multi-family
projects; (vii) fixed rate mortgage loans as to which escrowed funds are used
to reduce the borrower's monthly payments during the early years of the
mortgage loans ("buydown" mortgage loans); (viii) mortgage loans that provide
for adjustments in payments based on periodical changes in interest rates or in
other payment terms of the mortgage loans; and (ix) mortgage-backed serial
notes. All of these mortgage loans will be FHA Loans or VA Loans and, except as
otherwise specified above, will be fully-amortizing loans secured by first
liens on one- to four-family housing units.
FANNIE MAE CERTIFICATES. Fannie Mae is a federally chartered and privately
owned corporation organized and existing under the Federal National Mortgage
Association Charter Act of 1938. The obligations of Fannie Mae are not backed
by the full faith and credit of the United States government.
Each Fannie Mae Certificate will represent a pro rata interest in one or more
pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed rate level payment mortgage loans; (ii) fixed rate
growing equity mortgage loans; (iii) fixed rate graduated payment mortgage
loans; (iv) variable rate California mortgage loans; (v) other adjustable rate
mortgage loans; and (vi) fixed rate and adjustable mortgage loans secured by
multi-family projects.
FREDDIE MAC CERTIFICATES. Freddie Mac is a corporate instrumentality of the
United States created pursuant to the Emergency Home Finance Act of 1970, as
amended (the "FHLMC Act"). The obligations of Freddie Mac are obligations
solely of Freddie Mac and are not backed by the full faith and credit of the
U.S. government.
Freddie Mac Certificates represent a pro rata interest in a group of mortgage
loans (a "Freddie Mac Certificate group") purchased by Freddie Mac. The
mortgage loans underlying the Freddie Mac Certificates will consist of fixed
rate or adjustable rate mortgage loans with original terms to maturity of
between ten and thirty years, substantially all of which are secured by first
liens on one- to four-family residential properties or multi-family projects.
Each mortgage loan must meet the applicable standards set forth in the FHLMC
Act. A Freddie Mac Certificate group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and
participations comprising another Freddie Mac Certificate group.
CREDIT ENHANCEMENT. Mortgage-backed securities are often backed by a pool of
assets representing the obligations of a number of different parties. To lessen
the effect of failure by obligors on underlying assets to make payments, such
securities may contain elements of credit support. Such credit support falls
into two categories: (i) liquidity protection and (ii) protection against
losses resulting from ultimate
28
<PAGE>
default by an obligor on the underlying assets. Liquidity protection generally
refers to the provision of advances, typically by the entity administering the
pool of assets, to ensure that the pass-through of payments due on the
underlying pool occurs in a timely fashion. Protection against losses resulting
from ultimate default enhances the likelihood of ultimate payment of the
obligations on at least a portion of the assets in the pool. Such protection
may be provided through guarantees, insurance policies or letters of credit
obtained by the issuer or sponsor from third parties (referred to herein as
"third party credit support"), through various means of structuring the
transaction or through a combination of such approaches.
The ratings of mortgage-backed securities for which third-party credit
enhancement provides liquidity protection or protection against losses from
default are generally dependent upon the continued creditworthiness of the
provider of the credit enhancement. The ratings of such securities could be
subject to reduction in the event of deterioration in the creditworthiness of
the credit enhancement provider even in cases where the delinquency and loss
experience on the underlying pool of assets is better than expected.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal
thereof and interest thereon, with defaults on the underlying assets being
borne first by the holders of the most subordinated class), creation of
"reserve funds" (where cash or investments, sometimes funded from a portion of
the payments on the underlying assets, are held in reserve against future
losses) and "over- collateralization" (where the scheduled payments on, or the
principal amount of, the underlying assets exceed those required to make
payment of the securities and pay any servicing or other fees). The degree of
credit support provided for each security is generally based on historical
information with respect to the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that which is anticipated
could adversely affect the return on an investment in such a security.
V. FOREIGN INVESTMENTS
The Asian Equity International Fixed Income, Global Equity Emerging Markets
Debt, International Magnum and Emerging Markets Equity Portfolios will invest,
and the High Yield, International Fixed Income, Balanced, Growth and Multi-
Asset-Class Portfolios may invest, in securities of foreign issuers. Investors
should recognize that investing in such foreign securities involves certain
special considerations which are not typically associated with investing in
U.S. issuers. For a description of the effect on the Portfolios of currency
exchange rate fluctuation, see "Investment Objectives and Policies--Forward
Foreign Currency Exchange Contracts" above. As foreign issuers are not
generally subject to uniform accounting, auditing and financial reporting
standards and may have policies that are not comparable to those of domestic
issuers, there may be less information available about certain foreign
companies than about domestic issuers. Securities of some foreign issuers are
generally less liquid and more volatile than securities of comparable domestic
issuers. There is generally less government supervision and regulation of stock
exchanges, brokers and listed issuers than in the U.S. In addition, with
respect to certain foreign countries, there is the possibility of expropriation
or confiscatory taxation, political or social instability, or diplomatic
developments which could affect U.S. investments in those countries. Foreign
securities not listed on a recognized domestic or foreign exchange are regarded
as not readily marketable and therefore such investments will be limited to 15%
of a Portfolio's net asset value at the time of purchase.
Although the Portfolios will endeavor to achieve the most favorable execution
costs in their portfolio transactions, fixed commissions on many foreign stock
exchanges are generally higher than negotiated commissions on U.S. exchanges.
Certain foreign governments levy withholding or other taxes on dividend and
interest income. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from investments in such countries. Except in the case of
the Asian Equity, International Magnum, Emerging Markets Equity, Multi-Asset-
Class, International Fixed Income, Emerging Markets Debt and Global Equity
Portfolios, it is not expected that a Portfolio or its shareholders would be
able to claim a credit for U.S. tax purposes with respect to any such foreign
taxes. However, these foreign withholding taxes may not have a significant
impact on such Portfolios, because each Portfolio's investment objective is to
seek long-term capital appreciation, which generally (but not always) is
subject to tax and any dividend or interest income should be considered
incidental.
29
<PAGE>
FINANCIAL STATEMENTS
- --------------------
The initial statement of assets and liabilities of the Fund are set forth in
the following pages.
REPORT OF INDEPENDENT ACCOUNTANTS
- ---------------------------------
To the Shareholder and Board of Directors of Morgan Stanley Universal Funds,
Inc.
In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of The Emerging
Markets Equity Portfolio of Morgan Stanley Universal Funds, Inc. (the "Fund")
at September 11, 1996 in conformity with generally accepted accounting
principles. This financial statement is the responsibility of the Fund's
management, our responsibility is to express an opinion on this financial
statement based on our audit. We conducted our audit of this financial
statement in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statement, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
September 13, 1996
30
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
EMERGING MARKETS EQUITY PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 11, 1996
<TABLE>
<S> <C>
ASSETS
Assets
Cash............................................................... $100,000
----------
Deferred organization costs (Note 1)............................... 360,000
----------
Total Assets...................................................... 460,000
Liabilities:
Organization costs payable......................................... 360,000
----------
Commitments and contingencies (Note 2)
Net Assets:
Common Stock, $.001 par value, 500,000,000 shares authorized;
10,000 shares issued and outstanding.............................. 10
----------
Paid-in Surplus.................................................... 99,990
----------
Total Net Assets.................................................. $ 100,000
----------
Net Asset Value per share........................................... $ 10.00
==========
</TABLE>
NOTE 1: ORGANIZATION
Morgan Stanley Universal Funds, Inc. (the "Fund") was organized in Maryland on
March 26, 1996 and is registered with the Securities and Exchange Commission,
under the Investment Company Act of 1940, as amended, as an open-end management
investment company, with diversified and non-diversified series ("Portfolios").
The Fund had no operations other than the issuance of shares of its common
stock of the Emerging Markets Equity Portfolio to Morgan Stanley Asset
Management Inc. ("MSAM" ) on September 11, 1996. Organization costs estimated
at $360,000 will be deferred and amortized on a straight-line basis over a 60-
month period from the date the Fund commences operations. MSAM has agreed that
in the event any of its initial shares in the Fund are redeemed, the proceeds
on redemption will be reduced by the pro-rata portion of any unamortized
deferred organizational costs in the same proportion as the number of shares
redeemed bears to the initial shares held at the time of redemption.
NOTE 2: AGREEMENTS
The Fund intends to enter into an Investment Advisory Agreement with MSAM
pursuant to which MSAM will be responsible for providing investment management
services to the Fund with respect to the Emerging Markets Equity Portfolio.
For its services under the Investment Advisory Agreement, MSAM will receive an
annual fee, calculated daily and payable monthly, at the following rates: 1.25%
of the first $500 million of net assets; 1.20% of net assets from $500 million
to $1 billion; and 1.15% of net assets in excess of $1 billion.
The Fund intends to enter into an administrative agreement with MSAM pursuant
to which MSAM will provide administrative services to certain portfolios of the
Fund, including the Emerging Markets Equity Portfolio. For its administrative
services, MSAM will receive an annual fee of .25% of the average daily net
assets of the respective Portfolios of the Fund. MSAM intends to enter into a
sub-administration agreement with Chase Global Funds Services Company ("Chase
Global"), a subsidiary of The Chase Manhattan Bank, N.A. ("Chase"), pursuant to
which Chase Global will provide certain transfer agent, fund accounting and
administrative services to the Fund with respect to the Emerging Markets Equity
Portfolio. Certain employees of MSAM and Chase Global are officers of the Fund.
The Fund also intends to enter into a custody agreement with Morgan Stanley
Trust Company (the "International Custodian") pursuant to which the
International Custodian will provide the Fund with custody services for the
Fund's assets held outside the United States. With respect to its assets in the
United States, the Fund intends to enter into another custody agreement with
Chase (in such capacity, the "U.S. Custodian"). The custody agreements with the
International Custodian and the U.S. Custodian provide for an annual fee based
on the amount of assets under custody, plus transactional fees. The Fund
intends to enter into a Distribution Agreement with Morgan Stanley & Co.
Incorporated ("Morgan Stanley") pursuant to which Morgan Stanley will serve as
the exclusive Distributor of the Fund and sell shares of each Portfolio upon
the terms described in the Fund's Prospectus.
31
<PAGE>
PART C
Morgan Stanley Universal Funds, Inc.
Other Information
Item 24. Financial Statements and Exhibits
---------------------------------
(A) FINANCIAL STATEMENTS
--------------------
1 Part A - Prospectus
-------------------
No financial highlights are provided because the Fund has no operating
history.
2 Part B - Statement of Additional Information
--------------------------------------------
Report of Independent Accountants.
Statement of Assets and Liabilities dated September __, 1996.
Notes to Statement of Assets and Liabilities.
(B) EXHIBITS
--------
1 Articles of Incorporation. (Filed as Exhibit No. 1 to the Registration
Statement on Form N-1A, File No. 333-3013)
2 By-laws. (Filed as Exhibit No.2 to the Registration Statement on Form N-
1A, File No. 333-3013)
3 Not applicable.
4 Not applicable.
5 (a)Form of Investment Advisory Agreement between Registrant and Morgan
Stanley Asset Management Inc. ("MSAM") with respect to the Money Market,
Emerging Markets Debt, Growth, U.S. Real Estate, Global Equity,
International Magnum, Emerging Markets Equity and Asian Equity
Portfolios.*
(b)Form of Investment Advisory Agreement between Registrant and Miller
Anderson & Sherrerd, LLP ("MAS") with respect to the Fixed Income, High
Yield, International Fixed Income, Balanced, Multi-Asset-Class, Value,
Core Equity, Mid Cap Growth and Mid Cap Value Portfolios.*
6 Form of Distribution Agreement between Registrant and Morgan Stanley &
Co. Incorporated.*
7 Not applicable.
8 (a)Form of Domestic Mutual Fund Custody Agreement between Registrant and
Chase Manhattan Bank, N.A.*
(b)Form of International Custody Agreement between the Registrant and
Morgan Stanley Trust Company.*
9 (a)Form of Administration Agreement between Registrant and Morgan
Stanley Asset Management Inc.*
(b)Form of Administration Agreement between Registrant and Miller
Anderson & Sherrerd, LLP.*
C-1
<PAGE>
(c)Form of Sub-Administration Agreement between Morgan Stanley Asset
Management Inc. and Chase Global Funds Services Company.*
(d)Form of Sub-Administration Agreement between Miller Anderson &
Sherrerd LLP and Chase Global Funds Services Company.*
10 Opinion of Counsel.*
11 Consent of Independent Accountants.*
12 Not applicable.
13 Not applicable.
14 Not applicable.
15 Not applicable.
16 Not applicable.
24 Powers of Attorney.*
27 Financial Data Schedule.*
____________________________
* Filed herewith.
Item 25. Persons Controlled by or Under Common Control with Registrant
-------------------------------------------------------------
Initial capital of the Fund was provided by the investment of $100,000
by Morgan Stanley Asset Management Inc. ("MSAM") in shares of the
Emerging Markets Equity Portfolio of the Fund. MSAM is a subsidiary of
Morgan Stanley Group Inc., which is a publicly owned financial
services corporation listed on the New York Stock Exchange. See
Registration Statement on Form BD of Morgan Stanley & Co.
Incorporated (File No. 8209) for information on persons controlled by
or under common control with the Registrant.
Item 26. Number of Holders of Securities
-------------------------------
The following information is given as of September ___, 1996.
Number of
Title of Class Record Holders
-------------- --------------
Money Market Portfolio............................ 0
Fixed Income Portfolio............................ 0
High Yield Portfolio.............................. 0
International Fixed Income Portfolio.............. 0
Emerging Markets Debt Portfolio................... 0
Balanced Portfolio................................ 0
Multi-Asset-Class Portfolio....................... 0
Growth Portfolio.................................. 0
Value Portfolio................................... 0
C-2
<PAGE>
Core Equity Portfolio............................. 0
Mid Cap Growth Portfolio.......................... 0
Mid Cap Value Portfolio........................... 0
U.S. Real Estate Portfolio........................ 0
Global Equity Portfolio........................... 0
International Magnum Portfolio.................... 0
Emerging Markets Equity Portfolio................. 1
Asian Equity Portfolio............................ 0
Item 27. Indemnification
---------------
Reference is made to Article SEVEN of the Registrant's Articles
of Incorporation. Insofar as indemnification for liability arising under the
Securities Act of 1933, as amended (the "1933 Act"), may be permitted to
directors, officers and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission (the "Commission") such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
Item 28. Business and Other Connections of Investment Advisers
-----------------------------------------------------
Reference is made to the caption "Management of the Fund--Investment
Advisers" in the Prospectus constituting Part A of this Registration Statement
and "Management of the Fund" in Part B of this Registration Statement.
Listed below are the officers and Directors of Morgan Stanley Asset
Management Inc.:
DIRECTORS:
---------
James M. Allwin Director
Barton M. Biggs Director
Gordon S. Gray Director
Peter A. Nadosy Director
Dennis G. Sherva Director
OFFICERS:
--------
Barton M. Biggs Chairman, Managing Director
Peter A. Nadosy Vice Chairman, Managing Director
James M. Allwin President, Managing Director
P. Dominic Caldecott Managing Director (MSAM) - UK
A. Macdonald Caputo Managing Director
Ean Wah Chin Managing Director (MSAM) - Singapore
Garry B. Crowder Managing Director
Madhav Dhar Managing Director
Kurt A. Feuerman Managing Director
Gordon S. Gray Managing Director
Marianne Liang Hay Managing Director
C-3
<PAGE>
Gary D. Latainer Managing Director
Mahmoud A. Mamdani Managing Director
Robert A. Sargent Managing Director (MSAM) - UK
Bidyut C. Sen Managing Director
Vinod R. Sethi Managing Director
Dennis G. Sherva Managing Director
James L. Tanner Managing Director (MSAM) - UK
Richard G. Woolworth, Jr. Managing Director
Debra M. Aaron Principal
Warren Ackerman III Principal
John R. Alkire Principal (MSAM) - Tokyo
Robert E. Angevine Principal
Gerald P. Barth-Wehrenalp Principal
Francine J. Bovich Principal
Stuart J.M. Breslow Principal
Andrew C. Brown Principal (MSAM) - UK
Jeffry P. Brown Principal
Frances Campion Principal (MSAM) - UK
Terence P. Carmichael Principal
Arthur Certosimo Principal
Stephen C. Cordy Principal
Jacqueline A. Day Principal (MSAM) - UK
Abigail Jones Feder Principal
Eugene Flood, Jr. Principal
Thomas C. Frame Principal
Paul B. Ghaffari Principal
James Wayne Grisham Principal
Perry E. Hall II Principal
Ruth A. Hughes-Guden Principal
Margaret Kinsley Johnson Principal
Michael B. Kushma Principal
Marianne J. Lippmann Principal
Andrew Mack Principal (MSAM) - UK
Gary J. Mangino Principal
Jeffrey Margolis Principal
M. Paul Martin Principal
Walter Maynard, Jr. Principal
Robert L. Meyer Principal
Margaret P. Naylor Principal (MSAM) - UK
Warren Olsen Principal
Christopher G. Petrow Principal
Russell C. Platt Principal
Narayan Ramachandran Principal
Gail Hunt Reeke Principal
Christine I. Reilly Principal
Stefano Russo Principal (MSAM) - Milan
Bruce R. Sandberg Principal
Kiat Seng Seah Principal (MSAM) - Singapore
Stephen C. Sexauer Principal
Robert M. Smith Principal
Kunihiko Sugio Principal (MSAM) - Tokyo
Anne D. Thivierge Principal
Philip W. Winters Principal
Alford E. Zick, Jr. Principal
Suzanne S. Akers Vice President
William S. Auslander Vice President
Kimberly L. Austin Vice President
Marshall T. Bassett Vice President
Theodore R. Bigman Vice President
L. Kenneth Brooks Vice President
Jonathan Paul Buckeridge Vice President (MSAM) - Melbourne
Carl Kuo-Wei Chien Vice President (MSAM) - Hong Kong
C-4
<PAGE>
Lori A. Cohane Vice President
James Colmenares Vice President
Kate Cornish-Bowden Vice President (MSAM) - UK
Nikhil Dhaon Vice President
Christine H. du Bois Vice President
Raye L. Dube Vice President
Richard S Farden Vice President
Daniel E. Fox Vice President
Karen T. Frost Vice President (MSAM) - UK
Josephine M. Glass Vice President
Charles A. Golden Vice President
James A. Grasselino Vice President
Kenneth John Greig Vice President (MSAM) - UK
Maureen A. Grover Vice President
Kenneth R. Holley Vice President
Holly D. Hopps Vice President
Etsuko Fuseya Jennings Vice President
Donald B. Johnston Vice President
Peter L. Kirby Vice President
Michael F. Klein Vice President
George Koshy Vice President
Daniel R. Lascano Vice President
Arthur J. Lev Vice President
Valerie Y. Lewis Vice President
Jane Likins Vice President (MSAM) - UK
Khoon-Min Lim Vice President
William David Lock Vice President (MSAM) - UK
Gordon W. Loery Vice President
Yvonne Longley Vice President (MSAM) - UK
Paula J. Morgan Vice President (MSAM) - UK
Clare K. Mutone Vice President
Terumi Nagata Vice President (MSAM) - Tokyo
Yoshiro Okawa Vice President (MSAM) - Tokyo
Martin O. Pearce Vice President (MSAM) - UK
Alexander A. Pena Vice President
Anthony J. Pesce Vice President
David J. Polansky Vice President
Akash Prakash Vice President (MSAM) - Mumbai
Gregg A. Robinson Vice President
Gerald D. Rubin Vice President
Donald P. Ryan Vice President
Andy B. Skov Vice President
Michael James Smith Vice President (MSAM) - UK
Kim I. Spellman Vice President
Joseph P. Stadler Vice President
Christian K. Stadlinger Vice President
Catherine Steinhardt Vice President
Ram K. Sundaram Vice President
Joseph Y.S. Tern Vice President (MSAM) - Singapore
Richard Boon Hwee Toh Vice President (MSAM) - Singapore
K.N. Vaidyanathan Vice President (MSAM) - Bombay
Dennis J. Walsh Vice President
Kevin V. Wasp Vice President
Harold J. Schaaff, Jr. Principal, General Counsel and Secretary
Eileen Murray Managing Director and Treasurer
Madeline D. Barkhorn Assistant Secretary
Charlene R. Herzer Assistant Secretary
In addition, MSAM acts as investment adviser to the following
registered investment companies: American Advantage International Equity Fund;
The Brazilian Investment Fund, Inc.; The Enterprise Group of Funds, Inc. - Tax-
Exempt Income Portfolio; Fortis Series Fund, Inc. - Global Asset Allocation
Series; Fountain Square International Equity Fund; General American Capital
Company; The Latin American Discovery Fund, Inc.; certain portfolios of The
Legends Fund, Inc.; The Malaysia Fund, Inc.; Morgan Stanley Africa Investment
Fund, Inc.; Morgan Stanley Asia-Pacific Fund, Inc.; Morgan Stanley Emerging
Markets Debt Fund, Inc.; Morgan Stanley Emerging Markets Fund, Inc.; Morgan
Stanley European Emerging Markets Fund, Inc.; Morgan Stanley Global Opportunity
Bond Fund, Inc.; The Morgan Stanley High Yield Fund, Inc.; Morgan Stanley India
Investment Fund, Inc.; Morgan Stanley Fund, Inc.; Morgan Stanley Institutional
Fund, Inc.; The Pakistan Investment Fund, Inc.; PCS Cash Fund, Inc.; Principal
Aggressive Growth Fund, Inc.; Principal Asset Allocation Fund, Inc.; certain
portfolios of Sun America Series Trust; The Thai Fund, Inc. and The Turkish
Investment Fund, Inc.
MAS is a Pennsylvania limited liability partnership founded in 1969.
MAS provides investment services to employee benefit plans, endowment funds,
foundations and other institutional investors as well as serving as investment
adviser to MAS Funds, a registered investment company.
C-5
<PAGE>
The information required by this Item 28 with respect to each
director, officer or partner of MAS together with information as to any other
business, profession, vocation or employment of a substantial nature engaged in
by such officers and directors during the past two years, is incorporated by
reference to Schedules B and D of Form ADV filed by MAS pursuant to the
Investment Advisers Act of 1940 (SEC file No. 801-10437).
Item 29. Principal Underwriters
----------------------
Morgan Stanley & Co. Incorporated ("MS&Co.") is distributor for Morgan
Stanley Universal Funds, Inc., Morgan Stanley Institutional Fund, Inc., Morgan
Stanley Fund, Inc., and PCS Cash Fund, Inc. The information required by this
Item 29 with respect to each Director and officer of MS&Co. is incorporated by
reference to Schedule A of Form BD filed by MS&Co. pursuant to the Securities
and Exchange Act of 1934, as amended (SEC File No. 8-15869).
Item 30. Location of Accounts and Records
--------------------------------
The books, accounts and other documents required by Section 31(a)
under the Investment Company Act of 1940, as amended, and the rules promulgated
thereunder are maintained in the physical possession of the Registrant;
Registrant's Transfer Agent, Chase Global Funds Services Company, P.O. Box 2798,
Boston, Massachusetts 02208-2798; and the Registrant's custodian banks,
including sub-custodians.
Item 31. Management Services
-------------------
Each of MSAM and MAS have entered into Sub-Administration Agreements
with Chase Global Funds Services Companies ("Chase") (filed as Exhibit No. 9(c)
and 9(d) to Pre-Effective Amendment No.1 to the Registration Statement) pursuant
to which Chase will provide fund administration, fund accounting and transfer
agency services to specified Portfolios of the Registrant.
Item 32. Undertakings
------------
(a) Not applicable.
(b) Registrant undertakes to file a post-effective amendment
containing reasonably current financial statements, which need not be certified,
for the Money Market, Fixed Income, High Yield, International Fixed Income,
Emerging Market Debt, Balanced, Multi-Asset-Class, Growth, Value, Core Equity,
Mid Cap Growth, Mid Cap Value, U.S. Real Estate, Global Equity, International
Magnum, Emerging Markets Equity and Asian Equity Portfolios, within four to six
months from the effective date or this Registration Statement or the
commencement of operations of each such Investment Fund, whichever is later.
(c) Registrant hereby undertakes to furnish to each prospective
person to whom a prospectus will be delivered a copy of Registrant's latest
annual report to shareholders, when such annual report is issued, containing
information called for by Item 5A of Form N-1A, upon request and without charge.
(d) Registrant hereby undertakes that whenever a Shareholder or
Shareholders who meet the requirements of Section 16(c) of the 1940 Act inform
the Board of Directors of his or their desire to communicate with other
Shareholders of the Fund, the Directors will inform such Shareholder(s) as to
the approximate number of Shareholders of record and the approximate costs of
mailing or afford said Shareholders access to a list of Shareholders.
C-6
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant has duly
caused this Pre-Effective Amendment No. 1 to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of New York and State of New
York on the 13th day of September, 1996.
MORGAN STANLEY UNIVERSAL FUNDS, INC.
By: /s/ Warren J. Olsen
-------------------
Warren J. Olsen
President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Act of 1933 as amended,
this Amendment to this Registration Statement has been signed below by the
following persons in the capacities indicated on the 13th day of September,
1996.
Signature Title(s)
--------- --------
James R. Rooney* Treasurer, Chief Financial Officer
Thomas L. Bennett* Director
John D. Barrett, II* Director
Gerard E. Jones* Director
Andrew McNally, IV* Director
Samuel T. Reeves* Director
Fergus Reid* Director
Frederick O. Robertshaw* Director
Frederick B. Whittemore* Director
/s/ Warren J. Olsen
----------------------------
Warren J. Olsen
*Attorney-In-Fact and
President, Chief Executive
Officer and Director
C-7
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
Number Description
------ -----------
EX-99.B5 (a) Form of Investment Advisory Agreement between Registrant and
Morgan Stanley Asset Management Inc. ("MSAM") with respect to
the Money Market, Emerging Markets Debt, Growth, U.S. Real
Estate, Global Equity, International Magnum, Emerging Markets
Equity and Asian Equity Portfolios.
(b) Form of Investment Advisory Agreement between Registrant and
Miller Anderson & Sherrerd, LLP ("MAS") with respect to the
Fixed Income, High Yield, International Fixed Income,
Balanced, Multi-Asset-Class, Value, Core Equity, Mid Cap
Growth and Mid Cap Value Portfolios.
EX-99.B6 Form of Distribution Agreement between Registrant and Morgan
Stanley & Co. Incorporated.
EX-99.B8 (a) Form of Domestic Mutual Fund Custody Agreement between
Registrant and Chase Manhattan Bank, N.A.
(b) Form of International Custody Agreement between the
Registrant and Morgan Stanley Trust Company.
EX-99.B9 (a) Form of Administration Agreement between Registrant and
Morgan Stanley Asset Management Inc.
(b) Form of Administration Agreement between Registrant and
Miller Anderson & Sherrerd, LLP.
(c) Form of Sub-Administration Agreement between Morgan Stanley
Asset Management Inc. and Chase Global Funds Services
Company.
(d) Form of Sub-Administration Agreement between Miller Anderson
& Sherrerd, LLP and Chase Global Funds Services Company.
EX-99.B10 Opinion of Counsel.
EX-99.B11 Consent of Independent Accountants.
C-8
<PAGE>
EX-99.B24 Powers of Attorney.
EX-99.B27 Financial Data Schedule.
C-9
<PAGE>
EXHIBIT 99.B5(a)
MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this 9th day of September, 1996 by and between Morgan
Stanley Universal Funds, Inc., a Maryland corporation (the "Fund") and Morgan
Stanley Asset Management Inc., a Delaware corporation (the "Adviser").
1. Duties of Adviser. The Fund hereby appoints the Adviser to act as
investment adviser to the [INSERT NAME OF PORTFOLIO] Portfolio (the "Portfolio")
of the Fund for the period and on such terms as set forth in this Agreement.
The Fund employs the Adviser to manage the investment and reinvestment of the
assets of the Portfolio, to continuously review, supervise and administer the
investment program of the Portfolio, to determine in its discretion the
securities to be purchased or sold and the portion of the Portfolio's assets to
be held uninvested, to provide the Fund with records concerning the Adviser's
activities which the Fund is required to maintain, and to render regular reports
to the Fund's officers and Board of Directors concerning the Adviser's discharge
of the foregoing responsibilities. The Adviser shall discharge the foregoing
responsibilities subject to the control of the officers and the Board of
Directors of the Fund, and in compliance with the objectives, policies and
limitations set forth in the Fund's prospectus and applicable laws and
regulations. The Adviser accepts such employment and agrees to render the
services and to provide, at its own expense, the office space, furnishings and
equipment and the personnel required by it to perform the services on the terms
and for the compensation provided herein.
<PAGE>
2. Portfolio Transactions. The Adviser is authorized to select the brokers
or dealers that will execute the purchases and sales of securities for the
Portfolio and is directed to use its best efforts to obtain the best available
price and most favorable execution, except as prescribed herein. Unless and
until otherwise directed by the Board of Directors of the Fund, the Adviser is
authorized to effect individual securities transactions at commission rates in
excess of the minimum commission rates available, if the Adviser determines in
good faith that such amount of commission is reasonable in relation to the value
of the brokerage or research services provided by such broker or dealer, viewed
in terms of either that particular transaction or the Adviser's overall
responsibilities with respect to the Fund. The execution of such transactions
shall not be deemed to represent an unlawful act or breach of any duty created
by this Agreement or otherwise. The Adviser will promptly communicate to the
officers and Directors of the Fund such information relating to portfolio
transactions as they may reasonably request.
3. Compensation of the Adviser. For the services to be rendered by the
Adviser as provided in Section 1 of this Agreement, the Fund shall pay to the
Adviser, at the end of each of the Fund's fiscal quarters, an advisory fee
calculated by applying a quarterly rate, based on the annual percentage rates
as set forth in Schedule B attached hereto with respect to the average daily net
assets of the Portfolio for the quarter.
In the event of termination of this Agreement, the fee provided in this
Section shall be computed on the basis of the period ending on the last business
day on which this Agreement is in effect subject to a pro rata adjustment based
on the number of days elapsed in the current fiscal quarter as a percentage of
the total number of days in such quarter.
<PAGE>
4. Other Services. At the request of the Fund, the Adviser in its
discretion may make available to the Fund office facilities, equipment,
personnel and other services. Such office facilities, equipment, personnel and
services shall be provided for or rendered by the Adviser and billed to the Fund
at the Adviser's cost.
5. Reports. The Fund and the Adviser agree to furnish to each other
current prospectuses, statements of additional information, proxy statements,
reports to stockholders, certified copies of their financial statements, and
such other information with regard to their affairs as each may reasonably
request.
6. Status of Adviser. The services of the Adviser to the Fund are not to
be deemed exclusive, and the Adviser shall be free to render similar services to
others.
