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MORGAN STANLEY UNIVERSAL FUNDS, INC.
MORGAN STANLEY ASSET MANAGEMENT INC.
MORGAN STANLEY UNIVERSAL FUNDS, INC. (THE "FUND") IS A MUTUAL FUND DESIGNED TO
PROVIDE INVESTMENT VEHICLES FOR VARIABLE ANNUITY CONTRACTS AND VARIABLE LIFE
INSURANCE POLICIES AND FOR CERTAIN TAX-QUALIFIED INVESTORS. THIS PROSPECTUS
DESCRIBES FOUR PORTFOLIOS MANAGED BY MORGAN STANLEY ASSET MANAGEMENT INC.
("MSAM"). THE FUND ALSO OFFERS THIRTEEN OTHER PORTFOLIOS MANAGED BY MSAM OR
MILLER ANDERSON & SHERRERD, LLP., AN AFFILIATE OF MSAM. THE FUND MAKES
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 MAY 1, 1997, HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS INCORPORATED HEREIN BY
REFERENCE, AND, THEREFORE, LEGALLY FORMS A PART OF THE PROSPECTUS. FOR A COPY
OF THE SAI, AT NO CHARGE, CONTACT THE FUND BY CALLING 1-800-422-6464, EXT. 7182
OR CONTACT YOUR INSURANCE COMPANY.
SHARES OF EACH PORTFOLIO MAY BE PURCHASED ONLY BY INSURANCE COMPANIES FOR THEIR
SEPARATE ACCOUNTS FOR THE PURPOSE OF FUNDING VARIABLE ANNUITY CONTRACTS AND
VARIABLE LIFE INSURANCE POLICIES AND BY CERTAIN TAX-QUALIFIED INVESTORS.
PARTICULAR PORTFOLIOS MAY NOT BE AVAILABLE IN YOUR STATE DUE TO VARIOUS
INSURANCE REGULATIONS. PLEASE CHECK WITH YOUR INSURANCE COMPANY FOR AVAILABLE
PORTFOLIOS. INCLUSION OF A PORTFOLIO IN THIS PROSPECTUS WHICH IS NOT AVAILABLE
IN YOUR STATE IS NOT TO BE CONSIDERED A SOLICITATION.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE PORTFOLIOS:
Emerging Markets International Magnum
Debt Emerging Markets Equity
Global Equity
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 EMERGING MARKETS DEBT PORTFOLIO 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 July 15, 1997
MORGAN STANLEY UNIVERSAL FUNDS, INC.
P.O. Box 2798, Boston, MA 02208-2798
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THE FUND
The Fund is an open-end management investment company, or mutual fund. Each of
the four separate investment portfolios (each, a "Portfolio") described in this
Prospectus has a distinct investment objective. The following pages describe
the types of securities and investment techniques each Portfolio uses to seek
its objective, as well as the risks inherent in those types of securities and
investment techniques.
MANAGEMENT
Morgan Stanley Asset Management Inc. ("MSAM" or the "Adviser") advises the
following Portfolios:
Emerging Markets Debt
Global Equity
International Magnum
Emerging Markets Equity
MSAM conducts a world wide investment advisory business. As of May 31, 1997,
MSAM and its investment advisory affiliates had approximately $303 billion in
assets under management or fiduciary advice.
OFFERING OF SHARES
The Fund is intended to be a funding vehicle for all types of variable annuity
contracts and variable life insurance policies offered by insurance companies.
Shares of the Fund may also be offered to certain tax-qualified investors,
including qualified pension and retirement plans. It is possible that material
conflicts among the various insurance companies and other investors in the Fund
may arise. The Fund's Board of Directors will monitor events in order to
identify the existence of any material conflicts and to determine what action,
if any, should be taken in response to any such conflicts.
PROSPECTUS OUTLINE
PAGE
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FINANCIAL HIGHLIGHTS 3
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Financial highlights tables as of December 31, 1996.
PORTFOLIO SUMMARIES 3
For each Portfolio, the investment objective and a summary of strategy,
potential investors, and investment characteristics and risks.
THE PORTFOLIOS' INVESTMENTS 4
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A more detailed review of how each Portfolio invests and investment
characteristics and risks.
SECURITIES AND INVESTMENT TECHNIQUES 8
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More information about the types of investment strategies that may be used
by some or all of the Portfolios and information about investment risks and
limitations.
FUNDAMENTAL INVESTMENT LIMITS 22
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Certain policies that may be changed only by shareholders.
MANAGEMENT OF THE FUND 22
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General information about the organization and operations of the Fund,
including details about MSAM and the individual portfolio managers, as well as
fees, expenses and performance calculations.
ACCOUNT POLICIES 28
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Information on net asset value calculation, income and gain distributions,
taxes and share purchases and redemptions.
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FINANCIAL HIGHLIGHTS
The following table provides financial highlights for the shares of the
Emerging Markets Equity Portfolio for the period presented. The Emerging
Markets Equity Portfolio was the only Portfolio of the Fund operational in the
fiscal year ended December 31, 1996 and, therefore, is the only Portfolio with
audited financial highlights for this period. These audited financial
highlights are part of the Fund's financial statements which appear in the
Fund's December 31, 1996 Annual Report to Shareholders and which are included
in the Fund's Statement of Additional Information. The Emerging Markets Equity
Portfolio's financial highlights for the period ended December 31, 1996 have
been audited by Price Waterhouse LLP, whose unqualified report thereon is also
included in the Statement of Additional Information. Additional performance
information for the Emerging Markets Equity Portfolio is included in the Annual
Report. The Annual Report and the financial statements therein, along with the
Statement of Additional Information, are available at no cost from the Fund at
the address and toll-free number noted on the cover page to this Prospectus or
from your insurance company.
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1, 1996* TO
SELECTED PER SHARE DATA AND RATIOS DECEMBER 31, 1996
- ---------------------------------- -------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......................... $ 10.00
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net Invested Income......................................... 0.01
Net Realized and Unrealized Loss............................ (0.21)
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Total From Investment Operations.......................... (0.20)
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DISTRIBUTIONS
Net Invested Income......................................... (0.02)
-------
Total Distributions....................................... (0.02)
-------
NET ASSET VALUE, END OF PERIOD................................ $ 9.78
=======
TOTAL RETURN.................................................. (2.03)%
=======
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's)............................. $11,789
Ratio of Expenses to Average Net Assets....................... 1.75%**
Ratio of Net Investment Income to Average Net Assets.......... 0.32%**
Portfolio Turnover Rate....................................... 9%
Average Commission Rate#...................................... $0.0013
Effect of Voluntary Expense
Limitation During the Period:
Per Share Benefit to Net
Investment Income (Loss)................................... $ 0.08
Ratios Before Expense Limitation:
Expenses to Average Net
Assets..................................................... 6.17%**
Net Investment Income (Loss) to Average Net Assets.......... (4.06)%**
</TABLE>
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*Commencement of operations.
**Annualized.
# For the period ended December 31, 1996, the average commission rate paid on
trades on which commissions were charged was 0.45% of the trade amount.
PORTFOLIO SUMMARIES
Certain investment terms used below have initial capital letters ("Common
Stocks," for example). These terms are further described under "Securities and
Investment Techniques" below.
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.
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, Foreign Investment involves different or
increased risks. The performance of the Portfolio will be affected by foreign
currency values, the greater volatility of securities exchanges, risks in
connection with registration, clearing and settlement of securities
transactions and the overall political, economic and regulatory environment in
the countries in which the Portfolio invests. The risks of Foreign Investment
are exacerbated in the case of Emerging Market Country Securities.
