<PAGE>
As filed with the Securities and Exchange Commission on April 30, 1996
Securities Act File No. 33-
Investment Company Act File No. 811-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 /X/
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /X/
--------------
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
--------------
Approximate Date of Proposed Public Offering: As soon as practicable after
effective date of this Registration Statement.
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
Title of Securities Amount Being Amount of
Being Registered Registered Registration Fee
- - - ------------------- ------------ ----------------
<S> <C> <C>
Common Stock, par value Indefinite* $500**
$.001 per share
</TABLE>
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* Registrant elects to register an indefinite number of shares of its Common
Stock, par value $.001 per share, under the Securities Act of 1933 pursuant
to Rule 24f-2 under the Investment Company Act of 1940.
** Registrant has paid the Registration Fee prior to the filing of this
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.
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<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, 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
---------------------------------------------------
Item 1. Cover Page -- Cover Page
Item 2. Synopsis -- *
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 -- *
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.
- - - ------------------------------
* Ommitted since the answer is negative or the Item is not applicable.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. THESE +
+SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE +
+TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT +
+CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL +
+THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE WHICH SUCH OFFER, +
+SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION +
+UNDER THE SECURITIES LAWS OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION -- DATED APRIL 30, 1996
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 AND VARIABLE LIFE INSURANCE
CONTRACTS 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 ("SAI") DATED , 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 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 AND VARIABLE
LIFE INSURANCE CONTRACTS 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 , 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 investments.
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 manages
assets of approximately $57.4 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 $35 billion.
OFFERING OF SHARES
The Fund is intended to be a funding vehicle for all types of variable annuity
and variable life insurance contracts 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 between 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 PAGE
----
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 and the related
risks.
SECURITIES AND INVESTMENT TECHNIQUES 15
- - - ------------------------------------
More information about the types of investment strategies that may be
common to some or all of the Portfolios.
FUNDAMENTAL INVESTMENT LIMITS 31
- - - -----------------------------
Certain policies that may be changed only by shareholders.
MANAGEMENT OF THE FUND 31
- - - ----------------------
General information on organization and operations, including details
about MSAM, MAS and the individual portfolio managers, as well as fees,
expenses and performance calculations.
ACCOUNT POLICIES 39
- - - ----------------
Information on net asset value ("NAV") calculation, income and gain
distributions, taxes and share purchases and redemptions.
APPENDIX 40
- - - --------
Summaries of ratings of the fixed income securities in which the
Portfolios may invest.
2
<PAGE>
PORTFOLIO SUMMARIES
- - - -------------------
In the following summaries certain investment terms have initial capital
letters ("Money Market Instruments," for example). These terms are further
described under "Securities and Investment Techniques".
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, consistent with reasonable risk, by investing primarily in a
diversified portfolio of U.S. Governments and Agencies, Corporate Bonds,
Mortgage-Backed Securities, Foreign Bonds and other Fixed-Income Securities and
Derivatives. The Portfolio's average weighted maturity will ordinarily exceed
five 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, consistent with reasonable risk, 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.
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, consistent with reasonable risk, by investing primarily in a
diversified portfolio of Common Stocks and other Equity Securities of companies
which 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 which 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, consistent with reasonable risk, by investing primarily in a
diversified portfolio of Common Stocks and other Equity Securities which 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 with equity capitalizations usually
greater than $300 million which 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 smaller and medium size companies
that are deemed by MAS to offer long-term growth potential.
INVESTOR PROFILE: The Portfolio may be appropriate for investors who are
willing to ride out stock market fluctuations in pursuit of potentially high
long-term returns and who understand that investments in smaller 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, consistent with reasonable risk, by investing in Common Stocks
and other Equity Securities with equity capitalizations in the range of the
companies represented in the S&P MidCap 400 Index which are deemed by MAS to be
relatively undervalued based on certain proprietary measures of value.
INVESTOR PROFILE: The Portfolio may be appropriate for investors seeking an
above-average total return from Common Stocks of medium size companies which
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 companies 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 companies 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, consistent with reasonable risk, 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.
INVESTOR PROFILE: The Portfolio may be appropriate for investors seeking an
above-average return from high-grade Foreign Bonds and willing to accept some
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 individual stock selection and is value
driven.
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 enrichment, 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
countries. By including emerging market 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 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.
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 individual stock selection and is value driven. The Portfolio
intends to invest in Equity Securities which are traded on recognized stock
exchanges of the 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, consistent with reasonable risk, 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 be greater than five 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.
Neutral Mix
<TABLE>
<S> <C>
Equity Securities 60% Fixed-Income Securities 40%
----------------------- ---------------------------
(Can range from 45-75%) (Can range from 25-55%)
</TABLE>
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, consistent with reasonable risk, by investing primarily in a
diversified portfolio of Equity and Fixed-Income Securities (including High
Yield Securities) of United States and foreign issuers and Derivatives. The
average weighted maturity of the fixed income portion of the Portfolio will
ordinarily be greater than five years.
INVESTOR PROFILE: The Portfolio may be appropriate for investors seeking an
above-average return from a diversified portfolio of both Equity Securities of
United States and foreign issuers and a wide range of United States and foreign
Fixed-Income Securities ranging from high yield to high grade.
Neutral Mix
<TABLE>
<S> <C>
U.S. Equity U.S. Fixed-Income
Securities % Securities %
--------------------- ---------------------
(Can range from - %) (Can range from - %)
Foreign Equity Foreign Fixed-Income
Securities % Securities %
--------------------- ---------------------
(Can range from - %) (Can range from - %)
</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 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. 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 U.S. 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 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 environment, and overall economic factors in the countries in which
investments are made.
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.
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Each Portfolio will be invested according to its investment strategy. However,
the Portfolios also have the ability to invest without limitation in
investment-grade money market or short-term debt instruments for temporary,
defensive purposes.
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 (i) in one of the two highest rating categories
by at least two nationally recognized statistical rating organizations
assigning a rating to the security or issuer, or (ii) if only one rating
organization assigned a rating, by that rating organization, or (iii) if
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 Standard and Poor's Ratings Group ("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, consistent with reasonable risk, by investing in a
diversified portfolio of U.S. Governments and Agencies, Corporate Bonds,
Foreign Bonds, Mortgage-Backed Securities of domestic issuers, and other Fixed-
Income Securities and Derivatives. The Portfolio's average weighted maturity
will ordinarily be greater than five years.
Under normal circumstances, the Portfolio will invest at least 65% of the value
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,
Investment Company Securities, When-Issued and Delayed Delivery Securities and
Derivatives, including CMOs, Structured Notes, 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, consistent with reasonable risk, by investing primarily in High-
Yield Securities 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 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 be greater than five
years.
Under normal circumstances, the Portfolio will invest at least 65% of the value
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, Foreign
Currency, Investment Company Securities, Foreign Equities, Loan Participations,
Municipals, Brady Bonds, Asset-Backeds, and Derivatives, including When-Issued
or Delayed Delivery Securities, SMBSs, CMOs, Structured Notes, Forwards,
Futures, Options and Swaps. For risks associated with lower-quality debt
securities and additional information about investments, see "Securities and
Investment Techniques" below.
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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, consistent with reasonable risk, by investing primarily in Common
and Preferred Stocks, Convertible Securities, Rights and Warrants to purchase
Common Stocks, 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. Government 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 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 the value
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, other Fixed-Income Securities and Derivatives, including
When-Issued and Delayed Delivery Securities, 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 $750 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 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, consistent with reasonable risk, by investing primary in Common and
Preferred Stocks,
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Convertible Securities, Rights and Warrants to purchase Common Stocks, American
Depositary Receipts ("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. Government Agencies, Corporate Bonds, Foreign Bonds, Zero Coupons,
Repurchase Agreements, Cash Equivalents, Foreign Currency, Investment Company
Securities and Derivatives, including When-Issued or Delayed Delivery
Securities, 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 which are deemed to be
undervalued relative to the stock market in general as measured by the Standard
& Poor's 500 Index, 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 smaller and medium size
companies which are deemed by the Adviser to offer long-term growth potential.
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. Government Agencies, Corporate Bonds,
Foreign Bonds, Zero Coupons, Repurchase Agreements, Cash Equivalents, Foreign
Currency, Investment Company Securities and Derivatives, including When-Issued
and Delayed Delivery Securities, Forwards, Futures, Options and Swaps. For
additional information about investments, see "Securities and Investment
Techniques" below.
The Adviser's approach is to select high quality companies that it believes
have passed the earliest and riskiest stages of growth. The Adviser selects
individual stocks by fundamental business and financial factors relative to the
current market price. The Portfolio will purchase shares of companies that the
Adviser believes are capable of sustaining short-term and long-term earnings
growth and that are capable of producing positive earnings surprises relative
to consensus earnings estimates.
MID CAP VALUE PORTFOLIO
The Portfolio seeks above-average total return over a market cycle of three to
five years, consistent with reasonable risk, 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 in the range of the companies represented in the S&P MidCap 400
Index.
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. Government Agencies,
Corporate Bonds, Foreign Bonds, Zero Coupons, Repurchase Agreements, Cash
Equivalents, Foreign Currency, Investment Company Securities, and Derivatives,
including When-Issued Securities, 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 which 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 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 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
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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 a nationally
recognized statistical rating organization ("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.
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, Temporary Investments and Derivatives, including
Options, Futures and When-Issued and Delayed Delivery Securities, and may lend
its portfolio securities as described in "Securities and Investment Techniques"
below, which has additional information about the Portfolio's investments.
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 Standard & Poor's Stock Price Index ("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
should realize that by investing in REITs indirectly through the Portfolio, he
will bear not only his 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, consistent with reasonable risk, 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 will be generally greater
than five years. Under normal circumstances, the Portfolio will invest at least
80% of the value of its total assets in Fixed-Income Securities of issuers in
at least three countries other than the U.S., including Emerging Market
Countries Securities and Eastern European Securities.
The Portfolio may also invest in Foreign Currency, Investment Company
Securities, Preferred Stock and Derivatives, including When-Issued and Delayed
Delivery Securities, 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 Mortgage-Backed Securities and Corporate Bonds when it believes
they offer the most value, although most foreign currency denominated
investments are in Fixed-Income Securities 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 the value 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.
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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, Money Market Instruments, Repurchase
Agreements, Reverse Repurchase Agreements, Temporary Investments, Non-Publicly
Traded Securities, Private Placements, Restricted Securities, Short Sales,
Derivatives, including When-Issued or Delayed Delivery Securities, Forwards,
Futures and Options, and may lend its portfolio securities. The Portfolio may
also invest up to 5% of its total assets in Mortgage-Backed Securities, CMOs
and in other Asset-Backed securities 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
net asset value 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" 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 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
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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 U.S. and
Emerging Market Countries. Under normal circumstances, at least 65% of the
total assets of the Portfolio will be invested in Equity Securities and at
least 20% of the value of the Portfolio's total assets will be invested in the
Common Stocks of U.S. issuers. 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 which 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 value 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 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, Repurchase Agreements, Cash or Cash
Equivalents, and Derivatives, including When-Issued or Delayed Delivery
Securities, Forwards, 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" below.
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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 and Derivatives,
including When-Issued or Delayed Delivery Securities, Forwards, Futures and
Options and may lend its 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 below
investment grade Fixed-Income Securities (commonly referred to as high yield
bonds or junk bonds). For temporary defensive purposes, the Portfolio may
invest less than 65% of its total assets in emerging 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. For additional information about
investments, see "Securities and Investment Techniques" 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 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 medium and small companies that, in the Adviser's
view, have potential for growth.
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Emerging Market Countries 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 adequately hedge foreign
currency risk. 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 and Derivatives,
including When-Issued or Delayed Delivery Securities, 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 medium and small 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, consistent with reasonable risk, by investing in a diversified
portfolio of Equity and Fixed-Income Securities. The average weighted maturity
of the Portfolio's Fixed-Income Securities ordinarily will be greater than five
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, 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,
Investment Company Securities,
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Investment Funds, Eastern European Securities, Emerging Market Country
Securities, Loan Participations, Municipals and Derivatives, including When-
Issued or Delayed Delivery Securities, 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, consistent with reasonable risk, by investing in a diversified
portfolio of Common Stocks and Fixed-Income Securities of United States and
foreign issuers.
Under normal circumstances, the Portfolio will invest at least 65% of the value
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 generally will be greater than five years.
The Portfolio may also invest in Municipals, Loan Participations, Investment
Funds, Emerging Market Countries Securities, Foreign Currency, Forwards, CMOs,
Brady Bonds, Zero Coupons, Cash Equivalents, ADRs, When-Issued Securities and
Derivatives, including 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 INVESTMENTS 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 Portfolios' 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 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 goal. 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 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 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-five 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,
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<PAGE>
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 expiration 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, 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. companies. 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 Common Stocks generally
characterized by higher growth rates of revenues and earnings. These stocks
tend to have higher betas, and price/earnings ratios, and lower yields than the
stock market in general as measured by the S&P 500 Index.
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 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 bond 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.
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High yield bonds may also present risks based on payment expectations. For
example, high yield bonds 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 bond's
value will decrease in a rising interest rate market.
Certain types of high yield bonds 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 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. See "Value Investing" for a description of the second primary
component of fixed-income strategy.
Duration is a measure of the expected life of a fixed-income security 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.
Most debt obligations provide interest (coupon) payments in addition to a final
(par) payment at maturity. Some obligations also have call provisions.
Depending on the relative magnitude of these payments and the nature of the
call provisions, the market values of debt obligations may respond differently
to changes in the level and structure of interest rates.
Traditionally, a debt 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 debt 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. 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 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,
floating and variable rate securities 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 will use
sophisticated analytical techniques that incorporate the economic life of a
security into the determination of its interest rate exposure.
MORTGAGE INVESTING: At times it is anticipated that greater than 50% of a
fixed-income portfolio's assets may be invested in mortgage-backed securities.
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
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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 mortgage-backed securities issued by the various
Government-related organizations. However, a portfolio may invest, without
limit, in mortgage-backed securities 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 Standard & Poor's or be deemed by the
Adviser to be of comparable investment quality. It is not anticipated that
greater than 25% of a portfolio's assets will be invested in mortgage pools
comprised of private organizations.
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 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.
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 Advisers will look for those securities that
offer a higher yield to compensate for any variation in average maturity.
BRADY BONDS. Brady Bonds are debt obligations 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 recently, 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 only invest in
Brady Bonds consistent with quality specifications.