7. Liability of Adviser. In the absence of (i) willful misfeasance, bad
faith or gross negligence on the part of the Adviser in performance of its
obligations and duties hereunder, (ii) reckless disregard by the Adviser of its
obligations and duties hereunder, or (iii) a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services (in
which case any award of damages shall be limited to the period and the amount
set forth in Section 36(b)(3) of the Investment Company Act of 1940, as amended
("1940 Act")), the Adviser shall not be subject to any liability whatsoever to
the Fund, or to any stockholder of the Fund, for any error of judgment, mistake
of law or any other act or omission in the course of, or connected with,
rendering services hereunder including, without limitation, for any losses that
may be sustained in connection with the purchase, holding, redemption or sale of
any security on behalf of the Portfolio.
<PAGE>
8. Permissible Interests. Subject to and in accordance with the Articles
of Incorporation of the Fund and the Certificate of Incorporation of the
Adviser, Directors, officers, agents and stockholders of the Fund are or may be
interested in the Adviser (or any successor thereof) as Directors, officers,
agents, stockholders or otherwise; Directors, officers, agents and stockholders
of the Adviser are or may be interested in the Fund as Directors, officers,
stockholders or otherwise; and the Adviser (or any successor) is or may be
interested in the Fund as a stockholder or otherwise; and that the effect of any
such interrelationships shall be governed by said Articles of Incorporation,
Certificate of Incorporation and the provisions of the 1940 Act.
9. Duration and Termination. This Agreement, unless sooner terminated as
provided herein, shall continue until the earlier of the end of two years after
the date first written above or a date within such two-year period as
specifically approved (a) by the vote of a majority of those members of the
Board of Directors of the Fund who are not parties to this Agreement or
interested persons of any such party, cast in person at a meeting called for the
purpose of voting on such approval, and (b) by the Board of Directors of the
Fund or by vote of a majority of the outstanding voting securities of the
Portfolio thereafter shall continue for periods of one year so long as such
continuance is specifically approved at least annually; and (a) by the vote of a
majority of those members of the Board of Directors of the Fund who are not
parties to this Agreement or interested persons of any such party, cast in
person at a meeting called for the purpose of voting on such approval, and (b)
by the Board of Directors of the Fund or by vote of a majority of the
outstanding voting securities of the Portfolio; provided, however, that if the
-------- -------
holders of the Portfolio fail to approve the Agreement as provided herein, the
Adviser may continue to serve in such capacity in the manner and to the extent
permitted by the 1940 Act and rules thereunder. This Agreement may be terminated
with
<PAGE>
respect to the Portfolio at any time, without the payment of any penalty, by
vote of a majority of the entire Board of Directors of the Fund or by vote of a
majority of the outstanding voting securities of the Portfolio on 60 days'
written notice to the Adviser. This Agreement may be terminated by the Adviser
at any time, without the payment of any penalty, upon 90 days' written notice to
the Fund. This Agreement will automatically and immediately terminate in the
event of its assignment, provided that an assignment to a corporate successor to
--------
all or substantially all of the Adviser's business or to a wholly-owned
subsidiary of such corporate successor which does not result in a change of
actual control of the Adviser's business shall not be deemed to be an assignment
for the purposes of this Agreement. Any notice under this Agreement shall be
given in writing, addressed and delivered or mailed postpaid, to the other party
at any office of such party and shall be deemed given when received by the
addressee.
As used in this Section 9, the terms "assignment," "interested persons,"
and "a vote of a majority the outstanding voting securities" shall have the
respective meanings set forth in Section 2(a)(4), Section 2(a)(19) and Section
2(a)(42) of the 1940 Act.
10. Amendment of Agreement. This Agreement may be amended by mutual
consent, but the consent of the Fund must be approved (a) by vote of a majority
of those members of the Board of Directors of the Fund who are not parties to
this Agreement or interested persons of any such party, cast in person at a
meeting called for the purpose of voting on such amendment, and (b) by vote of a
majority of the outstanding voting securities of the Portfolio.
<PAGE>
11. Use of Name. The Fund agrees that if this Agreement is terminated and
the Adviser shall no longer be the investment adviser to the Fund, the Fund
will, within a reasonable period of time, change its name to delete reference to
"Morgan Stanley."
12. Severability. If any provisions of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
13. Applicable Law. This Agreement shall be construed in accordance with
the laws of the State of New York, provided, that nothing herein shall be
--------
construed as being inconsistent with the 1940 Act.
14. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized as of the day and year
first written above.
MORGAN STANLEY ASSET MORGAN STANLEY
ASSET MANAGEMENT INC. UNIVERSAL FUNDS, INC.
By: ____________ By:____________
Name: Name:
Title: Title:
<PAGE>
SCHEDULE A
TO
INVESTMENT ADVISORY AGREEMENT DATED AS OF SEPTEMBER 9, 1996
BY AND BETWEEN
MORGAN STANLEY UNIVERSAL FUNDS, INC.
and
MORGAN STANLEY ASSET MANAGEMENT INC.
PORTFOLIOS
----------
1. Money Market Portfolio
2. Growth Portfolio
3. U.S. Real Estate Portfolio
4. Emerging Markets Debt Portfolio
5. Global Equity Portfolio
6. International Magnum Portfolio
7. Emerging Markets Equity Portfolio
8. Asian Equity Portfolio
<PAGE>
SCHEDULE B
TO
INVESTMENT ADVISORY AGREEMENT DATED AS OF SEPTEMBER 9, 1996
BY AND BETWEEN
MORGAN STANLEY UNIVERSAL FUNDS, INC.
and
MORGAN STANLEY ASSET MANAGEMENT, INC.
ADVISORY FEES FOR THE FUND'S PORTFOLIOS ADVISED BY MSAM
-------------------------------------------------------
U.S. FIXED INCOME PORTFOLIO ADVISORY FEES
<TABLE>
<CAPTION>
================================================================
Assets Money Market
----------------------------------------------------------------
<S> <C>
First $500 million 0.30%
----------------------------------------------------------------
From $500 million to $1 billion 0.25%
----------------------------------------------------------------
More than $1 billion 0.20%
================================================================
</TABLE>
U.S. EQUITY PORTFOLIO ADVISORY FEES
<TABLE>
<CAPTION>
================================================================
Assets Growth U.S. Real Estate
----------------------------------------------------------------
<S> <C> <C>
First $500 million 0.55% 0.80%
----------------------------------------------------------------
From $500 million to $1 billion 0.50% 0.75%
----------------------------------------------------------------
More than $1 billion 0.45% 0.70%
================================================================
</TABLE>
<PAGE>
GLOBAL PORTFOLIO ADVISORY FEES
<TABLE>
<CAPTION>
================================================================================================
Emerging International Emerging Asian
Assets Markets Debt Global Equity Magnum Markets Equity
Equity
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
First $500 million 0.75% 0.80% 0.80% 1.25% 0.80%
- ------------------------------------------------------------------------------------------------
From $500 million to $1 0.70% 0.75% 0.75% 1.20% 0.75%
billion
- ------------------------------------------------------------------------------------------------
More than $1 billion 0.65% 0.70% 0.70% 1.15% 0.70%
================================================================================================
</TABLE>
<PAGE>
EXHIBIT 99.B5(b)
MILLER ANDERSON & SHERRERD, LLP
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this 9th day of September, 1996 by and between Morgan
Stanley Universal Funds, Inc., a Maryland corporation (the "Fund") and Miller
Anderson & Sherrerd, LLP, a Pennsylvania limited liability partnership (the
"Adviser").
1.Duties of Adviser. The Fund hereby appoints the Adviser to act as
investment adviser to the [INSERT NAME OF PORTFOLIO] Portfolio (the "Portfolio")
of the Fund for the period and on such terms as set forth in this Agreement.
The Fund employs the Adviser to manage the investment and reinvestment of the
assets of the Portfolio, to continuously review, supervise and administer the
investment program of the Portfolio, to determine in its discretion the
securities to be purchased or sold and the portion of the Portfolio's assets to
be held uninvested, to provide the Fund with records concerning the Adviser's
activities which the Fund is required to maintain, and to render regular reports
to the Fund's officers and Board of Directors concerning the Adviser's discharge
of the foregoing responsibilities. The Adviser shall discharge the foregoing
responsibilities subject to the control of the officers and the Board of
Directors of the Fund, and in compliance with the objectives, policies and
limitations set forth in the Fund's prospectus and applicable laws and
regulations. The Adviser accepts such employment and agrees to render the
services and to provide, at its own expense, the office space, furnishings and
equipment and the personnel required by it to perform the services on the terms
and for the compensation provided herein.
<PAGE>
2. Portfolio Transactions. The Adviser is authorized to select the
brokers or dealers that will execute the purchases and sales of securities for
the Portfolio and is directed to use its best efforts to obtain the best
available price and most favorable execution, except as prescribed herein.
Unless and until otherwise directed by the Board of Directors of the Fund, the
Adviser is authorized to effect individual securities transactions at commission
rates in excess of the minimum commission rates available, if the Adviser
determines in good faith that such amount of commission is reasonable in
relation to the value of the brokerage or research services provided by such
broker or dealer, viewed in terms of either that particular transaction or the
Adviser's overall responsibilities with respect to the Fund. The execution of
such transactions shall not be deemed to represent an unlawful act or breach of
any duty created by this Agreement or otherwise. The Adviser will promptly
communicate to the officers and Directors of the Fund such information relating
to portfolio transactions as they may reasonably request.
3. Compensation of the Adviser. For the services to be rendered by the
Adviser as provided in Section 1 of this Agreement, the Fund shall pay to the
Adviser, at the end of each of the Fund's fiscal quarters, an advisory fee
calculated by applying a quarterly rate, based on the annual percentage rates as
set forth in Schedule B attached hereto with respect to the average daily net
assets of the Portfolio for the quarter.
In the event of termination of this Agreement, the fee provided in this
Section shall be computed on the basis of the period ending on the last business
day on which this Agreement is in effect subject to a pro rata adjustment based
on the number of days elapsed in the current fiscal quarter as a percentage of
the total number of days in such quarter.
<PAGE>
4. Other Services. At the request of the Fund, the Adviser in its
discretion may make available to the Fund office facilities, equipment,
personnel and other services. Such office facilities, equipment, personnel and
services shall be provided for or rendered by the Adviser and billed to the Fund
at the Adviser's cost.
5. Reports. The Fund and the Adviser agree to furnish to each other
current prospectuses, statements of additional information, proxy statements,
reports to stockholders, certified copies of their financial statements, and
such other information with regard to their affairs as each may reasonably
request.
6. Status of Adviser. The services of the Adviser to the Fund are not to
be deemed exclusive, and the Adviser shall be free to render similar services to
others.
7. Liability of Adviser. In the absence of (i) willful misfeasance, bad
faith or gross negligence on the part of the Adviser in performance of its
obligations and duties hereunder, (ii) reckless disregard by the Adviser of its
obligations and duties hereunder, or (iii) a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services (in
which case any award of damages shall be limited to the period and the amount
set forth in Section 36(b)(3) of the Investment Company Act of 1940, as amended
("1940 Act")), the Adviser shall not be subject to any liability whatsoever to
the Fund, or to any stockholder of the Fund, for any error of judgment, mistake
of law or any other act or omission in the course of, or connected with,
rendering services hereunder including, without limitation, for any losses that
may be sustained in connection with the purchase, holding, redemption or sale of
any security on behalf of the Portfolio.
8. Permissible Interests. Subject to and in accordance with the
Articles of Incorporation of the Fund and the Certificate of Incorporation of
the Adviser, Directors, officers, agents and stockholders of the Fund are or may
<PAGE>
be interested in the Adviser (or any successor thereof) as Directors, officers,
agents, stockholders or otherwise; Directors, officers, agents and stockholders
of the Adviser are or may be interested in the Fund as Directors, officers,
stockholders or otherwise; and the Adviser (or any successor) is or may be
interested in the Fund as a stockholder or otherwise; and that the effect of any
such interrelationships shall be governed by said Articles of Incorporation,
Certificate of Incorporation and the provisions of the 1940 Act.
9. Duration and Termination. This Agreement, unless sooner terminated as
provided herein, shall continue until the earlier of the end of two years after
the date first written above or a date within such two-year period as
specifically approved (a) by the vote of a majority of those members of the
Board of Directors of the Fund who are not parties to this Agreement or
interested persons of any such party, cast in person at a meeting called for the
purpose of voting on such approval, and (b) by the Board of Directors of the
Fund or by vote of a majority of the outstanding voting securities of the
Portfolio thereafter shall continue for periods of one year so long as such
continuance is specifically approved at least annually; and (a) by the vote of a
majority of those members of the Board of Directors of the Fund who are not
parties to this Agreement or interested persons of any such party, cast in
person at a meeting called for the purpose of voting on such approval, and (b)
by the Board of Directors of the Fund or by vote of a majority of the
outstanding voting securities of the Portfolio; provided, however, that if the
-------- -------
holders of the Portfolio fail to approve the Agreement as provided herein, the
Adviser may continue to serve in such capacity in the manner and to the extent
permitted by the 1940 Act and rules thereunder. This Agreement may be
terminated with respect to the Portfolio at any time, without the payment of any
penalty, by vote of a majority of the entire Board of Directors of the Fund or
by vote of a majority of the outstanding voting securities of the Portfolio on
60 days' written notice to the Adviser. This Agreement may be terminated by the
Adviser at any time, without the payment of any penalty, upon 90 days' written
notice to the Fund. This Agreement will automatically
<PAGE>
and immediately terminate in the event of its assignment, provided that an
--------
assignment to a corporate successor to all or substantially all of the Adviser's
business or to a wholly-owned subsidiary of such corporate successor which does
not result in a change of actual control of the Adviser's business shall not be
deemed to be an assignment for the purposes of this Agreement. Any notice under
this Agreement shall be given in writing, addressed and delivered or mailed
postpaid, to the other party at any office of such party and shall be deemed
given when received by the addressee.
As used in this Section 9, the terms "assignment," "interested persons,"
and "a vote of a majority the outstanding voting securities" shall have the
respective meanings set forth in Section 2(a)(4), Section 2(a)(19) and Section
2(a)(42) of the 1940 Act.
10. Amendment of Agreement. This Agreement may be amended by mutual
consent, but the consent of the Fund must be approved (a) by vote of a majority
of those members of the Board of Directors of the Fund who are not parties to
this Agreement or interested persons of any such party, cast in person at a
meeting called for the purpose of voting on such amendment, and (b) by vote of a
majority of the outstanding voting securities of the Portfolio.
11. Severability. If any provisions of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
12. Applicable Law. This Agreement shall be construed in accordance
with the laws of the State of New York, provided, that nothing herein shall be
--------
construed as being inconsistent with the 1940 Act.
<PAGE>
13. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized as of the day and year
first written above.
MILLER ANDERSON & MORGAN STANLEY
SHERRERD, LLP UNIVERSAL FUNDS, INC.
By: _____________________ By:___________________________
Name: Name:
Title: Title:
<PAGE>
SCHEDULE A
TO
INVESTMENT ADVISORY AGREEMENT DATED AS OF SEPTEMBER 9, 1996
BY AND BETWEEN
MORGAN STANLEY UNIVERSAL FUNDS, INC.
and
MILLER ANDERSON & SHERRERD, LLP
PORTFOLIOS
----------
1. Fixed Income Portfolio
2. High Yield Portfolio
3. Core Equity Portfolio
4. Value Portfolio
5. Mid Cap Growth Portfolio
6. Mid Cap Value Portfolio
7. International Fixed Income Portfolio
8. Balanced Portfolio
9. Multi-Asset-Class Portfolio
5
<PAGE>
SCHEDULE B
TO
INVESTMENT ADVISORY AGREEMENT DATED AS OF SEPTEMBER 9, 1996
BY AND BETWEEN
MORGAN STANLEY UNIVERSAL FUNDS, INC.
and
MILLER ANDERSON & SHERRERD, LLP
ADVISORY FEES FOR THE FUND'S PORTFOLIOS ADVISED BY MAS
------------------------------------------------------
U.S. FIXED INCOME PORTFOLIO ADVISORY FEES
<TABLE>
<CAPTION>
================================================================================
Assets Fixed Income High Yield
- --------------------------------------------------------------------------------
<S> <C> <C>
First $500 million 0.40% 0.50%
- --------------------------------------------------------------------------------
From $500 million to $1 billion 0.35% 0.45%
- --------------------------------------------------------------------------------
More than $1 billion 0.30% 0.40%
================================================================================
</TABLE>
U.S. EQUITY PORTFOLIO ADVISORY FEES
<TABLE>
<CAPTION>
================================================================================
Mid Cap Mid Cap
Assets Core Equity Value Growth Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First $500 million 0.55% 0.55% 0.75% 0.75%
- --------------------------------------------------------------------------------
From $500 million to $1 billion 0.50% 0.50% 0.70% 0.70%
- --------------------------------------------------------------------------------
More than $1 billion 0.45% 0.45% 0.65% 0.65%
================================================================================
</TABLE>
GLOBAL PORTFOLIO ADVISORY FEES
<TABLE>
<CAPTION>
================================================================================
Assets International Fixed Income
- --------------------------------------------------------------------------------
<S> <C>
First $500 million 0.50%
- --------------------------------------------------------------------------------
From $500 million to $1 billion 0.45%
================================================================================
More than $1 billion 0.40%
- --------------------------------------------------------------------------------
</TABLE>
ASSET ALLOCATION PORTFOLIO ADVISORY FEES
<TABLE>
<CAPTION>
================================================================================
Assets Balanced Multi-Asset-Class
- --------------------------------------------------------------------------------
<S> <C> <C>
First $500 million 0.50% 0.65%
- --------------------------------------------------------------------------------
From $500 million to $1 billion 0.45% 0.60%
- --------------------------------------------------------------------------------
More than $1 billion 0.40% 0.55%
================================================================================
</TABLE>
<PAGE>
EXHIBIT 99.B6
MORGAN STANLEY & CO. INCORPORATED
DISTRIBUTION AGREEMENT
AGREEMENT, dated as of the 9th day of September, 1996, by and between
MORGAN STANLEY UNIVERSAL FUNDS, INC., a Maryland Corporation (the "Fund") and
MORGAN STANLEY & CO. INCORPORATED, a Delaware corporation (the "Distributor).
WITNESSETH:
WHEREAS, the Fund is registered as an open-end investment company under the
Investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the Fund desires to offer and sell shares of its portfolios (the
"Portfolios") to life insurance companies to be held in their separate accounts
("Separate Accounts") pursuant to variable annuity contracts and variable life
insurance policies and to entities qualified under pension and retirement plans
("Qualified Plan Entities");
WHEREAS, the Distributor is registered as a broker-dealer under the
Securities Exchange Act of 1934, as amended ("Securities Exchange Act") and is a
member of the National Association of Securities Dealers, Inc. ("NASD").
NOW THEREFORE, the Fund and the Distributor agree as follows:
Section 1. The Distributor shall assist the Fund in marketing and
selling shares of the Portfolios to Separate Accounts and to Qualified Plan
Entities, and to persons who have interests in such Separate Accounts and
Qualified Plan Entities. In all cases where the Fund enters into participation
agreements with life insurance companies for the sale of shares of the
Portfolios to Separate Accounts and Qualified Plan Entities, the Distributor
shall act in full accordance with such participation agreements.
<PAGE>
Section 2. Purchases and redemptions of shares of the Portfolios shall
be at net asset value, computed as set forth in the most recent Prospectuses and
Statements of Additional Information ("SAIs") contained in the Registration
Statement of the Fund on Form N-1A, File No. 333-3013, or any amendments or
supplements thereto ("Registration Statement").
Section 3. The Fund represents to the Distributor that the Registration
Statement contains all statements and information which are required to be
stated therein under the Securities Act of 1933, as amended, (the "1933 Act"),
and the rules adopted thereunder, and in all respects conforms to the
requirements of the Act, and the rules and regulations adopted thereunder, and
neither the Fund's prospectus nor its SAI includes any and regulations untrue
statement of a material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein not misleading;
provided, that the foregoing representations shall not apply to information
contained in or omitted from the Fund's Prospectuses or SAIs in reliance upon,
and in conformity with, any written information furnished by the Distributor
specifically for use in the preparation thereof.
Section 4. The Distributor shall submit to all regulatory and
administrative bodies having jurisdiction over the operations of the Distributor
and the Fund, present or future, any information, reports or other material
which any such body by reason of this Agreement may request or require as
authorized by applicable laws or regulations.
Section 5. This Agreement shall be subject to the provisions of the
1940 Act, the Securities Exchange Act and the 1933 Act and the rules, regu-
lations, and rulings thereunder, and the rules, regulations and rulings of
the NASD, from time to time in effect, including such exemptions from the 1940
Act and no-action positions as the Securities and Exchange Commission or its
staff may grant, and the terms hereof shall be interpreted and construed in
accordance therewith. Without limiting the
<PAGE>
generality of the foregoing, (a) the term "assigned" shall not include any
transaction exempted from section 15(b)(2) of the 1940 Act and (b) the vote of
the persons having voting rights in respect of the Fund referred to in Section 6
hereof shall be the affirmative votes of the lesser of (i) the holders of more
than 50% of all votes entitled to be cast in respect of the Fund or (ii) the
holders of at least 67% of the votes which are present at a meeting of such
persons if the holders of more than 50% of all votes entitled to be cast voted
in accordance with the By-laws of the Fund.
Section 6. This Agreement shall continue in effect only so long as such
continuance is specifically approved at least annually by a majority of the
Directors of the Fund who are not interested persons of the Fund or the
Distributor and by (a) persons having voting rights in respect of the Fund, by
the vote stated in Section 5 hereof, voted in accordance with the By-laws of the
Fund, or (b) the Board of Directors of the Fund.
Section 7. This Agreement shall terminate automatically in the event of
its assignment.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
Attest: MORGAN STANLEY UNIVERSAL FUNDS, INC.
By: __________________ By: ______________
Name: __________________ Name: ______________
Title:__________________ Title:______________
Attest: MORGAN STANLEY & CO., INCORPORATED
By: __________________ By: ______________
Name: __________________ Name: ______________
Title:__________________ Title:______________
<PAGE>
DOMESTIC MUTUAL FUND
CUSTODY AGREEMENT
MORGAN STANLEY UNIVERSAL FUNDS, INC.
CHASE MANHATTAN BANK, N.A.
DATED AS OF SEPTEMBER 9, 1996
<PAGE>
MUTUAL FUND CUSTODY AGREEMENT
Morgan Stanley Universal Funds, Inc.
Table of Contents
-----------------
<TABLE>
<CAPTION>
Section/Paragraph Page
- ----------------- ----
<S> <C>
1. Appointment 1
2. Delivery of Documents 1
3. Definitions 3
4. Delivery and Registration of the Property 4
5. Voting Rights 5
6. Receipt and Disbursement of Money 6
7. Receipt of Securities 7
8. Use of Securities Depository or the Book-Entry System 8
9. Instructions Consistent with the Articles, etc. 9
10. Transactions Not Requiring Written Instructions 10
11. Transactions Requiring Written Instructions 16
12. Purchase of Securities 17
13. Sales of Securities 18
14. Authorized Shares 18
15. Records 18
16. Cooperation with Accountants 19
17. Confidentiality 19
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
18. Equipment Failures 20
19. Right to Receive Advice 20
20. Compliance with Governmental Rules and Regulations 21
21. Compensation 21
22. Indemnification 21
23. Responsibility of Custodian 23
24. Collection 24
25. Duration and Termination 24
26. Notices 25
27. Further Actions 26
28. Amendments 26
29. Miscellaneous 26
</TABLE>
Signatures 27
Attachment A -- Fees
Attachment B -- Authorized Persons
Attachment C -- Portfolios of the Fund
-iii-
<PAGE>
MUTUAL FUND CUSTODY AGREEMENT
------------------------------
THIS AGREEMENT is made as of September 9, 1996, by and between Morgan
Stanley Universal Funds, Inc., a Maryland corporation (the "Fund"), and Chase
Manhattan Bank, National Association, a bank ("Chase" or the
------------
"Custodian").
W I T N E S S E T H:
-------------------
WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and
WHEREAS, the Fund desires to retain Custodian to serve as the Fund's
custodian for the assets of each of the series of shares (each, a "Portfolio")
of the Fund maintained in the United States and Custodian is willing to furnish
such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Fund hereby appoints Custodian to act as
-----------
custodian of its portfolio securities, cash and other property for the assets of
each of the series of shares (each, a "Portfolio") of the Fund maintained in the
United States on the terms set forth in this Agreement. Custodian accepts such
appointment and agrees to furnish the services herein set forth in return for
the compensation as provided in Paragraph 21 of this Agreement.
2. Delivery of Documents. The Fund will promptly furnish to
---------------------
Custodian such copies, properly certified or authenticated, of contracts,
documents and other related information
<PAGE>
that Custodian may request or requires to discharge its duties properly. Such
documents may include, but are not limited to, the following:
(a) Resolutions of the Fund's Directors authorizing the
appointment of Chase as custodian of the portfolio securities, cash and
other property of the Fund maintained in the United States and approving
this Agreement;
(b) Incumbency and signature certificates identifying and
containing the signatures of the Fund's officers and/or the persons
authorized to sign Written Instructions, as hereinafter defined, on
behalf of the Fund;
(c) The Fund's Articles of Incorporation filed with the
Department of Assessments of the State of Maryland and all amendments
and supplements thereto (such Articles of Incorporation, as currently in
effect and as they shall from time to time be amended, are herein called
the "Articles");
(d) The Fund's By-Laws and all amendments thereto (such By-Laws,
as currently in effect and as they shall from time to time be amended,
are herein called the "By-Laws");
(e) Resolutions of the Fund's Directors and/or the Fund's
stockholders approving the investment advisory agreements between the
Fund and the Fund's investment advisers (the "Advisory Agreements");
(f) The Advisory Agreements;
(g) The Fund's current Registration Statement on Form N-1A under
the 1940 Act and the Securities Act of 1933, as amended (the "1933 Act")
as filed with the Securities and Exchange Commission (the "SEC"); and
-2-
<PAGE>
(h) The Fund's most recent prospectus or prospectuses including
all amendments and supplements thereto (collectively, the "Prospectus").
The Fund will furnish Custodian from time to time with copies of all
amendments of or supplements to the foregoing, if any. The Fund will also
furnish Custodian with a copy of the opinion of counsel for the Fund with
respect to the validity of the shares of common stock, par value $.001 per share
(the "Shares"), of the Fund and the status of such Shares under the 1933 Act as
registered with the SEC, and under any other applicable federal law or
regulation.
3. Definitions.
-----------
(a) "Authorized Person". As used in this Agreement, the term
-------------------
"Authorized Person" means the Fund's President, Vice-President,
Treasurer and any other person, whether or not any such person is an
officer or employee of the Fund, duly authorized by the Directors of the
Fund to give Written Instructions on behalf of the Fund and listed on
Attachment B hereto which may be amended from time to time.
(b) "Book-Entry System". As used in this Agreement, the term
-------------------
"Book-Entry System" means the Federal Reserve/Treasury book-entry system
for United States and federal agency securities, its successor or
successors and its nominee or nominees.
(c) "Property". The term "Property," as used in this Agreement,
----------
means:
(i) any and all securities, cash, and other property of
the Fund which the Fund may from time to time deposit, or cause
to be deposited, with Custodian or which Custodian may from time
to time hold for the Fund;
(ii) all income in respect of any such securities, cash
or other property;
-3-
<PAGE>
(iii) all proceeds of the sales of any of such
securities, cash or other property; and
(iv) all proceeds of the sale of securities issued by
the Fund, which are received by Custodian from time to time
from, or on behalf of, the Fund.
(d) "Securities Depository". As used in this Agreement, the
-----------------------
term "Securities Depository" shall mean The Depository Trust Company, a
clearing agency registered with the SEC, or its successor or successors
and its nominee or nominees; and shall also mean any other registered
clearing agency, its successor or successors, specifically identified in
a certified copy of a resolution of the Fund's Directors approving
deposits by Custodian therein.
(e) "Written Instructions". Means instructions
----------------------
(i) delivered by mail, tested telegram, cable, telex,
facsimile sending device [or the internet] and received by
Custodian, signed by two Authorized Persons or by persons
reasonably believed by Custodian to be Authorized Persons; or
(ii) transmitted electronically through the [Chase Asset
Management System] or any similar electronic instruction system
acceptable to Custodian.
4. Delivery and Registration of the Property. The Fund will deliver
-----------------------------------------
or cause to be delivered to Custodian [all] Property owned by it, including cash
received for the issuance of its Shares, at any time during the period of this
Agreement, except for securities and monies to be delivered to the Fund's
international custodian, Morgan Stanley Trust Company ("MSTC") or to
-4-
<PAGE>
any subcustodian appointed pursuant to the custody agreement by and between the
Fund and MSTC or appointed pursuant to Paragraph 7 hereof. Custodian will not be
responsible for such securities and such monies until actually received by
Custodian or by any subcustodian appointed pursuant to Paragraph 7 hereof
("Chase Subcustodian"). All securities delivered to Custodian or to any Chase
Subcustodian (other than in bearer form) shall be registered in the name of the
Fund or in the name of a nominee of the Fund or in the name of Custodian or any
nominee of Custodian (with or without indication of fiduciary status) or in the
name of any Chase Subcustodian or any nominee of such Chase Subcustodian or
shall be properly endorsed and in form for transfer satisfactory to Custodian.
5. Voting Rights. With respect to all securities, however
-------------
registered, it is understood that the voting and other rights and powers shall
be exercised by the Fund. Custodian's only duty shall be to mail to the Fund any
documents received, including proxy statements and offering circulars, with any
proxies for securities registered in a nominee name executed by such nominee.
Where warrants, options, tenders or other securities have fixed expiration
dates, the Fund understands that in order for Custodian to act, Custodian must
receive the Fund's instructions at its offices in New York City, addressed as
Custodian may from time to time request, by no later than noon (Eastern Time) at
least one business day prior to the last scheduled date to act with respect
thereto (or such earlier date or time as permits the Fund a reasonable period of
time in which to respond after Custodian notifies the Fund of such date or
time). Absent Custodian's timely receipt of such instructions, such instruments
will expire without liability to Custodian.
-5-
<PAGE>
6. Receipt and Disbursement of Money.
---------------------------------
(a) Custodian shall open and maintain a custody account for the
Fund (the "Account") subject only to draft or order by Custodian acting
pursuant to the terms of this Agreement, and shall hold in such Account,
subject to the provisions hereof, all cash received by it from or for
the Fund. Custodian shall make payments of cash to, or for the account
of, the Fund from such cash only (i) for the purchase of securities for
the Fund as provided in Paragraph 12 hereof; (ii) upon receipt of
Written Instructions, for the payment of dividends or other
distributions of shares, or for the payment of interest, taxes,
administration, distribution or advisory fees or expenses which are to
be borne by the Fund under the terms of this Agreement or any service
provider agreement of the Fund; (iii) upon receipt of Written
Instructions for payments in connection with the conversion, exchange or
surrender of securities owned or subscribed to by the Fund and held by
or to be delivered toCustodian; (iv) to a Chase Subcustodian pursuant to
Paragraph 7 hereof; (v) for temporary short-term investment of such cash
as provided in Paragraph 10 hereof pending use of such cash for the
other purposes as provided herein (referred to herein as "Excess Cash");
or (vi) upon receipt of Written Instructions for other corporate
purposes.