GLOBAL EQUITY PORTFOLIO
OBJECTIVE AND STRATEGY: Long-term capital appreciation by investing primarily
in Equity Securities of issuers throughout the world, including U.S. issuers,
using an approach that is oriented to the selection of individual stocks that
MSAM believes are undervalued.
INVESTOR PROFILE: The Portfolio may be appropriate for investors who seek to
pursue their investment goals in markets throughout the world, including the
United States. By including international investments in their portfolio,
investors can achieve additional diversification and participate in growth
opportunities around the world.
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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, Foreign Investment involves different or increased
risks. The performance of the Portfolio will be affected by foreign currency
values, the greater volatility of securities exchanges, and the overall
political, economic and regulatory environment 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 domiciled in EAFE countries (defined
herein).
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 greater volatility of securities exchanges, and the overall
political, economic and regulatory environment in the countries in which the
Portfolio invests.
EMERGING MARKETS EQUITY PORTFOLIO
OBJECTIVE AND STRATEGY: Long-term capital appreciation by investing primarily
in Equity Securities of emerging market country issuers with a focus on those
in which MSAM believes the economies are developing strongly and in which the
markets are becoming more sophisticated.
INVESTOR PROFILE: The Portfolio may be appropriate for investors who seek to
achieve long-term capital appreciation by investing in Emerging Market Country
Securities. By including emerging market country investments in their
portfolio, investors can achieve additional diversification and participate in
growth opportunities in emerging market countries.
RISK PROFILE: Very high potential risk and reward. In addition to the general
risks involved in Equity Securities, including fluctuations in the stock market
and changes in the economy, international investing involves different or
increased risks. The performance of the Portfolio will be affected by foreign
currency values, the greater volatility of securities exchanges, and the
overall political, economic and regulatory environment in the countries in
which the Portfolio invests. The risks of Foreign Investing are exacerbated in
the case of Emerging Market Country Securities.
THE PORTFOLIOS' INVESTMENTS
INVESTMENT CHARACTERISTICS AND RISKS
The value of each Portfolio's investments and the income they generate will
vary from day-to-day and generally reflect market conditions, interest rates,
and other company, political, or economic news both in the United States and
abroad.
Each Portfolio spreads investment risk by limiting its holdings in any one
company or industry. Nevertheless, each Portfolio will experience price
volatility the extent of which will be affected by the types of securities and
techniques the particular Portfolio uses. 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.
Because the Emerging Markets Debt, International Magnum and Emerging Markets
Equity Portfolios are non-diversified Portfolios and are permitted greater
flexibility to invest their assets in the obligations of a single issuer, they
are exposed to increased risk of loss if such an investment underperforms
expectations. See "Non-Diversified Status" in this Prospectus and "Investment
Limitations" in the SAI.
Investments in securities rated below investment grade, sometimes called high
risk or High Yield Securities or junk bonds, carry a high degree of risk and
are considered speculative. The Adviser may use various investment techniques
to hedge risks, including the use of Derivatives, but there is no guarantee
that these strategies will work as intended. When Portfolio shares are
redeemed, they may be worth more or less than their original cost. An
investment in any one Portfolio is not in itself a balanced investment plan. As
with any mutual fund, there is no assurance that a Portfolio will achieve its
goal.
Each Portfolio will be invested according to its investment strategy. However,
the Portfolios also have the ability to invest without limitation in high-
quality Money Market Instruments or Temporary Investments for temporary,
defensive purposes. See "Securities and Investment Techniques" below.
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
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invest at least 65% of its total assets in government Fixed Income Securities,
including Loan Participations and Assignments between governments and financial
institutions, securities issued by government owned, controlled or sponsored
entities and securities of entities organized to restructure outstanding debt
of such issuers.
The Portfolio may also invest in Fixed Income Securities of corporate issuers
located in or organized under the laws of emerging market countries, Brady
Bonds, Zero Coupon, Pay-In-Kind or Deferred Payment Securities, ADRs, Foreign
Currency Transactions, Investment Company Securities, Investment Funds, Loan
Participations and Assignments, Money Market Instruments, Repurchase
Agreements, Reverse Repurchase Agreements, Temporary Investments, Non-Publicly
Traded Securities, Private Placements, Restricted Securities, When-Issued or
Delayed Delivery Securities and Derivatives, and may engage in Loans of
Portfolio Securities. The Portfolio may also invest up to 5% of its total
assets in MBSs, CMOs and in other ABSs 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 ("NAV") of the Portfolio's shares and
increases in the yield on the Portfolio's investments. For additional
information about investments, see "Securities and Investment Practices" and
"Non-Diversified Status" below.
MSAM'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, MSAM 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:
Algeria Argentina Brazil Bulgaria
Chile China Colombia Costa Rica
Czech Democratic Dominican Ecuador
Republic Republic Republic Greece
Egypt of Congo Indonesia Ivory Coast
Hungary India Malaysia Mexico
Jamaica Jordan Peru Pakistan
Morocco Nicaragua Russia Slovakia
Panama Paraguay Trinidad & Tunisia
Poland Portugal Tobago Venezuela
South Thailand
Africa Uruguay
Turkey
In selecting Emerging Market Country Fixed Income Securities for investment by
the Portfolio, MSAM 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, MSAM
expects to expand and further diversify the universe of emerging market
countries in which the Portfolio 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 generally involve a greater
risk of default and of volatility in price than securities in higher rating
categories. Ratings of
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Fixed Income Securities of foreign issuers, to the extent that those ratings
are undertaken, are related to evaluations of the country in which the issuer
of the instrument is located and generally take into account the currency in
which the Fixed Income Securities of a foreign issuer is denominated.
GLOBAL EQUITY PORTFOLIO
The Global Equity Portfolio seeks long-term capital appreciation by investing
primarily in Common and Preferred Stocks, Convertible Securities, and Rights
and Warrants to purchase Common Stocks, Depositary Receipts and other Equity
Securities of issuers throughout the world, including issuers in the United
States and emerging market countries. Under normal circumstances, at least 65%
of the total assets of the Portfolio will be invested in Equity Securities. In
addition, under normal circumstances, at least 20% of the Portfolio's total
assets will be invested in the Common Stocks of U.S. issuers and the remaining
equity position will be invested in at least three countries other than the
United States. Although the Portfolio intends to invest primarily in securities
listed on stock exchanges, it will also invest in Equity Securities that are
traded over the counter or that are not admitted to listing on a stock exchange
or dealt in on a regulated market. As a result of the absence of a public
trading market, such securities may pose liquidity risks.
The Portfolio may also invest in Foreign Currency Transactions, Money Market
Instruments, Repurchase Agreements and When-Issued or Delayed Delivery
Securities, and Loans of Portfolio Securities. For additional information about
investments, see "Securities and Investment Techniques" below.
The Adviser's approach is oriented to individual stock selection and is value
driven. In selecting stocks for the Portfolio, the Adviser initially identifies
those stocks that it believes to be undervalued in relation to the issuer's
assets, cash flow, earnings and revenues, and then evaluates the future value
of such stocks by running the results of an in-depth study of the issuer
through a dividend discount model. In selecting investments, the Adviser
utilizes the research of a number of sources, including Morgan Stanley Capital
International, an affiliate of the Adviser located in Geneva, Switzerland.
Portfolio holdings are regularly reviewed and subjected to fundamental analysis
to determine whether they continue to conform to the Adviser's value criteria.
Equity Securities that no longer conform to such investment criteria will be
sold.
Although the Portfolio will not invest for short-term trading purposes,
investment securities may be sold from time to time without regard to the
length of time they have been held. Investing in foreign countries and emerging
market countries subjects the Portfolio to additional risk, see "Foreign
Investment" 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
domiciled in EAFE countries (defined below). 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 "EAFE Index"), which
includes Australia, Japan, New Zealand, most nations located in Western Europe
and certain developed countries in Asia, such as Hong Kong and Singapore (each
an "EAFE country," and collectively the "EAFE countries"). Under normal
circumstances, at least 65% of the total assets of the Portfolio will be
invested in Equity Securities of issuers in at least three different EAFE
countries.