CASH EQUIVALENTS. Cash Equivalents are short-term fixed-income instruments
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 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 Advisers to be of
an investment quality comparable with
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other debt securities which may be purchased by the Portfolio.
(2)Commercial paper rated at time of purchase by one or more NRSRO to be in one
of their two highest categories, (e.g., A-1 or A-2 by S&P or Prime 1 or Prime 2
by Moody's), or, if not rated, issued by a corporation having an outstanding
unsecured debt issue rated high-grade by a NRSRO (e.g. A or better by Moody's,
S&P or Fitch);
(3)Short-term corporate obligations rated high-grade at the time of purchase by
a NRSRO (e.g. A or better by Moody's, S&P or Fitch);
(4)U.S. Government obligations including bills, notes, bonds and other debt
securities issued by the U.S. Treasury. These are direct obligations of the
U.S. Government and differ mainly in interest rates, maturities and dates of
issue;
(5)Securities issued or guaranteed by U.S. Government sponsored
instrumentalities and Federal agencies. These include securities issued by the
Federal Home Loan Banks, Federal Land Bank, Farmers Home Administration, Farm
Credit Banks, Federal Intermediate Credit Bank, Federal National Mortgage
Association, Federal Financing Bank, the Tennessee Valley Authority, and
others; and
(6)Repurchase Agreements collateralized by securities listed above.
CMOS. 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 being 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 Advisers 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 bonds in general,
mortgage-backeds will generally decline in price when interest rates rise.
However, when interest rates fall, mortgages 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, mortgages 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 bonds, convertible preferred stock, 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 debt instruments 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 American Depositary Receipts ("ADRs"), Global Depositary
Receipts ("GDRs") and other types of Depositary Receipts (which, together with
ADRs and GDRs, 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 U.S.
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
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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.
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,
Convertible Securities, Warrants, When-Issued and Delayed Delivery Securities,
Forwards, Futures, Options, Structured Notes, structured investments and Swaps.
The Advisers will use Derivatives only in circumstances where they offer the
most economic means of improving the risk/reward profile of a Portfolio. The
Advisers 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 Advisers 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 with counterparties
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 with ratings below AA.
See elsewhere in this "Securities and Investment Practices" section for
descriptions of these various derivative instruments, and see "Fundamental
Investment Policies and Restrictions" 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 Advisers 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.
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) which 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 U.S.
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. See the "Investment Objectives" section
applicable to a particular Portfolio to determine in which of the above a
Portfolio may invest.
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FIXED-INCOME SECURITIES. Debt securities commonly include, but are not limited
to, debentures, U.S. Governments, Zero Coupons, Agencies, Corporate Bonds, High
Yield Securities, Mortgage-Backed Securities, SMBSs, CMOs, Asset-Backeds,
Convertible Securities, Brady Bonds, Floaters, Inverse Floaters, Cash
Equivalents, 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 "Investment Objectives" 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 debt securities in which the Portfolio may invest will be rated
investment grade by recognized rating services such as Moody's or S&P (in the
case of Moody's and S&P, meaning rated A or higher by either), or if unrated,
will be determined to be of comparable quality by the Advisers.
FLOATERS. Floating and variable rate obligations ("Floaters") are debt
obligations 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 floating or variable rate
obligations 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 floating or
variable rate obligations 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 U.S., including: (1)
obligations issued or guaranteed by foreign national governments, their
agencies, instrumentalities, or political subdivisions; (2) debt 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; and (4) foreign Mortgage Securities and
various other mortgage and asset-backed securities denominated in foreign
currency. Investing in foreign companies involves certain special
considerations which 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 currencies 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 portfolio securities.
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
U.S. are traded on regulated exchanges. A Portfolio will incur brokerage fees
when it purchases or sells Futures Contracts or Options, and it will be
required to maintain margin deposits. Parties to a Futures Contract 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. The International Magnum Portfolio may not enter into
foreign currency Futures Contracts if the aggregate amount of initial margin
deposits on the Portfolio's Futures positions, including stock index Futures
Contracts (which are discussed below), would exceed 5% of the value of the
Portfolio's total assets. 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. 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.
At the maturity of a Forex Futures 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
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to Forex Futures contracts are effected on an exchange. A Portfolio will only
enter into such a Forex Futures 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 or
Futures contract, in which case the Portfolio may suffer a loss.
A Portfolio may also purchase put or call 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 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 U.S. 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 might 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 debt 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 time of the
contract. Forwards are traded in the interbank market conducted directly
between currency traders (usually large commercial banks).
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Purposes for which Forwards may be used include locking in an exchange rate in
connection with purchases and sales of securities denominated in foreign
currencies ("transaction hedge"), locking in the U.S. dollar value of portfolio
positions ("position hedge") and generally protecting the U.S. dollar value of
securities held by the Portfolio against exchange rate fluctuations.
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 Advisers will attempt to
hold such mismatching to a minimum, there can be no assurance that the Advisers
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 high-grade, liquid securities or cash 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 cash, U.S. government securities, or high-
grade debt securities 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 cash or securities 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 or 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.
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 Options, Futures and Options on
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
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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 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.
The Growth Portfolio may enter into Futures to remain fully invested and to
reduce transaction costs. The Growth Portfolio may also enter into Futures
transactions as a hedge against fluctuations in the price of a security it
holds or intends to acquire, but not for speculation or for achieving leverage.
The Growth Portfolio may enter into Futures provided that not more than 5% of
the Portfolio's total assets at the time of entering into the contract or
option is required as deposit to secure obligations under such Futures, and
provided that not more than 20% of the Growth Portfolio's total assets in the
aggregate is invested in Futures. The Growth Portfolio may purchase and write
call and put options on Futures that are traded on any 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. The Growth Portfolio will purchase and write
options on Futures for identical purposes to those set forth above for the
purchase of a Futures (purchase of a call option or sale of a put option) and
the sale of a Futures (purchase of a put option or sale of a call option), or
to close out a long or short position in the Futures.
The International Magnum Portfolio may purchase and sell stock index Futures
Contracts. A stock index Futures contract is an agreement to take or make
delivery of an amount of cash equal to the difference between the value of the
index at the beginning and at the end of the contract period. The Portfolio may
utilize stock index Futures Contracts in order to hedge against fluctuations in
the price of a security it holds or intends to acquire, to remain fully
invested and to reduce transaction costs, but not for speculation or for
achieving leverage. The Portfolio may enter into stock index Futures Contracts
provided that not more than 5% of the Portfolio's total assets at the time of
entering into the contract or option is required as deposit to secure
obligations under such contracts and Options, and provided that not more than
20% of the Portfolio's total assets in the aggregate is invested in stock index
Futures Contracts.
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's 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's 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's: 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." C The
rating C is reserved for income bonds on which "no interest is being
paid." D 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
bonds.
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.
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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 in other open-end or closed-end investment companies. The 1940 Act,
as amended, 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 SEC Rule or Order.
INVESTMENT FUNDS. Some emerging market countries have laws and regulations that
currently preclude direct Foreign Investment in the securities of their
companies. However, indirect Foreign 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 which 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 below under "Investment Restrictions." 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 Advisers), but also will indirectly bear similar expenses of the
underlying Investment Funds.
Certain of the Investment Funds referred to in the preceding paragraph are
advised by the Advisers. 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 Investors Service, Inc.
("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. Mortgage-Backed Securities,
including mortgage pass-throughs and CMOs, deemed investment grade by the
Advisers, 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 Advisers to be
investment grade quality. The Advisers may retain securities if their ratings
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 Advisers 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
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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 Advisers 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 Loan 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 Loan Participations
also may make it more difficult for a Portfolio to assign a value to these
securities for purposes of valuing a Portfolio's portfolio securities and
calculating its net asset value.
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. Loan 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 Loan Participations present additional risks of default or
loss.
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 the market value of its total assets.
For more detailed information about securities lending, see "Investment
Objectives and Policies" 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 make money market investments pending other investment or
settlement for liquidity, or in adverse market conditions. The money market
investments permitted for the Portfolios include obligations of the United
States Government and its agencies and instrumentalities; obligations of
foreign sovereignties, 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 investments, see "Description of Securities and Ratings" in the
SAI.
MORTGAGE-BACKED SECURITIES. Mortgage-Backed Securities ("MBS") represent an
ownership interest in a pool of residential and commercial mortgage loans.
Generally, these securities are designed to provide monthly payments of
interest and principal to the investor. The mortgagee's monthly payments to
his/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. MBS 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, MBS purchased by a Portfolio will
be those which at time of purchase are rated investment grade by one or more
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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 MBS, 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 Advisers
will look for those securities that offer a higher yield to compensate for any
variation in average maturity.
There are two methods of trading MBS. 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 MBS are traded
on a TBA basis.
A mortgage-backed bond is a collateralized debt security issued by a thrift or
financial institution. 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
Coupon Treasury Bonds), Agencies, cash equivalent securities, 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.
MUNICIPALS. Municipal securities ("Municipals") are debt obligations issued by
local, state and regional governments that provide interest income which is
exempt from federal income taxes. Municipals include both municipal bonds
(those securities with maturities of five years or more) and 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 sewage works. Industrial development bonds are ordinarily dependent on
the credit quality of a private user, not the public issuer.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Growth, U.S. Real Estate, International Magnum and Emerging
Markets Equity 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. Further, more
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, the 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, nor more than 10%, 15% for the Growth Portfolio, of
its total assets in securities that are restricted from sale to the public
without registration ("Restricted Securities") under the Securities Act of
1933, as amended (the "1933 Act"). Nevertheless, subject to the foregoing limit
on illiquid securities, 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
Restricted Securities that can be offered and sold to qualified institutional
buyers under Rule 144A under that Act ("144A Securities"). The Board of
Directors has adopted guidelines and delegated to the Advisers, subject to the
supervision of the Board of Directors, the daily function of determining and
monitoring the liquidity of 144A securities. Rule 144A securities may become
illiquid if qualified institutional buyers are not interested in acquiring the
securities. Investors should note that investments of 5% of the Portfolio's
total assets in Restricted Securities may be considered a speculative activity
and may involve greater risk and expense to the 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.
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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
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. Government securities
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 Advisers 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 [at work] 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. The aggregate of certain Repurchase Agreements and certain other
investments is limited as set forth under "Investment Limitations."
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
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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 purchase 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 cash, U.S. Government securities or other liquid high grade debt obligations
in an amount at least equal to its purchase obligations under these agreements.
If interest rates rise during a Reverse Repurchase Agreement, it may adversely
affect the Portfolio's ability to maintain a stable net asset value.
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. SMBS 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.
SMBS 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
IOs and POs 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 SMBS 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.
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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 Index. 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 Advisers 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 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. Government securities, or high grade 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 Portfolio'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 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 Advisers 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 were not used.
TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes in
economic, financial or political conditions make it advisable, the Growth,
International Magnum and Emerging Markets Equity Portfolios may reduce their
holdings in equity and other securities for temporary defensive purposes and
the Portfolios 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 securities in
which the Portfolio may invest consist of (a) obligations of the United States
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 United States or foreign country banks
denominated in any currency; (c) floating rate securities 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 United States and foreign country corporations meeting the
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 securities 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 debt securities to most foreign countries).
U.S. GOVERNMENTS. U.S. Treasury securities are Fixed-Income Securities which
are backed by the full faith and credit of the U.S. Government as to the
payment of both principal and interest.
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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 high-grade 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 Delivery Securities commitments
exceeding, in the aggregate, 15% of the market value 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
Coupon obligations ("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 Coupon
securities 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.
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 and its agencies and
instrumentalities, or (b) own more than 10% of the outstanding voting
securities of any one issuer.
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" in the SAI.
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
contracts. 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 contractowners, variable life insurance contractowners and
qualified plans that invest in the Fund due to the difference of 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 and life insurance contracts and
to qualified plans.
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The Boards of Directors of those life insurance companies and the Adviser have
agreed 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, those life insurance companies have
agreed, 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 contracts. Qualified plans which acquire more than 10 percent 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 contract 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 policyowners and must vote shares
in the separate account in proportion to the voting instructions received. An
insurance company is entitled to one vote for each share it owns. For a further
discussion, please refer to your insurance company's separate account
prospectus.
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 December 31,
1995, MSAM, together with its affiliated asset management companies (other than
MAS), managed investments totaling approximately $57.5 billion, including
approximately $40.1 billion under active management and $15.1 billion as Named
Fiduciary or Fiduciary Advisers. At December 31, 1995, MAS managed investments
totalling approximately $35.7 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's 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 BA 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 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 BS degree in Engineering from University of
Pennsylvania and an MBA from the Wharton School. Mr. Barth, 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 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
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Portfolio in 1989, 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, Portfolio Manager,
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, Portfolio Manager, 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. Mr. Angevine also
manages high yield assets for one of the largest corporate pension funds 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 joined MAS in 1988. He assumed
responsibility for the MAS Funds High Yield 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 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 and Select Equity Portfolios 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, Select Equity and Growth 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, Select Equity and Growth
Portfolios in 1994. Nicholas J. Kovich joined MAS in 1988. He assumed
responsibility for the MAS Funds Equity and Select Equity Portfolios in 1994.
Robert J. Marcin joined MAS in 1988. He assumed responsibility for the MAS
Funds Value Portfolio in 1990 and the MAS Funds Equity and Select Equity
Portfolios in 1994. Gary G. Schlarbaum, Partner, joined MAS in 1987. He assumed
responsibility for the MAS Funds Equity and Small Cap Value Portfolios in 1987,
the MAS Funds Select Equity Portfolio in 1988, 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 and Margaret K. Johnson. Kurt Feuerman joined
MSAM in July 1993 as a Managing Director in the Institutional Equity Group.
Previously Mr. Feuerman was a Managing Director of Morgan Stanley & Co.,
Incorporated's ("Morgan Stanley") 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. 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 Vice President of
MSAM and a Portfolio Manager in the Institutional Equity Group. She joined MSAM
in 1984 and worked as an Analyst in the Marketing and Fiduciary Adviser areas.
Ms. Johnson became an Equity Analyst in 1986 and a Portfolio Manager in 1989.
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.
Mr. Feuerman and Ms. Johnson have shared primary responsibility for managing
the Portfolio's assets since inception.
VALUE PORTFOLIO -- Richard M. Behler, Robert J. Marcin and A. Morris Williams,
Jr. Richard M. Behler 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 and
A. Morris Williams, Jr. is included under Core Equity Portfolio above. Mr.
Behler, Mr. Marcin and Mr. Williams, Jr., 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
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included under Core Equity Portfolio above. Abhi Y. Kanitkar 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 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 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, 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 serves 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 $2.8 billion as of October, 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. 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 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, Portfolio Manager, 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 and became a Vice President of
Morgan Stanley in 1992. Her responsibilities include day-to-day
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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.