(b) Custodian is hereby authorized to endorse and collect all
checks, drafts or other orders for the payment of money received as
custodian for the Fund.
7. Receipt of Securities.
---------------------
(a) Except as provided by Paragraph 8 hereof, Custodian shall
hold all securities and noncash Property received by it for the Fund.
All such securities and noncash Property are to be held or disposed of
by Custodian for the Fund pursuant to the
-6-
<PAGE>
terms of this Agreement. In the absence of Written Instructions
accompanied by a certified resolution authorizing the specific
transaction by the Fund's Directors, Custodian shall have no power or
authority to withdraw, deliver, assign, hypothecate, pledge or otherwise
dispose of any such securities and noncash Property, except in
accordance with the express terms provided for in this Agreement. In
connection with its duties under this Paragraph 7, Custodian may, at its
own expense, enter into subcustodian agreements with other banks or
trust companies for the receipt of certain securities and cash to be
held by Custodian for the account of the Fund pursuant to this
Agreement; provided, that each such bank or trust company has an
--------
aggregate capital, surplus and undivided profits, as shown by its last
published report, of not less than twenty million dollars ($20,000,000)
and that such bank or trust company agrees with Custodian to comply with
all relevant provisions of the 1940 Act and applicable rules and
regulations thereunder. Custodian will be liable for acts or omissions
of any such subcustodian.
(b) Promptly after the close of business on each day, Custodian
shall furnish the Fund with confirmations and a summary of all transfers
to or from the account of the Fund during said day. Where securities are
transferred to the account of the Fund established at a Securities
Depository or the Book Entry System pursuant to Paragraph 8 hereof,
Custodian shall also by book-entry or otherwise identify as belonging to
the Fund the quantity of securities that belongs to the Fund that are
part of a fungible bulk of securities registered in the name of
Custodian (or its nominee) or shown in Custodian's account on the books
of a Securities Depository or the Book-Entry System. At least
-7-
<PAGE>
monthly and from time to time, Custodian shall furnish the Fund with a
detailed statement of the Property held for the Fund under this
Agreement.
8. Use of Securities Depository or the Book-Entry System. The Fund
-----------------------------------------------------
shall deliver to Custodian a certified resolution of the Directors of the Fund
approving, authorizing and instructing Custodian on a continuous and ongoing
basis, until instructed to the contrary by Written Instructions actually
received by Custodian, (i) to deposit in a Securities Depository or the Book-
Entry System all securities of the Fund eligible for deposit therein and (ii) to
utilize a Securities Depository or the Book-Entry System to the extent possible
in connection with the performance of its duties hereunder, including without
limitation, settlements of purchases and sales of securities by the Fund, and
deliveries and returns of securities collateral in connection with borrowings.
Without limiting the generality of such use, it is agreed that the following
provisions shall apply thereto:
(a) Securities and any cash of the Fund deposited in a
Securities Depository or the Book-Entry System will at all times be
segregated from any assets and cash controlled by Custodian in other
than a fiduciary or custodian capacity but may be commingled with other
assets held in such capacities. Custodian will effect payment for
securities and receive and deliver securities in accordance with
accepted industry practices in the place where the transaction is
settled, unless the Fund has given Custodian Written Instructions to the
contrary.
(b) All books and records maintained by Custodian that relate to
the Fund's participation in a Securities Depository or the Book-Entry
System will at all times during Custodian's regular business hours be
open to the inspection of the Fund's duly authorized
-8-
<PAGE>
employees or agents, and the Fund will be furnished with all information
in respect of the services rendered to it as it may require.
9. Instructions Consistent with the Articles, etc. Unless otherwise
----------------------------------------------
provided in this Agreement, Custodian shall act only upon Written Instructions.
Custodian may assume that any Written Instructions received hereunder are not in
any way inconsistent with any provision of the Articles or By-Laws of the Fund
or any vote or resolution of the Fund's Directors, or any committee thereof.
Custodian shall be entitled to rely upon any Written Instructions actually
received by Custodian pursuant to this Agreement. The Fund agrees that
Custodian shall incur no liability in acting upon Written Instructions given to
Custodian. In accord with instructions from the Fund, as required by accepted
industry practice or as Custodian may elect in effecting the execution of Fund
instructions, advances of cash or other Property made by Custodian, arising from
the purchase, sale, redemption, transfer or other disposition of Property of the
Fund, or in connection with the disbursement of funds to any party, or in
payment of fees, expenses, claims or liabilities owed to Custodian by the Fund,
or to any other party which has secured judgment in a court of law against the
Fund that creates an overdraft in the accounts or over-delivery of Property
shall be deemed a loan by Custodian to the Fund, payable on demand, bearing
interest at such rate customarily charged by Custodian for similar loans. The
Fund agrees that test arrangements, authentication methods or other security
devices to be used with respect to instructions which the Fund may give by
telephone, telex, TWX, facsimile transmission, bank wire [, the internet] or
through an electronic instruction system, shall be processed in accordance with
terms and conditions for the use of such arrangements, methods or devices as
Custodian may put into effect and modify from time to time. The Fund shall
safeguard any test keys, identification
-9-
<PAGE>
codes or other security devices which Custodian makes available to the Fund and
agrees that the Fund shall be responsible for any loss, liability or damage
incurred by Custodian or by the Fund as a result of Custodian's acting in
accordance with instructions from any unauthorized person using the proper
security device unless such loss, liability or damage was incurred as a result
of Custodian's negligence or willful misconduct. Custodian may electronically
record, but shall not be obligated to so record, any instructions given by
telephone and any other telephone discussions with respect to the Account. In
the event that the Fund uses Custodian's Asset Management System ("AMS"), the
Fund agrees that Custodian is not responsible for the consequences of the
failure of the AMS to perform for any reason, beyond the reasonable control of
Custodian, or the failure of any communications carrier, utility, or
communications network. In the event the AMS is inoperable, the Fund agrees that
it will accept the communication of transaction instructions by telephone,
facsimile transmission on equipment compatible to Custodian's facsimile
receiving equipment or by letter, at no additional charge to the Fund.
10. Transactions Not Requiring Written Instructions. Custodian is
-----------------------------------------------
authorized to take the following actions without Written Instructions:
(a) Collection of Income and Other Payments.
---------------------------------------
(i) Custodian shall collect and receive for the account
of the Fund, all income and other payments and distributions,
including (without limitation) stock dividends, rights, warrants
and similar items, included or to be included in the Property of
the Fund, and promptly advise the Fund of such receipt and shall
credit such income, as collected, to the Fund. From time to
time, Custodian may elect, but shall not be so obligated, to
credit the Account with interest, dividends
-10-
<PAGE>
or principal payments on payable or contractual settlement date,
in anticipation of receiving same from a payor, central
depository, broker or other agent employed by the Fund or
Custodian. Any such crediting and posting shall be at the Fund's
sole risk, and Custodian shall be authorized to reverse any such
advance posting in the event Custodian does not receive good
funds from any such payor, central depository, broker or agent
of the Fund.
(ii) With respect to securities of foreign issuers,
Custodian shall effect collection of dividends, interest and
other income, and to notify the Fund of any call for redemption,
offer of exchange, right of subscription, reorganization, or
other proceedings affecting such securities, or any default in
payments due thereon. It is understood that Custodian shall be
under no responsibility for any failure or delay in effecting
such collections or giving such notice with respect to
securities of foreign issuers, regardless of whether or not the
relevant information is published in any financial service
available to Custodian unless such failure or delay is due to
its negligence or willful misconduct; provided that this sub-
paragraph (ii) shall not be construed as creating any such
responsibility with respect to securities of nonforeign issuers.
Collections of income in foreign currency are, to the extent
possible, to be converted into United States Dollars unless
otherwise instructed in writing, and in effecting such
conversion Custodian may use such methods or agencies as it may
see fit, including the facilities of its own foreign division at
customary rates. All risk and expenses incident to such
collection and conversion are for the account of the Fund, and
Custodian shall
-11-
<PAGE>
have no responsibility for fluctuations in exchange rates
affecting any such conversion.
(iii) Custodian shall endorse and deposit for collection
in the name of the Fund, checks, drafts, or other orders for the
payment of money on the same day as received.
(iv) Custodian shall receive and hold for the account of
the Fund all securities received by the Fund as a result of a
stock dividend, stock split or reorganization, recapitalization,
readjustment or other rearrangement or distribution of rights or
similar securities issued with respect to any portfolio
securities of the Fund held by Custodian hereunder.
(v) Custodian shall present for payment and collect the
amount payable upon all securities which may mature or be
called, redeemed or retired, or otherwise become payable on the
date such securities become payable.
(vi) Custodian shall take any action which may be
necessary and proper in connection with the collection and
receipt of such income and other payments and the endorsement
for collection of checks, drafts and other negotiable
instruments.
(vii) Custodian shall, with respect to domestic
securities, exchange securities in temporary form for securities
in definitive form, effect an exchange of shares where the par
value of stock is changed, and surrender securities at maturity
or when advised of earlier call for redemption, against payment
therefor in accordance with accepted industry practice. The Fund
understands that Custodian
-12-
<PAGE>
subscribes to one or more nationally recognized services that provide
information with respect to calls for redemption of bonds or other
corporate actions. Custodian shall not be liable for failure to redeem
any called bond or to take other action if notice of such call or action
was not provided by any service to which it subscribes provided that
Custodian shall have acted in good faith without negligence and in
accordance with "street practice" (as is customary in industry).
Custodian shall have no duty to notify the Fund of any rights, duties,
limitations, conditions or other information set forth in any security
(including mandatory or optional put, call or similar provisions), but
Custodian shall forward to the Fund any notices or other documents
subsequently received in regard to any such security. When fractional
shares of stock of a declaring corporation are received as a stock
distribution, unless specifically instructed to the contrary in writing,
Custodian is authorized to sell the fraction received and credit the
Fund's account. Unless specifically instructed to the contrary in
writing, Custodian is authorized to exchange securities in bearer form
for securities in registered form. If any Property registered in the
name of a nominee of Custodian is called for partial redemption by the
issuer of such Property, Custodian is authorized to allot the called
portion to the respective beneficial holders of the Property in such
manner deemed to be fair and equitable by Custodian in its sole
discretion.
(b) Miscellaneous Transactions. Custodian is authorized to
--------------------------
deliver or cause to be delivered Property against payment or other consideration
or written receipt therefor in the following cases:
-13-
<PAGE>
(i) for examination by a broker selling for the account of the Fund in
accordance with street delivery custom;
(ii) for the exchange of interim receipts or temporary securities for
definitive securities; and
(iii) for transfer of securities into the name of the Fund or
Custodian or a nominee of either, or for exchange of securities for a different
number of bonds, certificates, or other evidence, representing the same
aggregate face amount or number of units bearing the same interest rate,
maturity date and call provisions, if any; provided that, in any such case, the
--------
new securities are to be delivered to Custodian.
If to the Fund: Morgan Stanley Universal Funds, Inc.
1221 Avenue of the Americas
New York, NY 10020
Attention:
-----------------
If to Chase: Mr.
------------------------
[Senior Vice President]
Chase Manhattan Bank, N.A.
____________________________
New York, NY
---------------
(c) Short-Term Investments. Custodian is authorized to make temporary
----------------------
short-term investments of Excess Cash pursuant to the following standing
instructions:
-14-
<PAGE>
(i) to the extent that the Custodian is authorized by law and
regulation as a custodian of assets of investment companies to make
temporary short-term investments on behalf of the Fund, the Custodian
shall invest Excess Cash in interest-bearing or income-producing
accounts, including repurchase agreement programs, accounts of the
Custodian, or similar accounts of like liquidity and minimal credit
risk; and
(ii) to the extent that the amount of such Excess Cash exceeds
the Custodian's legal authorization (referred to herein as "Above-Limit
Excess Cash"), the Custodian shall invest Above-Limit Excess Cash in
either (A) interest-bearing time deposits not exceeding 3 days in
duration (except in the event of an extended holiday weekend of three or
four days in duration), or (B) repurchase agreements with maturities of
less than 3 days entered into with repurchase agreement dealers approved
by the Board of Directors of the Fund, depending on which investment,
time deposits or repurchase agreements, would produce a higher return.
11. Transactions Requiring Written Instructions. Upon receipt of
-------------------------------------------
Written Instructions and not otherwise, Custodian, directly or through the use
of a Securities Depository or the Book-Entry System, shall:
(a) execute and deliver to such persons as may be designated in
such Written Instructions, proxies, consents, authorizations, and any other
instruments whereby the authority of the Fund as owner of any securities
may be exercised;
(b) deliver any securities held for the Fund against receipt of
other securities issued or cash paid in connection with the liquidation,
reorganization,
-15-
<PAGE>
refinancing, merger, consolidation or recapitalization of any corporation, or
the exercise of any conversion privilege;
(c) deliver any securities held for the Fund to any protective
committee, reorganization committee or other person in connection with the
reorganization, refinancing, merger, consolidation, recapitalization or sale of
assets of any corporation, against receipt of such certificates of deposit,
interim receipts or other instruments or documents as may be issued to it to
evidence such delivery;
(d) make such transfers or exchanges of the assets of the Fund and
take such other steps as shall be stated in said instructions to be for the
purpose of effectuating any duly authorized plan of liquidation, reorganization,
merger, consolidation, recapitalization or sale of assets of the Fund;
(e) release securities belonging to the Fund to any bank or trust
company for the purpose of pledge or hypothecation to secure any loan incurred
by the Fund; provided, that securities shall be released only upon payment to
--------
Custodian of the monies borrowed, except that in cases where additional
collateral is required to secure a borrowing already made, subject to proper
prior authorization, further securities may be released for that purpose; and
pay such loan redelivery to it of the securities pledged or hypothecated
therefor and upon surrender of the note or notes evidencing the loan;
(f) deliver any securities held for the Fund upon the exercise of a
covered call option written by the Fund on such securities; and
-16-
<PAGE>
(g) deliver securities held for the Fund pursuant to separate
security lending agreements concerning the lending of the Fund's securities into
which the Fund may enter, from time to time.
12. Purchase of Securities. Promptly after each purchase of
----------------------
securities by any investment adviser (or any investment sub-adviser), the Fund
shall deliver to Custodian Written Instructions specifying with respect to each
such purchase: (a) the name of the issuer and the title of the securities; (b)
the number of shares or the principal amount purchased and accrued interest, if
any; (c) the dates of purchase and settlement; (d) the purchase price per unit;
(e) the total amount payable upon such purchase; (f) the name of the person from
whom or the broker through whom the purchase was made; and (g) the Portfolio of
the Fund for which the purchase was made. Custodian shall upon receipt of
securities purchased by or for the Portfolio of the Fund pay out of the moneys
held for the account of such Portfolio of the Fund the total amount payable to
the person from whom or the broker through whom the purchase was made, provided
that the same conforms to the total amount payable as set forth in such Written
Instructions.
13. Sales of Securities. Promptly after each sale of securities by
-------------------
any investment adviser, the Fund shall deliver to Custodian Written
Instructions, specifying with respect to each such sale: (a) the name of the
issuer and the title of the security; (b)the number of shares or principal
amount sold, and accrued interest, if any; (c) the date of sale; (d) the sale
price per unit; (e) the total amount payable to the Fund upon such sale; (f) the
name of the broker through whom or the person to whom the sale was made; and (g)
the Portfolio of the Fund for which the sale was made. Custodian shall deliver
the securities upon receipt of the total amount payable to the Fund upon such
sale, provided that the same conforms to the total amount payable as set forth
--------
in
-17-
<PAGE>
such Written Instructions. Subject to the foregoing, Custodian may accept
payment in such form as shall be satisfactory to it, and may deliver securities
and arrange for payment in accordance with the customs prevailing among dealers
in securities.
14. Authorized Shares. The Fund has a fixed number of shares of each
-----------------
Portfolio and of each class of shares of each Portfolio, as set forth in the
Articles.
15. Records. The books and records pertaining to the Fund that are in
-------
the possession of Custodian shall be the property of the Fund. Such books and
records shall be prepared and maintained as required by the 1940 Act; other
applicable federal and state securities laws and rules and regulations; and any
state or federal regulatory body having appropriate jurisdiction. The Fund, or
the Fund's authorized representatives, shall have access to such books and
records at all times during Custodian's normal business hours, and such books
and records shall be surrendered to the Fund promptly upon request. Upon
reasonable request of the Fund, copies of any such books and records shall be
provided by Custodian to the Fund or the Fund's authorized representative at the
Fund's expense.
16. Cooperation with Accountants. Custodian shall cooperate with the
----------------------------
Fund's independent certified public accountants and shall take all reasonable
action in the performance of its obligations under this Agreement to assure that
the necessary information is made available to such accountants for the
expression of their unqualified opinion, including but not limited to, the
opinion included in the Fund's semiannual reports on Form N-SAR.
17. Confidentiality. Custodian agrees on behalf of itself and its
---------------
employees to treat confidentially and as the proprietary information of the Fund
all records and other information relative to the Fund and its prior, present or
potential stockholders and relative to the Fund's
-18-
<PAGE>
investment advisers or sub-advisers and their prior, present or potential
customers, and not to use such records and information for any purpose other
than performance of its responsibilities and duties hereunder, except after
prior notification to, and approval in writing by, the Fund, which approval
shall not be unreasonably withheld and may not be withheld where Custodian may
be exposed to civil or criminal contempt proceedings for failure to comply, when
requested to divulge such information by duly constituted authorities, or when
so requested by the Fund. Nothing contained herein shall prohibit Custodian from
advertising or soliciting the public generally with respect to other products or
services, regardless of whether such advertisement or solicitation may include
prior, present or potential stockholders of the Fund.
18. Equipment Failures. In the event of equipment failures beyond
------------------
Custodian's control, Custodian shall, at no additional expense to the Fund, take
reasonable steps to minimize service interruptions but shall not have liability
with respect thereto. Custodian shall enter into and shall maintain in effect
with appropriate parties one or more agreements making reasonable provision for
back-up emergency use of electronic data processing equipment to the extent
appropriate equipment is available.
19. Right to Receive Advice.
-----------------------
(a) Advice of Fund. If Custodian shall be in doubt as to any
--------------
action to be taken or omitted by it, it may request, and shall receive, from the
Fund clarification or advice.
(b) Advice of Counsel. If Custodian shall be in doubt as to any
-----------------
question of law involved in any action to be taken or omitted by Custodian, it
may request advice at
-19-
<PAGE>
its own cost from counsel (who may be counsel for the Fund or, with the
consent of the Fund which shall not be unreasonably withheld, counsel
for Custodian).
(c) Conflicting Advice. In case of conflict between directions
------------------
or advice received by Custodian pursuant to subparagraph (a) of this
paragraph and advice received by Custodian pursuant to subparagraph (b)
of this paragraph, Custodian shall be entitled to rely on and follow the
advice received pursuant to the latter provision alone.
(d) Protection of Custodian. Custodian shall be protected in any
-----------------------
action or inaction which it takes or omits to take in reliance on any
directions or advice received pursuant to subparagraph (a) of this
section which Custodian, after receipt of any such directions or advice,
in good faith believes to be consistent with such directions or advice.
Nothing in this paragraph shall be construed as imposing upon Custodian
any obligation (i) to seek such directions or advice, or (ii) to act in
accordance with such directions or advice when received, unless, under
the terms of another provision of this Agreement, the same is a
condition to Custodian's properly taking or omitting to take such
action. Nothing in this subparagraph shall excuse Custodian when an
action or omission on the part of Custodian constitutes willful
misfeasance, bad faith, gross negligence or reckless disregard by
Custodian of its duties under this Agreement.
20. Compliance with Governmental Rules and Regulations. The Fund
--------------------------------------------------
assumes full responsibility for insuring that the contents of each prospectus of
the Fund comply with all applicable requirements of the 1933 Act, the 1940 Act,
and any laws, rules and regulations of governmental authorities having
appropriate jurisdiction.
-20-
<PAGE>
21. Compensation. As compensation for the services described within
------------
this Agreement and rendered by Custodian during the term of this Agreement, the
Fund will pay to Custodian, in addition to reimbursement of its out-of-pocket
expenses, monthly fees as outlined in Attachment A.
22. Indemnification. The Fund, as sole owner of the Property, agrees
---------------
to indemnify and hold harmless Custodian and its nominees from all taxes,
charges, expenses, assessments, claims, and liabilities (including, without
limitation, liabilities arising under the 1933 Act, the Securities Exchange Act
of 1934, as amended, the 1940 Act, and any state and foreign securities or blue
sky laws, all as amended from time to time) and expenses, including reasonable
attorney's fees and disbursements, arising directly or indirectly (a) from the
fact that securities included in the Property are registered in the name of any
such nominee or (b) without limiting the generality of the foregoing clause (a)
, from any action or thing that Custodian takes or does or omits to take or do
(i) at the request or on the direction of, or in reliance on the advice of, the
Fund given in accordance with the terms of this Agreement, or (ii) upon Written
Instructions; provided, that neither Custodian nor any of its nominees or any
--------
Chase Subcustodian shall be indemnified against any liability to the Fund or to
its stockholders (or any expenses incident to such liability) arising out of (x)
Custodian's or such nominee's or Chase Subcustodian's own willful misfeasance,
bad faith, gross negligence or reckless disregard of its duties under this
Agreement or any agreement between Custodian and any nominee or Chase
Subcustodian or (y) Custodian's negligence or Chase Subcustodian's negligent
failure to perform its duties under this Agreement. In the event of any advance
of cash for any purpose made by Custodian resulting from orders or Written
Instructions of the Fund, or in the event that Custodian or its nominee or a
Chase Subcustodian
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<PAGE>
shall incur or be assessed any taxes, charges, expenses, assessments, claims or
liabilities in connection with the performance of this Agreement, except such as
may arise from its or its nominee's or such Chase Subcustodian's own negligent
action, negligent failure to act, willful misconduct, or reckless disregard of
its duties under this Agreement or any agreement between Custodian and any
nominee or Chase Subcustodian, the Fund shall promptly reimburse Custodian for
such advance of cash or such taxes, charges, expenses, assessments, claims or
liabilities.
23. Responsibility of Custodian. Custodian shall be under no duty to
---------------------------
take any action on behalf of the Fund except as specifically set forth herein or
as may be specifically agreed to by Custodian in writing. In the performance of
its duties hereunder, Custodian shall be obligated to exercise care and
diligence and to act in good faith and to use its best efforts within reasonable
limits to insure the accuracy of all services performed under this Agreement.
Custodian shall be responsible for its own negligent failure or that of any
Chase Subcustodian it shall appoint to perform its duties under this Agreement
but to the extent that duties, obligations and responsibilities are not
expressly set forth in this Agreement, Custodian shall not be liable for any act
or omission which does not constitute willful misfeasance, bad faith, or gross
negligence on the part of Custodian or reckless disregard of such duties,
obligations and responsibilities. Without limiting the generality of the
foregoing or of any other provision of this Agreement, Custodian, in connection
with its duties under this Agreement, shall not be under any duty or obligation
to inquire into and shall not be liable for or in respect of (a) the validity or
invalidity or authority or lack thereof of any advice, direction, notice or
other instrument which conforms to the applicable requirements of this
Agreement, if any, and which Custodian believes to be genuine; (b) the validity
of the issue of any securities purchased or sold by the Fund, the legality
-22-
<PAGE>
of the purchase or sale thereof or the propriety of the amount paid or received
therefor; (c) the legality of the issue or sale of any Shares, or the
sufficiency of the amount to be received therefor; (d) the legality of the
redemption of any Shares, or the propriety of the amount to be paid therefor;
(e) the legality of the declaration or payment of any dividend or distribution
on Shares; or (f) delays or errors or loss of data occurring by reason of
circumstances beyond Custodian's control, including acts of civil or military
authority, national emergencies, labor difficulties, fire, mechanical breakdown
(except as provided in Paragraph 18 hereof), flood or catastrophe, acts of God,
insurrection, war, riots, or failure of the mail, transportation systems,
communication systems or power supply.
24. Collection. All collections of monies or other property in
----------
respect hereof, or which are to become part of, the Property (but not the
safekeeping thereof upon receipt by Custodian) shall be at the sole risk of the
Fund. In any case in which Custodian does not receive any payment due the Fund
within a reasonable time after Custodian has made proper demands for the same,
it shall so notify the Fund in writing, including copies of all demand letters,
any written responses thereto, and memoranda of all oral responses thereto, and
to telephonic demands, and await instructions from the Fund. Custodian shall
not be obliged to take legal action for collection unless and until reasonably
indemnified to its satisfaction. Custodian shall also notify the Fund as soon as
reasonably practicable whenever income due on securities is not collected in due
course.
25. Duration and Termination. This Agreement shall be effective as of
------------------------
the date hereof and shall continue until terminated by the Fund or by Custodian
on 90 days' written notice. Upon any termination of this Agreement, pending
appointment of a successor to Custodian or a
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<PAGE>
vote of the stockholders of the Fund to dissolve or to function without a
custodian of its cash, securities or other property, Custodian shall not deliver
cash, securities or other property of the Fund to the Fund, but may deliver them
to a bank or trust company of its own selection, having aggregate capital,
surplus and undivided profits, as shown by its last published report of not less
than twenty million dollars ($20,000,000) as a successor custodian for the Fund
to be held under terms similar to those of this Agreement; provided, that
--------
Custodian shall not be required to make any such delivery or payment until full
payment shall have been made by the Fund of all liabilities constituting a
charge on or against the properties then held by Custodian or on or against
Custodian and until full payment shall have been made to Custodian of all of its
fees, compensation, costs and expenses, subject to the provisions of Paragraph
21 of this Agreement.
26. Notices. All notices and other communications (collectively
-------
referred to as "Notice" or "Notices" in this paragraph) hereunder shall be in
writing or by confirm by telegram, cable, telex, facsimile sending device or the
internet. Notices shall be addressed (a) if to Custodian, at Custodian's
address, ____________, New York, New York, _________; (b) if to the Fund, at the
address of the Fund; or (c) if to neither of the foregoing, at such other
address as shall have been notified to the sender of any such Notice or other
communication. If the location of the sender of a Notice and the address of the
addressee thereof are, at the time of sending, more than 100 miles apart, the
Notice may be sent by first-class mail, in which case it shall be deemed to have
been given three days after it is sent, or if sent by confirming telegram,
cable, telex, facsimile sending device or the internet, it shall be deemed to
have been given immediately, and, if the location of the sender of a Notice and
the address of the addressee thereof are, at the time of sending, not more than
100 miles apart, the Notice may be sent by first-class mail, in
-24-
<PAGE>
which case it shall be deemed to have been given two days after it is sent, or
if sent by messenger, it shall be deemed to have been given on the day it is
delivered, or if sent by confirming telegram, cable, telex, facsimile sending
device or the internet, it shall be deemed to have been given immediately. All
postage, cable, telegram, telex, facsimile sending device or internet charges
arising from the sending of a Notice hereunder shall be paid by the sender.
27. Further Actions. Each party agrees to perform such further acts
---------------
and execute such further documents as are necessary to effectuate the purposes
hereof.
28. Amendments. This Agreement or any part hereof may be changed or
----------
waived only by an instrument in writing signed by the party against which
enforcement of such change or waiver is sought.
29. Miscellaneous. This Agreement embodies the entire Agreement and
-------------
understanding between the parties hereto, and supersedes all prior agreements
and understandings relating to the parties hereto. The captions in this
Agreement are included for convenience of reference only and in no way define or
delimit any of the provisions hereof or otherwise affect their construction or
effect. This Agreement shall be deemed to be a contract made in New York and
governed by New York law. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors.
-25-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their officers designated below as of the day and the year first
above written.
MORGAN STANLEY UNIVERSAL FUNDS, INC.
Attest: By
-------- ---------------------------------
Name: Name:
Title: Title: President
CHASE MANHATTAN BANK, N.A.
Attest: By
-------- ---------------------------------
Name: Name:
Title: Title:
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<PAGE>
ATTACHMENT A
FEES
-27-
<PAGE>
ATTACHMENT B
AUTHORIZED PERSONS
-28-
<PAGE>
ATTACHMENT C
PORTFOLIOS OF THE FUND
-29-
<PAGE>
EXHIBIT-99.B8(b)
CUSTODY AGREEMENT
-----------------
This Custody Agreement is dated as of September 9, 1996 between
MORGAN STANLEY TRUST COMPANY, a New York State chartered trust company (the
"Custodian"), and MORGAN STANLEY UNIVERSAL FUNDS, INC., a Maryland corporation
(the "Client").
1. Appointment and Acceptance; Accounts. (a) The Client hereby
------------------------------------
appoints the Custodian as a custodian of Property (as defined below) owned or
under the control of the Client that are delivered to the Custodian, or any
Subcustodian as appointed below, from time to time to be held in custody for the
benefit of the Client. The Custodian agrees to act as such custodian upon the
terms and conditions hereinafter provided.
(b) Prior to the delivery of any Property by the Client to the
Custodian, the Client shall deliver to the Custodian each document and other
item listed in Appendix 1. In addition, the Client shall deliver to the
Custodian any additional documents or items as the Custodian may deem necessary
for the performance of its duties under this Agreement.
(c) The Client instructs the Custodian to establish on the books and
records of the Custodian the accounts listed in Appendix 2 (the "Accounts") in
the name of the Client. Upon receipt of Authorized Instructions (as defined
below) and appropriate documentation, the Custodian shall open additional
Accounts for the Client. Upon the Custodian's confirmation to the Client of the
opening of such additional Accounts, or of the closing of Accounts, Appendix 2
shall be deemed automatically amended or supplemented accordingly. The
Custodian shall record in the Accounts and shall have general responsibility for
the safekeeping of all securities ("Securities"), cash, cash equivalents and
other property (all such Securities, cash, cash equivalents and other property
being collectively the "Property") of the Client that are delivered to the
Custodian for custody.
(d) The procedures the Custodian and the Client will use in
performing activities in connection with this Agreement are set forth in a
client services guide provided to the Client by the Custodian, as such guide may
be amended from time to time by the Custodian by written notice to the Client
(the "Client Services Guide").
2. Subcustodians. The Property may be held in custody and deposit
-------------
accounts that have been established by the Custodian with one or more domestic
or foreign banks or other institutions as listed on Exhibit A (the
"Subcustodians"), as such Exhibit may be amended from time to time by the
Custodian by written notice to the Client, or through the facilities of one or
more securities depositories or clearing agencies. The Custodian shall hold
Property through a Subcustodian, securities depository or clearing agency only
if (a) such Subcustodian and any securities depository or clearing agency in
which such Subcustodian or the Custodian holds Property, or any of their
creditors, may not assert any right, charge, security interest, lien,
encumbrance or other claim of any kind to such Property except a claim of
payment for its safe custody or administration and (b) beneficial ownership of
such Property may be freely transferred without the payment of money or value
other than for safe custody or administration. Any Subcustodian may hold
Property in a securities depository and may utilize a clearing agency.