Although the Portfolio intends to invest primarily in Equity Securities listed
on stock exchanges in an EAFE country, the Portfolio may invest without limit
in Equity Securities that are traded over the counter or that are not admitted
to listing on a stock exchange or dealt in on a regulated market. As a result
of the absence of a public trading market, such securities may pose liquidity
risks.
The Portfolio may also invest in Private Placements or initial public offerings
in the form of oversubscriptions, certain short-term (less than twelve months
to maturity) and medium-term (not greater than five years to maturity) Fixed
Income Securities, Foreign Currency Transactions, Temporary Investments, Money
Market Instruments, Non-Publicly Traded Securities, Restricted Securities,
Repurchase Agreements, Cash or Cash Equivalents, When-Issued or Delayed
Delivery Securities, and Derivatives and may engage in Loans of 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 Instruments 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 Investment Grade 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. For additional
information about investments, see "Securities and Investment Techniques" and
"Non-Diversified Status" below.
6
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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 EAFE 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 Transactions, Investment
Funds, Loan Participations and Assignments, Money Market Instruments,
Investment Company Securities, Repurchase Agreements, Non-Publicly Traded
Securities, Private Placements, Restricted Securities, Temporary Investments,
When-Issued and Delayed Delivery Securities, and Derivatives and may engage in
Loans of Portfolio Securities. It is likely that many of the Fixed Income
Securities in which the Portfolio will invest will be unrated, and whether or
not rated, such securities may have speculative characteristics.
When deemed appropriate by the Adviser, the Portfolio may also invest up to 10%
of its total assets (measured at the time of the investment) in Fixed Income
Securities that are not Investment Grade Securities (commonly referred to as
High Yield Securities or junk bonds). For temporary defensive purposes, the
Portfolio may invest less than 65% of its total assets in Emerging Market
Country Equity Securities, in which case the Portfolio may invest in other
Equity Securities or may invest in Fixed Income Securities as described in
"Securities and Investment Techniques--Temporary Investments" below. The
Portfolio also has the ability to invest without limitation in high quality
Money Market Instruments or Temporary Investments for temporary defensive
purposes. For additional information about investments, see "Securities and
Investment Techniques" and "Non-Diversified Status" below.
The Adviser's approach is to focus the Portfolio's investments on those
emerging market countries in which it believes the economies are developing
strongly and in which the markets are becoming more sophisticated. There are
currently over 130 countries which, in the opinion of the Adviser, are
generally considered to be emerging or developing countries by the
international financial community, approximately 40 of which currently have
stock markets. Currently, investing in many emerging market countries is not
feasible or may involve unacceptable political risks.
The Portfolio intends to invest primarily in some or all of the following
emerging market countries:
Argentina Botswana Brazil Chile
China Colombia Egypt Greece
Hong Kong Hungary India Indonesia
(China) Israel Jamaica Jordan
Kenya Malaysia Mexico Nigeria
Pakistan Peru Philippine Poland
Portugal Russia South Africa South Korea
Sri Lanka Taiwan Thailand Turkey
Venezuela Zimbabwe
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 small- and medium-size companies that, in the
Adviser's view, have potential for growth.
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Emerging Market Country Securities pose greater liquidity risks and other risks
than securities of companies located in developed countries and traded in more
established markets. The Portfolio may not be able to hedge foreign currency
risk adequately. For a description of special considerations and certain risks
associated with investment in foreign issuers, see "Foreign Investment" below.
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."
SECURITIES AND INVESTMENT TECHNIQUES
The following pages contain more detailed information about types of
instruments in which a Portfolio may invest and strategies the Adviser may
employ in pursuit of a Portfolio's investment objective. A summary of risks and
restrictions associated with these instruments and investment practices is
included as well. A complete listing of each Portfolio's policies and
limitations and more detailed information about each Portfolio's investments is
contained in the SAI. Policies and limitations are considered at the time such
investments are purchased; the sale of instruments is not required in the event
of a subsequent change in circumstances, for example, a rating's downgrade.
The investments of life insurance company separate accounts made under variable
annuity contracts and variable life insurance policies are subject to state
insurance laws and regulations. The Fund and its Portfolios will, when
required, comply with investment restrictions imposed under such laws and
regulations on life insurance company separate accounts investing in the
Portfolios.
The Adviser may not buy all of these instruments or use all of these techniques
to the full extent permitted unless it believes that doing so will help a
Portfolio achieve its investment objective. Current holdings and recent
investment strategies are described in the Portfolio's financial reports, which
will be sent to the Portfolios' shareholders twice a year. For a copy of an SAI
or financial report, at no charge, contact the Fund or your insurance company.
STRATEGIES
EMERGING MARKETS INVESTING: The Adviser's approach to Emerging Markets
Investing is based on the Adviser's evaluation of both short-term and long-term
international economic trends and the relative attractiveness of emerging
markets and individual emerging market securities.
As used in this Prospectus, emerging markets describes any country which is
generally considered to be an emerging or developing country by the
international financial community such as the International Bank for
Reconstruction and Development (more commonly known as the World Bank) and the
International Finance Corporation. There are currently over 130 countries which
are generally considered to be emerging or developing countries by the
international financial community, approximately 40 of which currently have
stock markets. Emerging markets can include every nation in the world except
the United States, Canada, Japan, Australia, New Zealand and most nations
located in Western Europe.
Currently, investing in many emerging market countries is either not feasible
or very costly, or may involve unacceptable political risks. Other special
risks include the possible increased likelihood of expropriation or the return
to power of a political regime which would institute policies to expropriate,
nationalize or otherwise confiscate investments. A Portfolio will focus its
investments on those emerging market countries in which the Adviser believes
the potential for market appreciation outweighs these risks and/or the cost of
investment. Investing in emerging markets also involves an extra degree of
custodial and/or market risk, especially where the securities purchased are not
traded on an official exchange or where ownership records regarding the
securities are maintained by an unregulated entity (or even the issuer itself).
FOREIGN FIXED INCOME INVESTING: The Adviser seeks to invest in Foreign Bonds
and other Fixed Income Securities denominated in foreign currencies, where, in
the opinion of the Adviser, the combination of current yield and currency value
offer attractive expected returns. When the total return opportunities in a
foreign bond market appear attractive in local currency terms, but where in the
Adviser's judgment unacceptable currency risk exists. Foreign Currency
Transactions and Swaps may be used to hedge the currency risk.
FOREIGN INVESTING: Investing in securities issued by foreign companies or
governments involves certain special considerations which are not typically
associated with investing in U.S. issuers. Since the securities of foreign
issuers may be denominated in foreign currencies, and since a Portfolio may
temporarily hold uninvested reserves in bank deposits of foreign currencies
prior to reinvestment or conversion to U.S. dollars, a Portfolio may be
affected favorably or unfavorably by changes in currency exchange 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
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listed companies than in the United States. With respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in those countries. Additionally, there may be difficulty in
obtaining and enforcing judgments against foreign issuers.
Although a Portfolio will endeavor to achieve the most favorable execution
costs in its portfolio transactions in foreign securities, fixed commissions on
many foreign stock exchanges are generally higher than negotiated commissions
on U.S. exchanges. In addition, it is expected that the expenses for custodial
arrangements of a Portfolio's foreign securities will be greater than the
expenses for the custodial arrangements for handling U.S. securities of equal
value. Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income a Portfolio receives from the companies comprising the Portfolio's
investments.