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 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 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. 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, Dean Williams 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, Portfolio Manager, 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. Dean
Williams joined MAS in 1988. He assumed responsibility for the International
Equity Portfolio in 1988 and the MAS Funds Emerging Markets and MAS Funds
Multi-Asset-Class Portfolios in 1994. Messrs. Bennett, Connolly, Germany,
Schlarbaum, Valeiras, Williams 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
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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 [ %] of the average daily net assets of each Portfolio.
The Chase Manhattan Bank, N.A. ("Chase") has entered into a sub-administration
agreement with each of MSAM and MAS (the "Chase Administration Agreements"),
pursuant to which Chase has agreed to provide certain administrative services
to the Fund. Pursuant to a delegation clause in the Chase Administration
Agreements, Chase has delegated its administration responsibilities to Chase
Global Funds Services Company ("CGFSC"), which is a subsidiary of Chase that
provides certain administrative services to the Fund. MSAM and MAS supervise
and monitor such administrative services provided by CGFSC. The services
provided under the Administration Agreements and the Chase 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 Chase
Administration Agreements as being in the best interests of the Fund. CGFSC's
business address is 73 Tremont Street, Boston, Massachusetts 02108-3913. For
additional information regarding the Administration Agreement or the Chase
Administration Agreement, see "Management of the Fund" in the SAI.
CGFSC calculates the net asset value (NAV) and dividends, maintains the general
accounting records and administers the securities lending program for each
Portfolio.
CUSTODIAN. 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 and employs subcustodians
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. CGFSC 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 the Advisers 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. Fees arrangements, 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 $ million
- - - -------------------------------------------------------------------------------
From $ million to $ million
- - - -------------------------------------------------------------------------------
More than $ million
===============================================================================
</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 $ million
- - - --------------------------------------------------------------------------------
From $ million to
$ million
- - - --------------------------------------------------------------------------------
More than $ million
================================================================================
</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 $ million
- - - ----------------------------------------------------------------------------------------
From $ million to
$ million
- - - ----------------------------------------------------------------------------------------
More than $ million
========================================================================================
</TABLE>
ASSET ALLOCATION PORTFOLIO ADVISORY FEES
<TABLE>
<CAPTION>
Assets Balanced Multi-Asset Class
- - - ---------------------------------------------------------------
<S> <C> <C>
First $ million
- - - ---------------------------------------------------------------
From $ million to $ million
- - - ---------------------------------------------------------------
More than $ million
</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 %
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 %
Global Equity %
International Magnum %
Emerging Markets Equity %
Asian Equity %
</TABLE>
OTHER EXPENSES
While the management fee is a significant component of each Portfolio's annual
operating costs, the Portfolios have other expenses as well. The variable
annuity and variable life contractholders incur fees and expenses separate from
the fees and expenses charged by the Portfolios.
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 the printing and mailing to existing
Annuity Contract and Life Contract owners of proxy statements, prospectuses and
statements of additional information; proxy solicitors' fees; expenses of
preparation, printing and mailing to Annuity Contract and Life Contract owners
the Annual and Semiannual shareholder reports; 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 , and Portfolio's annual
portfolio turnover rates are expected to be as high as [200%]. The
Portfolio's rate is expected to be as high as [150%]. 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
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.
EXPLANATION OF TERMS
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 and variable life insurance contracts 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.
ACCOUNT POLICIES
DISTRIBUTIONS AND TAXES
For a discussion of the tax status of a potential investor's variable insurance
contract, refer to the prospectus of the insurance company's separate account.
It is suggested you keep all statements you receive to assist in your personal
record keeping.
It is expected that shares of the Portfolios will be held under the terms of
variable annuity and variable life insurance contracts. Under current tax law,
dividends or capital gain distributions from any Portfolio are not currently
taxable when left to accumulate within a variable annuity or variable life
insurance contract or tax qualified investor, such as a qualified pension or
retirement plan. Depending on the variable contract, withdrawals from the
contracts may be subject to ordinary income tax, in addition to a 10% penalty
tax on withdrawals before age 59 1/2.
Each Portfolio is treated as a separate entity for federal income tax purposes.
Each Portfolio intends to pay out all of its net investment income and net
realized capital gains for each year. The Money Market Portfolio distributes
its dividends monthly and dividends from all of the Portfolios except the Money
Market Portfolio will be distributed at least annually. Each Portfolio makes
dividends and capital gain distributions on a per-share basis. After
distribution from a Portfolio, the Portfolio's share price drops by the amount
of the distribution. When dividends and capital gain distributions are
reinvested, the total value of an account will not be affected because,
although the shares will have a lower price, there will be correspondingly more
of them. Normally, net realized capital gains, if any, are distributed each
year for each Portfolio. Such income and capital gain distributions are
automatically reinvested in additional shares of the Portfolios.
TRANSACTION DETAILS
THE PORTFOLIOS ARE OPEN FOR BUSINESS each day the New York Stock Exchange
("NYSE") is open. Each 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 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.
Each Portfolio's assets are valued primarily on the basis of market quotations.
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
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 insurance contracts 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 and redeem from each Portfolio.
Each participating insurance company receives orders from its variable contract
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
39
<PAGE>
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 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 7 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.
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.
40
<PAGE>
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.
41
<PAGE>
MORGAN STANLEY UNIVERSAL FUNDS, INC.
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 and variable life insurance contracts and by certain
tax-qualified investors. The variable annuity and variable life contractholders
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 April 6, 1996. The
Fund filed a registration statement with the SEC 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 the "Adviser") or Miller Anderson & Sherrerd, LLP ("MAS" or the
"Adviser") thereby making available in a single product the combined strength of
these leading investment management firms.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission but has not yet become effective. These
securities may not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective. This statement of additional
information shall not constitute an offer to sell or the solicitation of an
offer to buy nor shall there be any sale of these securities in any State in
which such offer, solicitation or sale would be unlawful prior to registration
or qualification under the securities laws of any such State.
This Statement of Additional Information is not a prospectus but
should be read in conjunction with the prospectus of the Fund's Portfolios (the
"Prospectuses"). This Statement of Additional Information is incorporated by
reference into the Prospectus in its entirety. To obtain the Prospectus, please
call the Morgan Stanley Universal Funds, Inc. representative at [800-_______]
[or _________________ Insurance Company at 800-____________.]
TABLE OF CONTENTS
Page
----
Securities and Investment Techniques........................
Taxes.......................................................
Special Tax Considerations Relating to Foreign Investments..
Taxes and Foreign Shareholders..............................
Purchase of Shares..........................................
Redemption of Shares........................................
Exchange Features...........................................
State Law Restrictions......................................
Investment Limitations......................................
Determining Maturities of Certain Instruments...............
Management of the Fund......................................
Net Asset Value for the Money Market Portfolio..............
Performance Information.....................................
General Information.........................................
Description of Securities and Ratings.......................
Financial Statements........................................
Statement of Additional Information dated May 1, 1996, relating to:
Prospectus, dated May 1, 1996 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.
<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 Portfolios, International Fixed Income, Balanced and Multi-Asset-
Class.
The following discussion of the securities and investment techniques
supplements the discussion of investment policies, securities and investment
techniques 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 the
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 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.
2
<PAGE>
Brady Bonds. The Fixed Income, High Yield, International Fixed Income,
- - - -----------
Balanced, Multi-Asset-Class 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 recently, 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 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.
Brady Plan debt restructuring totalling approximately $73 billion have
been implemented to date in Argentina, Bulgaria, Costa Rica, Ecuador, Mexico,
Nigeria, the Philippines, Uruguay and Venezuela, with the largest proportion of
Brady Bonds having been issued to date by Mexico and Venezuela. Brazil and
Poland have announced plans to issue Brady Bonds aggregating approximately $52
billion, based on current estimates. There can be no assurance that the
circumstances regarding the issuance of Brady Bonds by these countries will not
change.
Eurodollar and Yankee Obligations
- - - ---------------------------------
Eurodollar bank obligations are dollar-denominated certificates of
deposit and time deposits issued outside the U.S. capital markets by foreign
branches of banks and by foreign banks. Yankee bank obligations are dollar-
denominated obligations issued in the U.S. capital markets by foreign banks.
Eurodollar and Yankee 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) 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
3
<PAGE>
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.
Forwards: 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.
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 cash, U.S. government securities, or
high-grade Fixed-Income Securities 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
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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: 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. No Portfolio will enter into
futures contracts or options thereon for speculative 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.
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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 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. 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.
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. The Portfolios intend to use futures contracts only for hedging
purposes.
Regulations of the CFTC applicable to the Portfolios require that all
futures transactions constitute bona fide hedging transactions except that a
Portfolio may engage in futures transactions that do not constitute bona fide
hedging to the extent that not more than 5% of the liquidation value of a
Portfolio's total assets are required as margin deposits or premiums for such
transactions. The Portfolios will only sell futures contracts to protect
securities owned against declines in price or purchase contracts to protect
against an increase in the price of securities intended for purchase. As
evidence of this hedging interest,
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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. The Emerging Markets Debt,
- - - --------------------------------------------
Growth, U.S. Real Estate, International Magnum and Emerging Markets Equity
Portfolios 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.
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.
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
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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 Emerging Markets Equity and Emerging Markets Debt Portfolio may
also invest in fixed and floating rate loans ("Loans") arranged through private
negotiations between an issuer of sovereign debt obligations and one or more
financial institutions ("Lenders"). The 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 a portion 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.
When each 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
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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 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 Fixed Income, High Yield,
- - - -------------------
International Fixed Income, Balanced, Multi-Asset-Class, Value, Core Equity, Mid
Cap Growth, Mid Cap Value, Emerging Markets Debt, Growth, International Magnum,
Emerging Markets Equity and U.S. Real Estate 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 state 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 listed put option
would give each Portfolio the right to sell the underlying security or currency
to the clearing corporation or exchange at the state 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 of
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 intermediate 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
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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 a
sufficient amount of cash, cash equivalents or liquid securities to purchase the
underlying security. When the Portfolio writes covered call options, it
augments its income by the premiums receive 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 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 sell a designated security at a designated price (the
"exercise price"), and when each Portfolio purchases a put option it acquires
the right to purchase 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 securities and other
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 Commission. In an over-the-counter trading environment, many of
the protections associated with transactions on exchanges will 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.
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Portfolio Turnover
The portfolio turnover rate for a year is the lesser of the value of
the purchases or sales for the year divided by the average monthly market value
of the Portfolio for the year, excluding U.S. Government securities and
securities with maturities of one year or less. The portfolio turnover rate for
a year is calculated by dividing the lesser of sales or the average monthly
value of the Portfolio's portfolio purchases of portfolio securities during that
year by securities, excluding money market instruments. The rate of portfolio
turnover will not be a limiting factor when the Portfolio deems it appropriate
to purchase or sell securities for the Portfolio. However, the U.S. federal tax
requirement that the Portfolio derive less than 30% of its gross income from the
sale or disposition of securities held less than three months may limit the
Portfolio's ability to dispose of its securities. See "Taxes."
Repurchase Agreements
Each Portfolio may invest in repurchase agreements collateralized by
U.S. Government securities, certificates of deposit and certain bankers'
acceptances. 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 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 Adviser and the Fund's 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 Investment Company Act of 1940, as amended
(the "1940 Act"), or the Rules and Regulations or interpretations of the
Securities and Exchange Commission (the "Commission") thereunder, which
currently require that (a) the borrower pledge and maintain with the Portfolio
collateral consisting of cash, an irrevocable letter of credit issued by a
domestic U.S. bank, or securities issued or guaranteed by the United States
Government 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.
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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 Portfolio may from time to time sell
securities short without limitation but consistent with applicable legal
requirements, although initially the Portfolio does not intend to sell
securities short. 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. Each 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.
Each 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 cash, U.S. Government Securities or other liquid, high
grade debt obligations. 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 cash, U.S. Government Securities or other
liquid high grade debt obligations 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 cash, U.S. Government Securities or other liquid high grade debt obligations
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
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 each 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.
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Structured Securities
Each of the Fixed Income, Balanced, Multi-Asset-Class 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.
SWAPS: Swap Contracts
The Fixed Income, High Yield, Value, Core Equity, Mid Cap Growth, Mid Cap Value,
International Fixed Income, Emerging Markets Debt, 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
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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 cash, U.S. Government securities, or high grade debt obligations,
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 Investment Company Act of 1940 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 with 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
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. The timely payment of coupon interest
and principal on these instruments remains guaranteed by the "full faith and
credit" of the United States Government.
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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 imputed interest an investor will earn if the security is held
until maturity. For tax purposes, a portion of this imputed 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.
Zero Coupon Treasury 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 (STIRPS) and Treasury Investment Growth Receipts (TIGERS).
TAXES
The following is only a summary of certain additional federal tax
considerations generally affecting the Fund and its shareholders that are not
described in the Prospectus. No attempt is made to present 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.
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.
Each Portfolio intends to 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,
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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.
In addition to the requirements described above, in order to qualify
as a RIC, a Portfolio must distribute at least 90% of its 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, and its distributions
(including capital gains distributions) will be taxable as ordinary income
dividends to its shareholders to the extent of the Portfolio's current and
accumulated earnings and profits, and will be eligible for the corporate
dividends received deduction for corporate shareholders.
Each Portfolio will decide whether to distribute or to retain all or
part of any net capital gains (the excess of net long-term capital gains over
net short-term capital losses) in any year for reinvestment. If any such gains
are retained, the Portfolio will pay federal income tax thereon, and, if the
Portfolio makes an election, the shareholders will include such undistributed
gains in their income, will increase their basis in Portfolio shares by 65% of
the amount included in their income and will be able to claim their share of the
tax paid by the Portfolio as a refundable credit against their federal income
tax liability.
A gain or loss realized by a shareholder on the sale or exchange of
shares of a Portfolio held as a capital asset will be capital gain or loss, and
such gain or loss will be long-term if the holding period for the shares exceeds
one year, and otherwise will be short-term. Any loss realized on a sale or
exchange of shares of a Portfolio will be disallowed to the extent the shares
disposed of are replaced within the 61-day period beginning 30 days before and
ending 30 days after the shares are disposed of. Any loss realized by a
shareholder on the disposition of shares held 6 months or less is treated as a
long-term capital loss to the extent of any distributions of net long-term
capital gains received by the shareholder with respect to such shares or any
inclusion of undistributed capital gain with respect to such shares.