1
<PAGE>
With respect to Property custodied in Russia, the Custodian shall enter into a
subcustody agreement with its Subcustodian for Russia that contains the
provisions set forth in Appendix A hereto.
3. Records. With respect to Property held by a Subcustodian:
-------
(a) The Custodian may hold Property for all of its customers with a
Subcustodian in a single account identified as belonging to the Custodian
for the benefit of its customers;
(b) The Custodian shall identify on its books as belonging to the
Client any Property held by a Subcustodian for the Custodian's account;
(c) The Custodian shall require that Property held by the
Subcustodian for the Custodian's account be identified on the
Subcustodian's books as separate from any other property held by the
Subcustodian other than property of the Custodian's customers held solely
for the benefit of customers of the Custodian; and
(d) In the event the Subcustodian holds Property in a securities
depository or clearing agency, such Subcustodian shall be required by its
agreement with the Custodian to identify on its books such Property as
being held for the account of the Custodian as custodian for its customers
or in such other manner as is required by local law or market practice.
4. Access to Records. The Custodian shall allow the Client's
-----------------
accountants reasonable access to the Custodian's records relating to the
Property held by the Custodian as such accountants may reasonably require in
connection with their examination of the Client's affairs. The Custodian shall
also obtain from any Subcustodian (and shall require each Subcustodian to use
reasonable efforts to obtain from any securities depository or clearing agency
in which it deposits Property) an undertaking, to the extent consistent with
local practice and the laws of the jurisdiction or jurisdictions to which such
Subcustodian, securities depository or clearing agency is subject, to permit
independent public accountants such reasonable access to the records of such
Subcustodian, securities depository or clearing agency as may be reasonably
required in connection with the examination of the Client's affairs or to take
such other action as the Custodian in its judgment may deem sufficient to ensure
such reasonable access.
5. Reports. The Custodian shall provide such reports and other
-------
information to the Client and to such persons as the Client directs as the
Custodian and the Client may agree from time to time.
6. Payment of Monies. The Custodian shall make, or cause any
-----------------
Subcustodian to make, payments from monies being held in the Accounts only in
accordance with Authorized Instructions or as provided in Sections 9, 13 and 17.
The Custodian may act as the Client's agent in foreign exchange
transactions at such rates as are agreed from time to time between the Client
and the Custodian.
2
<PAGE>
7. Transfer of Securities. The Custodian shall make, or cause any
----------------------
Subcustodian to make, transfers, exchanges or deliveries of Securities only in
accordance with Authorized Instructions or as provided in Sections 9, 13 and 17.
8. Corporate Action. (a) The Custodian shall notify the Client of
----------------
details of all corporate actions affecting the Client's Securities promptly upon
its receipt of such information.
(b) The Custodian shall take, or cause any Subcustodian to take, such
corporate action only in accordance with Authorized Instructions or as provided
in this Section 8 or Section 9.
(c) In the event the Client does not provide timely Authorized
Instructions to the Custodian, the Custodian shall act in accordance with the
default option provided by local market practice and/or the issuer of the
Securities.
(d) Unless the Custodian receives Authorized Instructions to the
contrary, fractional shares resulting from corporate action activity shall be
treated in accordance with local market practices.
9. General Authority. In the absence of Authorized Instructions to
-----------------
the contrary, the Custodian may, and may authorize any Subcustodian to:
(a) make payments to itself or others for expenses of handling
Property or other similar items relating to its duties under this
Agreement, provided that all such payments shall be accounted for to the
Client;
(b) receive and collect all income and principal with respect to
Securities and to credit cash receipts to the Accounts;
(c) exchange Securities when the exchange is purely ministerial
(including, without limitation, the exchange of interim receipts or
temporary securities for securities in definitive form and the exchange of
warrants, or other documents of entitlement to securities, for the
securities themselves);
(d) surrender Securities at maturity or when called for redemption
upon receiving payment therefor;
(e) execute in the Client's name such ownership and other
certificates as may be required to obtain the payment of income from
Securities;
(f) pay or cause to be paid, from the Accounts, any and all taxes and
levies in the nature of taxes imposed on Property by any governmental
authority in connection with custody of and transactions in such Property;
(g) endorse for collection, in the name of the Client, checks, drafts
and other negotiable instruments;
3
<PAGE>
(h) take non-discretionary action on mandatory corporate actions; and
(i) in general, attend to all nondiscretionary details in connection
with the custody, sale, purchase, transfer and other dealings with the
Property.
10. Authorized Instructions; Authorized Persons. (a) Except as
-------------------------------------------
otherwise provided in Sections 6 through 9, 13 and 17, all payments of monies,
all transfers, exchanges or deliveries of Property and all responses to
corporate actions shall be made or taken only upon receipt by the Custodian of
Authorized Instructions; provided that such Authorized Instructions are timely
--------
received by the Custodian. "Authorized Instructions" of the Client means
-----------------------
instructions from an Authorized Person received by telecopy, tested telex,
electronic link or other electronic means or by such other means as may be
agreed in writing between the Client and the Custodian.
(b) "Authorized Person" means each of the persons or entities
-----------------
identified on Appendix 3 as amended from time to time by written notice from the
Client to the Custodian. The Client represents and warrants to the Custodian
that each Authorized Person listed in Appendix 3, as amended from time to time,
is authorized to issue Authorized Instructions on behalf of the Client. Prior
to the delivery of the Property to the Custodian, the Custodian shall provide a
list of designated system user ID numbers and passwords that the Client shall be
responsible for assigning to Authorized Persons. The Custodian shall assume
that an electronic transmission received and identified by a system user ID
number and password was sent by an Authorized Person. The Custodian agrees to
provide additional designated system user ID numbers and passwords as needed by
the Client. The Client authorizes the Custodian to issue new system user ID
numbers upon the request of a previously existing Authorized Person. Upon the
issuance of additional system user ID numbers by the Custodian to the Client,
Appendix 3 shall be deemed automatically amended accordingly. The Client
authorizes the Custodian to receive, act and rely upon any Authorized
Instructions received by the Custodian which have been issued, or purport to
have been issued, by an Authorized Person.
(c) Any Authorized Person may cancel/correct or otherwise amend any
Authorized Instruction received by the Custodian, but the Client agrees to
indemnify the Custodian for any liability, loss or expense incurred by the
Custodian and its Subcustodians as a result of their having relied upon or acted
on any prior Authorized Instruction. An amendment or cancellation of an
Authorized Instruction to deliver or receive any security or funds in connection
with a trade will not be processed once the trade has settled.
11. Registration of Securities. (a) In the absence of Authorized
--------------------------
Instructions to the contrary, Securities which must be held in registered form
shall be registered in the name of the Custodian or the Custodian's nominee or,
in the case of Securities in the custody of an entity other than the Custodian,
in the name of the Custodian, its Subcustodian or any such entity's nominee.
The Custodian may, without notice to the Client, cause any Securities to be
registered or re-registered in the name of the Client.
(b) Where the Custodian has been instructed by the Client to hold any
Securities in the name of any person or entity other than the Custodian,
its Subcustodian or any such entity's nominee, the Custodian shall not be
responsible for any failure to collect such dividends or other income or
participate in any such corporate action with respect to such Securities.
The foregoing
4
<PAGE>
shall not relieve the Custodian of its obligation to hold in safekeeping all
Property of Client delivered to Custodian or any Subcustodian in accordance with
Section 1 hereof or to notify Client of any corporate action of which it
receives notice as provided in Section 8 hereof.
12. Deposit Accounts. Unless the Client and the Custodian otherwise
----------------
agree, all cash received by the Custodian for the Accounts shall be placed in
deposit accounts maintained by the Custodian for the benefit of its clients with
Subcustodians or other domestic or foreign deposit taking institutions
identified to the Client. The Client understands that such deposit accounts may
not be accompanied by the benefit of any governmental insurance. If the
Custodian and the Client have agreed in writing in advance that certain cash in
the Accounts shall bear interest, the Custodian shall be responsible for
crediting the Accounts with interest on such cash at the rates and times as
agreed between the Client and the Custodian from time to time and such rates may
be greater than or less than the rates paid on deposits by the applicable
deposit taking institution. Any difference between the interest so paid to the
Client and the interest so paid by the Subcustodians and other deposit taking
institutions shall be for the account of the Custodian.
13. Short-term Credit Extensions. (a) From time to time, the
----------------------------
Custodian may extend or arrange short-term credit for the Client which is (i)
necessary in connection with payment and clearance of securities and foreign
exchange transactions or (ii) pursuant to an agreed schedule, as and if set
forth in the Client Services Guide, of credits for dividends and interest
payments on Securities. All such extensions of credit shall be repayable by the
Client on demand.
(b) The Custodian shall be entitled to charge the Client interest for
any such credit extension at rates to be agreed upon from time to time or, if
such credit is arranged by the Custodian with a third party on behalf of the
Client, the Client shall reimburse the Custodian for any interest charge. In
addition to any other remedies available, the Custodian shall be entitled to a
right of set-off against the Property to satisfy the repayment of such credit
extensions and the payment of, or reimbursement for, accrued interest thereon.
14. Representations and Warranties. (a) The Client represents and
------------------------------
warrants that (i) the execution, delivery and performance of this Agreement
(including, without limitation, the ability to obtain the short-term extensions
of credit in accordance with Section 13) are within the Client's power and
authority and have been duly authorized by all requisite action (corporate or
otherwise) of the Client and of the beneficial owner of the Property, if other
than the Client, and (ii) this Agreement and each extension of short-term credit
extended to or arranged for the benefit of the Client in accordance with Section
13 shall at all times constitute a legal, valid and binding obligation of the
Client enforceable against the Client in accordance with their respective terms,
except as may be limited by bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors' rights in general and subject to the
effect of general principles of equity (regardless of whether considered in a
proceeding in equity or at law).
(b) The Custodian represents and warrants that (i) the execution,
delivery and performance of this Agreement are within the Custodian's power and
authority and have been duly authorized by all requisite action (corporate or
otherwise) of the Custodian and (ii) this Agreement constitutes the legal, valid
and binding obligation of the Custodian enforceable
5
<PAGE>
against the Custodian in accordance with its terms, except as may be limited by
bankruptcy, insolvency or other similar laws affecting the enforcement of
creditors' rights in general and subject to the effect of general principles of
equity (regardless of whether considered in a proceeding in equity or at law).
15. Standard of Care; Indemnification. (a) The Custodian shall be
---------------------------------
responsible for the performance of only such duties as are set forth in this
Agreement or contained in Authorized Instructions given to the Custodian which
are not contrary to the provisions of any relevant law or regulation. The
Custodian shall be liable to the Client for, and shall indemnify the Client
against, any loss, liability or expense incurred by the Client in connection
with this Agreement to the extent that any such loss, liability or expense
results from the negligence, willful misconduct or breach of the Custodian or
any Subcustodian; provided, however that in the case of Property held in Russia
-------- -------
neither the Custodian nor the Subcustodian shall be liable to the Client for any
indirect, consequential or special damages.
(b) The Client acknowledges that the Property may be physically held
outside the United States. Except as otherwise provided herein, the Custodian
shall not be liable for any loss, liability or expense resulting from events
beyond the reasonable control of the Custodian or Subcustodian, including, but
not limited to, force majeure.
----- -------
(c) In addition, the Client shall indemnify the Custodian and
Subcustodians and any nominee thereof, and hold each of them harmless from, any
liability, loss or expense (including attorneys' fees and disbursements)
incurred in connection with this Agreement, including without limitation, (i) as
a result of the Custodian having acted or relied upon any Authorized
Instructions or (ii) arising out of any such person acting as a nominee or
holder of record of Securities except to the extent such liability, loss or
expense results from the negligence or willful misconduct or breach of the
Custodian or any Subcustodian.
16. Fees; Liens. The Client shall pay to the Custodian from time to
-----------
time such compensation for its services pursuant to this Agreement as may be
mutually agreed upon as well as the Custodian's out-of-pocket and incidental
expenses. The Client shall hold the Custodian harmless from any liability or
loss resulting from any taxes or other governmental charges, and any expenses
related thereto, which may be imposed or assessed with respect to the Accounts
or any Property held therein. The Custodian is, and any Subcustodians are,
authorized to charge the Accounts for such items and the Custodian shall have a
lien, charge and security interest on any and all Property for any amount owing
to the Custodian from time to time under this Agreement.
17. Termination. This Agreement may be terminated by the Client or
-----------
the Custodian by 60 days written notice to the other, sent by registered mail.
If notice of termination is given, the Client shall, within 30 days following
the giving of such notice, deliver to the Custodian a statement in writing
specifying the successor custodian or other person to whom the Custodian shall
transfer the Property. In either event, the Custodian, subject to the
satisfaction of any lien it may have, shall transfer the Property to the person
so specified. If the Custodian does not receive such statement the Custodian,
at its election, may transfer the Property to a bank or trust company
established under the laws of the United States or any state thereof to be held
and disposed of pursuant to the provisions of this Agreement or may continue to
hold the Property until such a statement is delivered to the Custodian. In such
event the Custodian shall be entitled
6
<PAGE>
to fair compensation for its services during such period as the Custodian
remains in possession of any Property and the provisions of this Agreement
relating to the duties and obligations of the Custodian shall remain in full
force and effect; provided, however, that the Custodian shall have no obligation
to extend any credit to settle any transactions in Securities for the Accounts.
The provisions of Sections 15 and 16 shall survive termination of this
Agreement.
18. Investment Advice. The Custodian shall not supervise,
-----------------
recommend or advise the Client relative to the investment, purchase, sale,
retention or other disposition of any Property held under this Agreement.
19. Confidentiality. (a) The Custodian, its agents and employees
---------------
shall maintain and shall cause each Subcustodian to maintain the confidentiality
of information concerning the Property held in the Client's account, including
in dealings with affiliates of the Custodian. In the event the Custodian or any
Subcustodian is requested or required to disclose any confidential information
concerning the Property, the Custodian shall, to the extent practicable and
legally permissible, promptly notify the Client of such request or requirement
so that the Client may seek a protective order or waive any objection to the
Custodian's or such Subcustodian's compliance with this Section 19. In the
absence of such a waiver, if the Custodian or such Subcustodian is compelled, in
the opinion of its counsel, to disclose any confidential information, the
Custodian or such Subcustodian may disclose such information to such persons as,
in the opinion of counsel, is so required.
(b) The Client shall maintain the confidentiality of, and not provide
to any third parties absent the written permission of the Custodian, any
computer software, hardware or communications facilities made available to the
Client or its agents by the Custodian.
20. Notices. Any notice or other communication from the Client to
-------
the Custodian, unless otherwise provided by this Agreement or the Client
Services Guide, shall be sent by certified or registered mail to Morgan Stanley
Trust Company, One Pierrepont Plaza, Brooklyn, New York, 11201, Attention:
President, and any notice from the Custodian to the Client is to be mailed
postage prepaid, addressed to the Client at the address appearing below, or as
it may hereafter be changed on the Custodian's records in accordance with
written notice from the Client.
21. Assignment. This contract may not be assigned by either party
----------
without the prior written approval of the other.
22. Miscellaneous. (a) This Agreement shall bind the successors and
-------------
assigns of the Client and the Custodian.
(b) This Agreement shall be governed by and construed in accordance
with the internal laws of the State of New York without regard to its conflicts
of law rules and to the extent not preempted by federal law. The Custodian and
the Client hereby irrevocably submit to the exclusive jurisdiction of any New
York State court or any United States District Court located in the State of New
York in any action or proceeding arising out of this Agreement and hereby
irrevocably waive any objection to the venue of any such action or proceeding
brought in any such court or any defense of an inconvenient forum.
7
<PAGE>
In witness whereof, the parties hereto have set their hands as of the date
first above written.
MORGAN STANLEY UNIVERSAL FUNDS, INC.
By
----------------------
Name:
Title:
Address for record: c/o Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
Attention: Secretary of Morgan Stanley
Universal Funds, Inc.
Accepted:
MORGAN STANLEY TRUST COMPANY
By
---------------------------
Authorized Signature
8
<PAGE>
APPENDIX 1
Account Documentation
REQUIRED DOCUMENTATION FOR CORE CUSTODIAL SERVICES (INCLUDING TAX
- -----------------------------------------------------------------
RECLAIMS):
CUSTODY AGREEMENT
ACKNOWLEDGMENT OF RECEIPT OF CLIENT SERVICES GUIDE
(INCLUDING APPENDICES)
FEE SCHEDULE/BILLING GUIDE
GENERAL ACCOUNT INFORMATION
US TAX AUTHORITY DOCUMENTATION
LOCAL TAX OFFICE LETTER / APPLICATION LETTER
(NON-UNITED STATES-RESIDENT BENEFICIAL OWNERS, ONLY)
FORM 6166 / REQUEST FOR FOREIGN CERTIFICATION FORM
(UNITED STATES-RESIDENT BENEFICIAL OWNERS, ONLY)
CERTIFICATION OF BENEFICIAL OWNERSHIP, LEGAL NAME, LEGAL RESIDENCY, TAX
STATUS AND TAX IDS
TAX RECLAIM POWER OF ATTORNEY
PREVIOUS TAX RECLAIM FILING INFORMATION
(PREVIOUS FILERS, ONLY)
UK TAX AUTHORITY DOCUMENTATION
SOPHISTICATED INVESTOR (ACCREDITED INVESTOR) LETTER
(UNITED STATES-RESIDENT BENEFICIAL OWNERS, ONLY)
DOCUMENTATION THAT IS REQUIRED FROM AN ENTITY CLASSIFIED AS TAX-EXEMPT BY
- -------------------------------------------------------------------------
ITS LOCAL TAX AUTHORITY:
- -----------------------
UK FORM 4338
(EXEMPT NON-UNITED KINGDOM-RESIDENT BENEFICIAL OWNERS, ONLY)
UK FORM 309A
(EXEMPT UNITED STATES-RESIDENT BENEFICIAL OWNERS, ONLY)
9
<PAGE>
FOREIGN EXEMPTION LETTERS / APPLICATION FOR AUSTRALIAN EXEMPTION LETTER
(EXEMPT BENEFICIAL OWNERS, ONLY)
DOCUMENTATION THAT IS REQUIRED ONLY IF YOU WILL USE THE PROXY VOTING SERVICE:
- -----------------------------------------------------------------------------
VOTING POWER OF ATTORNEY
DOCUMENTATION THAT IS REQUIRED ONLY IF YOU WILL DEAL IN CERTAIN SECURITIES:
- --------------------------------------------------------------------------
JGB INDEMNIFICATION LETTER
KOREAN SECURITIES POWER OF ATTORNEY
NEW ZEALAND 'APPROVED ISSUER LEVY' LETTER
SPANISH POWER OF ATTORNEY WITH APOSTILE
10
<PAGE>
APPENDIX 2
Client Accounts
Account Name Account Number Account Mnemonic
- ------------ -------------- ----------------
1. Emerging Markets Equity Portfolio 00041129 MSUF
2.
3.
4.
5.
6.
7.
8.
9.
10.
11
<PAGE>
APPENDIX 3
Part I - Authorized Signatures
The Custodian is directed to accept and act upon Authorized Instructions
received from any of the following persons or entities:
Telephone/ Authorized
Name Organization Title Fax Signature
- ----------------- ------ ---- ---------
Authorized by: ___________________________
12
<PAGE>
Part II - System User ID numbers
The Custodian is directed to accept and act upon Authorized Instructions
transmitted electronically and identified with the following mnemonics and
system user ID numbers for the following activities:
Work Station Account Workstation Sessions
User I.D. Mnemonic Number TE TCC SL FE CM MA TD
- --------- -------- ------ -- --- -- -- -- -- --
Workstation Session Codes
- -------------------------
TE Trade Entry
TCC Trade Cancel/Correct
SL Securities Lending
FE Foreign Exchange
CM Cash Movement
MA Mass Authorization
TD Time Deposit
13
<PAGE>
EXHIBIT A
Subcustodians
<TABLE>
<CAPTION>
Country Sub-Custodian
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Argentina Citibank N.A.
Australia Westpac Banking Corporation
Austria Creditanstalt-Bankverein
Bangladesh Standard Chartered Bank
Belgium Bank Brussels Lambert S.A.
Botswana Barclays Bank of Botswana Ltd.
Brazil Banco de Boston
Canada The Toronto-Dominion Bank
Chile Citibank N.A.
China Hongkong and Shanghai Banking Corporation
Colombia Cititrust S.A.
Cyprus Barclays Bank PLC
Czech Republic JNG Bank N.V.
Denmark Den Danske Bank
Ecuador Citibank N.A.
Egypt Citibank N.A.
Finland Merita Bank
France Banque Indosuez
Germany Dresdner Bank AG
Ghana Barclays Bank of Ghana Ltd.
Greece Citibank N.A.
Hong Kong Hongkong and Shanghai Banking Corporation
Hungary Citibank Budapest Ra
India Standard Chartered Bank
India Hongkong and Shanghai Banking Corporation
India State Bank of India/Stock Holding Corporation of India Limited
India MSTC Mumbai Branch
Indonesia Hongkong and Shanghai Banking Corporation
Ireland Allied Irish Bank plc
Israel Bank Leumi
Italy Barclays Bank PLC
Japan The Bank of Tokyo-Mitsubishi Limited
Japan Morgan Stanley Japan Limited*
Jordan Arab Bank plc
Kenya Barclays Bank of Kenya, Ltd.
Korea Standard Chartered Bank
Luxembourg Bank Brussels Lambert S.A.
Malaysia OCBC Bank (Malaysia) Berbad
</TABLE>
*Not an eligible foreign custodian under Rule 17f-5
14
<PAGE>
Exhibit A
SUBCUSTODIANS
<TABLE>
<CAPTION>
Country Sub-Custodian
- --------------------------------------------------------------------------------
<S> <C>
Mauritius Hongkong and Shanghai Banking Corporation
Mexico Citibank Mexico S.A.
Morocco Banque Commerciale du Maroc
Netherlands ABN AMRO Bank N.V.
New Zealand ANZ Banking Group (New Zealand) Limited
Norway Den Norske Bank
Pakistan Standard Chartered Bank
Papua New Guinea Westpac Banking Corporation
Peru Citibank N.A.
Philippines Hongkong and Shanghai Banking Corporation
Poland Citibank Poland S.A.
Portugal Banco Comercial Portugues
Russia Credit Suisse (Moscow) Ltd.
Singapore Oversea-Chinese Banking Corporation Limited
Slovakia ING Bank N.V.
South Africa First National Bank of Southern Africa, Ltd.
Sapin Banco Santander
Sri Lanka Hongkong and Shanghai Banking Corporation
Swaziland Barclays Bank of Swaziland Ltd.
Sweden Svenska Handelsbanken
Switzerland Bank Leu Limited
Taiwan Hongkong and Shanghai Banking Corporation
Thailand Standard Chartered Bank
Tunisia Banque Internationale Arabe de Tunisie*
Turkey Citibank N.A.
UK Barclays Bank PLC
USA Chase Manhattan Bank
Uruguay Citibank N.A.
Venezuela Citibank N.A.
Zambia Barclays Bank of Zambia Ltd.
Zimbabwe Barclays Bank of Zimbabwe Ltd.
</TABLE>
*Not an eligible foreign custodian under Rule 17f-5
<PAGE>
APPENDIX A
Notwithstanding any other provisions of this Agreement, the following
definitions, provisions and acknowledgment shall apply with respect to Russian
securities.
a. Definitions:
-----------
(1) "Registrar Company" shall mean any entity providing share
registration services.
(2) "Register Contract" shall mean a contract between Subcustodian and a
Registrar Company (and as the same may be amended from time to time)
containing, inter alia, the contractual provisions described in
Paragraph(b)(5) below.
(3) "Share Extract" shall mean an extract of its share registration books
issued by a Registrar Company indicating ownership of a security.
b. Provisions:
----------
(1) No payment shall be made and no instructions for payment shall be
sent for securities prior to (i) the issuance by the Registrar
Company of the Share Extract relating to such securities and
verification of its validity by Subcustodian or (ii) confirmation
from Subcustodian specifying that the securities were properly
recorded by the Registrar Company and that the Registrar Company was
unwilling to issue a Share Extract.
(2) Subcustodian shall maintain custody of all Share Extracts (or
Confirmations) relating to securities.
(3) Delivery of securities may be made in accordance with the customary
or established securities trading or securities processing practices
and procedures in Russia in existence at the time. Delivery of
securities may also be made in any manner specifically required by
Authorized Instructions acceptable to MSTC.
(4) Subcustodian shall promptly notify MSTC of any loss of securities or
cash. Subcustodian shall not assume responsibility for, and shall not
be liable for, any action or inaction of any Registrar Company;
provided, however, Subcustodian shall use reasonable efforts to
enforce the Registrar Contracts.
<PAGE>
(5) Subcustodian shall use reasonable efforts to enter into a Registrar
Contract with each Registrar Company as agreed with MSTC. Each Registrar
Contract shall contain substantially the following protective conditions:
a. Regular Share Confirmations. Each contract will establish
---------------------------
Subcustodian's right to conduct regular share confirmations on behalf of
Subcustodian's clients. In conducting these share confirmations,
Subcustodian shall request either a duplicate share extract or some other
sufficient evidence of verification and will determine if Subcustodian's
records correlate with those of the Registrar Company. For at least the
first two years following Subcustodian's first use of a Registrar,
Subcustodian shall conduct these share confirmations on at least a
quarterly basis, although thereafter they may be conducted on a less
frequent basis as agreed with MSTC.
b. Prompt Re-registrations. Registrar Companies will be obligated to
-----------------------
affect re-registrations within 72 hours of receiving the necessary
documentation.
c. Use of Nominee Name. Each Registrar Contract shall establish
-------------------
Subcustodian's right to hold shares not held directly in the beneficial
owner's name in the name of a Subcustodian or Morgan Stanley nominee.
d. Auditor Verification. Each Registrar Contract will establish the
--------------------
right of Subcustodian to obtain direct access to the share register for the
independent auditors of each Subcustodian client.
e. Specification of Registrar Company's Responsibilities and Liabilities.
---------------------------------------------------------------------
In addition to setting forth the Registrar Company's responsibilities with
regard to corporate actions and other distributions, the Registrar
Company's liabilities, as established under the regulations applicable to
the share registration system, will be specified. The Registrar Contract
also will delineate the procedures for making a claim against and receiving
compensation from the Registrar Company in the event a loss is incurred.
(6) Subcustodian shall monitor each Registrar Company with which it has
concluded Registrar Contracts as well as each Registrar Company of issuers
in which MSTC has notified Subcustodian of investor interest and shall
promptly advise MSTC via authenticated SWIFT when Subcustodian has actual
knowledge of the occurrence of any one or more of the following events with
respect to a Registrar Company:
(a) a Registrar Company has eliminated the name of a shareholder from a
register or otherwise altered the shareholder's interest and
2
<PAGE>
that shareholder alleges that such elimination or alteration was
unlawful;
(b) a Registrar Company informs Subcustodian that it is no longer
able to materially comply with the protective provisions of the
Registrar Contract, or a Registrar Company has engaged in
conduct that indicates it will not materially comply with these
protective provisions:
(c) a Registrar Company has refused to re-register shares in the
name of a purchaser and the purchaser or seller has alleged that
such refusal was improper or unlawful;
(d) A Registrar Company holds for its own account securities of an
issuer for which it acts as registrar; and
(e) Subcustodian determines that any Registrar Company has
materially breached its Registrar Contract and such Registrar
Company has failed to cure such a breach within a reasonable
time.
(7) Subcustodian will maintain a list of Registrar Companies with which it
has entered into Registrar Contracts.
(8) Where an MSTC client is considering investing in the Russian securities
of an issuer as to which Subcustodian does not have a Registrar Contract
with the issuer's Registrar Company, MSTC may request that Subcustodian
consider whether it would be willing to attempt to enter into such a
Registrar Contract and Subcustodian shall advise MSTC of its willingness
to do so. Where Subcustodian has agreed to make such an attempt,
Subcustodian will advise MSTC of the occurrence of any one or more of
the events described in items (a)-(d) in subparagraph (6) above of which
Subcustodian has actual knowledge.
(9) With respect to Registrar Companies with which Subcustodian has entered
into Registrar Contracts. Subcustodian will advise MSTC of the
occurrence of any one or more of the events described in subparagraph
(6) above of which Subcustodian has actual knowledge.
(10) MSTC acknowledges that Subcustodian may not be able, in given cases and
despite its reasonable efforts, to obtain a Share Extract from a
Registrar Company and Subcustodian shall not be liable in any such event
including with respect to any losses resulting from such failure.
3
<PAGE>
(11) Subject to the cooperation of a Registrar Company, for at least
the first two years following Subcustodian's first use of a
Registrar Company, Subcustodian shall conduct share
confirmations on at least a quarterly basis, although thereafter
confirmations may be conducted on a less frequent basis as
agreed with MSTC.
(12) Subcustodian shall prepare a quarterly report identifying: (i)
any concerns it has regarding the Russian share registration
system that should be brought to the attention of MSTC's
clients; (ii) the steps Subcustodian has taken during the
reporting period to ensure that MSTC's clients interests
continue to be approximately recorded; and (iii) a cumulative
list of all Registrar Companies that have been the subject of
any of the events described in subparagraph (5) above.
c. Client's Acknowledgement with respect to Russian Bonds:
------------------------------------------------------
The Client understands that Russian law currently requires that Russian
Ministry of Finance Bonds (the "Bonds") be held with a Russian resident
institution authorized by the Central Bank of Russia as a depository for
Russian securities. The Custodian's Subcustodian in Russia currently
does not custody the Bonds. The majority of market participants settle
and hold Russian Ministry of Finance Bonds with Rosvneshtorgbank.
However, Rosvneshtorgbank is not a Subcustodian (nor is it an "eligible
foreign custodian" under Rule 17f-5) and the Custodian is not
responsible for any acts or omissions of Rosvneshtorgbank.
<PAGE>
EXHIBIT-99.B9(a)
MSAM ADMINISTRATION AGREEMENT
Agreement dated as of the 9th day of September, 1996 by and between
MORGAN STANLEY UNIVERSAL FUNDS, INC., a Maryland corporation (the "Fund") and
MORGAN STANLEY ASSET MANAGEMENT INC., a Delaware Corporation ("MSAM").