GROWTH STOCK INVESTING: The Adviser seeks to invest in Equity Securities
generally characterized by higher growth rates of revenues and earnings. These
stocks tend to have higher price volatility, higher price/earnings ratios, and
lower yields than the stock market in general as measured by the S&P 500.
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.
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 a 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 creditworthy companies,
or by highly leveraged (indebted) companies, which are generally less able than
more established or less leveraged companies to make scheduled payments of
interest and principal. The risks posed by securities issued under such
circumstances are substantial.
The market for High Yield Securities is still relatively new. Because of this,
a long-term track record for bond default rates does not exist. In addition,
the secondary market for High Yield Securities is generally less liquid than
that for investment grade corporate securities. In periods of reduced market
liquidity, High Yield Security prices may become more volatile, and both the
high yield market and a Portfolio may experience sudden and substantial price
declines. This lower liquidity might have and effect on a Portfolio's ability
to value or dispose of such securities. Also, there may be significant
disparities in the price quoted for High Yield Securities by various dealers.
Under such conditions, a Portfolio may find it difficult to value its
securities accurately. A Portfolio may also be forced to sell securities at a
significant loss in order to meet shareholder redemptions. These factors add to
the risks associated with investing in High Yield Securities.
High Yield Securities may also present risks based on payment expectations. For
example, High Yield Securities may contain redemption or call provisions. If an
issuer exercises these provisions in a declining interest rate market, a
Portfolio would have to replace the security with a lower yielding security,
resulting in a decreased return for investors. Conversely, a High Yield
Security's value will decrease in a rising interest rate market.
Certain types of High Yield Securities are non-income paying securities. For
example, Zero Coupons pay interest only at maturity and Pay-In-Kind Securities
pay interest in the form of additional securities. Payment in the form of
additional securities, or interest income recognized through discount
accretion, will, however, be treated as ordinary income which will be
distributed to shareholders even though the Portfolio does not receive periodic
cash flow from these investments.
VALUE STOCK INVESTING: Emphasizes Common Stocks that are deemed by the Adviser
to be undervalued relative to the stock market in general as measured by the
appropriate market index, based on value measures such as price/earnings ratios
and price/book ratios. Value stocks are generally dividend-paying Common
Stocks. However, non-dividend- paying stocks may also be selected for their
value characteristics.
INSTRUMENTS AND INVESTMENTS
AGENCIES. Agencies are securities which are not guaranteed by, or backed by the
full faith and credit of, the
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U.S. Government, but which are issued, sponsored or guaranteed by a federal
agency or federally sponsored agency such as the Student Loan Marketing
Association, Resolution Funding Corporation, or any of several other agencies.
For further information on these securities, see "Description of U.S.
Government Securities" in the SAI.
ABSs. Asset-backed securities ("ABSs") 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 ABSs 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 ABSs 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 ABSs, 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 prepayment will lengthen it. However,
it is possible to determine what the range of that movement could be and to
calculate the effect that it will have on the price of the security. In
selecting these securities, the Adviser will look for those securities that
offer a higher yield to compensate for any variation in average maturity.
BRADY BONDS. Brady Bonds are Fixed Income Securities that are created through
the exchange of existing commercial bank loans to foreign entities for new
obligations in connection with debt restructuring under a plan introduced by
Nicholas F. Brady when he was the U.S. Secretary of the Treasury. Brady Bonds
have been issued only in relatively recent years, and, accordingly, do not have
a long payment history. They may be collateralized or uncollateralized and
issued in various currencies (although most are dollar-denominated) and they
are actively traded in the over-the-counter secondary market. For further
information on these securities, see the SAI. A Portfolio will invest in Brady
Bonds only if they are consistent with quality specifications.
CASH EQUIVALENTS. Cash Equivalents are short-term Fixed Income Securities
comprising:
(1)Time deposits, certificates of deposit (including marketable variable rate
certificates of deposit) and bankers' acceptances issued by a commercial bank
or savings and loan association. Time deposits are non-negotiable deposits
maintained in a banking institution for a specified period of time at a stated
interest rate. Certificates of deposit are negotiable short-term obligations
issued by commercial banks 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 a U.S. bank, it is a member of the FDIC, and (iii) in the case of a
foreign branch of a U.S. bank, the security is deemed by the Adviser to be of
an investment quality comparable with other Fixed Income Securities which may
be purchased by the Portfolio.
(2)Commercial paper rated at time of purchase by one or more NRSROs in one of
their two highest categories, (e.g., A-1 or A-1+ by S&P or Prime 1 by Moody's,
or, if not rated, issued by a corporation having an outstanding unsecured debt
issue rated high-grade by an NRSRO (e.g., A or better by Moody's, S&P or Fitch
Investors Service, Inc. ("Fitch")).
(3)Short-term corporate obligations rated high-grade at the time of purchase by
an NRSRO (e.g., A or better by Moody's, S&P or Fitch).
(4)U.S. Governments and Agencies.
(5)Repurchase Agreements collateralized by securities listed above.
CMOs. Collateralized Mortgage Obligations ("CMOs") are Derivatives which are
collateralized by mortgage pass-through securities. Cash flows from the
mortgage pass-through securities are allocated to various tranches (a "tranche"
is essentially a separate security) in a predetermined, specified order. Each
tranche has a stated maturity--the latest date by which the tranche can be
completely repaid, assuming no prepayments--and has an average life--the
average of the time to receipt of a principal payment weighted by the size of
the principal payment. The average life is typically used as a proxy for
maturity because the debt is amortized (repaid a portion at a time), rather
than paid off entirely at maturity, as would be the case in a straight debt
instrument.
Due to the possibility that prepayments (on home mortgages and other
collateral) will alter the cash flow on CMOs, it is
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not possible to determine in advance the actual final maturity date or average
life. Faster prepayment will shorten the average life and slower prepayment
will lengthen it. However, it is possible to determine what the range of that
movement could be and to calculate the effect that it will have on the price of
the security. In selecting these securities, the Adviser will look for those
securities that offer a higher yield to compensate for any variation in average
maturity.
Prepayment risk has two important effects. First, like bonds in general, MBSs
will generally decline in price when interest rates rise. However, when
interest rates fall, MBSs may not enjoy as large a gain in market value due to
prepayment risk. Second, when interest rates fall, additional mortgage
prepayments must be reinvested at lower interest rates. In part to compensate
for these risks, MBSs will generally offer higher yields than comparable bonds.
See "MBSs" below.
COMMON STOCKS. Common Stocks are Equity Securities which represent an ownership
interest in a corporation, entitling the shareholder to voting rights and
receipt of dividends paid based on proportionate ownership.
CONVERTIBLE SECURITIES. Convertible Securities are securities, such as
convertible Corporate Bonds, convertible Preferred Stocks, Warrants or other
securities which may be exchanged under certain circumstances for a fixed
number of shares of Common Stock.
CORPORATE BONDS. Corporate Bonds are Fixed Income Securities issued by private
corporations. Bondholders, as creditors, have a prior legal claim over common
and preferred stockholders of the corporation as to both income and assets for
the principal and interest due to the bondholder. A Portfolio will buy
Corporate Bonds subject to any quality constraints. If a security held by a
Portfolio is down-graded, the Portfolio may retain the security.
DEPOSITARY RECEIPTS. Depositary Receipts are securities representing ownership
interests in securities of foreign companies (an "underlying issuer") and are
deposited with the depositary. Depositary Receipts are not necessarily
denominated in the same currency as the underlying securities. Depositary
Receipts include ADRs, Global Depositary Receipts ("GDRs") and other types of
Depositary Receipts (which, together with ADRs and GDRs, are hereinafter
collectively referred to as "Depositary Receipts"). ADRs are dollar-denominated
Depositary Receipts typically issued by a U.S. financial institution which
evidence ownership interests in a security or pool of securities issued by a
foreign issuer. ADRs are listed and traded in the United States. GDRs and other
types of Depositary Receipts are typically issued by foreign banks or trust
companies, although they also may be issued by U.S. financial institutions, and
evidence ownership interests in a security or pool of securities issued by
either a foreign or a U.S. corporation. Generally, Depositary Receipts in
registered form are designed for use in the U.S. securities market and
Depositary Receipts in bearer form are designed for use in securities markets
outside the United States.