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.
The excise tax is not applicable to any RIC whose shareholders are
either tax-exempt pension trusts or separate accounts of life insurance
companies funding variable contracts. Although each Portfolio believes that it
is not subject to the excise tax, each Portfolio intends to make the
distributions required to avoid the imposition of the tax, provided such
payments and distributions are determined to be in the best interest of such
Portfolio's shareholders.
Dividends declared by a Portfolio 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 Portfolio and received by the shareholders on
December 31 of that year if paid by the Portfolio at any time during the
following January.
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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.
SPECIAL TAX CONSIDERATIONS RELATING TO 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 Portfolio may elect to treat certain foreign income
taxes imposed on it for United States federal income tax purposes as paid
directly by its shareholders. A Portfolio will make such an election 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
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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 itemize deductions, a deduction, for
their shares of the foreign income taxes in computing their federal income tax
liability.
Shareholders who choose to utilize a credit (rather than a deduction)
for foreign taxes will be subject to a number of complex limitations regarding
the availability and utilization of the credit. Because of these limitations,
shareholders may be unable to claim a credit for the full amount of their
proportionate shares of the foreign income taxes paid by a Portfolio.
Shareholders are urged to consult their tax advisors regarding the application
of these rules to their particular circumstances.
TAXES AND FOREIGN SHAREHOLDERS
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, a foreign trust or estate, a foreign corporation,
or foreign a partnership ("Foreign Shareholder") depends on whether the income
from the Portfolio is "effectively connected" with a U.S. trade or business
carried on by such shareholder.
If the income from the Portfolio is not effectively connected with a
U.S. trade or business carried on by a Foreign Shareholder, distributions of net
investment income plus the excess of net short-term capital gains over net
long-term capital losses will be subject to U.S. withholding tax at the rate of
30% (or such lower treaty rate as may be applicable) upon the gross amount of
the dividend. Furthermore, Foreign Shareholders will generally be exempt from
U.S. federal income tax on gains realized on the sale of shares of the
Portfolio, distributions of net long-term capital gains, and amounts retained by
the Fund which are designated as undistributed capital gains.
If the income from the Portfolio is effectively connected with a U.S.
trade or business carried on by a Foreign Shareholder, then distributions from
the Portfolio and any gains realized upon the sale of shares of the Portfolio,
will be subject to U.S. federal income tax at the rates applicable to U.S.
citizens and residents or domestic corporations.
The Portfolio may be required to withhold U.S. federal income tax on
distributions that are otherwise exempt from withholding tax (or taxable at a
reduced treaty rate) unless the Foreign Shareholder complies with Internal
Revenue Service certification requirements.
The tax consequences to a Foreign Shareholder entitled to claim the
benefits of an applicable tax treaty may differ from those described here.
Furthermore, Foreign Shareholders are strongly urged to consult their own tax
advisors with respect to the particular tax consequences to them of an
investment in a Portfolio, including the potential application of the provisions
of the Foreign Investment in Real Estate Property Tax Act of 1980, as amended.
PURCHASE OF SHARES
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
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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 (i) to
suspend the offering of its shares, (ii) to reject purchase orders when in the
judgment of management such rejection is in the best interest of the Portfolio,
and (iii) to reduce or waive the minimum for initial and subsequent investments
for certain fiduciary accounts such as employee benefit plans or under
circumstances where certain economies can be achieved in sales of a Portfolio's
shares.
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, 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.
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EXCHANGE FEATURES
Shares of each Portfolio of the Fund may be exchanged for shares of
any other available Portfolio pursuant to the terms of the variable annuity or
variable life contract held by the contractholder.
STATE LAW RESTRICTIONS
The investments of variable annuity and variable life insurance
contracts are subject to the provisions of the insurance laws of the States of
domicile of the life insurance companies offering these contracts. The Fund and
its Portfolios will voluntarily comply with the statutory investment
restrictions applicable to the investments of life insurance company separate
accounts, of the States of domicile of the life insurance companies offering
these contracts, even though these state law investment restrictions do not
apply to the Fund and its Portfolios. For a description of the state law
restrictions applicable to the separate accounts of the life insurance companies
offering these contracts, see the accompanying prospectus for the variable
annuity and variable life insurance contracts.
INVESTMENT 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 (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 an 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 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, however, that 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, except 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.
20
<PAGE>
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) purchase on margin or sell short, except (i) that the Emerging
Markets Debt and Growth Portfolios 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, and 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 SEC's position on asset coverage (relating to the
Fixed Income, High Yield, International Fixed Income, Balanced, Value, Core
Equity, Mid Cap Growth, Mid Cap Value and Multi-Asset-Class Portfolios);
(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) pledge, mortgage, or hypothecate any of its assets to an extent
greater than 10% of its total assets at fair market value (relating to the
Emerging Markets Debt, Growth, International Magnum, Emerging Markets Equity,
Asian Growth, Global Equity and U.S. Real Estate Portfolios);
(5) pledge, mortgage, or hypothecate any of its assets to an extent
greater than 50% of its total assets at fair market value relating to the Fixed
Income, High Yield, International Fixed Income, Balanced, Value, Core Equity,
Mid Cap Growth, Mid Cap Value and Multi-Asset-Class Portfolios;
(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, determined at the time of investment, in securities subject to legal
or contractual restrictions on resale 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 Securities Act of 1933, as amended
(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;
21
<PAGE>
(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; and
(14) purchase puts, calls, straddles, spreads and any combination
thereof if for any reason thereof the value of its aggregate investment in such
classes of securities will exceed 5% of their respective total assets, except
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.
(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 Securities and
Exchange 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.
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: (1) 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
22
<PAGE>
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 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.
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. [Three Directors and all of the officers
of the Fund are directors, officers or employees of MSAM, distributor or
administrators. 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. 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>
Principal Occupation During
Name, Address and Age Position with Fund Past Five Years
- - - ----------------------- ---------------------- ---------------------------
<S> <C> <C>
W. Blair Garff Director
Michael F. Klein Director and President Vice President of MSAM;
Previously with Roger & Wells
(Law Firm).
Harold J. Schaaff, Jr.* Director Principal of Morgan Stanley & Co.
1221 Avenue of the Incorporated; General Counsel and
Americas Secretary of MSAM; Officer of
New York, NY 10020 various investment companies by
(35) MSAM.
Joseph P. Stadler* Treasurer Vice President of MSAM; Previously
1221 Avenue of the with Price Waterhouse LLP (accounting);
Americas Officer of various investment companies
New York, NY 10020 managed by MSAM.
(41)
Valerie Y. Lewis* Secretary Vice President of MSAM; Previously with
1221 Avenue of the Citicorp (banking); Officer of various
Americas investment companies managed by MSAM.
New York, NY 10020
(40)
</TABLE>
23
<PAGE>
Remuneration of Directors and Officers
The Fund pays each Director who is not also an officer or affliated person
of the Advisers, the Fund's distibutor, or administrators or any of their
affiliates an annual fee, plus travel and other expenses incurred in attending
board meetings. Directors who are also officers or affiliated persons receive no
remuneration for their services as Directors. The Fund's officers and employees
are paid by the Advisers or its agents. As of December 18, 1995, to Fund
management's knowledge, the Directors and officers of the Fund, as a group,
owned less than 1% of the outstanding common stock of each Portfolio of the
Fund.
Investment Advisory and Administrative Agreements
MSAM is a wholly-owned subsidiary of Morgan Stanley Group Inc. The
principal offices of Morgan Stanley Group Inc. are located at 1221 Avenue of the
Americas, New York, NY 10020.
MAS is a Pennsylvania limited liability partnership founded in 1969 and is
located at One Tower Bridge, West Conshohocken, PA 19428. On January 3, 1996,
Morgan Stanley Group Inc. acquired Miller Anderson & Sherrerd, LLP (the
"Adviser") in a transaction in which Morgan Stanley Asset Management Holdings
Inc., an indirect wholly owned subsidiary of Morgan Stanley Group Inc., became
the sole general partner of the Adviser. Morgan Stanley Asset Management
Holdings Inc. and two other wholly owned subsidiaries of Morgan Stanley Group
Inc. became the limited partners of the Adviser.
Pursuant to the MSAM Administration Agreement between MSAM and the
Fund, MSAM provides Administrative Services. For its services under the
Administration Agreement, the Fund pays MSAM a monthly fee which on an
annual basis equals [_____] of 1% of the average daily net assets of each
Portfolio.
Under the Agreement between MSAM and The Chase Manhattan Bank, N.A.
("Chase"), Chase Global Funds Services Company ("CGFSC," a Chase subsidiary)
provides certain administrative services to the Fund. CGFSC provides
operational and administrative services to investment companies with
approximately $42 billion in assets and having approximately _________
shareholder accounts as of February 29, 1996. CGFSC's business address is
73 Tremont Street, Boston, Massachusetts 02108-3913.
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 significantly restrict the personal investing
activities of all employees of the 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 the 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.
24
<PAGE>
Control Persons and Principal Holders of Securities
The names and addresses of the holders of 5% or more of the outstanding
shares of any class of the Fund as of _________________ and the percentage of
outstanding shares of such classes owned beneficially or of record by such
shareholders as of such date are, to Fund management's knowledge, as follows:
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 the 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
25
<PAGE>
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 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 returns 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
26
<PAGE>
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 Fund, 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:
(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.
27
<PAGE>
(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. 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).
28
<PAGE>
(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 and includes Australia, Belgium, Canada, Denmark, France,
Germany, Italy, Japan, The Netherlands, Spain, Sweden, United Kingdom
and the United States.
(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 larger.
(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.
29
<PAGE>
(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) Philadelphia Gold and Silver Index - an unmanaged index comprised of
seven leading companies involved in the mining of gold and silver.
(dd) 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.
(ee) Salomon Brothers GNMA Index - includes pools of mortgages originated
by private lenders and guaranteed by the mortgage pools of the
Government National Association.
(ff) Salomon Brothers High Grade Corporate Bond Index - consists of
publicly issued, non-convertible corporate bonds rated AA or AAA. It
a is value-weighted, total return index, including approximately 800
issues with maturities of 12 years or greater.
(gg) Salomon Brothers Broad Investment Grade Bond - 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.
(hh) 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.
(ii) 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.
30
<PAGE>
(jj) 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
31
<PAGE>
Chase serves as the Fund's domestic custodian. Chase is not affiliated
with Morgan Stanley & Co. Incorporated. Morgan Stanley Trust Company, Brooklyn,
NY, acts as the Fund's custodian for foreign assets held outside the United
States and employs subcustodians who were 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 subcustodians, 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 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.
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 Associates, 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
32
<PAGE>
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 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
33
<PAGE>
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 ("CMOs"), 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
34
<PAGE>
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 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, GNMA 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 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;
35
<PAGE>
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 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
36
<PAGE>
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, 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 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.
FINANCIAL STATEMENTS
There are no financial statements for the Portfolios.
37
<PAGE>
PART C
Morgan Stanley Universal Funds, Inc.
Other Information
ITEM 24. Financial Statements and Exhibits
---------------------------------
(A) FINANCIAL STATEMENTS
--------------------
To be filed by Pre-Effective Amendment.
(B) EXHIBITS
--------
1 Registrant's Articles of Incorporation.*
2 Registrant's By-laws.*
3 Not applicable.
4 Not applicable.
5 (a) Form of Investment Advisory Agreement between Registrant and Morgan
Stanley Asset Management Inc. 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 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 Registrant's Custodian Agreement.**
(b) Registrant's International Custodian Agreement.**
9 (a) Form of Administration Agreement between Registrant and Morgan Stanley
Asset Management Inc.**
(b) Chase Administration Agreement.**
10 Form of Opinion of Counsel.**
11 Consent of Independent Accountants.*
12 Not applicable.
C-1
<PAGE>
13 Form of Purchase Agreement.**
14 Not applicable.
15 Not applicable.
16 Not applicable.
24 Powers of Attorney.**
27 Financial Data Schedule.**
____________________________
* File herewith.
** To be filed by Pre-Effective Amendment.
ITEM 25. Persons Controlled by or Under Common Control with Registrant
-------------------------------------------------------------
No person is controlled by or under common control with the Registrant.
ITEM 26. Number of Holders of Securities
-------------------------------
The following information is given as of April 29, 1996.
<TABLE>
<CAPTION>
Number of
Title of Class Record Holders
-------------- --------------
<S> <C>
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
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.............. 0
Asian Equity Portfolio......................... 0
</TABLE>
ITEM 27. Indemnification
---------------
C-2
<PAGE>
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 Adviser
----------------------------------------------------
Reference is made to the caption "Management of the Fund--Investment
Adviser" 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
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
Michael A. Crowe Managing Director
Madhav Dhar Managing Director
Kurt A. Feuerman Managing Director
Gordon S. Gray Managing Director
Gary D. Latainer Managing Director
Peter A. Nadosy Managing Director
Bidyut Sen Managing Director
Dennis G. Shorva Managing Director
Richard G. Woolworth,Jr. Managing Director
C-3
<PAGE>
Warren Ackerman III Principal
John R. Alkire Principal (MSAM) - Tokyo
Robert E. Angevine Principal
Gerald P. Barth Principal
Francine J. Bovich Principal
Jeffrey Brown Principal
Terence P. Carmichael Principal
Arthur Certosimo Principal
Stephen C. Cordy Principal
Jacqueline A. Day Principal (MSAM) - UK
Paul B. Ghaffari Principal
James Wayne Grisham Principal
Perry E. Hall II Principal
Marianne Laing Hay Principal (MSAM) - UK
Margaret Kinsley Johnson Principal
Kathryn Jonas Kasanoff Principal
Debra A. F. Kushma Principal
Michael Kushma Principal
Marianne J. Lippamnn Principal
Gary J. Mangino 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
Gail Hunt Reeke Principal
Christine I. Reilly Principal
Bruce R. Sandberg Principal
Robert A. Sargent Principal (MSAM) - UK
Harold J. Schaaff, Jr. Principal
Kiat Seng Seah Principal (MSAM) - Singapore
Vinod R. Sethi Principal
Stephen C. Sexauer Principal
Robert M. Smith Principal
Philip W. Winters Principal
Alford E. Zick, Jr. Principal
Suzanne Akers Vice President
William Auslander Vice President
Marianne Bachyuski Vice President
Marshall T. Bassett Vice President
L. Kenneth Brooks Vice President
Andrew C. Brown Vice President (MSAM) - UK
Frances Campion Vice President (MSAM) - UK
Carl Kuo-Wei Chien Vice President (MSAM) - Hong Kong
Lori A. Cohane Vice President
James Colmenares Vice President
Kate Cornish-Bowden Vice President (MSAM) - UK
C-4
<PAGE>
Bertrand Le Pan De Ligny Vice President (MSAM) - UK
Christine H. du Bois Vice President
Raye L. Dube Vice President
Abigail Jones Feder Principal
Josephine M. Glass Vice President
Maureen A. Grover Vice President
Kenneth R. Holley Vice President
Michael F. Klein Vice President
Nan B. Levy Vice President
Valerie Y. Lewis Vice President
Gordon W. Loery Vice President
Yvonne Longley Vice President (MSAM) - UK
Jeffrey Margolis Principal
Paula J. Morgan Vice President (MSAM) - UK
Clare K. Mutone Vice President
Martin O. Pearce Vice President
Alexander A. Pena Vice President
Anthony J. Pesce Vice President
David J. Polansky Vice President
Doanld P. Ryan 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
Kunihiko Sugio Vice President (MSAM) - Tokyo
Joseph Y.S. Tern Vice President (MSAM) - Singapore
Ann D. Thiviergo Vice President
Richard Boon Hwee Toh Vice President (MSAM) - Singapore
K.N. Vaidyanathan Vice President (MSAM) - Bombay
Dennis Walsh Vice President
Kevin V. Wasp Vice President
Harold J. Schaaff, Jr. General Counsel and Secretary
Madeline D. Barkhorn Assistant Secretary
Charlene R. Herzer Assistant Secretary
Charles R. Hintz Treasurer
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.; all funds of the Morgan Stanley
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
C-5
<PAGE>
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.