WHEREAS, the Fund has filed a Registration Statement on Form N-1A to
register as an investment company under the Investment Company Act of 1940, as
amended (the "1940 Act") and to offer and sell shares of its series of stock
(each series, a "Portfolio") under the Securities Act of 1933, as amended (the
"1933 Act");
WHEREAS, the Board of Directors of the Fund may from time to time
designate or classify additional Portfolios and classes of shares of such
Portfolios or redesignate or reclassify existing Portfolios and classes of
shares of such Portfolios and cause the shares of such Portfolios and classes to
be registered under the 1933 Act; and
WHEREAS, the Fund desires to retain MSAM to render certain management,
administrative, transfer agency, dividend disbursing and other services to
certain Portfolios of the Fund, and MSAM is willing to render such services;
<PAGE>
NOW, THEREFORE, the parties hereto, intending to be legally bound
hereby, agree as follows:
1. Appointment of Administrator
----------------------------
The Fund hereby appoints MSAM to act as administrator to the
Portfolios of the Fund as set forth on SCHEDULE A attached hereto (the "MSAM
Portfolios") for the period and on the terms set forth in this Agreement. In
connection therewith, MSAM accepts such appointment and agrees to render the
services and provide, at its own expense, the office space, furnishings and
equipment and the personnel required by it to perform the services on the terms
and for the compensation herein provided. The parties hereto agree that MSAM may
render and provide the services described herein directly or through the
services of third parties. In connection with such appointment, the Fund will
deliver to MSAM copies of each of the following documents and will deliver to it
all future amendments and supplements, if any:
A. A certified copy of the Articles of Incorporation of the Fund as
currently in effect and as supplemented or amended from time to time;
B. A certified copy of the Fund's By-Laws as currently in effect and
as amended from time to time;
<PAGE>
C. A copy of the resolution of the Fund's Board of Directors
authorizing this Agreement;
D. Specimens of all forms of outstanding and new stock certificates
of the MSAM Portfolios, if any, in the forms approved from time to time by the
Board of Directors of the Fund with a certificate of the Secretary of the Fund
as to such approval;
E. The Fund's registration statement on Form N-1A as filed with, and
declared effective by, the U.S. Securities and Exchange Commission, and all
amendments thereto;
F. Each resolution of the Board of Directors of the Fund authorizing
the original issue of its shares of the MSAM Portfolios;
G. Certified copies of the resolutions of the Fund's Board of
Directors authorizing: (1) certain persons to give instructions to the Fund's
Custodian(s) pursuant to the Fund's custody agreements and (2) certain persons
to sign checks and pay expenses on behalf of the Fund.
H. A copy of each of the Fund's investment advisory agreements as
currently in effect and as amended from time to time.
<PAGE>
I. A copy of each of the Fund's custody agreements as currently in
effect and as amended from time to time.
J. Such other certificates, documents or opinions which MSAM may, in
its reasonable discretion, deem necessary or appropriate in the proper
performance of its duties hereunder.
2. Representation and Warranties of MSAM
-------------------------------------
MSAM represents and warrants to the Fund that:
A. It is a limited liability partnership, duly organized and
existing in good standing under the laws of Pennsylvania.
B. It is duly qualified to carry on its business in the State of New
York.
C. It is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into and perform the services contemplated in
this Agreement.
D. All requisite corporate proceedings have been taken to authorize
it to enter into and perform this Agreement.
<PAGE>
E. It has and will continue to have and maintain, directly or
through third parties, the necessary facilities, equipment and personnel to
perform its duties and obligations under this Agreement.
3. Authorized Shares
-----------------
The Fund certifies to MSAM that (i) the Fund is authorized to issue
the number of shares, par value $0.001 per share, of common stock ("shares"), as
set forth in the Articles of Incorporation of the Fund, as currently in effect
and as supplemented or amended from time to time; (ii) the Board of Directors
has the power to classify or designate or reclassify or redesignate its unissued
shares of stock, from time to time, into one or more series of shares or
Portfolios and each series of shares or Portfolio into one or more classes of
shares; and (iii) the Fund will initially offer shares of more than one
Portfolio.
4. Services Provided by MSAM
-------------------------
MSAM shall discharge, directly or through third parties, the following
responsibilities subject to the control of the Fund's Board of Directors, and in
compliance with the objectives, policies and limitations set forth in the Fund's
registration statement, By-Laws and applicable laws and regulations.
<PAGE>
A. General Administration. Under the direction of the Fund's Board
----------------------
of Directors, MSAM shall manage, administer, and conduct all of the general
business activities of the MSAM Portfolios other than those that have been
contracted to third parties by the Fund. MSAM shall, directly or through third
parties, provide the personnel and facilities necessary to perform such general
business activities under the supervision of the Fund's Board of Directors and
executive officers.
B. Accounting. MSAM shall, directly or through third parties,
----------
provide the following accounting services to the MSAM Portfolios:
1) Maintenance of the books and records and accounting controls for
the MSAM Portfolios' assets, including records of all securities
transactions;
2) Daily calculation of the net asset value for each of the MSAM
Portfolios;
3) Accounting for dividends and interest received and distributions
made by each of the MSAM Portfolios;
4) Preparation and filing of the MSAM Portfolios' U.S. tax returns
and annual and semi-annual reports on Form N-SAR;
<PAGE>
5) The production of transaction data, financial reports and such
other periodic and special reports as the Board of Directors of the
MSAM Portfolios may reasonably request;
6) The preparation of financial statements for the annual and semi-
annual reports and other shareholder communications;
7) Liaison with the MSAM Portfolios' independent public accountants;
8) Monitoring and administration of arrangements with the MSAM
Portfolios' custodian and depository banks; and
9) Maintenance of (but not the payment for) the fidelity bond
required to be maintained under the 1940 Act and preparation of the
filings required in connection therewith.
C. Transfer Agent. The Fund hereby directs MSAM to be responsible
--------------
for the appointment of a transfer agent for the MSAM Portfolios (the "MSAM
Transfer Agent") and MSAM agrees to act in such capacity. In connection with
such appointment, the MSAM Transfer Agent shall:
1) Maintain records showing for each shareholder of the MSAM
Portfolios the following:
<PAGE>
a) Name, address and tax identifying number (if applicable);
b) Number of shares of each MSAM Portfolio that is held;
c) Historical information including dividends paid and date and
price of all transactions, including individual purchases and
redemptions; and
d) Any dividend reinvestment order, application, dividend
address and correspondence relating to the current maintenance of
the account.
2) Record the issuance of shares of each MSAM Portfolio and notify
the Fund in case any proposed issuance of shares by the MSAM
Portfolios shall result in an over-issuance as identified by SECTION
8-104(2) of the Uniform Commercial Code and in case any issuance
would result in such an over-issuance, shall refuse to countersign and
issue, and/or credit, said shares. Except as specifically agreed in
writing, MSAM and any transfer agent appointed by MSAM shall have no
obligation when countersigning and issuing and/or crediting shares, to
take cognizance of any other laws relating to the issue and sale of
such shares except insofar as policies and procedures of the Stock
Transfer Association recognize such laws.
3) Process all orders for the purchase of shares of each MSAM
Portfolio in accordance with the Fund's current registration
statement. Upon receipt of any
<PAGE>
check or other payment for purchase of shares of the MSAM Portfolios
from an investor, the MSAM Transfer Agent will (i) stamp the order
with the date of receipt, (ii) determine the amounts thereof due the
MSAM Portfolios, and (iii) notify the MSAM Portfolios of such
determination and deposit, such notification to be given on a daily
basis of the total amounts determined and deposited to said account
during such day. The MSAM Transfer Agent shall then credit the share
account of the investor with the number of shares to be purchased
according to the price of the MSAM Portfolio's shares in effect for
purchases made on the date such payment is received as set forth in
the Fund's then-current prospectus and shall promptly mail a
confirmation of said purchase to the investor, all subject to any
instructions that the Fund may give to MSAM or the MSAM Transfer Agent
with respect to the timing or manner of acceptance of orders for
shares relating to payments so received by it.
4) Receive and stamp with the date of receipt all requests for
redemptions of shares held in certificate or non-certificate form, and
shall process said redemption requests as follows:
a) If such certificate or redemption request complies with the
applicable standards approved by the Fund, MSAM or the MSAM
Transfer Agent shall on each business day notify the Fund of the
total number of shares presented and covered by such requests
received by MSAM or the MSAM Transfer Agent on such day;
<PAGE>
b) On or prior to the seventh calendar day succeeding any such
request for redemption, or such shorter period of time as may be
required by applicable law, MSAM or the MSAM Transfer Agent shall
notify the Custodian, subject to instructions from the Fund, to
transfer monies to such account as designated by MSAM or the MSAM
Transfer Agent for such payment to the redeeming shareholder of
the applicable redemption or repurchase price; and
c) If any such certificate or request for redemption does not
comply with applicable standards, MSAM or the MSAM Transfer Agent
shall promptly notify the investor of such fact, together with
the reason therefore, and shall effect such redemption at the
MSAM Portfolio's price next determined after receipt of documents
complying with said standards or, at such other time as the Fund
shall so direct.
5) Acknowledge all correspondence from shareholders relating to
their share accounts and undertake such other shareholder
correspondence as may from time to time be mutually agreed upon.
6) Process redemptions, exchanges and transfers of MSAM Portfolio
shares upon telephone instructions from qualified shareholders in
accordance with the procedures set forth in the Fund's then-current
prospectus. MSAM and any transfer agent appointed by MSAM shall be
permitted to act upon the instruction
<PAGE>
of any person by telephone to redeem, exchange and/or transfer MSAM
Portfolio shares from any account for which such services have been
authorized. In accordance with SECTION 7 herein, the Fund hereby
agrees to indemnify and hold MSAM and any transfer agent appointed by
MSAM harmless against all losses, costs or expenses, including
attorney fees, suffered or incurred by MSAM and any transfer agent
appointed by MSAM directly or indirectly as a result of (i) taping the
telephone conversation of any shareholder, or (ii) relying on the
telephone instructions of any person acting on behalf of a shareholder
account for which telephone services have been authorized.
D. Recording of Transfer. A transfer agent duly appointed by MSAM
---------------------
is authorized to transfer on the records of the Fund maintained by it, shares
represented by certificates, as well as issued shares held in non-certificate
form, upon the surrender to it of the certificate or in the case of non-
certificated shares, comparable transfer documents in proper form for transfer,
and upon cancellation thereof to countersign and issue new certificates or other
document of ownership for a like amount of stock and to deliver the same
pursuant to the transfer instructions.
E. Stock Certificates. In the event one or more shareholders of any
------------------
MSAM Portfolio requests certificates representing the shares of such shareholder
or shareholders, the Fund shall supply any transfer agent appointed by MSAM with
a sufficient supply of continuous form blank stock certificates for each of the
MSAM Portfolios to meet such requests for certificates. Such blank stock
certificates shall be properly signed, manually or by facsimile, as
<PAGE>
authorized by the Fund, and shall bear the Fund's seal or facsimile thereof; and
notwithstanding the death, resignation or removal of any officers of the Fund
authorized to sign certificates of stock, the MSAM Transfer Agent may, until
otherwise directed by the Fund or MSAM, continue to countersign certificates
which bear the manual or facsimile signature of such officer.
F. Issue of Share Certificates. If a shareholder of any MSAM
---------------------------
Portfolio requests a certificate representing his shares, the MSAM Transfer
Agent, will countersign and mail by first class mail, a share certificate to the
investor at his address as set forth on the transfer books of the Fund.
G. Returned Checks. In the event that any check or other order for
---------------
the payment of money is returned unpaid for any reason, MSAM or a third party
appointed by MSAM will take such steps, including redepositing said check for
collection or returning said check to the investor, as MSAM or a third party
appointed by MSAM may, at its discretion, deem appropriate, or as the Fund may
instruct.
H. Dividend Tax Reporting and Withholding. MSAM or a third party
--------------------------------------
appointed by MSAM will prepare, file with the U.S. Internal Revenue Service and
mail to shareholders of the MSAM Portfolios such returns for reporting payment
of dividends and distributions as are required by applicable laws to be so filed
and/or mailed and MSAM or a third party appointed by MSAM shall withhold such
sums as are required to be withheld under applicable U.S. Federal income tax
laws, rules and regulations.
<PAGE>
I. Proxies. MSAM or a third party appointed by MSAM shall mail
-------
proxy statements, proxy cards and other proxy materials supplied to it by the
Fund and shall receive, examine and tabulate returned proxies. MSAM or a third
party appointed by MSAM shall make interim reports of the status of such
tabulation to the Fund upon request, and shall certify the final results of the
tabulation.
J. Dividend Disbursing. MSAM or a third party appointed by MSAM
-------------------
shall act as Dividend Disbursing Agent for each of the MSAM Portfolios, and, as
such, shall prepare and mail checks or credit income and capital gain payments
to shareholders. The Fund shall advise MSAM or a third party appointed by MSAM
of the declaration of any dividend or distribution and the record and payable
date thereof at least five (5) days prior to the record date. MSAM or a third
party appointed by MSAM shall, on or before the payment date of any such
dividend or distribution, notify the Fund's custodians of the estimated amount
required to pay any portion of said dividend or distribution which is payable in
cash, and on or before the payment date of such distribution, the Fund shall
instruct its custodians to make available to MSAM or a third party appointed by
MSAM sufficient funds for the cash amount to be paid out. If an MSAM Portfolio
shareholder is entitled to receive additional shares by virtue of any such
distribution or dividend, appropriate credits will be made to his account and/or
certificates delivered where requested. An MSAM Portfolio shareholder not
electing issuance of certificates will receive a confirmation from MSAM or a
third party appointed by MSAM indicating the number of shares credited to his
account as a result of the reinvested dividend or distribution.
<PAGE>
K. Other Information. MSAM shall, directly or through third
-----------------
parties, furnish for the Fund such other information as is required by law,
including but not limited to shareholder lists for the MSAM Portfolios, and such
related statistical information as may be reasonably requested by the Fund.
5. Services To Be Obtained Independently By The Fund
-------------------------------------------------
The following shall be provided to the Fund at no expense to MSAM
hereunder:
A. Organizational expenses;
B. Services of independent accountants;
C. Services of outside legal counsel (including such counsel's
review of the Fund's registration statement, proxy materials and other reports
and materials prepared by MSAM directly or through third parties under this
Agreement);
D. Any services contracted for by the Fund directly from parties
other than MSAM;
E. Trading operations and brokerage fees, commissions and transfer
taxes in connection with the purchase and sale of securities for its investment
portfolio;
<PAGE>
F. Taxes, insurance premiums and other fees and expenses applicable
to it operation;
G. Investment advisory services;
H. Costs incidental to any meetings of shareholders including, but
not limited to, legal and accounting fees, proxy filing fees and the
preparation, printing and mailing of any proxy materials;
I. Costs incidental to Directors' meetings, including fees and
expenses of Directors;
J. The salary and expenses of any officer or employee of the Fund;
K. Services of the Fund's custodians and depository banks, and all
services related thereto;
L. Costs incidental to the preparation, printing and distribution of
the Fund's registration statement and any amendments thereto, and shareholder
reports;
M. All registration fees and filing fees required under the
securities laws of the United States and state regulatory authorities; and
<PAGE>
N. Fidelity bond and Director's and Officers' liability insurance.
6. Prices, Charges and Instructions
--------------------------------
A. The Fund will pay to MSAM, as compensation for the services
provided and the expenses assumed pursuant to this Agreement, as agreed to in a
written fee schedule approved by the parties hereto (see SCHEDULE B). In
addition, MSAM, or third parties providing such services for the benefit of the
Fund through arrangements with MSAM, shall be reimbursed for the cost of any and
all forms, including blank checks and proxies, used by it in communicating with
shareholders of the MSAM Portfolios, or especially prepared for use in
connection with its obligations hereunder, as well as the cost of postage,
telephone, telex and telecopy used in communicating with shareholders of the
MSAM Portfolios and microfilm used each year to record the previous year's
transactions in shareholder accounts and computer tapes used for permanent
storage of records, permanent storage costs for hard copy Fund records and cost
of insertion of materials in mailing envelopes by outside firms. Prior to
ordering any forms in such supply as it estimates will be adequate for more than
two years' use, MSAM or any third party appointed by MSAM shall obtain the
written consent of the Fund. All forms and other supplies as described above
for which MSAM or any third party appointed by MSAM has received reimbursement
from the Fund shall be and remain the property of the Fund until used for the
Fund.
<PAGE>
B. At any time MSAM, and third parties providing such services for
the benefit of the Fund through arrangements with MSAM, may apply to any officer
of the Fund or officer of the Fund's investment adviser for instructions, and
may consult with legal counsel for the Fund, or its own outside legal counsel,
at the expense of the Fund, with respect to any matter arising in connection
with the services to be performed by MSAM or any third party appointed by MSAM
under this Agreement and MSAM and such third parties shall not be liable and
shall be indemnified by the Fund for any action taken or omitted by it in good
faith in reliance upon such instructions. In carrying out its duties hereunder,
MSAM and such third parties shall be protected and indemnified in acting upon
any paper or document believed by it to be genuine and to have been signed by
the proper person or persons and shall not be held to have notice of any change
of authority of any person, until receipt of written notice thereof from the
Fund. MSAM shall also be protected and indemnified, except where a stop order is
in effect, in recognizing stock certificates which MSAM reasonably believes to
bear the proper manual or facsimile signature of the officers of the Fund, and
the proper counter-signatures of any former transfer agent of the Fund.
7. Limitation of Liability and Indemnification
-------------------------------------------
A. MSAM shall be responsible hereunder for the performance of only
such duties as are set forth or contemplated herein or contained in instructions
given to it which are not contrary to this Agreement. MSAM shall have no
liability for any loss or damage resulting
<PAGE>
from the performance or non-performance of its duties hereunder unless solely
caused by or resulting from the gross negligence or willful misconduct of MSAM,
its officers and employees.
B. The Fund shall indemnify and hold MSAM, and third parties
providing services for the benefit of the Fund through arrangements with MSAM,
harmless from all loss, cost, damage and expense, including reasonable expenses
for counsel, incurred by such person resulting from any claim, demand, action or
proceeding arising out of or based upon the Fund's material breach of this
Agreement or material omission by the Fund in the performance of its duties
hereunder or under such arrangements with MSAM as to which the Fund has received
written notice, or as a result of acting upon any instructions reasonably
believed by any such person to have been executed by a duly authorized officer
of the Fund or of the Fund's investment advisers, provided that this
indemnification shall not apply to any such loss, cost, damage or expense
arising out of or based upon actions or omissions of MSAM, its officers,
employees or agents in cases of its or their own gross negligence or willful
misconduct.
C. The Fund will be entitled to participate at its own expense in
the defense, or, if it so elects, to assume the defense of any suit brought to
enforce any liability subject to the indemnification provided above, but, if the
Fund elects to assume the defense, such defense shall be conducted by counsel
chosen by the Fund. In the event the Fund elects to assume the defense of any
such suit and retain such counsel, MSAM or any of its affiliated persons or any
third parties providing services for the benefit of the Fund through
arrangements with MSAM, named as defendant or defendants in the suit, may retain
additional counsel but shall bear the fees and
<PAGE>
expenses of such counsel unless at such time the Fund specifically authorizes in
writing the retaining of such counsel at the Fund's expense.
D. No provisions of this Agreement shall be deemed to protect MSAM
or any of its directors, officers and/or employees, or any of its affiliated
persons or any third parties providing services for the benefit of the Fund
through arrangements with MSAM against liability to the Fund or its shareholders
to which it might otherwise be subject by reason of any fraud, willful
misfeasance or gross negligence in the performance of its or their' duties or
the reckless disregard of its or their obligations under this Agreement.
8. Confidentiality
---------------
MSAM agrees that, except as otherwise required by law or as necessary
in accordance with this Agreement, MSAM will keep confidential all records and
information in its possession relating to the Fund or its shareholders or
shareholder accounts and will not disclose the same to any person except at the
request or with the written consent of the Fund.
9. Compliance With Governmental Rules and Regulations
--------------------------------------------------
The Fund assumes full responsibility hereunder for complying with all
applicable requirements of the 1933 Act, the 1940 Act and the Securities
Exchange Act of 1934, as
<PAGE>
amended (the "1934 Act"), and any laws, rules and regulations of governmental
authorities having jurisdiction, except to the extent that MSAM specifically
assumes any such obligations under the terms of this Agreement.
MSAM shall, directly or through third parties, maintain and preserve
for the periods prescribed, such records relating to the services to be
performed by MSAM under this Agreement as are required pursuant to the 1940 Act
and the 1934 Act. All such records shall at all times remain the property of
the Fund, shall be readily accessible during normal business hours to each party
hereto, and shall be promptly surrendered upon the termination of this Agreement
or otherwise on written request. Records shall be surrendered in usable machine
readable form.
10. Status of MSAM
--------------
The services of MSAM to the Fund are not to be deemed exclusive, and
MSAM shall be free to render similar services to others. MSAM shall be deemed
to be an independent contractor hereunder and shall, unless otherwise expressly
provided herein or authorized by the Fund from time to time, have no authority
to act or represent the Fund in any way or otherwise be deemed an agent of the
Fund with respect to this Agreement.
11. Printed Matter Concerning the Fund or MSAM
------------------------------------------
<PAGE>
Neither the Fund nor MSAM shall, with respect to this Agreement,
publish or circulate any printed matter that contains any reference to the other
party without its prior written approval, excepting such printed matter as
refers in accurate terms to MSAM's appointment under this Agreement and except
as required by applicable laws.
12. Term, Amendment and Termination
-------------------------------
This Agreement may be modified or amended from time to time by mutual
agreement between the parties hereto. The Agreement shall remain in effect for
a period of one year from the date the Fund's registration statement on file
with the U.S. Securities and Exchange Commission becomes effective and shall
automatically continue in effect thereafter unless terminated by either party at
the end of such period or thereafter on 60 days' prior written notice to the
other party. Upon termination of the Agreement, the Fund shall pay to MSAM such
compensation as may be due under the terms hereof as of the date of such
termination. If, during the initial one-year period, either of the parties
hereto shall be in default in the performance of any of its duties and
obligations hereunder (the "Defaulting Party"), the other party hereto may give
written notice to the Defaulting Party and if such default shall not have been
remedied within 30 days after such written notice is given, then the party
giving such notice may terminate this Agreement by 90 days' written notice of
such termination to the Defaulting Party, but such termination shall not affect
any rights or obligations of either party arising from or relating to such
default under the terms hereof.
<PAGE>
13. Notices
-------
Any notice or other communication authorized or required by this
Agreement to be given to any party mentioned herein shall be sufficiently given
if addressed to such party and mailed postage prepaid or delivered to its
principal office.
14. Non-Assignability
-----------------
This Agreement shall not be assigned by any of the parties hereto
without the prior consent in writing of the other party.
15. Successors
----------
This Agreement shall be binding on and shall inure to the benefit of
the Fund and MSAM, and their respective successors.
16. Governing Law
-------------
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
<PAGE>
17. Counterparts
------------
This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original.
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be duly executed as of the day and year first above written.
ATTEST: MORGAN STANLEY
UNIVERSAL FUNDS, INC.
By_______________________________
Name: Name:
Title: Title:
ATTEST: MORGAN STANLEY ASSET
MANAGEMENT INC.
By_______________________________
Name: Name:
Title: Title:
<PAGE>
SCHEDULE A
TO
MSAM ADMINISTRATION AGREEMENT DATED AS OF SEPTEMBER 9, 1996
BY AND BETWEEN
MORGAN STANLEY UNIVERSAL FUNDS, INC.
and
MORGAN STANLEY ASSET MANAGEMENT INC.
PORTFOLIOS
1. Money Market Portfolio
2. Growth Portfolio
3. U.S. Real Estate Portfolio
4. Emerging Markets Debt Portfolio
5. Global Equity Portfolio
6. International Magnum Portfolio
7. Emerging Markets Equity Portfolio
8. Asian Equity Portfolio
<PAGE>
SCHEDULE B
TO
MSAM ADMINISTRATION AGREEMENT DATED AS OF SEPTEMBER 9, 1996
BY AND BETWEEN
MORGAN STANLEY UNIVERSAL FUNDS, INC.
and
MORGAN STANLEY ASSET MANAGEMENT INC.
FEE SCHEDULE
------------
For the services provided and the expenses assumed pursuant to the attached MSAM
Administration Agreement, Morgan Stanley Universal Funds, Inc. (the "Fund")
shall pay to Morgan Stanley Asset Management Inc. an annual fee, in monthly
installments, of .25% of the average daily net assets of each of the Portfolios
of the Fund.
<PAGE>
EXHIBIT-99.B9(b)
MAS ADMINISTRATION AGREEMENT
Agreement dated as of the 9th day of September, 1996 by and between
MORGAN STANLEY UNIVERSAL FUNDS, INC., a Maryland corporation (the "Fund") and
Miller Anderson & Sherrerd, LLP, a Pennsylvania limited liability partnership
("MAS").
WHEREAS, the Fund has filed a Registration Statement on Form N-1A to
register as an investment company under the Investment Company Act of 1940, as
amended (the "1940 Act") and to offer and sell shares of its series of stock
(each series, a "Portfolio") under the Securities Act of 1933, as amended (the
"1933 Act");
WHEREAS, the Board of Directors of the Fund may from time to time
designate or classify additional Portfolios and classes of shares of such
Portfolios or redesignate or reclassify existing Portfolios and classes of
shares of such Portfolios and cause the shares of such Portfolios and classes to
be registered under the 1933 Act; and
<PAGE>
WHEREAS, the Fund desires to retain MAS to render certain management,
administrative, transfer agency, dividend disbursing and other services to
certain Portfolios of the Fund, and MAS is willing to render such services;
NOW, THEREFORE, the parties hereto, intending to be legally bound
hereby, agree as follows:
1. Appointment of Administrator
----------------------------
The Fund hereby appoints MAS to act as administrator to the
Portfolios of the Fund as set forth on SCHEDULE A attached hereto (the "MAS
Portfolios") for the period and on the terms set forth in this Agreement. In
connection therewith, MAS accepts such appointment and agrees to render the
services and provide, at its own expense, the office space, furnishings and
equipment and the personnel required by it to perform the services on the terms
and for the compensation herein provided. The parties hereto agree that MAS may
render and provide the services described herein directly or through the
services of third parties. In connection with such appointment, the Fund will
deliver to MAS copies of each of the following documents and will deliver to it
all future amendments and supplements, if any:
A. A certified copy of the Articles of Incorporation of the Fund as
currently in effect and as supplemented or amended from time to time;
<PAGE>
B. A certified copy of the Fund's By-Laws as currently in effect and
as amended from time to time;
C. A copy of the resolution of the Fund's Board of Directors
authorizing this Agreement;
D. Specimens of all forms of outstanding and new stock certificates
of the MAS Portfolios, if any, in the forms approved from time to time by the
Board of Directors of the Fund with a certificate of the Secretary of the Fund
as to such approval;
E. The Fund's registration statement on Form N-1A as filed with, and
declared effective by, the U.S. Securities and Exchange Commission, and all
amendments thereto;
F. Each resolution of the Board of Directors of the Fund authorizing
the original issue of its shares of the MAS Portfolios;
G. Certified copies of the resolutions of the Fund's Board of
Directors authorizing: (1) certain persons to give instructions to the Fund's
Custodian(s) pursuant to the Fund's custody agreements and (2) certain persons
to sign checks and pay expenses on behalf of the Fund.
H. A copy of each of the Fund's investment advisory agreements as
currently in effect and as amended from time to time.
<PAGE>
I. A copy of each of the Fund's custody agreements as currently in
effect and as amended from time to time.
J. Such other certificates, documents or opinions which MAS may, in
its reasonable discretion, deem necessary or appropriate in the proper
performance of its duties hereunder.
2. Representation and Warranties of MAS
------------------------------------
MAS represents and warrants to the Fund that:
A. It is a corporation, duly organized and existing in good standing
under the laws of Delaware.
B. It is duly qualified to carry on its business in the State of New
York.
C. It is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into and perform the services contemplated in
this Agreement.
D. All requisite corporate proceedings have been taken to authorize
it to enter into and perform this Agreement.
<PAGE>
E. It has and will continue to have and maintain, directly or
through third parties, the necessary facilities, equipment and personnel to
perform its duties and obligations under this Agreement.
3. Authorized Shares
-----------------
The Fund certifies to MAS that (i) the Fund is authorized to issue
the number of shares, par value $0.001 per share, of common stock ("shares"), as
set forth in the Articles of Incorporation of the Fund, as currently in effect
and as supplemented or amended from time to time; (ii) the Board of Directors
has the power to classify or designate or reclassify or redesignate its unissued
shares of stock, from time to time, into one or more series of shares or
Portfolios and each series of shares or Portfolio into one or more classes of
shares; and (iii) the Fund will initially offer shares of more than one
Portfolio.
4. Services Provided by MAS
------------------------
MAS shall discharge, directly or through third parties, the following
responsibilities subject to the control of the Fund's Board of Directors, and in
compliance with the objectives, policies and limitations set forth in the Fund's
registration statement, By-Laws and applicable laws and regulations.
<PAGE>
A. General Administration. Under the direction of the Fund's Board of
----------------------
Directors, MAS shall manage, administer, and conduct all of the general
business activities of the MAS Portfolios other than those that have been
contracted to third parties by the Fund. MAS shall, directly or through third
parties, provide the personnel and facilities necessary to perform such general
business activities under the supervision of the Fund's Board of Directors and
executive officers.
B. Accounting. MAS shall, directly or through third parties,
----------
provide the following accounting services to the MAS Portfolios:
1) Maintenance of the books and records and accounting controls for
the MAS Portfolios' assets, including records of all securities
transactions;
2) Daily calculation of the net asset value for each of the MAS
Portfolios;
3) Accounting for dividends and interest received and distributions
made by each of the MAS Portfolios;
4) Preparation and filing of the MAS Portfolios' U.S. tax returns
and annual and semi-annual reports on Form N-SAR;
<PAGE>
5) The production of transaction data, financial reports and such
other periodic and special reports as the Board of Directors of the
MAS Portfolios may reasonably request;
6) The preparation of financial statements for the annual and semi-
annual reports and other shareholder communications;
7) Liaison with the MAS Portfolios' independent public accountants;
8) Monitoring and administration of arrangements with the MAS
Portfolios' custodian and depository banks; and
9) Maintenance of (but not the payment for) the fidelity bond
required to be maintained under the 1940 Act and preparation of the
filings required in connection therewith.
C. Transfer Agent. The Fund hereby directs MAS to be responsible
--------------
for the appointment of a transfer agent for the MAS Portfolios (the "MAS
Transfer Agent") and MAS agrees to act in such capacity. In connection with
such appointment, the MAS Transfer Agent shall:
1) Maintain records showing for each shareholder of the MAS
Portfolios the following:
a) Name, address and tax identifying number (if applicable);
b) Number of shares of each MAS Portfolio that is held;
<PAGE>
c) Historical information including dividends paid and date and
price of all transactions, including individual purchases and
redemptions; and
d) Any dividend reinvestment order, application, dividend
address and correspondence relating to the current maintenance of
the account.
2) Record the issuance of shares of each MAS Portfolio and notify
the Fund in case any proposed issuance of shares by the MAS Portfolios
shall result in an over-issuance as identified by SECTION 8-104(2) of
the Uniform Commercial Code and in case any issuance would result in
such an over-issuance, shall refuse to countersign and issue, and/or
credit, said shares. Except as specifically agreed in writing, MAS and
any transfer agent appointed by MAS shall have no obligation when
countersigning and issuing and/or crediting shares, to take cognizance
of any other laws relating to the issue and sale of such shares except
insofar as policies and procedures of the Stock Transfer Association
recognize such laws.