Depositary Receipts may be "sponsored" or "unsponsored". Sponsored Depositary
Receipts are established jointly by a depositary and the underlying issuer,
whereas unsponsored Depositary Receipts may be established by a depositary
without participation by the underlying issuer. Holders of an unsponsored
Depositary Receipt generally bear all the costs associated with establishing
the unsponsored Depositary Receipt. In addition, the issuers of the securities
underlying unsponsored Depositary Receipts are not obligated to disclose
material information in the United States and, therefore, there may be less
information available regarding such issuers and there may not be a correlation
between such information and the market value of the Depositary Receipts. For
purposes of a Portfolio's investment policies, the Portfolio's investments in
Depositary Receipts will be deemed to be investments in the underlying
securities except as noted.
DERIVATIVES. The Portfolios are permitted to invest in various derivative
instruments for both hedging and non-hedging purposes. Derivatives include
Options, Futures, Structured Notes, Caps, Floors, Collars and Swaps.
Additionally, the Portfolios may invest in other Derivatives that are developed
over time if their use would be consistent with the objectives of the
Portfolios. Each Portfolio will limit its use of the foregoing Derivatives for
non-hedging purposes to 33 1/3% of its total assets measured by the aggregate
notional amount of outstanding derivative instruments. The Portfolios'
investments in Derivatives for hedging purposes and in forward foreign currency
contracts are not subject to the foregoing limits.
The Portfolios may use Derivatives under a number of different circumstances to
further their investment objectives. The Portfolios may use Derivatives when
doing so provides more liquidity than the direct purchase of the securities
underlying such Derivatives. For example, a Portfolio may purchase Derivatives
to quickly gain exposure to a market in response to changes in the Portfolio's
asset allocation policy or upon the inflow of investable cash when the
Derivative provides greater liquidity than the underlying securities market. A
Portfolio may also use Derivatives when it is restricted from directly owning
the underlying securities due to foreign investment restrictions or other
reasons or when doing so provides a price advantage over purchasing the
underlying securities directly, either because of a pricing differential
between the Derivatives and securities markets or because of lower transaction
costs associated with the Derivatives transaction. Derivatives may also be used
by a Portfolio for hedging purposes and under other circumstances in which the
Portfolio's portfolio manager believes it advantageous to do so consistent with
the Portfolio's investment objective. A Portfolio will not, however, use
Derivatives in a manner that creates leverage, except to the extent that the
use of leverage is expressly permitted by the Portfolio's investment policies,
and then only in a manner consistent with such policies.
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Some of the Derivatives in which the Portfolios may invest and the risks
related thereto are described in more detail below.
Options. The Portfolios may seek to increase their returns or may hedge their
portfolio investments through Options transactions with respect to securities,
instruments, indices or baskets thereof in which such Portfolios may invest, as
well as with respect to foreign currency. Purchasing a put Option gives a
Portfolio the rights to sell a specified security, currency or basket of
securities or currencies at the exercise price until the expiration of the
Option. Purchasing a call Option gives a Portfolio the right to purchase a
specified security, currency or basket of securities or currencies at the
exercise price until the expiration of the Option.
Each Portfolio also may write (i.e., sell) put and call Options on investments
held in its portfolio, as well as with respect to foreign currency. A Portfolio
that has written an Opinion receives a premium, which increases the Portfolio's
return on the underlying security or instrument in the event the Option expires
unexercised or is closed out at a profit. However, by writing a call Option, a
Portfolio will limit its opportunity to profit from an increase in the market
value of the underlying security or instrument above the exercise price of the
Option for as long as the Portfolio's obligations as writer of the Option
continues. The Portfolios may only write Options that are "covered." A covered
call Option means that so long as the Portfolio is obligated as the writer of
the Option, it will earmark or segregate sufficient liquid assets to cover its
obligations under the Option or own (i) the underlying security or instrument
subject to the Option, (ii) securities or instruments convertible or
exchangeable without the payment of any consideration into the security or
instrument subject to the Option, or (iii) a call Option on the same underlying
security with a strike price no higher than the price at which the underlying
instrument was sold pursuant to a short Option position.
By writing (or selling) a put Option, a Portfolio incurs an obligation to buy
the security or instrument 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. The Portfolios may also write Options that may be
exercisable by the purchaser only on a specific date. A Portfolio that has
written a put Option will earmark or segregate sufficient liquid assets to
cover its obligations under the Option or will own a put Option on the same
underlying security with an equal or higher strike price.
The Portfolios may engage in transactions in Options which are graded on
recognized exchanges or over-the-counter. There currently are limited Options
markets in many countries, particularly emerging countries such as Latin
American countries, and the nature of the strategies adopted by MSAM and the
extent to which those strategies are used will depend on the development of
such Option markets. The primary risks associated with the use of Options are
(i) imperfect correlation between the change in market value of investments
held, purchased or sold by a Portfolio and the prices of Options relating to
such investments; and (ii) possible lack of a liquid secondary market for an
Option.
Futures. The Portfolios may purchase and sell futures contracts and options on
futures contracts, including but not limited to securities index futures,
foreign currency exchange futures, interest rate futures contracts and other
financial futures (collectively, "Futures"). Futures contracts provide for the
sale of one party and purchase by another party of a specified amount of a
specific security, instrument or basket thereof, at a specific future date and
at a specified price. An option on a futures contract is a legal contract that
gives the holder the right to buy or sell a specified amount of futures
contracts at a fixed or determinable price upon the exercise of the option.
The Portfolios may sell securities index futures contracts and/or options
thereon in anticipation of or during a market decline to attempt to offset the
decrease in market value of investments in its portfolio, or purchase
securities index futures in order to gain market exposure. Subject to
applicable laws, the Portfolios may engage in transactions in securities index
futures contracts (and options thereon) which are traded on a recognized
securities or futures exchange, or may purchase or sell such instruments in the
over-the-counter market. There currently are limited securities index futures
and options on such futures in many countries, particularly emerging countries.
The nature of the strategies adopted by MSAM, and the extent to which those
strategies are used, may depend on the development of such markets.
The Portfolios may engage in transactions involving foreign currency exchange
futures contracts. Such contracts involve an obligation to purchase or sell a
specific currency at a specified future date and at a specified price. The
Portfolios may engage in such transactions to hedge their respective holdings
and commitments against changes in the level of future currency rates or to
adjust their exposure to a particular currency. For more information, see
"Foreign Currency Transactions" below.
The Portfolios may engage in transactions in interest futures transactions.
Interest rate futures contracts involve an obligation to purchase or sell a
specific debt security, instrument or basket thereof at a specified future date
at a specified price. The value of the contract rises and falls inversely with
changes in interest rates. The Portfolios may engage in such transactions to
hedge their holdings of debt instruments against future changes in interest
rates.
Financial futures are futures contracts relating to financial instruments, such
as U.S. Government securities, foreign currencies, and certificates of deposit.
Such contracts involve an obligation to purchase or sell a specific security,
instrument or basket thereof at a specified future date at a specified price.
Like interest rate futures contracts, the value of financial futures contracts
rises and falls inversely with changes in interest rates. The Portfolios may
engage in
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financial futures contracts for hedging and non-hedging purposes.