Miller Anderson & Sherrerd, LLP (the "Adviser") is a Pennsylvania limited
liability partnership founded in 1969. The Adviser provides investment services
to employee benefit plans, endowment funds, foundations and other institutional
investors.
The information required by this Item 28 with respect to each director,
officer or partner of the Adviser 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 the Adviser 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 (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
-------------------
Morgan Stanley Asset Management Inc. ("MSAM") has entered into a Chase
Administration Agreement with The Chase Manhattan Bank, N.A. ("Chase") (which is
to be filed as Exhibit No. 9(b) to a pre-effective amendment to the Registration
Statement) pursuant to which Chase will provide the following services to the
Registrant: (i) managing, administering and conducting the general business
activities of the Registrant, other than those which are contracted to third
parties; (ii) providing personnel and facilities to perform the foregoing; (iii)
accounting services, including the preparation of statements and reports; (iv)
transfer agent services, including processing correspondence from shareholders,
recording transfers, issuing stock certificates and handling checks; (v)
handling dividends and distributions, including disbursing, withholding and tax
reporting; and (vi) providing office facilities, statistical and research data,
office supplies and assisting the Registrant to comply with regulatory
developments.
C-6
<PAGE>
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-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York and State of New York, on April 29, 1996.
MORGAN STANLEY UNIVERSAL FUNDS, INC.
By: /s/ Michael F. Klein
--------------------------
Michael F. Klein
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
- - - --------- ----- ----
/s/ Michael F. Klein Director, President and April 29, 1996
- - - --------------------------- Chief Executive Officer
Michael F. Klein
/s/ Harold J. Schaaff, Jr. Director April 29, 1996
- - - ---------------------------
Harold J. Schaaff, Jr.
/s/ W. Blair Garff Director April 29, 1996
- - - ---------------------------
W. Blair Garff
/s/ Joseph P. Stadler Chief Financial Officer April 29, 1996
- - - --------------------------- and Treasurer
Joseph P. Stadler
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
Number Description Page No.
------ ----------- --------
EX-99.B1 Registrant's Articles of Incorporation.
EX-99.B2 Registrant's By-laws.
EX-99.B3 Not applicable.
EX-99.B4 Not applicable.
EX-99.B5 (a) Form of Investment Advisory Agreement between Registrant and
Morgan Stanley Asset Management Inc. with respect to the Money
Market, Emerging Markets Debt, Equity 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 with respect to the Fixed
Income, High Yield, International Fixed Income, Balanced,
Multi-Asset-Class, Value, 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.B7 Not applicable.
EX-99.B8 (a) Form of Registrant's Custodian Agreement.
(b) Registrant's International Custodian Agreement.
EX-99.B9 (a) Form of Administration Agreement between Registrant and Morgan
Stanley Asset Management Inc.
(b) Chase Administration Agreement.
EX-99.B10 Opinion of Counsel.
EX-99.B11 Consent of Independent Accountants.
EX-99.B12 Not applicable.
EX-99.B13 Form of Purchase Agreement.
EX-99.B14 Not applicable.
EX-99.B15 Not applicable.
EX-99.B16 Not applicable.
EX-99.B24 Powers of Attorney.
-1-
<PAGE>
Exhibit 3.1
ARTICLES OF INCORPORATION
MORGAN STANLEY UNIVERSAL FUNDS, INC.
Morgan Stanley Universal Funds, Inc., a Maryland corporation having
its principal office in Baltimore, Maryland and having its resident agent
located in Baltimore, Maryland (herein after called the "Corporation"), hereby
certifies to the State Department of Assessments and Taxation that:
FIRST: I, THE UNDERSIGNED, Joseph C. Benedetti, whose post office
address is 1221 Avenue of the Americas, New York, New York, 10020, being at
least twenty-one years of age, do under and by virtue of the General Laws of the
State of Maryland authorizing the formation of corporations, associate myself as
incorporator with the intention of forming a corporation (hereinafter called the
"Corporation").
SECOND: The name of the Corporation is Morgan Stanley Universal
Funds, Inc.
THIRD: The purpose for which the Corporation is formed is to act as
an open-end management investment company under the federal Investment Company
Act of 1940 as then in effect and the rules and regulations from time to time
promulgated and effective thereunder (referred to herein collectively as the
"Investment Company Act of 1940") and to exercise and enjoy all of the powers,
rights and privileges granted to, or conferred upon, corporations by the General
Laws of the State of Maryland now or hereafter in force.
FOURTH: The post office address of the principal office of the
Corporation in this State is 11 East Chase Street, Baltimore, Maryland 21202.
The name of the resident agent in this State is CSC-Lawyers Incorporating
Service Company, and the post office address of the resident agent is 11 East
Chase Street, Baltimore, Maryland 21202.
FIFTH: 1. The total number of shares of stock which the Corporation
shall have the authority to issue is nine billion (9,000,000,000) shares of
stock, with a par value of one-tenth of one cent ($.001) per share to be known
and designated as Common Stock, such shares of Common Stock having an aggregate
par value of nine million dollars ($9,000,000). The Board of Directors shall
have power and authority to increase or decrease, from time to time, the
aggregate number of shares of stock, or any class of stock, which the
Corporation shall have the authority to issue.
2. Subject to the provisions of these Articles of Incorporation, the
Board of Directors shall have the power to issue shares of Common Stock of the
Corporation from time to time, at prices not less than the net asset value or
par value thereof, whichever is greater, for such consideration as may be
<PAGE>
fixed from time to time pursuant to the direction of the Board of Directors.
All stock shall be issued on a non-assessable basis.
3. Pursuant to Section 2-105 of the Maryland General Corporation Law,
the Board of Directors of the Corporation shall have the power to designate one
or more classes of shares of Common Stock, to fix the number of shares in any
such class and to classify or reclassify any unissued shares with respect to
such class. Any such class (subject to any applicable rule, regulation or order
of the Securities and Exchange Commission or other applicable law or regulation)
shall have such preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, terms and conditions
of redemption and other characteristics as the Board may determine in the
absence of contrary determination set forth herein. The aforesaid power shall
include the power to create, by classifying unissued shares in the aforesaid
manner, one or more classes in addition to those initially designated as named
below. Subject to such aforesaid power, the Board of Directors has designated
seventeen portfolios of the Corporation. The names of such classes and the
number of shares of Common Stock classified and allocated to these classes are
as follows:
<TABLE>
<CAPTION>
Number of Shares of
Common Stock
Name of Class Classified and Allocated
- - - ------------- ------------------------
<S> <C>
Money Market Portfolio 1,000,000,000
Fixed Income Portfolio 500,000,000
High Yield Portfolio 500,000,000
International Fixed Income Portfolio 500,000,000
Emerging Markets Debt Portfolio 500,000,000
Balanced Portfolio 500,000,000
Multi-Asset-Class Portfolio 500,000,000
Growth Portfolio 500,000,000
Value Portfolio 500,000,000
Core Equity Portfolio 500,000,000
Mid Cap Growth Portfolio 500,000,000
Mid Cap Value Portfolio 500,000,000
U.S. Real Estate Portfolio 500,000,000
Global Equity Portfolio 500,000,000
International Magnum Portfolio 500,000,000
Emerging Markets Equity Portfolio 500,000,000
Asian Equity Portfolio 500,000,000
</TABLE>
4. Each share of a class shall have equal rights with each other
share of that class with respect to the assets of the Corporation pertaining to
that class. The dividends payable to the holders of any class (subject to any
applicable rule, regulation or order of the Securities and Exchange Commission
or any other applicable law or regulation) shall be determined by
-2-
<PAGE>
the Board and need not be individually declared, but may be declared and paid in
accordance with a formula adopted by the Board. Whether or not the amount of
dividend or distribution so declared can be calculated at the time of such
declaration.
5. The holder of each share of stock of the Corporation shall be
entitled to one vote for each full share and a fractional vote for each
fractional share of stock, irrespective of the class, then outstanding in his or
her name in the books of the Corporation. On any matter submitted to a vote of
stockholders, all shares of the Corporation then issued and outstanding and
entitled to vote, irrespective of the class, shall be voted in the aggregate and
not by class except (1) when otherwise expressly provided by the Maryland
General Corporation Law, or (2) when required by the Investment Company Act of
1940, as amended, shares shall be voted by individual class and (3) when the
matter does not affect any interest of a particular class, then only
stockholders of such other class or classes whose interests may be affected
shall be entitled to vote hereon. Holders of shares of stock of the Corporation
shall not be entitled to cumulative voting in the election of Directors or on
any other matter.
6. All consideration received by the Corporation for the issue or
sale of stock of each class, together with all income, earnings, profits, and
proceeds thereof, including any proceeds derived from the sale, exchange or
liquidation thereof, and any funds or payments derived form any reinvestment of
such proceeds in whatever form the same may be, shall belong to the class of
shares of stock with respect to which such assets, payments or funds were
received by the Corporation for all purposes, subject only to the rights of
creditors, and shall be so handled upon the books of account of the Corporation.
Such assets, income, earnings, profits and proceeds thereof, including any
proceeds derived from the sale, exchange or liquidation thereof and any assets
derived from any reinvestment of such proceeds in whatever form the same may be,
and herein referred to as "assets belonging to" such class.
7. The Board of Directors may from time to time declare and pay
dividends or distributions, in stock property or in cash, on any or all classes
of stock and to the stockholders of record as of such date as the Board of
Directors may determine, provided such dividends or distributions on shares of
any class of stock shall be paid only out of earnings, surplus, or other
lawfully available assets belonging to such class. Subject to the foregoing
proviso, the amount of any dividends or distributions and the payment thereof
shall be wholly in the discretion of the Board of Directors.
8. In the event of the liquidation or dissolution of the Corporation,
stockholders of each class shall be entitled to receive, as a class, out of the
assets of the Corporation
-3-
<PAGE>
available for distribution to stockholders, but other than general assets, the
assets belonging to such class and the assets so distributable to the
stockholders of any class shall be distributed among such stockholders in
proportion to the number of shares of such class held by them and recorded on
the books of the Corporation. In the event that there are any general assets
not belonging to any particular class of stock and available for distribution,
such distribution shall be made to the holders of stock of all classes in
proportion to the net asset value of the respective class determined as
hereinafter provided.
9. The assets belonging to any class of stock shall be charged with
the liabilities in respect to such class and shall also be charged with its
share of the general liabilities of the Corporation, in proportion to the net
asset value of the respective class determined as hereinafter provided. The
determination of the Board of Directors shall be conclusive as to the amount of
liabilities, including accrued expenses and reserves, as to the allocation of
the same as to a given class, and as to whether the same or general assets of
the Corporation are allocable to one or more classes.
10. The Board of Directors may provide for a holder of any class of
stock of the Corporation, who surrenders his certificate in good form for
transfer to the Corporation or, if the shares in question are not represented by
certificates, who delivers to the Corporation a written request in good order
signed by the shareholder to convert the shares in question on such basis as the
Board may provide, into shares of stock of any other class of the Corporation.
The net asset value per share of a class of the Corporation's Common
Stock shall be determined in accordance with the Investment Company Act of 1940,
as amended, and with generally accepted accounting principles.
11. Subject to subsection 12 below, the net asset value per share of
the Corporation's Common Stock shall be determined by adding the value of all
securities, cash and other assets of the Corporation pertaining to that class
subtracting the liabilities applicable to that class, allocating any general
assets and general liabilities to that class and dividing the net result by the
number of shares of that class outstanding. Subject to subsection 12 below, the
value of the securities, cash and other assets, and the amount and nature of
liabilities, and the allocation thereof to any particular class, shall be
determined pursuant to procedures or methods prescribed by or approved by the
Board of Directors in its sole discretion and shall be so determined at the time
or times prescribed or approved by the Board of Directors in its sole
discretion.
12. The net asset value per share of the Corporation's Common Stock
for the purpose of issue, redemptions or repurchase
-4-
<PAGE>
of a share, shall be determined in accordance with the Investment Company Act of
1940 and any other applicable federal securities law or rule or regulation.
13. All shares now or hereafter authorized shall be subject to
redemption and redeemable at the option of the stockholder, in the sense used in
the General Corporation Law of the State of Maryland. Each holder of a share,
upon request to the Corporation accompanied by surrender of the appropriate
stock certificate or certificates in proper form for transfer, shall be entitled
to require the Corporation to redeem all or any part of the shares standing in
the name of such holder on the books of the Corporation at a redemption price
per share equal to the net asset value per share determined in accordance with
this Article.
14. Notwithstanding subsection 13 above, (or any other provision of
these Articles of Incorporation), the Board of Directors of the Corporation may
suspend the right of the holders of shares to require the Corporation to redeem
such shares (or may suspend any voluntary purchase of such shares pursuant to
the provisions of these Articles of Incorporation) during any national financial
emergency.