3) Process all orders for the purchase of shares of each MAS
Portfolio in accordance with the Fund's current registration
statement. Upon receipt of any check or other payment for purchase of
shares of the MAS Portfolios from an investor, the MAS Transfer
Agent will (i) stamp the order with the date of receipt, (ii)
determine the amounts thereof due the MAS Portfolios, and (iii)
notify the MAS Portfolios of such determination and deposit, such
notification to be given on a daily basis of the total amounts
determined and deposited to said account during such day. The MAS
<PAGE>
Transfer Agent shall then credit the share account of the investor
with the number of shares to be purchased according to the price of
the MAS Portfolio's shares in effect for purchases made on the date
such payment is received as set forth in the Fund's then-current
prospectus and shall promptly mail a confirmation of said purchase to
the investor, all subject to any instructions that the Fund may give
to MAS or the MAS Transfer Agent with respect to the timing or manner
of acceptance of orders for shares relating to payments so received by
it.
4) Receive and stamp with the date of receipt all requests for
redemptions of shares held in certificate or non-certificate form, and
shall process said redemption requests as follows:
a) If such certificate or redemption request complies with the
applicable standards approved by the Fund, MAS or the MAS
Transfer Agent shall on each business day notify the Fund of the
total number of shares presented and covered by such requests
received by MAS or the MAS Transfer Agent on such day;
b) On or prior to the seventh calendar day succeeding any such
request for redemption, or such shorter period of time as may be
required by applicable law, MAS or the MAS Transfer Agent shall
notify the Custodian, subject to instructions from the Fund, to
transfer monies to such account as
<PAGE>
designated by MAS or the MAS Transfer Agent for such payment to
the redeeming shareholder of the applicable redemption or
repurchase price; and
c) If any such certificate or request for redemption does not
comply with applicable standards, MAS or the MAS Transfer Agent
shall promptly notify the investor of such fact, together with
the reason therefore, and shall effect such redemption at the
MAS Portfolio's price next determined after receipt of documents
complying with said standards or, at such other time as the Fund
shall so direct.
5) Acknowledge all correspondence from shareholders relating to
their share accounts and undertake such other shareholder
correspondence as may from time to time be mutually agreed upon.
6) Process redemptions, exchanges and transfers of MAS Portfolio
shares upon telephone instructions from qualified shareholders in
accordance with the procedures set forth in the Fund's then-current
prospectus. MAS and any transfer agent appointed by MAS shall be
permitted to act upon the instruction of any person by telephone to
redeem, exchange and/or transfer MAS Portfolio shares from any account
for which such services have been authorized. In accordance with
SECTION 7 herein, the Fund hereby agrees to indemnify and hold MAS and
any transfer agent appointed by MAS harmless against all losses, costs
or expenses, including attorney fees, suffered or incurred by MAS and
any transfer agent appointed by MAS directly
<PAGE>
or indirectly as a result of (i) taping the telephone conversation of
any shareholder, or (ii) relying on the telephone instructions of any
person acting on behalf of a shareholder account for which telephone
services have been authorized.
D. Recording of Transfer. A transfer agent duly appointed by MAS
---------------------
is authorized to transfer on the records of the Fund maintained by it, shares
represented by certificates, as well as issued shares held in non-certificate
form, upon the surrender to it of the certificate or in the case of non-
certificated shares, comparable transfer documents in proper form for transfer,
and upon cancellation thereof to countersign and issue new certificates or other
document of ownership for a like amount of stock and to deliver the same
pursuant to the transfer instructions.
E. Stock Certificates. In the event one or more shareholders of any
------------------
MAS Portfolio requests certificates representing the shares of such shareholder
or shareholders, the Fund shall supply any transfer agent appointed by MAS with
a sufficient supply of continuous form blank stock certificates for each of the
MAS Portfolios to meet such requests for certificates. Such blank stock
certificates shall be properly signed, manually or by facsimile, as authorized
by the Fund, and shall bear the Fund's seal or facsimile thereof; and
notwithstanding the death, resignation or removal of any officers of the Fund
authorized to sign certificates of stock, the MAS Transfer Agent may, until
otherwise directed by the Fund or MAS, continue to countersign certificates
which bear the manual or facsimile signature of such officer.
<PAGE>
F. Issue of Share Certificates. If a shareholder of any MAS
---------------------------
Portfolio requests a certificate representing his shares, the MAS Transfer
Agent, will countersign and mail by first class mail, a share certificate to the
investor at his address as set forth on the transfer books of the Fund.
G. Returned Checks. In the event that any check or other order for
---------------
the payment of money is returned unpaid for any reason, MAS or a third party
appointed by MAS will take such steps, including redepositing said check for
collection or returning said check to the investor, as MAS or a third party
appointed by MAS may, at its discretion, deem appropriate, or as the Fund may
instruct.
H. Dividend Tax Reporting and Withholding. MAS or a third party
--------------------------------------
appointed by MAS will prepare, file with the U.S. Internal Revenue Service and
mail to shareholders of the MAS Portfolios such returns for reporting payment
of dividends and distributions as are required by applicable laws to be so filed
and/or mailed and MAS or a third party appointed by MAS shall withhold such
sums as are required to be withheld under applicable U.S. Federal income tax
laws, rules and regulations.
I. Proxies. MAS or a third party appointed by MAS shall mail proxy
-------
statements, proxy cards and other proxy materials supplied to it by the Fund and
shall receive, examine and tabulate returned proxies. MAS or a third party
appointed by MAS shall make interim reports of the status of such tabulation to
the Fund upon request, and shall certify the final results of the tabulation.
<PAGE>
J. Dividend Disbursing. MAS or a third party appointed by MAS
-------------------
shall act as Dividend Disbursing Agent for each of the MAS Portfolios, and, as
such, shall prepare and mail checks or credit income and capital gain payments
to shareholders. The Fund shall advise MAS or a third party appointed by MAS
of the declaration of any dividend or distribution and the record and payable
date thereof at least five (5) days prior to the record date. MAS or a third
party appointed by MAS shall, on or before the payment date of any such
dividend or distribution, notify the Fund's custodians of the estimated amount
required to pay any portion of said dividend or distribution which is payable in
cash, and on or before the payment date of such distribution, the Fund shall
instruct its custodians to make available to MAS or a third party appointed by
MAS sufficient funds for the cash amount to be paid out. If an MAS Portfolio
shareholder is entitled to receive additional shares by virtue of any such
distribution or dividend, appropriate credits will be made to his account and/or
certificates delivered where requested. An MAS Portfolio shareholder not
electing issuance of certificates will receive a confirmation from MAS or a
third party appointed by MAS indicating the number of shares credited to his
account as a result of the reinvested dividend or distribution.
K. Other Information. MAS shall, directly or through third parties,
-----------------
furnish for the Fund such other information as is required by law, including but
not limited to shareholder lists for the MAS Portfolios, and such related
statistical information as may be reasonably requested by the Fund.
5. Services To Be Obtained Independently By The Fund
-------------------------------------------------
<PAGE>
The following shall be provided to the Fund at no expense to MAS
hereunder:
A. Organizational expenses;
B. Services of independent accountants;
C. Services of outside legal counsel (including such counsel's
review of the Fund's registration statement, proxy materials and other reports
and materials prepared by MAS directly or through third parties under this
Agreement);
D. Any services contracted for by the Fund directly from parties
other than MAS;
E. Trading operations and brokerage fees, commissions and transfer
taxes in connection with the purchase and sale of securities for its investment
portfolio;
F. Taxes, insurance premiums and other fees and expenses applicable
to it operation;
G. Investment advisory services;
H. Costs incidental to any meetings of shareholders including, but
not limited to, legal and accounting fees, proxy filing fees and the
preparation, printing and mailing of any proxy materials;
<PAGE>
I. Costs incidental to Directors' meetings, including fees and
expenses of Directors;
J. The salary and expenses of any officer or employee of the Fund;
K. Services of the Fund's custodians and depository banks, and all
services related thereto;
L. Costs incidental to the preparation, printing and distribution of
the Fund's registration statement and any amendments thereto, and shareholder
reports;
M. All registration fees and filing fees required under the
securities laws of the United States and state regulatory authorities; and
N. Fidelity bond and Director's and Officers' liability insurance.
6. Prices, Charges and Instructions
--------------------------------
A. The Fund will pay to MAS, as compensation for the services
provided and the expenses assumed pursuant to this Agreement, as agreed to in a
written fee schedule approved by the parties hereto (see SCHEDULE B). In
addition, MAS, or third parties providing such services for the benefit of the
Fund through arrangements with MAS, shall be reimbursed for the cost of any and
<PAGE>
all forms, including blank checks and proxies, used by it in communicating with
shareholders of the MAS Portfolios, or especially prepared for use in
connection with its obligations hereunder, as well as the cost of postage,
telephone, telex and telecopy used in communicating with shareholders of the
MAS Portfolios and microfilm used each year to record the previous year's
transactions in shareholder accounts and computer tapes used for permanent
storage of records, permanent storage costs for hard copy Fund records and cost
of insertion of materials in mailing envelopes by outside firms. Prior to
ordering any forms in such supply as it estimates will be adequate for more than
two years' use, MAS or any third party appointed by MAS shall obtain the
written consent of the Fund. All forms and other supplies as described above
for which MAS or any third party appointed by MAS has received reimbursement
from the Fund shall be and remain the property of the Fund until used for the
Fund.
B. At any time MAS, and third parties providing such services for
the benefit of the Fund through arrangements with MAS, may apply to any officer
of the Fund or officer of the Fund's investment adviser for instructions, and
may consult with legal counsel for the Fund, or its own outside legal counsel,
at the expense of the Fund, with respect to any matter arising in connection
with the services to be performed by MAS or any third party appointed by MAS
under this Agreement and MAS and such third parties shall not be liable and
shall be indemnified by the Fund for any action taken or omitted by it in good
faith in reliance upon such instructions. In carrying out its duties hereunder,
MAS and such third parties shall be protected and indemnified in acting upon
any paper or document believed by it to be genuine and to have been signed by
the proper person or persons and shall not be held to have notice of any change
of authority of any person, until receipt of written notice thereof from the
Fund. MAS shall also be protected and
<PAGE>
indemnified, except where a stop order is in effect, in recognizing stock
certificates which MAS reasonably believes to bear the proper manual or
facsimile signature of the officers of the Fund, and the proper counter-
signatures of any former transfer agent of the Fund.
7. Limitation of Liability and Indemnification
-------------------------------------------
A. MAS shall be responsible hereunder for the performance of only
such duties as are set forth or contemplated herein or contained in instructions
given to it which are not contrary to this Agreement. MAS shall have no
liability for any loss or damage resulting from the performance or non-
performance of its duties hereunder unless solely caused by or resulting from
the gross negligence or willful misconduct of MAS, its officers and employees.
B. The Fund shall indemnify and hold MAS, and third parties
providing services for the benefit of the Fund through arrangements with MAS,
harmless from all loss, cost, damage and expense, including reasonable expenses
for counsel, incurred by such person resulting from any claim, demand, action or
proceeding arising out of or based upon the Fund's material breach of this
Agreement or material omission by the Fund in the performance of its duties
hereunder or under such arrangements with MAS as to which the Fund has received
written notice, or as a result of acting upon any instructions reasonably
believed by any such person to have been executed by a duly authorized officer
of the Fund or of the Fund's investment advisers, provided that this
indemnification shall not apply to any such loss, cost, damage or expense
arising out of or based
<PAGE>
upon actions or omissions of MAS, its officers, employees or agents in cases of
its or their own gross negligence or willful misconduct.
C. The Fund will be entitled to participate at its own expense in
the defense, or, if it so elects, to assume the defense of any suit brought to
enforce any liability subject to the indemnification provided above, but, if the
Fund elects to assume the defense, such defense shall be conducted by counsel
chosen by the Fund. In the event the Fund elects to assume the defense of any
such suit and retain such counsel, MAS or any of its affiliated persons or any
third parties providing services for the benefit of the Fund through
arrangements with MAS, named as defendant or defendants in the suit, may retain
additional counsel but shall bear the fees and expenses of such counsel unless
at such time the Fund specifically authorizes in writing the retaining of such
counsel at the Fund's expense.
D. No provisions of this Agreement shall be deemed to protect MAS or
any of its directors, officers and/or employees, or any of its affiliated
persons or any third parties providing services for the benefit of the Fund
through arrangements with MAS against liability to the Fund or its shareholders
to which it might otherwise be subject by reason of any fraud, willful
misfeasance or gross negligence in the performance of its or their' duties or
the reckless disregard of its or their obligations under this Agreement.
8. Confidentiality
---------------
<PAGE>
MAS agrees that, except as otherwise required by law or as necessary
in accordance with this Agreement, MAS will keep confidential all records and
information in its possession relating to the Fund or its shareholders or
shareholder accounts and will not disclose the same to any person except at the
request or with the written consent of the Fund.
9. Compliance With Governmental Rules and Regulations
--------------------------------------------------
The Fund assumes full responsibility hereunder for complying with all
applicable requirements of the 1933 Act, the 1940 Act and the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and any laws, rules and
regulations of governmental authorities having jurisdiction, except to the
extent that MAS specifically assumes any such obligations under the terms of
this Agreement.
MAS shall, directly or through third parties, maintain and preserve
for the periods prescribed, such records relating to the services to be
performed by MAS under this Agreement as are required pursuant to the 1940 Act
and the 1934 Act. All such records shall at all times remain the property of
the Fund, shall be readily accessible during normal business hours to each party
hereto, and shall be promptly surrendered upon the termination of this Agreement
or otherwise on written request. Records shall be surrendered in usable machine
readable form.
10. Status of MAS
-------------
<PAGE>
The services of MAS to the Fund are not to be deemed exclusive, and
MAS shall be free to render similar services to others. MAS shall be deemed
to be an independent contractor hereunder and shall, unless otherwise expressly
provided herein or authorized by the Fund from time to time, have no authority
to act or represent the Fund in any way or otherwise be deemed an agent of the
Fund with respect to this Agreement.
11. Printed Matter Concerning the Fund or MAS
-----------------------------------------
Neither the Fund nor MAS shall, with respect to this Agreement,
publish or circulate any printed matter that contains any reference to the other
party without its prior written approval, excepting such printed matter as
refers in accurate terms to MAS's appointment under this Agreement and except
as required by applicable laws.
12. Term, Amendment and Termination
-------------------------------
This Agreement may be modified or amended from time to time by mutual
agreement between the parties hereto. The Agreement shall remain in effect for
a period of one year from the date the Fund's registration statement on file
with the U.S. Securities and Exchange Commission becomes effective and shall
automatically continue in effect thereafter unless terminated by either party at
the end of such period or thereafter on 60 days' prior written notice to the
other party. Upon termination of the Agreement, the Fund shall pay to MAS such
compensation as may be due under
<PAGE>
the terms hereof as of the date of such termination. If, during the initial one-
year period, either of the parties hereto shall be in default in the performance
of any of its duties and obligations hereunder (the "Defaulting Party"), the
other party hereto may give written notice to the Defaulting Party and if such
default shall not have been remedied within 30 days after such written notice is
given, then the party giving such notice may terminate this Agreement by 90
days' written notice of such termination to the Defaulting Party, but such
termination shall not affect any rights or obligations of either party arising
from or relating to such default under the terms hereof.
13. Notices
-------
Any notice or other communication authorized or required by this
Agreement to be given to any party mentioned herein shall be sufficiently given
if addressed to such party and mailed postage prepaid or delivered to its
principal office.
14. Non-Assignability
-----------------
This Agreement shall not be assigned by any of the parties hereto
without the prior consent in writing of the other party.
15. Successors
----------
<PAGE>
This Agreement shall be binding on and shall inure to the benefit of
the Fund and MAS, and their respective successors.
16. Governing Law
-------------
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
17. Counterparts
------------
This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original.
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be duly executed as of the day and year first above written.
ATTEST: MORGAN STANLEY
UNIVERSAL FUNDS, INC.
____________ By:______________
Name: Name:
Title: Title:
ATTEST: MILLER ANDERSON &
SHERRERD, LLP
____________ By:______________
Name: Name:
Title: Title:
<PAGE>
SCHEDULE A
TO
MAS ADMINISTRATION AGREEMENT DATED AS OF SEPTEMBER 9, 1996
BY AND BETWEEN
MORGAN STANLEY UNIVERSAL FUNDS, INC.
and
MILLER ANDERSON & SHERRERD, LLP
PORTFOLIOS
1. Fixed Income Portfolio
2. High Yield Portfolio
3. Core Equity Portfolio
4. Value Portfolio
5. Mid Cap Growth Portfolio
6. Mid Cap Value Portfolio
7. International Fixed Income Portfolio
8. Balanced Portfolio
9. Multi-Asset-Class Portfolio
<PAGE>
SCHEDULE B
TO
MAS ADMINISTRATION AGREEMENT DATED AS OF SEPTEMBER 9, 1996
BY AND BETWEEN
MORGAN STANLEY UNIVERSAL FUNDS, INC.
and
MILLER ANDERSON & SHERRERD, LLP
FEE SCHEDULE
------------
For the services provided and the expenses assumed pursuant to the attached MAS
Administration Agreement, Morgan Stanley Universal Funds, Inc. (the "Fund")
shall pay to Miller Anderson & Sherrerd, LLP, an annual fee, in monthly
installments, of .25% of the average daily net assets of each of the MAS
Portfolios of the Fund.
<PAGE>
EXHIBIT-99.B9(c)
MUTUAL FUNDS SUB-ADMINISTRATION AGREEMENT
. Fund Administration Services
. Fund Accounting Services
. Transfer Agency Services
CHASE GLOBAL FUNDS SERVICES COMPANY
AUGUST ____, 1996
<PAGE>
MUTUAL FUNDS SUB-ADMINISTRATION AGREEMENT
Table of Contents
-----------------
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C>
1. Appointment................................................. 1
2. Representations and Warranties.............................. 1
3. Delivery of Documents....................................... 3
4. Services Provided........................................... 4
5. Fees and Expenses........................................... 5
6. Limitation of Liability and Indemnification................. 7
7. Term........................................................ 10
8. Notices..................................................... 10
9. Waiver...................................................... 11
10. Force Majeure............................................... 11
11. Amendments.................................................. 11
12. Severability................................................ 11
13. Governing Law............................................... 11
Signatures....................................................... 12
</TABLE>
<PAGE>
MUTUAL FUNDS SUB-ADMINISTRATION AGREEMENT
Table of Contents (continued)
-----------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Schedule A - Fees and Expenses................................... A-1
Schedule B - Fund Administration Services Description............ B-1
Schedule C - Fund Accounting Services Description................ C-1
Schedule D - Transfer Agency Services Description................ D-1
</TABLE>
<PAGE>
MUTUAL FUNDS SUB-ADMINISTRATION AGREEMENT
AGREEMENT made as of ____, 1996 by and between Morgan Stanley Asset
Management, Inc. ("MSAM") a Delaware corporation, and Chase Global Funds
Services Company ("Chase"), a Delaware corporation.
W I T N E S S E T H:
WHEREAS, The Morgan Stanley Universal Funds, Inc. (the "Fund")
is registered as a no-load, open-end management investment company, with
diversified and nondiversified series of shares (each, a "portfolio"), under the
Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, MSAM is responsible for the provision of certain transfer
agent, fund accounting and administration services to the portfolios (the "MSAM
Portfolios") of the Fund pursuant to the Agreement between MSAM and the Fund
dated as of ____ 1996 (the "MSAM Administration Agreement"); and
WHEREAS, MSAM wishes to retain Chase to provide certain transfer agent,
fund accounting and administration services with respect to the MSAM Portfolios
of the Fund, and Chase is willing to furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows
1. Appointment. MSAM hereby appoints Chase to provide services for the
Fund, as described hereinafter, subject to the supervision of MSAM and the Board
of Directors of the Fund (the "Board"), for the period and on the terms set
forth in this Agreement. Chase accepts such appointment and agrees to furnish
the services herein set forth in return for the compensation as provided in
Section 5 of and Schedule A to this Agreement.
2. Representations and Warranties.
(a) Chase represents and warrants to MSAM that:
1
<PAGE>
(i) Chase is a corporation, duly organized and existing
under the laws of the State of Delaware;
(ii) Chase is duly qualified to carry on its business in the
Commonwealth of Massachusetts;
(iii) Chase is empowered under applicable laws and by its
Articles of Incorporation and By-Laws to enter into and perform this Agreement;
(iv) all requisite corporate proceedings have been taken to
authorize Chase to enter into and perform this Agreement;
(v) Chase has, and will continue to have, access to the
facilities, personnel and equipment required to fully perform its duties and
obligations hereunder;
(vi) no legal or administrative proceedings have been
instituted or threatened which would impair Chase's ability to perform its
duties and obligations under this Agreement; and
(vii) Chase's entrance into this Agreement shall not cause a
material breach or be in material conflict with any other agreement or
obligation of Chase or any law or regulation applicable to Chase;
(b) MSAM represents and warrants to Chase than
(i) the Fund is a Maryland corporation, duly organized and
existing and in good standing under the laws of Maryland;
(ii) the Fund is empowered under applicable laws and by its
Charter Document and By-Laws to enter into and perform this Agreement;
(iii) all requisite proceedings have been taken to authorize
the Fund to enter into and perform this Agreement;
(iv) the Fund is an investment company properly registered
under the 1940 Act;
(v) a registration statement under the Securities Act of
1933, as amended ("1933 Act") and the 1940 Act on Form N-1A has been filed and
will be effective and will remain effective during the term of this Agreement,
and all necessary filings under the laws of the states will have been made and
will be current during the term of this Agreement;
2
<PAGE>
(vi) no legal or administrative proceedings have been
instituted or threatened which would impair the Fund's ability to perform its
duties and obligations under this Agreement;
(vii) the Fund's registration statements comply in all
material respects with the 1933 Act and the 1940 Act (including the rules and
regulations thereunder) and none of the Fund's prospectuses and/or statements of
additional information contain any untrue statement of material fact or omit to
state a material fact necessary to make the statements therein not misleading;
and
(viii) the Fund's entrance into this Agreement shall not cause
a material breach or be in material conflict with any other agreement or
obligation of the Fund or any law or regulation applicable to it.
3. DELIVERY OF DOCUMENTS. MSAM will promptly furnish to Chase such
copies, properly certified or authenticated, of contracts, documents and other
related information that Chase may request or requires to properly discharge
its duties. Such documents may include but are not limited to the following:
(a) Resolutions of the Board authorizing the appointment of MSAM and
Chase to provide certain services to the Fund and approving this Agreement;
(b) The Fund's Charter Document;
(c) The Fund's By-Laws;
(d) The Fund's Notification of Registration on Form N-8A under the
1940 Act as filed with the Securities and Exchange Commission ("SEC");
(e) The Fund's registration statement including exhibits, as
amended, on Form N-1A (the "Registration Statement") under the 1933 Act and the
1940 Act, as filed with the SEC;
(f) Copies of the Investment Advisory Agreement between the Fund and
its investment adviser (the "Advisory Agreement");
(g) Opinions of counsel and auditors' reports;
(h) The Fund's prospectus(es) and statement(s) of additional
information relating to all funds, series, portfolios and classes, as
applicable, and all amendments and supplements thereto (such Prospectus(es), and
Statement(s) of Additional Information and
3
<PAGE>
supplements thereto, as presently in effect and as from time to time hereafter
amended and supplemented, herein called the "Prospectus"); and
(i) Such other agreements as the Fund may enter into from time to
time including securities lending agreements, futures and commodities account
agreements, brokerage agreements and options agreements.
4. SERVICES PROVIDED.
(a) Chase will provide the following services subject to the control,
direction and supervision of MSAM and the Board and in compliance with the
objectives, policies and limitations set forth in the Fund's Registration
Statement, Charter Document and By-Laws; applicable laws and regulations; and
all resolutions and policies implemented by the Board;
(i) Fund Administration,
(ii) Fund Accounting, and
(iii) Transfer Agency.
A detailed description of each of the above services is contained in Schedules
B, C and D, respectively, to this Agreement.
(b) Chase will also;
(i) provide office facilities with respect to the provision of
the services contemplated herein (which may be in the offices of Chase or a
corporate affiliate of Chase):
(ii) provide the services of individuals to serve as officers of
the Fund who will be designated by Chase and elected by the Board subject to
reasonable Board approval;
(iii) provide or otherwise obtain personnel sufficient for
provision of the services contemplated herein;
(iv) furnish equipment and other materials, which are necessary
or desirable for provision of the services contemplated herein; and
(v) keep records relating to the services provided hereunder in
such from and manner as Chase may deem appropriate or advisable. To the extent
required by Section 31 of the 1940 Act and the rules thereunder, Chase agrees
that all such records
4
<PAGE>
prepared or maintained by Chase relating to the services provided hereunder are
the property of the Fund and will be preserved for the periods prescribed under
Rule 31a-2 under the 1940 Act, maintained at the Fund's expense, and made
available in accordance with such Section and rules.
5. Fees and Expenses
(a) As compensation for the services rendered to MSAM and the Fund
pursuant to this Agreement, MSAM shall pay Chase monthly fees determined as
set forth in Schedule A to this Agreement. Such fees are to be billed monthly
and shall be due and payable upon receipt of the invoice. Upon any termination
of the provision of services under this Agreement before the end of any month,
the fee for the part of the month before such termination shall be prorated
according to the proportion which such part bears to the full monthly period and
shall be payable upon the date of such termination.
(b) For the purpose of determining fees calculated as a function
of the Fund's assets, the value of the Fund's assets and net assets shall be
computed as required by its currently effective Prospectus, generally accepted
accounting principles, and resolutions of the Board.
(c) MSAM may request additional services, additional processing,
or special reports, with such specifications and requirements documentation as
may be reasonably required by Chase. If Chase elects to provide such services or
arrange for their provision, it shall be entitled to additional fees and
expenses at its customary rates and charges.
(d) Chase will bear its own expenses in connection with the
performance of the services under this Agreement except as provided herein or as
agreed to by the parties. MSAM agrees to promptly reimburse Chase for any
services, equipment or supplies ordered by or for MSAM or the Fund through Chase
and for any other expenses that Chase may incur on MSAM or the Fund's behalf at
MSAM or the Fund's request or as consented to by MSAM or the Fund. Such other
expenses to be incurred in the operation of the Fund and to be borne by MSAM,
include, but are not limited to: taxes; interest; brokerage fees and
commissions; salaries and fees of officers and directors who are not officers,
directors, shareholders or employees of Chase, or the Fund's investment adviser
or
5
<PAGE>
distributor; SEC and state Blue Sky registration and qualification fees, levies,
fines and other charges; EDGAR filing fees', processing services and related
fees; postage and mailing costs; costs of share certificates; advisory and
administration fees; charges and expenses of pricing and data services,
independent public accountants and custodians; insurance premiums including
fidelity bond premiums; legal expenses; consulting fees; customary bank charges
and fees; costs of maintenance of corporate existence; expenses of typesetting
and printing of Prospectuses for regulatory purposes and for distribution to
current shareholders of the Fund (the Fund's distributor to bear the expense of
all other printing, production, and distribution of Prospectuses, and marketing
materials); expenses of printing and production costs of shareholders' reports
and proxy statements and materials; expenses of proxy solicitation, proxy
tabulation and annual meetings; costs and expenses of Fund stationery and forms;
costs and expenses of special telephone and data lines and devices; costs
associated with corporate, shareholder, and Board meetings; trade association
dues and expenses; reprocessing costs to Chase caused by third party errors; and
any extraordinary expenses and other customary Fund expenses. In addition, Chase
may utilize one or more independent pricing services to obtain securities prices
and to act as backup to the primary pricing services, in connection with
determining the net asset values of the Fund. MSAM will reimburse Chase for the
Fund's share of the cost of such services based upon the actual usage, or a
pro-rata estimate of the use, of the services for the benefit of the Fund.
(e) All fees, out-of-pocket expenses, or additional charges of Chase
shall be billed on a monthly basis and shall be due and payable upon receipt of
the invoice.
(f) Chase will render, after the close of each month in which
services have been furnished, a statement reflecting all of the charges for such
month. Charges remaining unpaid after thirty (30) days shall bear interest in
finance charges equivalent to, in the aggregate, the Prime Rate (as determined
by Chase) plus two percent per year and all costs and expenses of effecting
collection of any such sums, including reasonable attorney's fees, shall be paid
by the Fund to Chase.
(g) In the event that MSAM is more than sixty (60) days delinquent in
its payments of monthly billings in connection with this Agreement (with the
exception of
6
<PAGE>
specific amounts which may be contested in good faith by the Fund), this
Agreement may be terminated upon thirty (30) days' written notice to the Fund
by Chase. The Fund must notify Chase in writing of any contested amounts within
thirty (30) days of receipt of a billing for such amounts. Disputed amounts are
not due and payable while they are being investigated.
6. Limitation of Liability and Indemnification.
(a) Chase shall not be liable for any error of judgment or mistake
of law or for any loss or expense suffered by MSAM or the Fund, in connection
with the matters to which this Agreement relates, except for a loss or expense
solely caused by or resulting from willful misfeasance, bad faith or gross
negligence on Chase's part in the performance of its duties or from reckless
disregard by Chase of its obligations and duties under this Agreement. In no
event shall Chase be liable for any indirect, incidental, special or
consequential losses or damages of any kind whatsoever (including but not
limited to lost profits), even if Chase has been advised of the likelihood of
such loss or damage and regardless of the form of action.