Under the rules adopted by the Commodity Futures Trading Commission, each
Portfolio may enter into futures contracts and options thereon for both hedging
and non-hedging purposes, provided that not more than 5% of such Portfolio's
total assets at the time of entering the transaction are required as margin and
option premiums to secure obligations under such contracts relating to non-
hedging activities.
Gains and losses on futures contracts and options thereon depend on MSAM's
ability to predict correctly the direction of securities prices, interest rates
and other economic factors. Other risks associated with the use of futures and
options are (i) imperfect correlation between the change in market value of
investments held by a Portfolio and the prices of futures and options relating
to investments purchased or sold by the Portfolio, and (ii) possible lack of a
liquid secondary market for a futures contract and the resulting inability to
close a futures position. The risk that a Portfolio will be unable to close out
a futures position or options contract will be minimized by only entering into
futures contracts or options transactions for which there appears to be a
liquid exchange or secondary market. The risk of loss in trading on 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.
Caps, Floors and Collars. The Portfolios may invest in Caps, Floors and
Collars, which are instruments analogous to Options. In particular, a Cap is
the right to receive the excess of a reference rate over a given rate and is
analogous to a put Option. A Floor is the right to receive the excess of a
given rate over a reference rate and is analogous to a call Option. Finally, a
Collar is an instrument that combines a Cap and a Floor. That is, the buyer of
a Collar buys a Cap and writes a Floor, and the writer of a Collar writes a Cap
and buys a Floor. The risks associated with Caps, Floors and Collars are
similar to those associated with Options. In addition, Caps, Floors and Collars
are subject to risk of default by the counterparty because they are privately
negotiated instruments.
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 as the S&P 500. In some cases, the impact of the movements of
these factors may increase or decrease through the use of multipliers or
deflators. The use of Structured Notes allows a Portfolio to tailor its
investments to the specific risks and returns MSAM wishes to accept while
avoiding or reducing certain other risks.
Swaps. Swap Contracts ("Swaps") are Derivatives in the form of a contract or
other similar instrument in which two parties agree to exchange the returns
generated by a security, instrument, basket thereof or index for the returns
generated by another security, instrument, basket thereof or index. The payment
streams are calculated by reference to a specific security, index or instrument
and an agreed upon notional amount. The relevant indices include but are 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 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.
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
and liquid securities. A Portfolio will not enter into any Swap agreement
unless the counterparty meets the rating requirements set forth in guidelines
established by the Fund's Board of Directors.
Interest rate and total rate of return Swaps do not involve the delivery of
securities, other underlying assets, or principal. Accordingly, the risk of
loss with respect to interest rate and total rate of return Swaps is limited to
the net amount of 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 payments that a
Portfolio is contractually entitled to receive. In contrast, currency Swaps may
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 may be 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 Swaps 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 Swaps market has become relatively liquid.
Swaps that include Caps, Floors and Collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than "traditional" Swaps.
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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 MSAM 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.
EASTERN EUROPEAN SECURITIES. The economies of Eastern European countries are
currently suffering both from the stagnation resulting from centralized
economic planning and control and the higher prices and unemployment associated
with the transition to market economics. Unstable economic and political
conditions may adversely affect security values. Upon the accession to power of
Communist regimes approximately 40 years ago, the governments of a number of
Eastern European countries expropriated a large amount of property. The claims
of many property owners against those governments were never finally settled.
In the event of the return to power of the Communist Party, there can be no
assurance that a Portfolio's investments in Eastern Europe would not be
expropriated, nationalized or otherwise confiscated.
EMERGING MARKET COUNTRY SECURITIES. An Emerging Market Country Security is one
issued by a company that has one or more of the following characteristics: (i)
its principal securities trading market is in an emerging market, (ii) alone or
on a consolidated basis it derives 50% or more of its annual revenue from
either goods produced, sales made or services performed in emerging markets, or
(iii) it is organized under the laws of, and has a principal office in, an
emerging market country. The Adviser will base determinations as to eligibility
on publicly available information and inquiries made to the companies.
The economies of individual emerging market countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product, rate of inflation, currency depreciation, capital reinvestment,
resource self-sufficiency and balance of payments position. Further, the
economies of developing countries generally are heavily dependent upon
international trade and, accordingly, have been, and may continue to be,
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been, and may
continue to be, adversely affected by economic conditions in the countries with
which they trade.
Investing in emerging market countries may entail purchasing securities issued
by or on behalf of entities that are insolvent, bankrupt, in default or
otherwise engaged in an attempt to reorganize or reschedule their obligations,
and in entities that have little or no proven credit rating or credit history.
In any such case, the issuer's poor or deteriorating financial condition may
increase the likelihood that the investing Portfolio 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) that could affect adversely the economies of such countries or the value
of a Portfolio's investments in those countries. In addition, it may be
difficult to obtain and enforce a judgment in a court outside of the United
States.
EQUITY SECURITIES. Equity Securities commonly include, but are not limited to,
Common Stocks, Preferred Stocks, Depositary Receipts, Rights, Warrants, and
Foreign Equities. Preferred Stock is contained in both the definition of Equity
Securities and Fixed Income Securities because it exhibits characteristics
commonly associated with each type of security. See the "The Portfolios'
Investments" section applicable to a particular Portfolio to determine in which
of the above a Portfolio may invest.
FIXED INCOME SECURITIES. Fixed Income Securities commonly include, but are not
limited to, debentures, U.S. Governments, Zero Coupons, Agencies, Corporate
Bonds, High Yield Securities, MBSs, SMBSs, CMOs, ABSs, Convertible Securities,
Brady Bonds, Floaters, Inverse Floaters, Cash Equivalents, Municipals,
Repurchase Agreements, Preferred Stocks and Foreign Bonds. Preferred Stock is
contained in both the definition of Equity Securities and Fixed Income
Securities since it exhibits characteristics commonly associated with each type
of security. See the "The Portfolios' Investments" section applicable to a
particular Portfolio to determine in which of the above a Portfolio may invest.
The short-term and medium-term Fixed Income Securities in which the
International Magnum Portfolio may invest consist of (a) obligations of
governments, agencies or instrumentalities of any member state of the
Organization for Economic Cooperation and Development ("OECD"), including the
United States; (b) bank deposits and bank obligations (including certificates
of deposit, time deposits and bankers' acceptances) of banks organized under
the laws of any member state of the OECD, including the United States,
denominated in any currency; and (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 are invested in any one of such issuers. The
short-term and medium-term securities in which the Portfolio may invest will be
rated investment grade by an NRSRO (e.g., rated A or higher by Moody's or S&P),
or if unrated, will be determined to be of comparable quality by the Adviser.
FLOATERS. Floaters are Fixed Income Securities with a floating or variable rate
of interest, i.e., the rate of interest
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varies with changes in specified market rates or indices, such as the prime
rate, or at specified intervals. Certain Floaters may carry a demand feature
that permits the holder to tender them back to the issuer of the underlying
instrument, or to a third party, at par value prior to maturity. When the
demand feature of certain Floaters represents an obligation of a foreign
entity, the demand feature will be subject to certain risks discussed under
"Foreign Investment".
FOREIGN BONDS. Foreign Bonds are Fixed Income Securities denominated in foreign
currency and issued and traded primarily outside the United States, including:
(1) obligations issued or guaranteed by foreign national governments, their
agencies, instrumentalities, or political subdivisions; (2) Fixed Income
Securities issued, guaranteed or sponsored by supranational organizations
established or supported by several national governments, including the World
Bank, the European Community, the Asian Development Bank and others; (3) non-
government foreign corporate debt securities; (4) foreign MBSs and various
other MBSs and Asset-Backeds denominated in foreign currency; and (5) Brady
Bonds. Investing in foreign companies involves certain special considerations
that are not typically associated with investing in U.S. companies. See
"Foreign Investment" below.