"For the purpose of these Articles of Incorporation, a "national
financial emergency" is defined as the whole or any part of any period (i)
during which the New York Stock Exchange is closed other than customary weekend
and holiday closing, (ii) during which trading on the New York Stock Exchange is
restricted, (iii) during which an emergency exists as a result of which disposal
by the Corporation of securities owned by such class is not reasonably
practicable or it is not reasonably practicable for the Corporation fairly to
determine the value of the net assets of such class, or (iv) during any other
period when the Securities and Exchange Commission (or any succeeding
governmental authority) may for the protection of security holders of the
Corporation by order permit suspension of the right of redemption or
postponement of the date of payment on redemption, provided that applicable
rules and regulations of the Securities and Exchange Commission (or any
succeeding governmental authority) shall govern as to whether the conditions
under which (a) trading shall be deemed to be restricted, and (b) an emergency
shall be deemed to exist.
15. The Board of Directors may by resolution from time to time
authorize the repurchase by the Corporation, either directly or through an
agent, of shares upon such terms and conditions and for such consideration as
the Board of Directors shall deem advisable, out of funds legally available
therefor, at prices per share not in excess of the net asset value per share
determined in accordance with this Article and to take all other steps deemed
necessary or advisable in connection therewith.
-5-
<PAGE>
16. Except as otherwise permitted by the Investment Company Act of
1940, payment of the redemption or repurchase of shares surrendered to the
Corporation for redemption pursuant to the provisions of subsection 12 or 18 of
this Article or for repurchase by the Corporation pursuant to the provisions of
subsection 15 of this Article shall be made by the Corporation within seven days
after surrender of such shares to the Corporation for such purpose. Any such
payment may be made in whole or in part in portfolio securities or in cash, as
the Board of Directors shall deem advisable, and no stockholder shall have the
right, other than as determined by the Board of Directors, to have his shares
redeemed or repurchased in portfolio securities.
17. In the absence of any specifications as to the purposes for which
shares are redeemed or repurchased by the Corporation, all shares so redeemed or
repurchased shall be deemed to be acquired for retirement in the sense
contemplated by the General Corporation Law of the State of Maryland. Shares
retired by redemption or repurchase shall thereafter have the status of
authorized but unissued shares.
18. All shares now or hereafter authorized shall be subject to
redemption and redeemable at the option of the Corporation. The Board of
Directors may by resolution from time to time authorize the Corporation to
require the redemption of all or any part of any outstanding shares, without the
vote or consent of stockholders (including through the establishment of uniform
standards with respect to the minimum net asset value of a stockholder account)
upon the sending of written notice thereof to each stockholder any of whose
shares are so redeemed and upon such terms and conditions as the Board of
Directors shall deem advisable, out of funds legally available therefore, at net
asset value per share determined in accordance with the provisions of this
Article and to take all other steps deemed necessary or advisable in connection
therewith. The Board of Directors may authorize the closing of those accounts
not meeting the specified minimum standards of net asset value by redeeming all
of the shares in such accounts.
19. The holders of shares of Common Stock or other securities of the
Corporation shall have no preemptive rights to subscribe to new or additional
shares of its Common Stock or other securities.
SIXTH: The number of directors of the Corporation shall be three
provided, however, that the number of Directors may be increased or decreased in
accordance with the By-laws so long as the number is never less than three. The
names of the directors who shall act until the first annual meeting or until
their successors are duly chosen and qualify are: Michael F. Klein, Harold J.
Schaaff, Jr. and W. Blair Garff.
-6-
<PAGE>
SEVENTH: 1. A director or officer of the Corporation shall not be
liable to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director or officer, except to the extent such exemption
from liability or limitation thereof is not permitted by laws (including the
Investment Company Act of 1940) as currently in effect or as the same may
hereafter be amended.
No amendment, modification or repeal of this Section 1 shall adversely
affect any right to protection of a director or officer that exists at the time
of such amendment, modification or repeal.
2. The Corporation shall indemnify to the fullest extent permitted by
law (including the Investment Company Act of 1940) as currently in effect or as
the same may hereafter be amended, any person made or threatened to be made a
party to any action, suit or proceeding, whether criminal, civil, administrative
or investigative, by reason of the fact that such person or such person's
testator or intestate is or was a director or officer of the Corporation or
serves or served at the request of the Corporation any other enterprise as a
director or officer. To the fullest extent permitted by law (including the
Investment Company Act of 1940) as currently in effect or as the same may
hereafter be amended, expenses incurred by any such person in defending any such
action, suit or proceeding shall be paid or reimbursed by the Corporation
promptly upon receipt by it of an undertaking of such person to repay such
expenses if it shall ultimately be determined that such person is not entitled
to be indemnified by the Corporation. The rights provided to any person in this
Section 2 shall be enforceable against the Corporation by such person who shall
be presumed to have relied upon it in serving or continuing to serve as a
director or officer as provided above. No amendment of this Section 2 shall
impair the rights of any person arising at any time with respect to events
occurring prior to such amendment. For purposes of this Section 2, the term
"Corporation" shall include any predecessor of the Corporation and any
constituent corporation (including any constituent) absorbed by the Corporation
in a consolidation merger; the term "other enterprise" shall include any
corporation, partnership, joint venture, trust or employee benefit plan; service
"at the request of the Corporation" shall include service as a director or
officer of the Corporation which imposes duties on, or involves services by,
such director or officer with respect to an employee benefit plan, its
participants or beneficiaries; any excise taxes assessed on a person with
respect to an employee benefit plan shall be deemed to be indemnifiable
expenses; and action by a person with respect to any employee benefit plan which
such person reasonably believes to be in the interest of the participants and
beneficiaries of such plan shall be deemed to be action not opposed to the best
interests of the Corporation. The provisions
-7-
<PAGE>
of this Section 2 shall be in addition to the other provisions of this Article
SEVENTH.
3. Nothing in this Article protects or purports to protect, any
director or officer against any liability to the Corporation or its security
holders to which he or she would otherwise be subject by reason of willful
malfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office.
4. Each section or portion thereof of this Article shall be deemed
severable from the remainder, and the invalidly of any such section or portion
shall not affect the validity of the remainder of this Article.
EIGHTH: The Board of Directors shall have the management and control
of the property, business and affairs of the Corporation and is hereby vested
with all the powers possessed by the Corporation itself so far as is not
inconsistent with law or these Articles of Incorporation. In furtherance and
without limitation of the foregoing provisions, it is expressly declared that,
subject to these Articles of Incorporation, the Board of Directors shall have
power:
1. To make, alter, amend or repeal from time to time the By-laws of
the Corporation except as such power may otherwise be limited in the By-laws.
2. To authorize the repurchase of shares in the open market or
otherwise, at prices not in excess of the net asset value of such shares
determined in accordance with Article FIFTH hereof, provided the Corporation has
assets legally available for such purpose, and to pay for such shares in cash,
securities or other assets then held or owned by the Corporation.
3. To fix an offering price for the shares of any class which shall
yield to the Corporation not less than the par value thereof, at which price the
shares of the Common Stock of the Corporation shall be offered for sale, and to
determine from time to time thereafter the offering price which shall yield to
the Corporation not less than the par value thereof from sales to the shares of
its Common Stock.
4. From time to time to determine whether and to what extent and at
what times and places and under what conditions and regulations the books and
accounts of the Corporation, or any of them other than the stock ledger, shall
be open to the inspection of the stockholders, and no stockholder shall have any
right to inspect any account or book or document of the Corporation, except as
conferred by law or authorized by resolution of the Board of Directors or of the
stockholders.
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5. In addition to the powers and authorities granted herein and by
statute expressly conferred upon it, the Board of Directors is authorized to
exercise all such powers and do all acts and things as may be exercised or done
by the Corporation, subject, nevertheless, to the provisions of Maryland laws,
of these Articles of Incorporation, and of the By-Laws of the Corporation.
NINTH: The books of the Corporation may be kept (subject to any
provisions contained in applicable statutes) outside the State of Maryland at
such place or places as may be designed from time to time by the Board of
Directors or in the By-Laws of the Corporation. Election of directors need not
be by ballot unless the By-Laws of the Corporation shall so provide.
TENTH: The Corporation reserves the right to amend, alter, change or
repeal any provisions contained in these Articles of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
ELEVENTH: 1. The presence in person or by proxy of the holders of
record of one-third of the shares issued and outstanding and entitled to vote
thereat shall constitute a quorum for the transaction of any business at all
meetings of the stockholders except as otherwise provided by law or in these
Articles of Incorporation.
2. On any given matter, the presence in any meeting, in person or by
proxy, of holders of record of less than one-third of the shares issued and
outstanding and entitled to vote threat shall not prevent action at such meeting
upon any other matter or matters which may properly come before the meeting, if
there shall be present thereat, in person or by proxy, holders of record of the
number of shares required for action in respect of such other matter or matters.
3. Notwithstanding any provision of Maryland law requiring more than
a majority vote of the Common Stock, or any class thereof, in connection with
any corporation action (including, but not limited to, the amendment of these
Articles of Incorporation), unless otherwise provided in these Article of
Incorporation the Corporation may take or authorize such action upon the
favorable vote of the holders of a majority of the outstanding shares of Common
Stock entitled to vote thereon.
TWELFTH: All persons who shall acquire shares in the Corporation
shall acquire the same subject to the provisions of these Articles of
Incorporation.
THIRTEENTH: The Corporation reserves the right from time to time to
amend, alter, or repeal any of the provisions of these Articles of Incorporation
(including any amendment that
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changes the terms of any of the outstanding shares by classification,
reclassification or otherwise), and any contract rights, as expressly set forth
in these Articles of Incorporation, of any outstanding shares, and to add or
insert any other provisions that may, under the statutes of the State of
Maryland at the time in force, be lawfully contained in articles of
incorporation, and all rights at any time conferred upon the stockholders of the
Corporation by these Articles of Incorporation are subject to the provisions of
this Article THIRTEENTH.
The term "Articles of Incorporation" as used herein and in the By-laws of
the Corporation shall be deemed to mean these Articles of Incorporation as from
time to time amended and restated.
IN WITNESS WHEREOF, the undersigned incorporator of MORGAN STANLEY UNIVERSAL
FUNDS, INC. has signed these Articles of Incorporation on this 26th day of
March, 1996.
MORGAN STANLEY UNIVERSAL FUNDS, INC.
By /s/ Joseph C. Benedetti
-----------------------
Joseph C. Benedetti
Incorporator
Attest:
By /s/ Joseph A. Messing
---------------------
Joseph A. Messing
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CERTIFICATE
-----------
The undersigned Incorporator of MORGAN STANLEY UNIVERSAL FUNDS, INC.,
who executed on behalf of said corporation the foregoing Articles of
Incorporation of which this certificate is made a part, hereby acknowledges, in
the name and on behalf of said corporation, the foregoing Articles of
Incorporation to be his act and further certifies that, to the best of his
knowledge, information and belief, the matters and facts set forth therein are
true in all material respects, under the penalties of perjury.
/s/ Joseph C. Benedetti
-----------------------
Joseph C. Benedetti
Incorporator
Dated: March 26th 1996
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Exhibit 3.2
BY-LAWS OF
MORGAN STANLEY UNIVERSAL FUNDS, INC.
ARTICLE I
Fiscal Year and Offices
Section 1. Fiscal Year. Unless otherwise provided by resolution of the Board
of Directors the fiscal year of the Corporation shall begin on January 1 and end
on the last day of December.
Section 2. Registered Office. The registered office of the Corporation in
Maryland shall be located at 11 East Chase Street, Baltimore, Maryland 21202,
and the name and address of its Resident Agent is CSC-Lawyers Incorporating
Service Company, 11 East Chase Street, Baltimore, Maryland, 21202.
Section 3. Other Offices. The Corporation shall also have a place of
business in New York, New York, and the Corporation shall have the power to open
additional offices for the conduct of its business in such places as the Board
of Directors may from time to time designate.
ARTICLE II
Meetings of Stockholders
Section 1. Place of Meeting. Meetings of the Stockholders for the election
of Directors shall be held in such place as the Board of Directors may by
resolution establish. In the absence of any specific resolution, Annual
Meetings of Stockholders shall be held at the corporation's principal office in
New York, New York. Meetings of Stockholders for any other purpose may be held
at such place and time as shall be fixed by resolution of the Board of Directors
and stated in the notice of the Meeting, or in a duly executed waiver of notice
thereof.
Section 2. Annual Meetings. An annual meeting of the stockholders of the
Corporation shall not be required to be held in any year in which stockholders
are not required to elect directors under the Investment Company Act of 1940, as
amended (the "1940 Act"), even if the Corporation is holding a meeting of the
stockholders for a purpose other than the election of directors. If the
Corporation is required by the 1940 Act to hold a meeting to elect directors,
the meeting shall be designated as the Annual Meeting of stockholders for that
year and shall be held within 120 days after the occurrence of an event
requiring the election of directors. The Board of Directors may, in its
discretion, hold a meeting to be designated as the Annual Meeting of
stockholders any year where an election of directors by stockholders is not
required under the 1940 Act. The date of an Annual Meeting shall be set by
appropriate resolution of the Board of Directors, and stockholders shall vote on
the election of directors and transact any other business as may properly be
brought before the Annual Meeting.
Section 3. Special Meetings. Special Meetings of the Stockholders may be
called at any time by the Chairman of the Board or the President, or by a
majority of the Board of Directors, and shall be called by the Chairman of the
Board, President or Secretary upon written request of the holders of shares
entitled to cast not less than ten percent of all the votes entitled to be cast
at such meeting provided that (a) such request shall state the purposes of such
meeting and the matters proposed to be acted on, and (b) the Stockholders
requesting such meeting shall have paid to the Corporation the reasonably
estimated cost of preparing and mailing the notice thereof, which the Secretary
shall determine and specify to such
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Stockholders. No Special Meeting need be called to consider any matter which is
substantially the same as a matter voted on at any meeting of the Stockholders
held during the preceding twelve months.
Section 4. Notice. Not more than ninety days, nor less than ten days before
the date of every Annual or Special Stockholders' Meeting, the Secretary shall
cause to be mailed to each Stockholder entitled to vote at such meeting at his
or her address (as it appears on the records of the Corporation at the time of
mailing) written notice stating the time and place of the meeting and, in the
case of a Special Meeting of Stockholders, shall be limited to the purposes
stated in the notice. Notice of any Stockholders' meeting need not be given to
any Stockholder who shall sign a written waiver of such notice whether before or
after the time of such meeting, or to any Stockholder who shall attend such
meeting in person or by proxy. Notice of adjournment of a Stockholders' meeting
to another time or place need not be given, if such time and place are announced
at the meeting.