(b) Subject to Section 6(a) above, Chase shall not be responsible
for, and MSAM shall indemnify and hold Chase harmless from and against, any and
all losses, damages, costs, reasonable attorneys' fees and expenses, payments,
expenses and liabilities incurred by Chase, any of its agents, or MSAM's or the
Fund's agents in the performance of its/their duties hereunder, including but
not limited to those arising out of or attributable to:
(i) any and all actions of Chase or its officers or agents
required to be taken pursuant to this Agreement;
(ii) the reliance on or use by Chase or its officers or agents
of information, records, or documents which are received by Chase or its
officers or agents and furnished to it or them by or on behalf of MSAM or the
Fund, and which have been prepared or maintained by MSAM or the Fund or any
third party on behalf of MSAM or the Fund;
(iii) MSAM's or the Fund's refusal or failure to comply with the
terms of this Agreement or MSAM's or the Fund's lack of good faith, or its/their
actions, or lack thereof, involving negligence or willful misfeasance;
7
<PAGE>
(iv) the breach of any representation or warranty of MSAM or the
Fund hereunder;
(v) the taping or other form of recording of telephone conversations
or other forms of electronic communications with investors and shareholders, or
reliance by Chase on telephone or other electronic instructions of any person
acting on behalf of a shareholder or shareholder account for which telephone or
other electronic services have been authorized;
(vi) the reliance on or the carrying out by Chase or its officers or
agents of any proper instructions reasonable believed to be duly authorized, or
requests of MSAM or the Fund or recognition by Chase of any share certificates
which are reasonably believed to bear the proper signatures of the officers of
the Fund and the proper countersignature of any transfer agent or registrar of
the Fund;
(vii) any delays, inaccuracies, errors in or omissions from
information or data provided to Chase by data, corporate action pricing services
or securities brokers and dealers;
(viii) the offer or sale of shares by the Fund in violation of any
requirement under the Federal securities laws or regulations or the securities
laws or regulations of any state, or in violation of any stop order or other
determination or ruling by any Federal agency or any state agency with respect
to the offer or sale of such shares in such state (1) resulting from activities,
actions, or omissions by the Fund or its other service providers and agents, or
(2) existing or arising out of activities, actions or omissions by or on behalf
of the Fund prior to the effective date of this Agreement;
(ix) any failure of the Fund's registration statement to comply with
the 1933 Act and the 1940 Act (including the rules and regulations thereunder)
and any other applicable laws, or any untrue statement of a material fact or
omission of a material fact necessary to make any statement therein not
misleading in a Fund's prospectus;
(x) the actions taken by MSAM or by the Fund, its investment
adviser, and its distributor in compliance with applicable securities, tax,
commodities and other laws, rules and regulations, or the failure to so comply;
and
8
<PAGE>
(xi) all actions, inactions, omissions, or errors caused by third
parties to whom Chase, MSAM or the Fund has assigned any rights and/or delegated
any duties under this Agreement at the request of or as required by MSAM or the
Fund, its investment advisers, distributor, administrator or sponsor.
(c) In performing its services hereunder, Chase shall be entitled to
rely on any oral or written instructions, notices or other communications,
including electronic transmissions, from MSAM, the Fund and their custodians,
officers and directors, investors, agents and other service providers which
Chase reasonably believes to be genuine, valid and authorized, and shall be
indemnified by MSAM for any loss or expense caused by such reliance. Chase
shall also be entitled to consult with and rely on the advice and opinions of
outside legal counsel retained by MSAM or the Fund, as necessary or appropriate.
7. TERM. This agreement shall become effective on the date first
hereinabove written and may be modified or amended from time to time by mutual
agreement between the parties hereto. The Agreement shall continue in effect
unless terminated by either party on 180 days' prior written notice. Upon
termination of this Agreement, MSAM shall pay to Chase such compensation and any
out-of-pocket or other reimbursable expenses which may become due or payable
under the terms hereof as of the date of termination or after the date that the
provision of services ceases, whichever is later.
8. NOTICES. Any notice required or permitted hereunder shall be in
writing and shall be deemed effective on the date of personal delivery (by
private messenger, courier service or otherwise) or upon confirmed receipt of
telex or facsimile, whichever occurs first, or upon receipt if by mail to the
parties at the following address (or such other address as a party may specify
by notice to the other);
9
<PAGE>
If to MSAM:
Attention:
Fax:
If to Chase.
Chase Global Funds Services Company
73 Tremont Street
Boston, MA 02108
Attention:
Fax:
9. WAIVER. The failure of a party to insist upon strict adherence to any
term of this Agreement on any occasion shall not be considered a waiver nor
shall it deprive such party of the right thereafter to insist upon strict
adherence to that term or any term of this Agreement. Any waiver must be in
writing signed by the waiving party.
10. FORCE MAJEURE. Chase shall not be responsible or liable for any harm,
loss or damage suffered by MSAM or the Fund, it investors, or other third
parties or for any failure or delay in performances of Chases obligations under
this Agreement arising out of or caused, directly or indirectly, by
circumstances beyond Chase's control. In the event of a force majeure, any
resulting harm, loss, damage, failure or delay by Chase will not give MSAM the
right to terminate this Agreement.
11. AMENDMENTS. This Agreement may be modified or amended from time to
time by mutual written agreement between the parties. No provision of this
Agreement may be changed, discharged, or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of the
change, discharge or termination is sought.
12. SEVERABILITY. If any provision of this Agreement is invalid or
unenforceable, the balance of the Agreement shall remain in effect, and if any
provision is inapplicable to any person or circumstance it shall nevertheless
remain applicable to all other persons and circumstances.
13. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY THE SUBSTANTIVE
LAWS OF THE STATE OF NEW YORK.
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below as of the date first written above.
MORGAN STANLEY ASSET
MANAGEMENT, INC.
By:
----------------------
Name:
--------------------
Title:
-------------------
CHASE GLOBAL FUNDS
SERVICES COMPANY
By:
-----------------------
Name:
---------------------
Title:
--------------------
<PAGE>
MUTUAL FUNDS SERVICE AGREEMENT
SCHEDULE A
FEES AND EXPENSES
Fund Administration and Accounting Fees
A. For the services rendered under this Agreement, the Fund shall pay to
the Administrator an annual fee based on the following schedule:
_____of 1% on the first $_____million in total assets, plus
_____of 1% on the next $____million in total assets, plus
_____of 1% of the total assets in excess of $1 billion
B. The foregoing calculation is based on the average daily net assets of
the Fund. The fees will be computed, billed and payable monthly. The
minimum charge per year for the Fund will not be less than _____ of 1%
of average daily net assets.
C. Out-of-pocket expenses, including but not limited to those in Section
5(d), will be computed, billed and payable monthly.
Transfer Agency Fees
A. $_____per account
B. Out-of-pocket expenses, including but not limited to those in Section
5(d), and customary bank charges and offsets and customized systems and
technology charges, which will be computed, billed and payable monthly.
A-1
<PAGE>
MUTUAL FUNDS SERVICE AGREEMENT
SCHEDULE B
GENERAL DESCRIPTION OF FUND ADMINISTRATION SERVICES
I. Financial and Tax Reporting
A. Prepare management reports and Board of Directors [Trustees] materials
such as unaudited financial statements and summaries of dividends and
distributions.
B. Report Fund performance to outside services as directed by Fund
management.
C. Calculate dividend and capital gain distributions in accordance with
distribution policies detailed in the Fund's prospectus(es). Assist
Fund management in making final determinations of distribution amounts.
D. Estimate and recommend year-end dividend and capital gain distributions
necessary to establish Fund's status as a regulated investment company
("RIC") under Section 4982 of the Internal Revenue Code of 1986, as
amended (the "Code") regarding minimum distribution requirements.
E. Working with the Fund's public accountants or other professionals,
prepare and file Fund's federal tax return on Form 1120-RIC along with
all state and local tax returns where applicable. Prepare and file
Federal Excise Tax Return (Form 8613).
F. Prepare and file Fund's Form N-SAR with the SEC.
G. Prepare and coordinate printing of Fund's Semiannual and Annual Reports
to Shareholders
H. In conjunction with transfer agent, notify shareholders as to what
portion, if any, of the distributions made by the Fund's during the
prior fiscal year were exempt-interest dividends under Section 852
(b)(5)(A) of the Code.
I. Provide Form 1099-MISC to persons other than corporations (i.e.,
Trustees [Directors]) to whom the Fund paid more than $600 during the
year.
B-1
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J. Prepare and file California State Expense Limitation Report, if
applicable.
K. Provide financial information for Fund proxies and prospectuses
(Expense Table).
II. Portfolio Compliance
A. Assist with monitoring each Investment Fund's compliance with
investment restrictions (e.g., issuer or industry diversification,
etc.) listed in the current prospectus(es) and Statement(s) of
Additional Information, although primary responsibility for such
compliance shall remain with the Fund's investment adviser or
investment manager.
B. Assist with monitoring each Investment Fund's compliance with the
requirements of Section 851 of the Code for qualification as a RIC
(i.e., 90% Income, 30% Income - Short Three, Diversification Tests),
although primary responsibility for such compliance shall remain with
the Fund's investment adviser or investment manager.
C. Assist with monitoring investment manager's compliance with Board
directives such as "Approved Issuers Listings for Repurchase
Agreements", Rule 17a-7, and Rule 12d-3 procedures, although primary
responsibility for such compliance shall remain with the Fund's
investment adviser or investment manager.
D. Mail quarterly requests for "Securities Transaction Reports" to the
Fund's Directors [Trustees] and Officers and "access persons" under
the terms of the Fund's Code of Ethics and SEC regulations.
III. Regulatory Affairs and Corporate Governance
A. Prepare and file post-effective amendments to the Fund's registration
statement and supplements as needed.
B. Prepare and file proxy materials and administer shareholder meetings.
C. Prepare and file all state registrations of the Fund's securities
including annual renewals; registering new funds, portfolios, or
classes; preparing and filing sales reports; filing copies of the
registration statement, prospectus and statement of additional
information; and increasing registered amounts of securities in
individual states.
B-2
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D. Prepare Board materials for Board meetings.
E. Assist with the review and monitoring of fidelity bond and errors and
omissions insurance coverage and the submission of any related
regulatory filings.
F. Prepare and update documents such as charter document, by-laws, and
foreign qualification filings.
G. Provide support with respect to routine regulatory examinations or
investigations of the Fund.
H. File copies of financial reports to shareholders with the SEC under
Rule 30b2-1.
IV. General Administration
A. Furnish officers of the Fund, subject to reasonable Board approval.
B. Prepare fund, portfolio or class expense projections, establish
accruals and review on a periodic basis, including expenses based on a
percentage of average daily net assets (advisory and administrative
fees) and expenses based on actual charges annualized and accrued daily
(audit fees, registration fees, directors' fees, etc.)
C. For new funds, portfolios and classes, obtain Employer or Taxpayer
Identification Number and CUSIP numbers, as necessary. Estimate
organizational costs and expenses and monitor against actual
disbursements.
D. Coordinate all communications and data collection with regard to any
regulatory examinations and yearly audits by independent accountants.
B-3
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MUTUAL FUNDS SERVICE AGREEMENT
SCHEDULE C
DESCRIPTION OF FUND ACCOUNTING SERVICES
I. General Description
Chase shall provide the following accounting services to the Fund:
A. Maintenance of the books and records for the Fund's assets, including
records of all securities transactions.
B. Calculation of each funds', portfolios' or classes' Net Asset Value in
accordance with the Prospectus, and after the fund, portfolio or class
meets eligibility requirements, transmission to NASDAQ and to such
other entities as directed by the Fund.
C. Accounting for dividends and interest received and distributions made
by the Fund.
D. Coordinate with the Fund's independent auditors with respect to the
annual audit, and as otherwise requested by the Fund.
E. As mutually agreed upon, Chase will provide domestic and/or
international reports.
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MUTUAL FUNDS SERVICE AGREEMENT
SCHEDULE II
DESCRIPTION OF TRANSFER AGENCY SERVICES
The following is a general description of the transfer agency services
Chase shall provide to the Fund.
A. Shareholder Recordkeeping. Maintain records showing for each Fund
shareholder the following: (i) name, address, appropriate tax
certification and tax identifying number; (ii) number of shares of each
fund, portfolio or class; (iii) historical information including, but
not limited to, dividends paid, date and price of all transactions
including individual purchases and redemptions, based upon appropriate
supporting documents; and (iv) any dividend reinvestment order,
application, specific address, payment and processing instructions and
correspondence relating to the current maintenance of the account.
B. Shareholder Issuance. Record the issuance of shares of each fund,
portfolio or class. Except as specifically agreed in writing between
Chase and the Fund, Chase shall have no obligation when countersigning
and issuing and/or crediting shares to take cognizance of any other
laws relating to the issue and sale of such shares except insofar as
policies and procedures of the Stock Transfer Association recognize
such laws.
C. Transfer, Purchase and Redemption Orders. Process all orders for the
transfer, purchase and redemption of shares of the Fund in accordance
with the Fund's current prospectus and customary transfer agency
policies and procedures, including electronic transmissions which the
Fund acknowledges it has authorized, or in accordance with any
instructions of the Fund or its agents which Chase reasonably believes
to be authorized.
D. Shareholder Communications. Transmit all communications by the Fund
to its shareholders promptly following the delivery by the Fund of the
material to be transmitted by mail, telephone, courier service or
electronically.
E. Proxy Materials. Assist with the mailing or transmission of proxy
materials, tabulating votes, and compiling and certifying voting
results. Services may include the provision of inspectors of election
at any meeting of shareholders
<PAGE>
F. Share Certificates. If permitted by Fund policies, and if a
shareholder of the Fund requests a certificate representing shares,
Chase as Transfer Agent, will countersign and mail a share certificate
to the investor at his/her address as it appears on the Fund's
shareholder records.
G. Returned Checks. In the event that any check or other negotiable
instrument for the payment of shares is returned unpaid for any reason,
Chase will take such steps, as Chase may, in its discretion, deem
appropriate and notify the Fund of such action. However, the Fund
remains ultimately liable for any returned checks or negotiable
instruments of its shareholders.
H. Shareholder Correspondence. Acknowledge all correspondence from
shareholders relating to their share accounts and undertake such other
shareholder correspondence as may from time to time be mutually agreed
upon.
I. Tax Reporting. Chase shall issue appropriate shareholder tax forms as
required.
J. Dividend Disbursing. Chase will prepare and mail checks, place wire
transfers or credit income and capital gain payments to shareholders.
The Fund will advise Chase of the declaration of any dividend or
distribution and the record and payable date thereof at least five (5)
days prior to the record date. Chase will, on or before the payment
date of any such dividend or distribution, notify the Fund's Custodian
of the estimated amount required to pay any portion of such dividend or
distribution payable in cash, and on or before the payment date of such
distribution, the Fund will instruct its Custodian to make available to
Chase sufficient funds for the cash amount to be paid out. If a
shareholder is entitled to receive additional shares by virtue of any
such distribution or dividend, appropriate credits will be made to each
shareholder's account.
K. Escheatment. Chase shall provide escheatment services only with
respect to the escheatments laws of the Commonwealth of Massachusetts,
including those which relate to reciprocal agreements with other
states.
L. Telephone Services. Chase will provide staff coverage, training and
supervision in connection with the Fund's telephone line for
shareholder inquiries, and will respond to inquiries concerning
shareholder records, transactions processed by Chase, procedure to
effect the shareholder records and inquiries of a general nature
relative to shareholder services. All other telephone calls will be
referred to the Fund, as appropriate.
D-2
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M. Fulfillment Services. As directed by the Fund, the Fund Adviser or
the Distributor, or upon the request of prospective shareholders
either by telephone or in writing, Chase will mail reasonable
quantities of prospectuses, applications to purchase shares, and
other information normally sent to prospective shareholders.
D-3
<PAGE>
APPENDIX 1
Yield Computation [may also be used for any complex or unusual item requested
by clients]
L. (1) CGFSC shall compute the yield, or tax equivalent yield, for
the Fund for the periods of time as agreed to by the parties;
(2) CGFSC shall have no responsibility to review, confirm or
otherwise assume any duty with respect to the accuracy or
correctness of any data, including but not limited to security
attributes, pricing data, and tax equivalent data, supplied to it
by the Fund, any of the Fund's agents including the investment
adviser, or by third party providers. CGFSC is entitled to rely on
information or data provided to it by the Fund's agents or
investment advisers, or by third party providers and will not be
liable for any loss or expense suffered by the Fund caused by such
reliance;
(3) The Fund shall provide, from time to time as may be
appropriate, and CGFSC shall be entitled to rely on the written
standards and guidelines to be followed by CGFSC in interpreting
and applying the computation methods set forth in the SEC Releases,
industry standards and regulatory guidelines regarding yield as
they specifically apply to the Fund, as well as information
relating to any and all of the Fund's assets. The Fund shall keep
CGFSC informed of all publicly available information and of any
non-public advice or information obtained by the Fund from its
accountants, its personnel or its investment adviser related to
industry standards, or regulatory guidelines regarding the
computations to be undertaken by CGFSC pursuant to this Agreement
and CGFSC shall not be charged with knowledge of such information
unless it has been furnished to CGFSC in writing; and
(4) The Fund shall indemnify CGFSC for any expenses, assessments,
claims or liabilities which it may incur in connection with this
Amendment, except as may arise from CGFSC's gross negligence, bad
faith or willful misconduct. In no event shall CGFSC be liable for
any indirect, incidental, special or consequential loss or damage
of any kind whatsoever (including but not limited to lost profits),
even if Chase has been advised of the likelihood of such loss or
damage and regardless of the form of action.
CHASE GLOBAL FUNDS SERVICES [THE FUND]
COMPANY --------------------------
By: By:
----------------------- ----------------------
<PAGE>
APPENDIX 2
Authorized Personnel
The following personnel are authorized to give written or oral instructions
to Chase, subject to provisions of Section 6(b)(vi):
1.
2.
3.
4.
5.
It is the sole responsibility of the Fund to notify Chase of any
-------
changes to this list in writing.
CHASE GLOBAL FUNDS SERVICES [THE FUND]
COMPANY -----------------------------
By: By:
---------------------------- --------------------------
<PAGE>
EXHIBIT-99.B9(d)
MUTUAL FUNDS SUB-ADMINISTRATION AGREEMENT
.FUND ADMINISTRATION SERVICES
.FUND ACCOUNTING SERVICES
.TRANSFER AGENCY SERVICES
CHASE GLOBAL FUNDS SERVICES COMPANY
AUGUST , 1996
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<PAGE>
MUTUAL FUNDS SUB-ADMINISTRATION AGREEMENT
AGREEMENT made as of _____, 1996 by and between Miller Anderson & Sherrerd
("MAS") a Delaware corporation, and Chase Global Funds Services Company
("Chase"), a Delaware corporation.
WITNESSETH:
WHEREAS, The Morgan Stanley Universal Funds, Inc. (the "Fund") is
registered as a no-load, open-end management investment company, with
diversified and nondiversified series of shares (each, a "portfolio"), under the
Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, MAS is responsible for the provision of certain transfer agent,
fund accounting and administration services to the portfolios (the "MAS
Portfolios") of the Fund pursuant to the Agreement between MAS and the Fund
dated as of ______ 1996 (the "MAS Administration Agreement"); and
WHEREAS, MAS wishes to retain Chase to provide certain transfer agent, fund
accounting and administration services with respect to the MAS Portfolios of the
Fund, and Chase is willing to furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT. MAS hereby appoints Chase to provide services for the
Fund, as described hereinafter, subject to the supervision of MAS and the Board
of Directors of the Fund (the "Board"), for the period and on the terms set
forth in this Agreement. Chase accepts such appointment and agrees to furnish
the services herein set forth in return for the compensation as provided in
Section 5 of and Schedule A to this Agreement.
2. REPRESENTATIONS AND WARRANTIES.
(a) Chase represents and warrants to MAS that:
1
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(i) Chase is a corporation, duly organized and existing
under the laws of the State of Delaware;
(ii) Chase is duly qualified to carry on its business in the
Commonwealth of Massachusetts;
(iii) Chase is empowered under applicable laws and by its
Articles of Incorporation and By-Laws to enter into and perform this Agreement;
(iv) all requisite corporate proceedings have been taken to
authorize Chase to enter into and perform this Agreement;
(v) Chase has, and will continue to have, access to the
facilities, personnel and equipment required to fully perform its duties and
obligations hereunder;
(vi) no legal or administrative proceedings have been
instituted or threatened which would impair Chase's ability to perform its
duties and obligations under this Agreement; and
(vii) Chase's entrance into this Agreement shall not cause
a material breach or be in material conflict with any other agreement or
obligation of Chase or any law or regulation applicable to Chase;
(b) MAS represents and warrants to Chase that:
(i) the Fund is a Maryland corporation, duly organized and
existing and in good standing under the laws of Maryland;
(ii) the Fund is empowered under applicable laws and by its
Charter Document and By-Laws to enter into and perform this Agreement;
(iii) all requisite proceedings have been taken to authorize
the Fund to enter into and perform this Agreement;
(iv) the Fund is an investment company properly registered
under the 1940 Act;
(v) a registration statement under the Securities Act of
1933, as amended ("1933 Act") and the 1940 Act on Form N-1A has been filed and
will be effective and will remain effective during the term of this Agreement,
and all necessary filings under the laws of the states will have been made and
will be current during the term of this Agreement;
2
<PAGE>
(vi) no legal or administrative proceedings have been
instituted or threatened which would impair the Fund's ability to perform its
duties and obligations under this Agreement;
(vii) the Fund's registration statements comply in all
material respects with the 1933 Act and the 1940 Act (including the rules and
regulations thereunder) and none of the Fund's prospectuses and/or statements of
additional information contain any untrue statement of material fact or omit to
state a material fact necessary to make the statements therein not misleading;
and
(viii) the Fund's entrance into this Agreement shall not cause
a material breach or be in material conflict with any other agreement or
obligation of the Fund or any law or regulation applicable to it.
3. Delivery Of Documents. MAS will promptly furnish to Chase such
copies, properly certified or authenticated, of contracts, documents and other
related information that Chase may request or requires to properly discharge its
duties. Such documents may include but are not limited to the following:
(a) Resolutions of the Board authorizing the appointment of MAS and
Chase to provide certain services to the Fund and approving this Agreement;
(b) The Fund's Charter Document;
(c) The Fund's By-Laws;
(d) The Fund's Notification of Registration on Form N-8A under the
1940 Act as filed with the Securities and Exchange Commission ("SEC");
(e) The Fund's registration statement including exhibits, as
amended, on Form N-1A (the "Registration Statement") under the 1933 Act and the
1940 Act, as filed with the SEC;
(f) Copies of the Investment Advisory Agreement between the Fund
and its investment adviser (the "Advisory Agreement");
(g) Opinions of counsel and auditors'reports;
(h) The Fund's prospectus(es) and statement(s) of additional
information relating to all funds, series, portfolios and classes, as
applicable, and all amendments and supplements thereto (such Prospectus(es) and
Statement(s) of Additional Information and
3
<PAGE>
supplements thereto, as presently in effect and as from time to time hereafter
amended and supplemented, herein called the "Prospectuses"); and
(i) Such other agreements as the Fund may enter into from time to
time including securities lending agreements, futures and commodities account
agreements, brokerage agreements and options agreements.
4. Service Provided.
(a) Chase will provide the following services subject to the
control, direction and supervision of MAS and the Board and in compliance with
the objectives, policies and limitations set forth in the Fund's Registration
Statement, Charter Document and By-Laws; applicable laws and regulations; and
all resolutions and policies implemented by the Board:
(i) Fund Administration,
(ii) Fund Accounting, and
(iii) Transfer Agency.
A detailed description of each of the above services is contained in Schedules
B, C and D, respectively, to this Agreement.
(b) Chase will also:
(i) provide office facilities with respect to the provision
of the services contemplated herein (which may be in the offices of Chase or
a corporate affiliate of Chase);
(ii) provide the services of individuals to serve as officers
of the Fund who will be designated by Chase and elected by the Board subject to
reasonable Board approval;
(iii) provide or otherwise obtain personnel sufficient for
provision of the services contemplated herein;
(iv) furnish equipment and other materials, which are
necessary or desirable for provision of the services contemplated herein; and
(v) keep records relating to the services provided hereunder
in such form and manner as Chase may deem appropriate or advisable. To the
extent required by Section 31 of the 1940 Act and the rules thereunder, Chase
agrees that all such records
4
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prepared or maintained by Chase relating to the services provided hereunder are
the property of the Fund and will be preserved for the periods prescribed under
Rule 31a-2 under the 1940 Act, maintained at the Fund's expense, and made
available in accordance with such Section and rules.
5. FEES AND EXPENSES.
(a) As compensation for the services rendered to MAS and the Fund
pursuant to this Agreement, MAS shall pay Chase monthly fees determined as set
forth in Schedule A to this Agreement. Such fees are to be billed monthly and
shall be due and payable upon receipt of the invoice. Upon any termination of
the provision of services under this Agreement before the end of any month, the
fee for the part of the month before such termination shall be prorated
according to the proportion which such part bears to the full monthly period and
shall be payable upon the date of such termination.
(b) For the purpose of determining fees calculated as a function of
the Fund's assets, the value of the Fund's assets and net assets shall be
computed as required by its currently effective Prospectus, generally accepted
accounting principles, and resolutions of the Board.
(c) MAS may request additional services, additional processing, or
special reports, with such specifications and requirements documentation as may
be reasonably required by Chase. If Chase elects to provide such services or
arrange for their provision, it shall be entitled to additional fees and
expenses at its customary rates and charges.
(d) Chase will bear its own expenses in connection with the
performance of the services under this Agreement except as provided herein or as
agreed to by the parties. MAS agrees to promptly reimburse Chase for any
services, equipment or supplies ordered by or for MAS or the Fund through Chase
and for any other expenses that Chase may incur on MAS or the Fund's behalf at
MAS or the Fund's request or as consented to by MAS or the Fund. Such other
expenses to be incurred in the operation of the Fund and to be borne by MAS,
include, but are not limited to: taxes; interest, brokerage fees and
commissions; salaries and fees of officers and directors who are not officers,
directors, shareholders or employees of Chase, or the Fund's investment adviser
or distributor, SEC
5
<PAGE>
and state Blue Sky registration and qualification fees, levies, fines and other
charges; EDGAR filing fees', processing services and related fees; postage and
mailing costs; costs of share certificates; advisory and administration fees;
charges and expenses of pricing and data services, independent public
accountants and custodians; insurance premiums including fidelity bond premiums;
legal expenses; consulting fees; customary bank charges and fees; costs of
maintenance of corportate existence; expenses of typesetting and printing of
Prospectuses for regulatory purposes and for distribution to current
shareholders of the Fund (the Fund's distributor to bear the expense of all
other printing, production, and distribution of Prospectuses, and marketing
materials); expenses of printing and production costs of shareholders' reports
and proxy statements and materials; expenses of proxy solicitation, proxy
tabulation and annual meetings; costs and expenses of Fund stationery and forms;
costs and expenses of special telephone and data lines and devices; costs
associated with corporate, shareholder and Board meetings; trade association
dues and expenses; reprocessing costs to Chase caused by third party errors; and
any extraordinary expenses and other customary Fund expenses. In addition, Chase
may utilize one or more independent pricing services to obtain securities prices
and to act as backup to the primary pricing services, in connection with
determining the net asset values of the Fund. MAS will reimburse Chase for the
Fund's share of the cost of such services based upon the actual usage, or a pro-
rata estimate of the use, of the services for the benefit of the Fund.
(e) All fees, out-of-pocket expenses, or additional charges of Chase
shall be billed on a monthly basis and shall be due and payable upon receipt of
the invoice.
(f) Chase will render, after the close of each month in which
services have been furnished, a statement reflecting all of the charges for such
month. Charges remaining unpaid after thirty (30) days shall bear interest in
finance charges equivalent to, in the aggregate, the Prime Rate (as determined
by Chase) plus two percent per year and all costs and expenses of effecting
collection of any such sums, including reasonable attorney's fees, shall be paid
by the Fund to Chase.
(g) In the event that MAS is more than sixty (60) days delinquent in
its payments of monthly billings in connection with this Agreement (with the
exception of specific amounts which may be contested in good faith by the Fund),
this Agreement may
6
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be terminated upon thirty (30) days' written notice to the Fund by Chase. The
Fund must notify Chase in writing of any contested amounts within thirty (30)
days of receipt of a billing for such amounts. Disputed amounts are not due and
payable while they are being investigated.
6. LIMITATION OF LIABILITY AND INDEMNIFICATION.
(a) Chase shall not be liable for any error of judgement or mistake
of law or for any loss or expense suffered by MAS or the Fund, in connection
with the matters to which this Agreement relates, except for a loss or expense
solely caused by or resulting from willful misfeasance, bad faith or gross
negligence on Chase's part in the performance of its duties or from reckless
disregard by Chase of its obligations and duties under this Agreement. In no
event shall Chase be liable for any indirect, incidental, special or
consequential losses or damages of any kind whatsoever (including but not
limited to lost profits), even if Chase has been advised of the likelihood of
such loss or damage and regardless of the form of action.
(b) Subject to Section 6(a) above, Chase shall not be responsible
for, and MAS shall indemnify and hold Chase harmless from and against, any and
all losses, damages, costs, reasonable attorneys' fees and expenses, payments,
expenses and liabilities incurred by Chase, any of its agents, or MAS's or the
Fund's agents in the performance of its/their duties hereunder, including but
not limited to those arising out of or attributable to:
(i) any and all actions of Chase or its officers or agents
required to be taken pursuant to this Agreement;
(ii) the reliance on or use by Chase or its officers or agents
of information, records, or documents which are received by Chase or its
officers or agents and furnished to it or them by or on behalf of MAS or the
Fund, and which have been prepared or maintained by MAS or the Fund or any third
party on behalf of MAS or the Fund;
(iii) MAS's or the Fund's refusal or failure to comply with the
terms of this Agreement or MAS's or the Fund's lack of good faith, or its/their
actions, or lack thereof, involving negligence or willful misfeasance;
(iv) the breach of any representation or warranty of MAS or the
Fund hereunder;
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(v) the taping or other form of recording of telephone conversation or
other forms of electronic communications with investors and shareholders, or
reliance by Chase on telephone or other electronic instructions of any person
acting on behalf of a shareholder or shareholder account for which telephone or
other electronic services have been authorized;
(vi) the reliance on or the carrying out by Chase or its officers or
agents of any proper instructions reasonably believed to be duly authorized, or
requests of MAS or the Fund or recognition by Chase of any share certificates
which are reasonably believed to bear the proper signatures of the officers of
the Fund and the proper countersignature of any transfer agent or registrar of
the Fund;
(vii) the offer or sale of shares by the Fund in violation of any
requirement under the Federal securities laws or regulations or the securities
laws or regulations of any state, or in violation of any stop order or other
determination or ruling by any Federal agency or any state agency with respect
to the offer or sale of such areas in such state (1) resulting from activities,
actions, or omissions by the Fund or its other service providers and agents,
or (2) existing or arising out of activities, actions or omissions by or on
behalf of the Fund prior to the effective date of this Agreement;
(ix) any failure of the Fund's registration statement to comply with
the 1933 Act and the 1940 Act (including the rules and regulations thereunder)
and any other applicable laws, or any untrue statement of a material fact or
omission of a material fact necessary to make any statement therein, not
misleading in a Fund's prospectus;
(x) the actions taken by MAS or by the Fund, its investment adviser,
and its distributor in compliance with applicable securities, tax, commodities
and other laws, rules and regulations, or the failure to so comply; and
(xi) all actions, inactions, omissions, or errors caused by third
parties to whom Chase, MAS or the Fund has assigned any rights and/or delegated
any
8
<PAGE>
duties under this Agreement at the request of or as required by MAS or the Fund,
its investment advisers, distributor, administrator or sponsor.
(c) In performing its services hereunder, Chase shall be entitled to
rely on any oral or written instructions, notices or other communications,
including electronic transmissions, from MAS, the Fund and their custodians,
officers and directors, investors, agents and other service providers which
Chase reasonably believes to be genuine, valid and authorized, and shall be
indemnified by MAS for any loss or expense caused by such reliance. Chase shall
also be entitled to consult with and rely on the advice and opinions of outside
legal counsel retained by MAS or the Fund, as necessary or appropriate.