FOREIGN CURRENCY TRANSACTIONS. Portfolios investing in foreign securities will
regularly transact security purchases and sales in foreign currencies. The
Portfolios may hold foreign currency or engage in the Foreign Currency
Transactions discussed below.
As a means of reducing the risks associated with investing in securities
denominated in foreign currencies, a Portfolio may purchase or sell foreign
currency on a forward basis ("Forwards" or "forward contracts"), enter into
foreign currency futures and options on futures contracts ("Forex Futures") and
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 a Portfolio's
investments.
Forex Futures are standardized contracts for the future delivery of a specified
amount of a foreign currency at a future date at a price set at the time of the
contract. Forex Futures traded in the United States are traded on regulated
futures exchanges. A Portfolio will incur brokerage fees when it purchases or
sells Forex Futures and it will be required to maintain margin deposits.
Parties to a Forex Future must make initial margin deposits to secure
performance of the contract, which generally range from 2% to 5% of the
contract price. There also are requirements to make "variation" margin deposits
as the value of the futures contract fluctuates.
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 a Portfolio purchases or sells
securities, locking in the U.S. dollar value of dividends declared on
securities held by a Portfolio and generally protecting the U.S. dollar value
of securities held by a 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 a Portfolio as a result of
exchange rate fluctuation, they will also limit any gains that may otherwise
have been realized.
Forwards 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).
A Portfolio may use Forwards 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 U.S. dollars 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 MSAM will attempt to hold
such mismatching to a minimum, there can
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be no assurance that MSAM will be able to do so. When a Portfolio enters into a
forward contract for purposes of creating a synthetic security, it will
generally be required to hold liquid assets in a segregated account with a
daily value at least equal to its obligation under the forward contract.
A Portfolio engaging in Forwards will comply with the segregation requirements
required by the 1940 Act and the rules adopted thereunder. 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.
FOREIGN EQUITIES. Foreign Equity Securities ("Foreign Equities") include, but
are not limited to, Common Stock, Preferred Stock, Depositary Receipts, Rights,
Warrants and Convertible Securities of foreign issuers. Investing in foreign
companies involves certain special considerations which are not typically
associated with investing in U.S. companies. See "Foreign Investment" below.
FOREIGN INVESTMENT. Investment in securities and obligations of foreign issuers
and in foreign branches of domestic banks involves somewhat different
investment risks than those affecting obligations of U.S. issuers. There may be
limited publicly available information with respect to foreign issuers, and
foreign issuers are not generally subject to uniform accounting, auditing and
financial standards and requirements comparable to those applicable to U.S.
companies. There may also be less government supervision and regulation of
foreign securities exchanges, brokers and listed companies than in the United
States. Many foreign securities markets have substantially less volume than
U.S. national securities exchanges, and securities of some foreign issuers are
less liquid and more volatile than securities of comparable domestic issuers.
Brokerage commissions and other transaction costs on foreign securities
exchanges are generally higher than in the United States. Dividends and
interest paid by foreign issuers may be subject to withholding and other
foreign taxes, which may decrease the net return on Foreign Investments as
compared to dividends and interest paid by U.S. companies. Additional risks
include future political and economic developments, the possibility that a
foreign jurisdiction will impose or change withholding taxes on income payable
with respect to foreign securities, and the possible adoption of foreign
governmental restrictions such as exchange controls.
Prior governmental approval for Foreign Investments may be required under
certain circumstances in some emerging countries, and the extent of Foreign
Investment in certain Fixed Income Securities and domestic companies may be
subject to limitation in other emerging countries. Foreign ownership
limitations also may be imposed by the charters of individual companies in
emerging countries to prevent, among other concerns, violation of Foreign
Investment limitations.
Repatriation of investment income, capital and the proceeds of sales by foreign
investors may require governmental registration and/or approval in some
emerging countries. A Portfolio could be adversely affected by delays in, or a
refusal to grant, any required governmental registration or approval for such
repatriation. Any investment subject to such repatriation controls will be
considered illiquid if it appears reasonably likely that this process will take
more than seven days.
Investments in securities of foreign issuers are frequently denominated in
foreign currencies. Because a Portfolio may temporarily hold uninvested
reserves in bank deposits in foreign currencies, the value of the Portfolio's
assets, as measured in U.S. dollars, may be affected favorably or unfavorably
by changes in currency exchange rates and in exchange control regulations and a
Portfolio may incur costs in connection with conversions between various
currencies.
HIGH YIELD SECURITIES. High Yield Securities are generally considered to
include Corporate Bonds, Preferred Stocks and Convertible Securities rated Ba
through C by Moody's or BB through D by S&P, and unrated securities considered
to be of equivalent quality. Securities rated less than Baa by Moody's or BBB
by S&P are classified as non-Investment Grade Securities and are commonly
referred to as junk bonds or High Yield Securities. Such securities carry a
high degree of risk and are considered speculative by the major credit rating
agencies. The following are excerpts from the Moody's and S&P definitions for
speculative-grade debt obligations:
Moody's: Ba-rated bonds have "speculative elements" so their future
"cannot be considered assured," and protection of principal and interest
is "moderate" and "not well safeguarded during both good and bad times in
the future." B-rated bonds "lack characteristics of a desirable
investment" and the assurance of interest or principal payments "may be
small." Caa-rated bonds are "of poor standing," and "may be in default"
or may have "elements of danger with respect to principal or interest."
Ca-rated bonds represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked
shortcomings. C-rated bonds are the "lowest rated" class of bonds, and
issues so rated can be regarded as having "extremely poor prospects" of
ever attaining any real investment standing.
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S&P: BB-rated bonds have "less near-term vulnerability to default" than
B- or CCC-rated securities but face major ongoing uncertainties . . .
which may lead to inadequate capacity to pay interest or principal. B-
rated bonds have a "greater vulnerability to default than BB-rated bonds
and the ability to pay interest or principal will likely be impaired by
adverse business conditions." CCC-rated bonds have a currently
identifiable "vulnerability to default" and, without favorable business
conditions, will be "unable to repay interest and principal." The rating
C is reserved for income bonds on which "no interest is being paid." Debt
rated D is "in default," and "payment of interest and/or repayment of
principal is in arrears."
While such securities offer high yields, they also normally carry with them a
greater degree of risk than securities with higher ratings. Lower-rated bonds
are considered speculative by traditional investment standards. High Yield
Securities may be issued as a consequence of corporate restructuring or similar
events. Also, High Yield Securities are often issued by smaller, less credit
worthy companies, or by highly leveraged (indebted) companies, which are
generally less able than more established or less leveraged companies to make
scheduled payments of interest and principal. The price movement of these
securities is influenced less by changes in interest rates and more by the
financial and business position of the issuing corporation when compared to
Investment Grade Securities.
The risks posed by securities issued under such circumstances are substantial.
If a security held by a Portfolio is down-graded, the Portfolio may retain the
security.
INVERSE FLOATERS. Inverse floating rate obligations ("Inverse Floaters") are
Fixed Income Securities, which have coupon rates that vary inversely at a
multiple of a designated floating rate, such as LIBOR (London Inter-Bank
Offered Rate). Any rise in the reference rate of an Inverse Floater (as a
consequence of an increase in interest rates) causes a drop in the coupon rate
while any drop in the reference rate of an Inverse Floater causes an increase
in the coupon rate. Inverse Floaters may exhibit substantially greater price
volatility than fixed rate obligations having similar credit quality,
redemption provisions and maturity, and Inverse Floater CMOs exhibit greater
price volatility than the majority of mortgage pass-through securities or CMOs.
In addition, some Inverse Floater CMOs exhibit extreme sensitivity to changes
in prepayments. As a result, the yield to maturity of an Inverse Floater CMO is
sensitive not only to changes in interest rates, but also to changes in
prepayment rates on the related underlying mortgage assets.