Section 5. Record Date for Meetings. The Board of Directors may fix in
advance a date not more than ninety days, nor less than ten days, prior to the
date of any Annual or Special Meeting of the Stockholders as a record date for
the determination of the Stockholders entitled to receive notice of, and to vote
at any meeting and any adjournment thereof; and in such case such Stockholders
and only such Stockholders as shall be Stockholders of record on the date so
fixed shall be entitled to receive notice of and to vote at such meeting and any
adjournment thereof, as the case may be, notwithstanding any transfer of any
stock on the books of the Corporation after any such record date fixed as
aforesaid.
Section 6. Quorum. At any meeting of Stockholders, the presence in person or
by proxy of the holders of a majority of all the votes entitled to be cast at
the meeting shall constitute a quorum for the transaction of business at the
meeting, except that where any provision of law or the Articles of Incorporation
require that the holders of any class of shares shall vote as a class, then a
majority of the aggregate number of shares of that class at the time outstanding
shall be necessary to constitute a quorum for the transaction of such business.
If, however, such quorum shall not be present or represented at any meeting of
the Stockholders, any officer entitled to preside at, or act as Secretary of,
such meeting, shall have the power to adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum shall be
present or represented. At such adjourned meeting at which a quorum shall be
present or represented any business may be transacted which might have been
transacted at the meeting as originally notified.
Section 7. Voting. Each Stockholder shall have one vote for each full share
and a fractional vote for each fractional share of stock having voting power
held by such Stockholder on the record date set pursuant to Section 5 on each
matter submitted to a vote at a meeting of Stockholders. Such vote may be made
in person or by proxy. If no record date has been fixed for the determination of
Stockholders, the record date for the determination of Stockholders entitled to
notice of or to vote at a meeting of Stockholders shall be at the close of
business (i) on the day on which notice of the meeting is mailed or (ii) on the
day 30 days before the meeting, whichever is the closer date to the meeting. At
all meetings of the Stockholders, a quorum being present, all matters shall be
decided by majority vote of the shares of stock entitled to vote held by
Stockholders present in person or by proxy, unless the question is one which by
express provision of the laws of the State of Maryland, the 1940 Act, as from
time to time amended, or the Articles of Incorporation, a different vote is
required, in which case such express provision shall control the decision of
such question. At all meetings of Stockholders, unless the voting is conducted
by inspectors, all questions relating to the qualification of voters and the
validity of proxies and the acceptance or rejection of votes shall be decided by
the Chairman of the meeting.
Section 8. Voting - Proxies. The right to vote by proxy shall exist only if
the instrument authorizing such proxy to act shall have been executed in writing
by the Stockholder himself or herself by his or her attorney thereunto duly
authorized in writing. No proxy shall be voted on after eleven months from its
date unless it
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provides for a longer period. Each proxy shall be in writing subscribed by the
Stockholder or his or her duly authorized attorney and shall be dated, but need
not be sealed, witnessed or acknowledged. Proxies shall be delivered to the
Secretary of the Corporation or person acting as Secretary of the meeting before
being voted. A proxy with respect to stock held in the name of two or more
persons shall be valid if executed by one of them unless at or prior to exercise
of such proxy the Corporation received a specific written notice to the contrary
from any one of them. A proxy purporting to be executed by or on behalf of a
Stockholder shall be deemed valid unless challenged at or prior to its exercise.
Section 9. Inspectors. At any election of Directors, the Board of Directors
prior thereto may, or, if they have not so acted, the Chairman of the meeting,
may appoint one or more inspectors of election who shall first subscribe an oath
of affirmation to execute faithfully the duties of inspectors at such election
with strict impartiality and according to the best of their ability, and shall
after the election make a certificate of the result of the vote taken. No
candidate for the office of Director shall be appointed such inspector.
Section 10. Stock Ledger and List of Stockholders. It shall be the duty of
the Secretary or Assistant Secretary of the Corporation to cause an original or
duplicate stock ledger to be maintained at the office of the Corporation's
transfer agent. Such stock ledger may be in written form or any other form
capable of being converted into written form within a reasonable time for visual
inspection. Any one or more persons, each of whom has been a Stockholder of
record of the Corporation for more than six months next preceding such request,
who owns or own in the aggregate 5% or more of the outstanding capital stock of
the Corporation, may submit a written request to any officer of the Corporation.
Within 20 days after such a request, there shall be prepared and filed at the
Corporation's principal office a list containing the names and addresses of all
Stockholders of the Corporation and the number of shares of each class held by
each Stockholder, certified as correct by an officer of the Corporation, by its
stock transfer agent, or by its registrar.
Section 11. Action Without Meeting. Any action to be taken by Stockholders
may be taken without a meeting if all Stockholders entitled to vote on the
matter consent to the action in writing, and the written consents are filed with
the records of the meetings of Stockholders. Such consent shall be treated for
all purposes as a vote at a meeting.
ARTICLE III
Directors
Section 1. General Powers. The business of the Corporation shall be under
the direction of its Board of Directors, which may exercise all powers of the
Corporation, except such as are by statute, or the Articles of Incorporation, or
by these By-Laws conferred upon or reserved to the Stockholders. All acts done
by any meeting of the Directors or by any person acting as a Director, so long
as his or her successor shall not have been duly elected or appointed, shall,
notwithstanding that it be afterwards discovered that there was some defect in
the election of the Directors or of such person acting as aforesaid or that they
or any of them were disqualified, be as valid as if the Directors or such other
person, as the case may be, had been duly elected and were or was qualified to
be Directors or a Director of the Corporation.
Section 2. Number and Term of Office. The number of Directors that shall
constitute the whole Board shall be determined from time to time by the Board of
Directors, but shall not be fewer than three, nor more than fifteen. Each
Director elected shall hold office until the earlier of the following: (i) his
or her successor is elected and qualified; (ii) his or her death; (iii) he or
she shall have resigned; (iv) December 31 of the year in which he or she shall
have reached seventy-three years of age; or (v) he or she shall have been
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removed as hereinafter provided in these By-Laws or as otherwise provided by
Statute or the Articles of Incorporation. Directors need not be Stockholders.
Section 3. Election. Initially the Directors shall be those persons named as
such in the Articles of Incorporation. The Directors shall be elected by the
vote of a majority of the shares present in person or by proxy at the Annual
Meeting of the Stockholders, except that any vacancy in the Board of Directors
may be filled by a majority vote of the Board of Directors, although less than a
quorum, if immediately after filling any such vacancy at least two-thirds of the
directors then holding office shall have been elected to such office by the
stockholders. A newly created directorship may be filled only by a vote of the
entire Board of Directors. However, if at any time less than a majority of the
Directors then holding office were elected by Stockholders, a Stockholders
Meeting shall be called as soon as possible, and in any event within sixty days,
for the purpose of electing an entire Board of Directors.
Section 4. Removal of Directors. At any Stockholders Meeting, provided a
quorum is present, any Director may be removed (either with or without cause) by
the vote of the holders of a majority of the shares present or represented at
the meeting, and at the same meeting a duly qualified person may be elected in
his or her stead by a majority of the votes validly cast.
Section 5. Place of Meeting. Meetings of the Board of Directors, regular or
special, may be held at any place in or out of the State of Maryland as the
Board may from time to time determine.
Section 6. Quorum. At all meetings of the Board of Directors a majority of
the entire Board of Directors shall constitute a quorum for the transaction of
business and the action of a majority of the Directors present at any meeting at
which a quorum is present shall be the action of the Board of Directors unless
the concurrence of a greater proportion is required for such action by the laws
of Maryland, the 1940 Act, these By-Laws or the Articles of Incorporation. If a
quorum shall not be present at any meeting of Directors, the Directors present
may by a majority vote adjourn the meeting from time to time without notice
other than announcement at the meeting, until a quorum shall be present.
Section 7. Regular Meetings. Regular meetings of the Board of Directors may
be held without notice at such time and place as shall from time to time be
determined by the Board of Directors, provided that notice of any change in the
time or place of such meetings shall be sent promptly to each Director not
present at the meeting at which such change was made in the manner provided for
notice of special meetings. Members of the Board of Directors or any committee
designated thereby may participate in a meeting of such Board or committee by
means of a conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other at the same
time, and participation by such means shall constitute presence in person at a
meeting.
Section 8. Special Meetings. Special Meetings of the Board of Directors may
be called by the Chairman of the Board or the President on one day's notice to
each Director; Special Meetings shall be called by the Chairman of the Board,
President or Secretary in like manner and on like notice on the written request
of two Directors.
Section 9. Informal Actions. Any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if a written consent to such action is signed in one or more
counterparts by all members of the Board or of such committee, as the case may
be, and such written consent is filed with the minutes of proceedings of the
Board or committee.
Section 10. Committees. The Board of Directors may by resolution passed by a
majority of the entire Board appoint from among its members an Executive
Committee and other committees composed of two or
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more Directors, and may delegate to such committees, in the intervals between
meetings of the Board of Directors, any or all of the powers of the Board of
Directors in the management of the business and affairs of the Corporation,
except the powers to declare dividends or distributions on stock, to issue stock
or to recommend to Stockholders any action requiring Stockholder approval.
Section 11. Action of Committees. In the absence of an appropriate
resolution of the Board of Directors each committee may adopt such rules and
regulations governing its proceedings, quorum and manner of acting as it shall
deem proper and desirable, provided that the quorum shall not be less than two
Directors. The committees shall keep minutes of their proceedings and shall
report the same to the Board of Directors at the meeting next succeeding, and
any action by the committee shall be subject to revision and alteration by the
Board of Directors, provided that no rights of third persons shall be affected
by any such revision or alteration. In the absence of any member of such
committee the members thereof present at any meeting, whether or not they
constitute a quorum, may appoint a member of the Board of Directors to act in
the place of such absent member, amend the By-Law, or approve any merger or
share exchange which does not require stockholder approval.
Section 12. Compensation. Any Director, whether or not he or she is a
salaried officer or employee of the Corporation, may be compensated for his or
her services as Director or as a member of a committee of Directors, or as
Chairman of the Board or chairman of a committee by fixed periodic payments or
by fees for attendance at meetings or by both, and in addition may be reimbursed
for transportation and other expenses, all in such manner and amounts as the
Board of Directors may from time to time determine.
ARTICLE IV
Notices
Section 1. Form. Notices to Stockholders shall be in writing and delivered
personally or mailed to the Stockholders at their addresses appearing on the
books of the Corporation. Notices to Directors shall be oral or by telephone or
telegram or in writing delivered personally or mailed to the Directors at their
addresses appearing on the books of the Corporation. Notice by mail shall be
deemed to be given at the time when the same shall be mailed. Notice to
Directors need not state the purpose of a Regular or Special Meeting, unless as
otherwise required by the 1940 Act or other applicable laws or regulations.
Section 2. Waiver. Whenever any notice of the time, place or purpose of any
meeting of Stockholders, Directors or a committee is required to be given under
the provisions of Maryland law or under the provisions of the Articles of
Incorporation or these By-laws, a waiver thereof in writing, signed by the
person or persons entitled to such notice and filed with the records of the
meeting, whether before or after the holding thereof, or actual attendance at
the meeting of Stockholders in person or by proxy, or at the meeting of
Directors of committee in person, shall be deemed equivalent to the giving of
such notice to such persons.
ARTICLE V
Officers
Section 1. Executive Officers. The officers of the Corporation shall be
chosen by the Board of Directors and shall include a President, who shall be a
Director, a Secretary and a Treasurer. The Board of Directors may, from time to
time, elect or appoint a Controller, one or more Vice Presidents, Assistant
Secretaries and Assistant Treasurers. The Board of Directors, at its
discretion, may also appoint a Director as Chairman of
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the Board who shall perform and execute such executive and administrative duties
and powers as the Board of Directors shall from time to time prescribe. The
same person may hold two or more offices, except that no person shall be both
President and Secretary and no officer shall execute, acknowledge or verify any
instrument in more than one capacity, if such instrument is required by law, the
Articles of Incorporation or these By-Laws to be executed, acknowledged or
verified by two or more officers.
Section 2. Election. The Board of Directors shall choose a President, a
Secretary and a Treasurer at its first meeting and thereafter annually. If any
officer or officers are not elected at any such meeting, such officer or
officers may be elected at any subsequent regular or special meeting of the
Board of Directors. Each officer elected by the Board of Directors shall hold
office until the next annual meeting of the Board of Directors and until his or
her successor shall have been chosen and qualified.
Section 3. Other Officers. The Board of Directors from time to time may
appoint such other officers and agents as it shall deem advisable, who shall
hold their offices for such terms and shall exercise powers and perform such
duties as shall be determined from time to time by the Board. The Board of
Directors from time to time may delegate to one or more officers or agents the
power to appoint any such subordinate officers or agents and to prescribe their
respective rights, terms of office, authorities and duties.
Section 4. Compensation. The salaries or other compensation of all officers
and agents of the Corporation shall be fixed by the Board of Directors, except
that the Board of Directors may delegate to any person or group of persons the
power to fix the salary or other compensation of any subordinate officers or
agents appointed pursuant to Section 3 of this Article V.
Section 5. Tenure. The officers of the Corporation shall serve for one year
and until their successors are chosen and qualify. Any officer or agent may be
removed by the affirmative vote of a majority of the Board of Directors
whenever, in its judgment, the best interests of the corporation will be served
thereby. In addition, any officer or agent appointed pursuant to Section 3 may
be removed, either with or without cause, by any officer upon whom such power of
removal shall have been conferred by the Board of Directors. Any vacancy
occurring in any office of the Corporation by death, resignation, removal or
otherwise shall be filled by the Board of Directors, unless pursuant to Section
3 the power of appointment has been conferred by the Board of Directors on any
other officer.
Section 6. President. The President, unless the Chairman has been so
designated, shall be the Chief Executive Officer of the Corporation; he or she
shall preside at all meetings of the Stockholders and Directors, and shall see
that all orders and resolutions of the Board are carried into effect. The
President, unless the Chairman has been so designated, shall also be the chief
administrative officer of the Corporation and shall perform such other duties
and have such other powers as the Board of Directors may from time to time
prescribe.
Section 7. Chairman of the Board. The Chairman of the Board, if one shall be
chosen, shall preside at all meetings of the Board of Directors and
Stockholders, and shall perform and execute such executive duties and
administrative powers as the Board of Directors shall from time to time
prescribe.