7. TERM. This Agreement shall become effective on the date first
hereinabove written and may be modified or amended from time to time by mutual
agreement between the parties hereto. The Agreement shall continue in effect
unless terminated by either party on 180 days' prior written notice. Upon
termination of this Agreement, MAS shall pay to Chase such compensation and any
out-of-pocket or other reimbursable expenses which may become due or payable
under the terms hereof as of the date of termination or after the date that the
provision of services ceases, whichever is later.
8. NOTICES. Any notice required or permitted hereunder shall be in
writing and shall be deemed effective on the date of personal delivery (by
private messenger, courier service or otherwise) or upon confirmed receipt of
telex or facsimile, whichever occurs first, or upon receipt if by mail to the
parties at the following address (or such other address as a party may specify
by notice to the other):
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If to MAS:
Attention:
Fax:
If to Chase:
Chase Global Funds Services Company
73 Tremont Street
Boston, MA 02108
Attention:
Fax:
9. WAIVER. The failure of a party to insist upon strict adherence to any
term of this Agreement on any occasion shall not be considered a waiver nor
shall it deprive such party of the right thereafter to insist upon strict
adherence to that term or any term of this Agreement. Any waiver must be in
writing signed by the waiving party.
10. FORCE MAJEURE. Chase shall not be responsible or liable for any harm,
loss or damage suffered by MAS or the Fund, its investors, or other third
parties or for any failure or delay in performance of Chases obligations under
this Agreement arising out of or caused, directly or indirectly, by
circumstances beyond Chase's control. In the event of a force majeure, any
resulting harm, loss, damage, failure or delay by Chase will not give MAS the
right to terminate this Agreement.
11. AMENDMENTS. This Agreement may be modified or amended from time to
time by mutual written agreement between the parties. No provision of this
Agreement may be changed, discharged, or terminated orally, by only by an
instrument in writing signed by the party against which enforcement of the
change, discharge or termination is sought.
12. SEVERABILITY. If any provision of this Agreement is invalid or
unenforceable, the balance of the Agreement shall remain in effect, and if any
provision is inapplicable to any person or circumstance it shall nevertheless
remain applicable to all other persons and circumstances.
13. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY THE SUBSTANTIVE
LAWS OF THE STATE OF NEW YORK.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below as of the date first written above.
MILLER ANDERSON & SHERRERD
By:
----------------------
Name:
--------------------
Title:
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CHASE GLOBAL FUNDS
SERVICES COMPANY
By:
----------------------
Name:
--------------------
Title:
-------------------
11
<PAGE>
MUTUAL FUNDS SERVICES AGREEMENT
SCHEDULE A
FEES AND EXPENSES
Fund Administration and Accounting Fees
A. For the services rendered under this Agreement, the Fund shall pay to the
Administrator an annual fee based on the following schedule:
______of 1% on the first $_____million in total assets, plus
______of 1% on the next $_____million in total assets, plus
______of 1% of the total assets in excess of $1 billion
B. The foregoing calculation is based on the average daily net assets of the
Fund. The fees will be computed, billed and payable monthly. The minimum
charge per year for the Fund will not be less than _____ of 1% of average
daily net assets.
C. Out-of-pocket expenses, including but not limited to those in Section 5(d),
will be computed, billed and payable monthly.
Transfer Agency Fees
A. $____per account
B. Out-of-pocket expenses, including but not limited to those in Section 5(d),
and customary bank charges and offsets and customized systems and technology
charges, which will be computed, billed and payable monthly.
A-1
<PAGE>
MUTUAL FUNDS SERVICE AGREEMENT
SCHEDULE B
GENERAL DESCRIPTION OF FUND ADMINISTRATION SERVICES
I. Financial and Tax Reporting
A. Prepare management reports and Board of Directors [Trustees] materials,
such as unaudited finacial statements and summaries of dividends and
distributions.
B. Report Fund performance to outside services as directed by Fund
management.
C. Calculate dividend and capital gain distributions in accordance with
distribution policies detailed in the Fund's prospectus(es). Assist
Fund management in making final determinations of distribution amounts.
D. Estimate and recommend year-end dividend and capital gain distributions
necessary to establish Fund's status as a regulated investment company
("RIC") under Section 4982 of the Internal Revenue Code of 1986, as
amended (the "Code") regarding minimum distribution requirements.
E. Working with the Fund's public accountants or other professionals,
prepare and file Fund's Federal tax return on Form 1120-RIC along with
all state and local tax returns where applicable. Prepare and file
Federal Excise Tax Return (Form 8613).
F. Prepare and file Fund's Form N-SAR with the SEC.
G. Prepare and coordinate printing of Fund's Semiannual and Annual Reports
to Shareholders.
H. In conjunction with transfer agent, notify shareholders as to what
portion, if any, of the distributions made by the Fund's during the
prior fiscal year were exempt-interest dividends under Section
352(b)(5)(A) of the Code.
I. Provide Form 1099-MISC to persons other than corporations (i.e.,
Trustees [Directors]) to whom the Fund paid more than $600 during the
year.
B-1
<PAGE>
J. Prepare and file California State Expense Limitation Report, if
applicable.
K. provide financial information for Fund proxies and prospectuses
(Expense Table).
II. Portfolio Compliance
A. Assist with monitoring each Investment Fund's compliance with
investment restrictions (e.g., issuer or industry diversification,
etc.) listed in the current prospectus(es) and Statement(s) of
Additional Information, although primary responsibility for such
compliance shall remain with the Fund's investment adviser or
investment manager.
B. Assist with monitoring each Investment Fund's compliance with the
requirements of Section 851 of the Code for qualification as a RIC
(i.e., 90% Income, 30% Income - Short Three, Diversification Tests),
although primary responsibility for such compliance shall remain with
the Fund's investment adviser or investment manager.
C. Assist with monitoring investment manager's compliance with Board
directives such as "Approved Issuers Listings for Repurchase
Agreements", Rule 17a-7, and Rule 12d-3 procedures, although primary
responsibility for such compliance shall remain with the Fund's
investment adviser or investment manager.
D. Mail quarterly request for "Securities Transaction Reports" to the
Fund's Directors [Trustees] and Officers and "access persons" under
the terms of the Fund's Code of Ethics and SEC regulations.
III. Regulatory Affairs and Corporate Governance
A. Prepare and file post-effective amendments to the Fund's registration
statement and supplements as needed.
B. Prepare and file proxy materials and administer shareholder meetings.
C. Prepare and file all state registrations of the Fund's securities
including annual renewals;registering new funds, portfolios, or
classes; preparing and filing sales reports; filing copies of the
registration statement, prospectus and statement of additional
information; and increasing registered amounts of securities in
individual states.
B-2
<PAGE>
D. Prepare Board materials for Board meetings.
E. Assist with the review and monitoring of fidelity bond and errors and
omissions insurance coverage and the submission of any related
regulatory filings.
F. Prepare and update documents such as charter document, by-laws, and
foreign qualification filings.
G. Provide support with respect to routine regulatory examinations or
investigations of the Fund.
H. File copies of financial reports to shareholders with the SEC under
Rule 30b2-1.
IV. General Administration
A. Furnish officers of the Fund, subject to reasonable Board approval.
B. Prepare fund, portfolio or class expense projections, establish
accruals and review on a periodic basis, including expenses based on a
percentage of average daily net assets (advisory and administrative
fees) and expenses based on actual charges annualized and accrued
daily (audit fees, registration fees, directors' fees, etc.).
C. For new funds, portfolios and classes, obtain Employer or Taxpayer
Identification Number and CUSIP numbers, as necessary. Estimate
organizational costs and expenses and monitor against actual
disbursements.
D. Coordinate all communications and data collection with regard to any
regulatory examinations and yearly audits by independent accountants.
B-3
<PAGE>
MUTUAL FUNDS SERVICE AGREEMENT
SCHEDULE C
DESCRIPTION OF FUND ACCOUNTING SERVICES
I. General Description
Chase shall provide the following accounting services to the Fund:
A. Maintenance of the books and records for the Fund's assets, including
records of all securities transactions.
B. Calculation of each funds' portfolios' or classes' Net Asset Value in
accordance with the Prospectus, and after the fund, portfolio or class
meets eligibility requirements, transmission to NASDAQ and to such other
entities as directed by the Fund.
C. Accounting for dividends and interest received and distributions made by
the Fund.
D. Coordinate with the Fund's independent auditors with respect to the
annual audit, and as otherwise requested by the Fund.
E. As mutually agreed upon, Chase will provide domestic and/or
international reports.
C-1
<PAGE>
MUTUAL FUNDS SERVICE AGREEMENT
SCHEDULE D
DESCRIPTION OF TRANSFER AGENCY SERVICES
The following is a general description of the transfer agency services
Chase shall provide to the Fund.
A. Shareholder Recordkeeping. Maintain records showing for each Fund
shareholder the following (i) name, address, appropriate tax
certification and tax identifying number; (ii) number of shares of
each fund, portfolio or class; (iii) historical information
including, but not limited to, dividends paid, date and price of all
transactions including, individual purchases and redemptions, based
upon appropriate supporting documents; and (iv) any dividend
reinvestment order, application, specific address, payment and
processing instructions and correspondence relating to the current
maintenance of the account.
B. Shareholder Issuance. Record the issuance of shares of each fund,
portfolio or class. Except as specifically agreed in writing between
Chase and the Fund, Chase shall have no obligation when
countersigning and issuing and/or crediting shares to take
cognizance of any other laws relating to the issue and sale of such
shares except insofar as policies and procedures of the Stock
Transfer Association recognize such laws.
C. Transfer, Purchase and Redemption Orders. Process all orders for
the transfer, purchase and redemption of shares of the Fund in
accordance with the Fund's current prospectus and customary transfer
agency policies and procedures, including electronic transmissions
which the Fund acknowledges it has authorized, or in accordance with
any instructions of the Fund or its agents which Chase reasonably
believes to be authorized.
D. Shareholder Communications. Transmit all communications by the Fund
to its shareholders promptly following the delivery by the Fund of
the material to be transmitted by mail, telephone, courier service
or electronically.
E. Proxy Materials. Assist with the mailing or transmission of proxy
materials, tabulating votes, and compiling and certifying voting
results. Services may include the provision of inspectors of
election at any meeting of shareholders .
D-1
<PAGE>
F. Share Certificates. If permitted by Fund policies, and if a
shareholder of the Fund requests a certificate representing shares,
Chase as Transfer Agent, will countersign and mail a share certificate
to the investor at his/her address as it appears on the Fund's
shareholder records.
G. Returned Checks. In the event that any check or other negotiable
instrument for the payment of shares is returned unpaid for any
reason, Chase will take such steps, as Chase may, in its discretion,
deem appropriate and notify the Fund of such action. However, the Fund
remains ultimately liable for any returned checks or negotiable
instruments of its shareholders.
H. Shareholder Correspondence. Acknowledge all correspondence from
shareholders relating to their share accounts and undertake such other
shareholder correspondence as may from time to time be mutually agreed
upon.
I. Tax Reporting. Chase shall issue appropriate shareholder tax forms as
required.
J. Dividend Disbursing. Chase will prepare and mail checks, place wire
transfers or credit income and capital gain payments to shareholders.
The Fund will advise Chase of the declaration of any dividend or
distribution and the record and payable date thereof at least five (5)
days prior to the record date. Chase will, on or before the payment
date of any such dividend or distribution, notify the Fund's Custodian
of the estimated amount required to pay any portion of such dividend
or distribution payable in cash, and on or before the payment date of
such distribution, the Fund will instruct its Custodian to make
available to Chase sufficient funds for the cash amount to be paid
out. If a shareholder is entitled to receive additional shares by
virtue of any such distribution or dividend, appropriate credits will
be made to each shareholder's account.
K. Escheatment. Chase shall provide escheatment services only with
respect to the escheatment laws of the Commonwealth of Massachusetts,
including those which relate to reciprocal agreements with other
states.
L. Telephone Services. Chase will provide staff coverage, training and
supervision in connection with the Fund's telephone line for
shareholder inquiries, and will respond to inquiries concerning
shareholder records, transactions processed by Chase, procedures to
effect the shareholder records and inquiries of a general nature
relative to shareholder services. All other telephone calls will be
referred to the Fund, as appropriate.
D-2
<PAGE>
M. Fulfillment Services. As directed by the Fund, the Fund Adviser or the
Distributor, or upon the request of prospective shareholders either by
telephone or in writing, Chase will mail reasonable quantities of
prospectuses, applications to purchase shares, and other information
normally sent to prospective shareholders.
D-3
<PAGE>
APPENDIX 1
Yield Computation [may also be used for any complex or unusual item requested
by clients]
L. (1) CGFSC shall compute the yield, or tax equivalent yield, for the
Fund for the periods of time as agreed to by the parties;
(2) CGFSC shall have no responsibility to review, confirm or
otherwise assume any duty with respect to the accuracy or correctness
of any data, including but not limited to security attributes, pricing
data, and tax equivalent data, supplied to it by the Fund, any of the
Fund's agents including the investment adviser, or by third party
providers. CGFSC is entitled to rely on information or data provided
to it by the Fund's agents or investment advisers, or by third party
providers and will not be liable for any loss or expense suffered by
the Fund caused by such reliance;
(3) The Fund shall provide, from time to time as may be appropriate,
and CGFSC shall be entitled to rely on, the written standards and
guidelines to be followed by CGFSC in interpreting and applying the
computation methods set forth in the SEC Releases, industry standards
and regulatory guidelines regarding yield as they specifically apply
to the Fund, as well as information relating to any and all of the
Fund's assets. The Fund shall keep CGFSC informed of all publicly
available information and of any non-public advice or information
obtained by the Fund from its accountants, its personnel or its
investment adviser related to industry standards, or regulatory
guidelines regarding the computations to be undertaken by CGFSC
pursuant to this Agreement and CGFSC shall not be charged with
knowledge of such information unless it has been furnished to CGFSC in
writing; and
(4) The Fund shall indemnify CGFSC for any expenses, assessments,
claims or liabilities which it may incur in connection with this
Amendment, except as may arise from CGFSC's gross negligence, bad
faith or willful misconduct. In no event shall CGFSC be liable for any
indirect, incidental, special or consequential loss or damage of any
kind whatsoever (including but not limited to lost profits), even if
Chase has been advised of the likelihood of such loss or damage and
regardless of the form of action.
CHASE GLOBAL FUNDS SERVICES [THE FUND]
COMPANY ---------------------------------
By: By:
------------------------ ------------------------------
<PAGE>
APPENDIX 2
Authorized Personnel
The following personnel are authorized to give written or oral instructions
to Chase, subject to the provisions of Section 6(b)(vi):
1.
2.
3.
4.
5.
It is sole responsibility of the _____ Fund to notify Chase of any changes
to this list in writing.
CHASE GLOBAL FUNDS SERVICES [THE FUND]
COMPANY ------------------------------
By: By:
---------------------- ---------------------------
<PAGE>
EXHIBIT-99.B10
September 11, 1996
Morgan Stanley Universal Funds, Inc.
1221 Avenue of the Americas
New York, New York 10020
Gentlemen:
We have acted as counsel to you in connection with the organization of Morgan
Stanley Universal Funds, Inc. (the "Fund") and the proposed offering of up to
9,000,000,000 shares of common stock, par value $.001 per share (the "Common
Stock"), of the Fund.
Having prepared the Articles of Incorporation and By-Laws of the Fund, and
having assisted in the preparation of the Fund's Registration Statement on Form
N-1A (File Nos. 333-3013 and 811-7607) under the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, including all pre-
effective amendments thereto (the "Registration Statement"), relating to the
offering of the Common Stock, and having assisted in the preparation of other
related documents, we are of the opinion that:
1. The Fund is a Maryland corporation validly organized and in good standing
under the laws of that state, authorized to issue up to 9,000,000,000 shares of
Common Stock (the "Shares").
2. Upon the effectiveness of the Registration Statement, you will, in
jurisdictions where the Shares are qualified for sale, be authorized to make a
public offering of Shares pursuant to the terms of the offering as described in
the prospectus filed as part of the Registration Statement, and the Shares, when
issued upon receipt of payment therefor as described in such prospectus, will be
validly issued, fully paid and nonassessable by the Fund.
We have not reviewed the securities laws of any state or territory in connection
with the proposed offering of Shares and we express no opinion as to the
legality of any offer or sale of Shares under any such state or territorial
securities laws.
This opinion is intended only for your use in connection with the offering of
Shares and may not be relied upon by any other person.
We hereby consent to the inclusion of this opinion as Exhibit 10 to the
Registration Statement to be filed with the Securities and Exchange Commission.
Very truly yours,
/s/Morgan, Lewis & Bockius LLP
<PAGE>
EXHIBIT 99.B11
Consent of Independent Accountants
We hereby consent to the use in the Statement of Additional Information
constituting part of this Pre-Effective Amendment No. 1 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
September 13, 1996, relating to the statement of assets and liabilities at
September 11, 1996 of The Emerging Markets Equity Portfolio of Morgan Stanley
Universal Funds, Inc., which appears in such Registration Statement.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
September 13, 1996
<PAGE>
EXHIBIT 99.B24
MORGAN STANLEY UNIVERSAL FUNDS, INC.
POWER OF ATTORNEY
Barton M. Biggs, whose signature appears below, does hereby constitute and
appoint Warren J. Olsen, Michael F. Klein and Harold J. Schaaff, Jr., his true
and lawful attorneys and agents, with power of substitution or resubstitution,
to do any and all acts and things and to execute any and all instruments which
said attorneys and agents may deem necessary or advisable or which may be
required to enable Morgan Stanley Universal Funds, Inc. (the "Fund") to comply
with the Securities Act of 1933, as amended (the "1933 Act") and the Investment
Company Act of 1940, as amended (the "1940 Act"), and any rules, regulations or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the Fund's Registration Statement on Form N-1A pursuant to the
1933 Act and the 1940 Act, together with any and all amendments thereto,
including foregoing, the power and authority to sign in the name and on behalf
of the undersigned as a President and a director of the Fund such Registration
Statement and any and all such amendments filed with the Securities and
Exchanges Commission under the 1933 Act and the 1940 Act, and any other
instruments or documents related thereto, and the undersigned does hereby ratify
and confirm all that said attorney and agents shall do or cause to be done by
virtue hereof.
/s/ Barton M. Biggs
---------------------------
Barton M. Biggs
Date: August 15, 1996
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
POWER OF ATTORNEY
Frederick B. Whittemore, whose signature appears below, does hereby
constitute and appoint Warren J. Olsen, Michael F. Klein and Harold J. Schaaff,
Jr., his true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents may deem necessary or advisable or
which may be required to enable Morgan Stanley Universal Funds, Inc. (the
"Fund") to comply with the Securities Act of 1933, as amended (the "1933 Act")
and the Investment Company Act of 1940, as amended (the "1940 Act"), and any
rules, regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the Fund's Registration Statement on Form N-
1A pursuant to the 1933 Act and the 1940 Act, together with any and all
amendments thereto, including foregoing, the power and authority to sign in the
name and on behalf of the undersigned as a President and a director of the Fund
such Registration Statement and any and all such amendments filed with the
Securities and Exchanges Commission under the 1933 Act and the 1940 Act, and any
other instruments or documents related thereto, and the undersigned does hereby
ratify and confirm all that said attorney and agents shall do or cause to be
done by virtue hereof.
/s/ Frederick B. Whittemore
---------------------------
Frederick B. Whittemore
Date: August 15, 1996
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
POWER OF ATTORNEY
Thomas L. Bennett, whose signature appears below, does hereby constitute
and appoint Warren J. Olsen, Michael F. Klein and Harold J. Schaaff, Jr., his
true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents may deem necessary or advisable or
which may be required to enable Morgan Stanley Universal Funds, Inc. (the
"Fund") to comply with the Securities Act of 1933, as amended (the "1933 Act")
and the Investment Company Act of 1940, as amended (the "1940 Act"), and any
rules, regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the Fund's Registration Statement on Form N-
1A pursuant to the 1933 Act and the 1940 Act, together with any and all
amendments thereto, including foregoing, the power and authority to sign in the
name and on behalf of the undersigned as a President and a director of the Fund
such Registration Statement and any and all such amendments filed with the
Securities and Exchanges Commission under the 1933 Act and the 1940 Act, and any
other instruments or documents related thereto, and the undersigned does hereby
ratify and confirm all that said attorney and agents shall do or cause to be
done by virtue hereof.
/s/ Thomas L. Bennett
------------------------
Thomas L. Bennett
Date: August 15, 1996
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
POWER OF ATTORNEY
Warren J. Olsen, whose signature appears below, does hereby constitute and
appoint Michael F. Klein and Harold J. Schaaff, Jr., his true and lawful
attorneys and agents, with power of substitution or resubstitution, to do any
and all acts and things and to execute any and all instruments which said
attorneys and agents may deem necessary or advisable or which may be required to
enable Morgan Stanley Universal Funds, Inc. (the "Fund") to comply with the
Securities Act of 1933, as amended (the "1933 Act") and the Investment Company
Act of 1940, as amended (the "1940 Act"), and any rules, regulations or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the Fund's Registration Statement on Form N-1A pursuant to the
1933 Act and the 1940 Act, together with any and all amendments thereto,
including foregoing, the power and authority to sign in the name and on behalf
of the undersigned as a President and a director of the Fund such Registration
Statement and any and all such amendments filed with the Securities and
Exchanges Commission under the 1933 Act and the 1940 Act, and any other
instruments or documents related thereto, and the undersigned does hereby ratify
and confirm all that said attorney and agents shall do or cause to be done by
virtue hereof.
/s/ Warren J. Olsen
--------------------------
Warren J. Olsen
Date: August 15, 1996
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
POWER OF ATTORNEY
John D. Barrett, II, whose signature appears below, does hereby constitute
and appoint Warren J. Olsen, Michael F. Klein and Harold J. Schaaff, Jr., his
true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents may deem necessary or advisable or
which may be required to enable Morgan Stanley Universal Funds, Inc. (the
"Fund") to comply with the Securities Act of 1933, as amended (the "1933 Act")
and the Investment Company Act of 1940, as amended (the "1940 Act"), and any
rules, regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the Fund's Registration Statement on Form N-
1A pursuant to the 1933 Act and the 1940 Act, together with any and all
amendments thereto, including foregoing, the power and authority to sign in the
name and on behalf of the undersigned as a President and a director of the Fund
such Registration Statement and any and all such amendments filed with the
Securities and Exchanges Commission under the 1933 Act and the 1940 Act, and any
other instruments or documents related thereto, and the undersigned does hereby
ratify and confirm all that said attorney and agents shall do or cause to be
done by virtue hereof.
/s/ John D. Barrett, II
-------------------------
John D. Barrett, II
Date: August 15, 1996
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
POWER OF ATTORNEY
Gerard E Jones, whose signature appears below, does hereby constitute and
appoint Warren J. Olsen, Michael F. Klein and Harold J. Schaaff, Jr., his true
and lawful attorneys and agents, with power of substitution or resubstitution,
to do any and all acts and things and to execute any and all instruments which
said attorneys and agents may deem necessary or advisable or which may be
required to enable Morgan Stanley Universal Funds, Inc. (the "Fund") to comply
with the Securities Act of 1933, as amended (the "1933 Act") and the Investment
Company Act of 1940, as amended (the "1940 Act"), and any rules, regulations or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the Fund's Registration Statement on Form N-1A pursuant to the
1933 Act and the 1940 Act, together with any and all amendments thereto,
including foregoing, the power and authority to sign in the name and on behalf
of the undersigned as a President and a director of the Fund such Registration
Statement and any and all such amendments filed with the Securities and
Exchanges Commission under the 1933 Act and the 1940 Act, and any other
instruments or documents related thereto, and the undersigned does hereby ratify
and confirm all that said attorney and agents shall do or cause to be done by
virtue hereof.
/s/ Gerard E. Jones
---------------------------
Gerard E. Jones
Date: August 15, 1996
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
POWER OF ATTORNEY
Andrew Mc Nally,IV, whose signature appears below, does hereby constitute
and appoint Warren J. Olsen, Michael F. Klein and Harold J. Schaaff, Jr., his
true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents may deem necessary or advisable or
which may be required to enable Morgan Stanley Universal Funds, Inc. (the
"Fund") to comply with the Securities Act of 1933, as amended (the "1933 Act")
and the Investment Company Act of 1940, as amended (the "1940 Act"), and any
rules, regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the Fund's Registration Statement on Form N-
1A pursuant to the 1933 Act and the 1940 Act, together with any and all
amendments thereto, including foregoing, the power and authority to sign in the
name and on behalf of the undersigned as a President and a director of the Fund
such Registration Statement and any and all such amendments filed with the
Securities and Exchanges Commission under the 1933 Act and the 1940 Act, and any
other instruments or documents related thereto, and the undersigned does hereby
ratify and confirm all that said attorney and agents shall do or cause to be
done by virtue hereof.
/s/ Andrew McNally, IV
__________________________
Andrew McNally, IV
Date: August 15, 1996
--
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
POWER OF ATTORNEY
Samuel T. Reeves, whose signature appears below, does hereby constitute and
appoint Warren J. Olsen, Michael F. Klein and Harold J. Schaaff, Jr., his true
and lawful attorneys and agents, with power of substitution or resubstitution,
to do any and all acts and things and to execute any and all instruments which
said attorneys and agents may deem necessary or advisable or which may be
required to enable Morgan Stanley Universal Funds, Inc. (the "Fund") to comply
with the Securities Act of 1933, as amended (the "1933 Act") and the Investment
Company Act of 1940, as amended (the "1940 Act"), and any rules, regulations or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the Fund's Registration Statement on Form N-1A pursuant to the
1933 Act and the 1940 Act, together with any and all amendments thereto,
including foregoing, the power and authority to sign in the name and on behalf
of the undersigned as a President and a director of the Fund such Registration
Statement and any and all such amendments filed with the Securities and
Exchanges Commission under the 1933 Act and the 1940 Act, and any other
instruments or documents related thereto, and the undersigned does hereby ratify
and confirm all that said attorney and agents shall do or cause to be done by
virtue hereof.
/s/ Samuel T. Reeves
________________________
Samuel T. Reeves
Date: August 15, 1996
--
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
POWER OF ATTORNEY
Fergus Reid, whose signature appears below, does hereby constitute and
appoint Michael F. Klein and Harold J. Schaaff, Jr., his true and lawful
attorneys and agents, with power of substitution or resubstitution, to do any
and all acts and things and to execute any and all instruments which said
attorneys and agents may deem necessary or advisable or which may be required to
enable Morgan Stanley Universal Funds, Inc. (the "Fund") to comply with the
Securities Act of 1933, as amended (the "1933 Act") and the Investment Company
Act of 1940, as amended (the "1940 Act"), and any rules, regulations or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the Fund's Registration Statement on Form N-1A pursuant to the
1933 Act and the 1940 Act, together with any and all amendments thereto,
including foregoing, the power and authority to sign in the name and on behalf
of the undersigned as a President and a director of the Fund such Registration
Statement and any and all such amendments filed with the Securities and
Exchanges Commission under the 1933 Act and the 1940 Act, and any other
instruments or documents related thereto, and the undersigned does hereby ratify
and confirm all that said attorney and agents shall do or cause to be done by
virtue hereof.
/s/ Fergus Reid
__________________________
Fergus Reid
Date: August 15, 1996
--
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
POWER OF ATTORNEY
Frederick O. Robertshaw, whose signature appears below, does hereby
constitute and appoint Warren J. Olsen, Michael F. Klein and Harold J. Schaaff,
Jr., his true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents may deem necessary or advisable or
which may be required to enable Morgan Stanley Universal Funds, Inc. (the
"Fund") to comply with the Securities Act of 1933, as amended (the "1933 Act")
and the Investment Company Act of 1940, as amended (the "1940 Act"), and any
rules, regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the Fund's Registration Statement on Form N-
1A pursuant to the 1933 Act and the 1940 Act, together with any and all
amendments thereto, including foregoing, the power and authority to sign in the
name and on behalf of the undersigned as a President and a director of the Fund
such Registration Statement and any and all such amendments filed with the
Securities and Exchanges Commission under the 1933 Act and the 1940 Act, and any
other instruments or documents related thereto, and the undersigned does hereby
ratify and confirm all that said attorney and agents shall do or cause to be
done by virtue hereof.
/s/ Frederick O. Robertshaw
____________________________
Frederick O. Robertshaw
Date: August 15, 1996
--
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
POWER OF ATTORNEY
James R. Rooney, whose signature appears below, does hereby constitute and
appoint Michael F. Klein, Warren J. Olsen and Harold J. Schaaff, Jr., his true
and lawful attorneys and agents, with power of substitution or resubstitution,
to do any and all acts and things and to execute any and all instruments which
said attorneys and agents may deem necessary or advisable or which may be
required to enable Morgan Stanley Universal Funds, Inc. (the "Fund") to comply
with the Securities Act of 1933, as amended (the "1933 Act") and the Investment
Company Act of 1940, as amended (the "1940 Act"), and any rules, regulations or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the Fund's Registration Statement on Form N-1A pursuant to the
1933 Act and the 1940 Act, together with any and all amendments thereto,
including foregoing, the power and authority to sign in the name and on behalf
of the undersigned as a President and a director of the Fund such Registration
Statement and any and all such amendments filed with the Securities and
Exchanges Commission under the 1933 Act and the 1940 Act, and any other
instruments or documents related thereto, and the undersigned does hereby ratify
and confirm all that said attorney and agents shall do or cause to be done by
virtue hereof.
/s/ James R. Rooney
_________________________
James R. Rooney
Date: August 15, 1996
--
<PAGE>
[ARTICLE] 6
[CIK] 0001011378
[NAME] MORGAN STANLEY UNIVERSAL FUNDS, INC.
[SERIES]
[NUMBER] 1
[NAME] EMERGING MARKETS EQUITY PORTFOLIO
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] OTHER
[FISCAL-YEAR-END] DEC-31-1996
[PERIOD-START] SEP-11-1996
[PERIOD-END] SEP-11-1996
[INVESTMENTS-AT-COST] 100
[INVESTMENTS-AT-VALUE] 100
[RECEIVABLES] 0
[ASSETS-OTHER] 0
[OTHER-ITEMS-ASSETS] 460
[TOTAL-ASSETS] 460
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 360
[TOTAL-LIABILITIES] 360
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 100
[SHARES-COMMON-STOCK] 10
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 100
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 0
[OTHER-INCOME] 0
[EXPENSES-NET] 0
[NET-INVESTMENT-INCOME] 0
[REALIZED-GAINS-CURRENT] 0
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 0
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 0
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 10
[NUMBER-OF-SHARES-REDEEMED] 0
[SHARES-REINVESTED] 0
[NET-CHANGE-IN-ASSETS] 100
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 0
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 0
[AVERAGE-NET-ASSETS] 100
[PER-SHARE-NAV-BEGIN] 10.00
[PER-SHARE-NII] 0
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] 0
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 10.00
[EXPENSE-RATIO] 0
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