Section 8. Vice-President. The Vice-Presidents, in order of their seniority,
shall, in the absence or disability of the President, perform the duties and
exercise the powers of the President and shall perform such other duties as the
Board of Directors or the Chief Executive Officer may from time to time
prescribe.
Section 9. Secretary. The Secretary shall attend all meetings of the Board
of Directors and all meetings of the Stockholders and record all the proceedings
thereof and shall perform like duties for any Committee when required. He or
she shall give, or cause to be given, notice of meetings of the Stockholders and
of the
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Board of Directors, shall have charge of the records of the Corporation,
including the stock books, and shall perform such other duties as may be
prescribed by the Board of Directors or Chief Executive Officer, under whose
supervision he or she shall be. He or she shall keep in safe custody the seal
of the Corporation and, when authorized by the Board of Directors, shall affix
and attest the same to any instrument requiring it. The Board of Directors may
give general authority to any other officer to affix the seal of the Corporation
and to attest the affixing by his or her signature.
Section 10. Assistant Secretaries. The Assistant Secretaries in order of
their seniority, shall, in the absence or disability of the Secretary, perform
the duties and exercise the powers of the Secretary and shall perform such other
duties as the Board of Directors shall prescribe.
Section 11. Treasurer. The Treasurer, unless another officer has been so
designated, shall be the Chief Financial Officer and the principal accounting
officer of the Corporation. He or she shall have general charge of the finances
and books of account of the Corporation. Except as otherwise provided by the
Board of Directors, he or she shall have general supervision of the funds and
property of the Corporation and of the performance by the custodian of its
duties with respect thereto. He or she shall render to the Board of Directors,
whenever directed by the Board, an account of the financial condition of the
Corporation and of all his or her transactions as Treasurer; and as soon as
possible after the close of each financial year he or she shall make and submit
to the Board of Directors a like report for such financial year. He or she
shall cause to be prepared annually a full and correct statement of the affairs
of the Corporation, including a balance sheet and a financial statement of
operations for the preceding fiscal year, which shall be submitted at the Annual
Meeting of Stockholders and filed within twenty days thereafter at the principal
office of the Corporation in the State of Maryland. He or she shall perform all
the acts incidental to the office of Treasurer, subject to the control of the
Board of Directors.
Section 12. Controller. The Controller shall be under the direct supervision
of the Chief Financial Officer of the Corporation. He or she shall maintain
adequate records of all assets, liabilities and transactions of the Corporation,
establish and maintain internal accounting control and, in cooperation with the
independent public accountants selected by the Board of Directors, shall
supervise internal auditing. He or she shall have such further powers and
duties as may be conferred upon him or her from time to time by the President or
the Board of Directors.
Section 13. Assistant Treasurers. The Assistant Treasurers, in the order of
their seniority, shall, in the absence or disability of the Treasurer, perform
the duties and exercise the powers of the Treasurer and shall perform such other
duties as the Board of Directors may from time to time prescribe.
Section 14. Surety Bonds. The Board of Directors may require any officer or
agent of the Corporation to execute a bond (including, without limitation, any
bond required by the 1940 Act, and the rules and regulations of the Securities
and Exchange Commission) to the Corporation in such sum and with such surety or
sureties as the Board of Directors may determine, conditioned upon the faithful
performance of his or her duties of the Corporation, including responsibility
for negligence and for the accounting of any Corporation's property, funds or
securities that may come into his or her hands.
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ARTICLE VI
Investment Restrictions
Section 1. Trading in Securities. Neither any investment adviser or any
officer or director thereof, nor any officer or director of the Corporation
shall take a long or short position in the securities issued by the Corporation,
except as permitted by applicable laws and regulations; provided, that the
foregoing shall not prevent the purchase from the Corporation of shares issued
by it by the officers or directors of the Corporation or of the investment
adviser or by the investment adviser at the price available to the public at the
moment of such purchase.
In any case where an officer or director of the Corporation or of any
investment adviser or a member of an advisory or portfolio committee of the
Corporation is also an officer or director of another corporation and the
purchase or sale of shares issued by that other corporation is under
consideration, the officer or director or committee member concerned will
abstain from participating in any decision made on behalf of the Corporation to
purchase or sell any securities issued by the other corporation.
Section 2. Loans to Affiliates. The Corporation shall not lend assets of the
Corporation to any officer or director of the Corporation, or to any partner,
officer, director or stockholder of, or person who has a material, financial
interest in, any investment adviser of the Corporation, or the distributor of
the Corporation, or to the investment adviser of the Corporation or to the
distributor of the corporation.
Section 3. Conflict of Interest Transaction. The Corporation shall not
permit any officer or director, or any officer or director of any investment
adviser or distributor of the Corporation to deal for or on behalf of the
Corporation with himself or herself as principal or agent, or with any
partnership, association or corporation in which he or she has a material,
financial interest; provided that the foregoing provisions shall not prevent (a)
officers or directors of the Corporation from buying, holding or selling shares
in the Corporation, or from being partners, officers or directors of or
otherwise financially interested in any investment adviser, sponsor, manager or
distributor of the Corporation; (b) purchases or sales of securities or other
property by the Corporation from or to an affiliated person or to any investment
adviser or distributor of the Corporation if such transaction is exempt from the
applicable provisions of the 1940 Act; (c) purchases of investments owned by the
Corporation through a security dealer who is, or one or more of whose partners,
stockholders, officers or director is, an officer or director of the
Corporation, if such transactions are handled in the capacity of brokers only
and commissions charged do not exceed customary brokerage charges for such
services; (d) employment of legal counsel, registrar, transfer agent, dividend
disbursing agent or custodian who is, or has a partner, stockholder, officer or
director, who is an officer or director of the Corporation, if only customary
fees are charged for services to the Corporation; (e) sharing statistical,
research, legal and management expenses with a firm of which an officer or
directors of the Corporation is an officer or director or otherwise financially
interested; (f) purchase for the portfolio of the Corporation of securities
issued by an issuer having an officer, director or securities holder who is an
officer or director of the Corporation or of any investment adviser of the
Corporation, unless the retention of such securities in the portfolio of the
Corporation would be a violation of these By-Laws or the Articles of
Incorporation of the Corporation.
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ARTICLE VII
Stock
Section 1. Certificates. No certificates certifying the ownership of shares
shall be issued except as the Directors may otherwise authorize. In the event
that the Directors authorize the issuance of share certificates, subject to the
provisions of Article VII, Section 3, each stockholder shall be entitled to a
certificate stating the number of shares and the series or class owned by him or
her, in such form as shall be prescribed from time to time by the Directors.
Such certificates shall be signed by the President or any Vice-President and by
the Treasurer or any Assistant Treasurer. Such signatures may be facsimiles if
the certificate is signed by a transfer agent, or by a registrar, other than a
Director, officer or employee of the Corporation. In case any officer who has
signed or whose facsimile signature has been placed on such certificate shall
cease to be such officer before such certificate is issued, it may be issued by
the Corporation with the same effect as if he or she were such officer at the
time of its issue.
In lieu of issuing certificates for shares, the Directors or the transfer
agent may either issue receipts therefor or may keep accounts upon the books of
the Corporation for the record holders of such shares, who shall in either case
be deemed, for all purposes hereunder, to be the holders of certificates for
such shares as if they had accepted such certificates and shall be held to have
expressly assented and agreed to the terms hereof.
Section 2. Loss of Certificates. In case of the alleged loss or destruction
or the mutilation of a share certificate, a duplicate certificate may be issued
in place thereof, upon such terms as the Directors may prescribe.
Section 3. Issuance of New Certificate to Pledgee. A pledgee of shares
transferred as collateral security shall be entitled to a new certificate if the
instrument of transfer substantially describes the debt or duty that is intended
to be secured thereby. Such new certificate shall express on its face that it
is held as collateral security, and the name of the pledgor shall be stated
thereon, who alone shall be liable as a stockholder, and entitled to vote
thereon.
Section 4. Discontinuance of Issuance of Certificates. The Directors may at
any time discontinue the issuance of share certificates and may, by written
notice to each stockholder, require the surrender of share certificates to the
Corporation for cancellation. Such surrender and cancellation shall not effect
the ownership of shares in the Corporation.
Section 5. Transfer of Capital Stock. Transfers of shares of the stock of
the Corporation shall be made on the books of the Corporation by the holder of
record thereof (in person or by his or her attorney thereunto duly authorized by
a power of attorney duly executed in writing and filed with the Secretary of the
Corporation) (i) if a certificate or certificates have been issued, upon the
surrender of the certificate or certificates, properly endorsed or accompanied
by proper instruments of transfer, representing such shares, or (ii) as
otherwise prescribed by the Board of Directors. Every certificate exchanged,
surrendered for redemption or otherwise returned to the Corporation shall be
marked "Canceled" with the date of cancellation.
Section 6. Registered Stockholders. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such shares or shares on the part of any
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other person, whether or not it shall have express or other notice thereof,
except as otherwise provided by the General Laws of the State of Maryland.
Section 7. Transfer Agents and Registrars. The Board of Directors may, from
time to time, appoint or remove transfer agents and/or registrars of transfers
of shares of stock of the Corporation, and it may appoint the same person as
both transfer agent and registrar. Upon any such appointment being made all
certificates representing shares of stock thereafter issued shall be
countersigned by one of such transfer agents or by one of such registrars of
transfers or by both and shall not be valid unless so countersigned. If the
same person shall be both transfer agent and registrar, only one
countersignature by such person shall be required.
Section 8. Stock Ledger. The Corporation shall maintain an original stock
ledger containing the names and addresses of all stockholders and the number and
class of shares held by each stockholder. Such stock ledger may be in written
form or any other form capable of being converted into written form within a
reasonable time for visual inspection.
ARTICLE VIII
General Provisions
Section 1. Rights in Securities. The Board of Directors, on behalf of the
Corporation, shall have the authority to exercise all of the rights of the
Corporation as owner of any securities which might be exercised by any
individual owning such securities in his or her own right; including, but not
limited to, the rights to vote by proxy for any and all purposes, to consent to
the reorganization, merger or consolidation of any issuer or to consent to the
sale, lease or mortgage of all or substantially all of the property and assets
of any issuer; and to exchange any of the shares of stock of any issuer for the
shares of stock issued therefor upon any such reorganization, merger,
consolidation, sale lease or mortgage. The Board of Directors shall have the
right to authorize any officer of the investment adviser to execute proxies and
the right to delegate the authority granted by this Section 1 to any officer of
the Corporation.
Section 2. Custodianship.
(a) The Corporation shall place and at all times maintain in the custody of a
custodian (including any sub-custodian for the custodian) all funds, securities
and similar investments owned by the Corporation. Subject to the approval of
the Board of Directors the custodian may enter into arrangements with securities
depositories, as long as such arrangements comply with the provisions of the
1940 Act and the rules and regulations promulgated thereunder. Subject to the
foregoing, the custodian (and any sub-custodian) shall be a bank having no less
aggregate capital, surplus and undivided profits as required by the 1940 Act and
the rules and regulations promulgated thereunder or such greater amounts as
determined by the Board of Directors from time to time, and the custodian shall
be appointed from time to time by the Board of Directors, which shall fix its
remuneration.
(b) Upon termination of a custodian agreement or inability of the custodian to
continue to serve, the Board of Directors shall promptly appoint a successor
custodian. But in the event that no successor custodian can be found who has
the required qualifications and is willing to serve, the Board of Directors
shall call as promptly as possible a Special Meeting of the Stockholders to
determine whether the Corporation shall function without a custodian or shall be
liquidated. If so directed by vote of the holders of
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a majority of the outstanding shares of stock of the Corporation, the custodian
shall deliver and pay over all property of the Corporation held by it as
specified in such vote.
(c) The following provisions shall apply to the employment of a custodian and
to any contract entered into with the custodian so employed:
The Board of Directors shall cause to be delivered to the custodian all
securities owned by the Corporation or to which it may become entitled, and
shall order the same to be delivered by the custodian only in completion of a
sale, exchange, transfer, pledge, or other disposition thereof, all as the
Board of Directors may generally or from time to time require or approve or to
a successor custodian; and the Board of Directors shall cause all funds owned
by the Corporation or to which it may become entitled to be paid to the
custodian, and shall order the same disbursed only for investment against
delivery of the securities acquired, or in payment of expenses, including
management compensation, and liabilities of the Corporation, including
distributions to stockholders or proper payments to borrowers of securities
representing partial return of collateral, or to a successor custodian.
Section 3. Reports. Not less often than semi-annually, the Corporation shall
transmit to the Stockholders a report of the operations of the Corporation,
based at least annually upon an audit by independent public accountants, which
report shall clearly set forth, in addition to the information customarily
furnished in a balance sheet and profit and loss statement, a statement of all
amounts paid to security dealers, legal counsel, transfer agent, disbursing
agent, registrar or custodian or trustee, where such payments are made to a
firm, corporation, bank or trust company, having a partner, officer or director
who is also an officer or director of the Corporation. A copy, or copies, of
all reports submitted to the Stockholders of the Corporation shall also be sent,
as required, to the regulatory agencies of the United States and of the states
in which the securities of the Corporation are registered and sold.
Section 4. Seal. The corporate seal shall have inscribed thereon the name of
the Corporation, the year of its organization and the words "Corporate Seal,
Maryland". The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
Section 5. Execution of Instruments. All deeds, documents, transfers,
contracts, agreements and other instruments requiring execution by the
Corporation shall be signed by the Chairman or the President or a Vice President
and by the Treasurer or Secretary or an Assistant Treasurer or an Assistant
Secretary, or as the Board of Directors may otherwise, from time to time,
authorize. Any such authorization may be general or confined to specific
instances. Except as otherwise authorized by the Board of Directors, all
requisitions or orders for the assignment of securities standing in the name of
the custodian or its nominee, or for the execution of powers to transfer the
same, shall be signed in the name of the Corporation by the Chairman or the
President or a Vice-President and by the Secretary, Treasurer or an Assistant
Treasurer.
ARTICLE IX
Amendments
The By-Laws of the Corporation may be altered, amended or repealed either by
the affirmative vote of a majority of the stock issued and outstanding and
entitled to vote in respect thereof and represented in person or by proxy at any
annual or special meeting of the Stockholders, or by the Board of Directors at
any regular or special meeting of the Board of Directors.
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Exhibit 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the reference to us under the heading "Independent
Accountants" in the Prospectus constituting part of this Registration
Statement on Form N-1A.
PRICE WATERHOUSE LLP
New York, NY
April 29, 1996
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