INVESTMENT COMPANY SECURITIES. Investments in investment companies are
securities of other open-end or closed-end investment companies. The 1940 Act
generally prohibits a Portfolio from acquiring more than 3% of the outstanding
voting shares of an investment company and limits such investments to no more
than 5% of the Portfolio's total assets in any one investment company and no
more than 10% in any combination of investment companies. The 1940 Act also
prohibits a Portfolio from acquiring any security of a registered closed-end
investment company if the Portfolio and other investment companies with the
same adviser would own more than 10% of the outstanding voting shares of the
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 under the 1940 Act or by a rule or order of the Securities and
Exchange Commission ("SEC").
INVESTMENT FUNDS. Some emerging market countries have laws and regulations that
currently preclude direct investment in the securities of their companies.
However, indirect investment in the securities of companies listed and traded
on the stock exchanges in these countries is permitted by certain emerging
market countries through Investment Funds that have been specifically
authorized. A Portfolio may invest in these Investment Funds subject to the
provisions of the 1940 Act, as applicable, and other applicable laws as
discussed in "Investment Limitations" in the SAI. The Portfolios will invest in
such Investment Funds only where appropriate given that the Portfolios'
shareholders will bear not only their proportionate share of the expenses of
the Portfolio (including operating expenses and the fees of the Adviser), but
also will indirectly bear similar expenses of the underlying Investment Funds.
Certain Investment Funds are advised by the Adviser. The 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 NRSROs in one of the four highest rating categories at the time of
purchase (e.g., AAA, AA, A or BBB by S&P or Fitch, or Aaa, Aa, A or Baa by
Moody's). Securities rated BBB or Baa represent the lowest of four levels of
Investment Grade Securities and are regarded as borderline between definitely
sound obligations and those in which the speculative element begins to
predominate. MBSs, including mortgage pass-throughs and CMOs, deemed investment
grade by the Adviser, will either carry a guarantee from an agency of the U.S.
Government or a private issuer of the timely payment of principal and interest
(such guarantees do not extend to the market value of such securities or the
net asset value per share of the Portfolio) or, in the case of unrated
securities, be sufficiently seasoned and considered by the Adviser to be of
comparable quality. The Adviser may retain a security if its rating falls below
investment grade if it deems retention of the security
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to be in the best interests of the Portfolio. Any Portfolio permitted to hold
Investment Grade Securities may hold unrated securities if the Adviser
considers the risks involved in owning that security to be equivalent to the
risks involved in holding an Investment Grade Security.
LOAN PARTICIPATIONS AND ASSIGNMENTS. Loan Participations are loans or other
direct debt instruments which are interests in amounts owed by a corporate,
governmental or other borrower to another party. They may represent amounts
owed to lenders or lending syndicates, to suppliers of goods or services (trade
claims or other receivables), or to other parties. A Portfolio may invest in
fixed rate and floating rate loans ("Loans") arranged through private
negotiations between an issuer of sovereign debt obligations and one or more
financial institutions ("Lenders"). A Portfolio's investments in Loans are
expected in most instances to be in the form of participation in Loans
("Participations") and assignments of all or a portion of Loans ("Assignments")
from third parties. A Portfolio will have the right to receive payments of
principal, interest and any fees to which it is entitled only from the Lender
selling the Participation and only upon receipt by the Lender of the payments
from the borrower. In the event of the insolvency of the Lender selling a
Participation, a Portfolio may be treated as a general creditor of the Lender
and may not benefit from any set-off between the Lender and the borrower.
Certain Participations may be structured in a manner designed to avoid
purchasers of Participations being subject to the credit risk of the Lender
with respect to the Participation. Even under such a structure, in the event of
the Lender's insolvency, the Lender's servicing of the Participation may be
delayed and the assignability of the Participation may be impaired. A Portfolio
will acquire Participations only if the Lender interpositioned between a
Portfolio and the borrower is determined by the Adviser to be creditworthy.
When a Portfolio purchases Assignments from Lenders it will acquire direct
rights against the borrower on the Loan. However, because Assignments are
arranged through private negotiations between potential assignees and potential
assignors, the rights and obligations acquired by a Portfolio as the purchaser
of an Assignment may differ from, and be more limited than, those held by the
assigning Lender. Because there is no liquid market for such securities, a
Portfolio anticipates that such securities could be sold only to a limited
number of institutional investors. The lack of a liquid secondary market may
have an adverse impact on the value of such securities and a Portfolio's
ability to dispose of particular Assignments or Participations when necessary
to meet a Portfolio's liquidity needs or in response to a specific economic
event such as a deterioration in the creditworthiness of the borrower. The lack
of a liquid secondary market for Assignments and Participations also may make
it more difficult for a Portfolio to assign a value to these securities for
purposes of valuing a Portfolio's securities and calculating its NAV.
Direct debt instruments involve the risk of loss in case of default or
insolvency of the borrower. Direct debt instruments may offer less legal
protection to a Portfolio in the event of fraud or misrepresentation and may
involve a risk of insolvency of the lending bank or other financial
intermediary. Direct debt instruments may also include standby financing
commitments that obligate the investing Portfolio to supply additional cash to
the borrower on demand. Participations involving emerging market country
issuers may relate to Loans as to which there has been or currently exists an
event of default or other failure to make payment when due, and may represent
amounts owed to financial institutions that are themselves subject to political
and economic risks, including the risk of currency devaluation, expropriation,
or failure. Such Participations present additional risks of default or loss.
LOANS OF PORTFOLIO SECURITIES. Each Portfolio may lend its securities to
brokers, dealers, domestic and foreign banks or other financial institutions
for the purpose of increasing its net investment income. These loans must be
secured continuously by cash or equivalent collateral, or by a letter of credit
at least equal to the market value of the securities loaned plus accrued
interest or income. There may be a risk of delay in recovery of the securities
or even loss of rights in the collateral should the borrower of the securities
fail financially. A Portfolio will not enter into securities loan transactions
exceeding, in the aggregate, 33 1/3% of its total assets. For more detailed
information about securities lending, see "Securities and Investment
Techniques" in the SAI.
MONEY MARKET INSTRUMENTS. Each Portfolio may invest in Money Market
Instruments, although the Portfolios intend to stay invested in securities
satisfying their primary investment objective to the extent practical. Each
Portfolio may invest in Money Market Instruments pending other investment or
settlement for liquidity, or in adverse market conditions. The Money Market
Instruments permitted for the Portfolios include obligations of the U.S.
Government and its agencies and instrumentalities; obligations of foreign
sovereignties; obligations of the International Bank for Reconstruction and
Development; other debt securities; commercial paper, including bank
obligations; certificates of deposit, including Eurodollar certificates of
deposit; and Repurchase Agreements. For more detailed information about these
Money Market Instruments, see "Description of Certain Securities and Ratings"
in the SAI.
MBSs. Mortgage-Backed Securities ("MBSs") are instruments that entitle the
holder to a share of all interest and principal payments from pools of
residential and commercial mortgage loans underlying the instruments, and may
take the form of pass-through securities or CMOs. Generally, these securities
are designed to provide monthly payments of interest and principal to the
investor.
Pass-Through Securities. The mortgagee's monthly payments to his or her lending
institution are passed through to investors such as the Portfolio. Most issuers
or poolers provide guarantees of payments, regardless of whether the
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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 or pooler. The pools are assembled by various governmental, Government-
related and private organizations. A Portfolio may invest in securities issued
or guaranteed by the GNMA, FHLMC, FNMA, private issuers and other government
agencies. There can be no assurance that the private insurers can meet their
obligations under the policies. MBSs issued by non-agency issuers, whether or
not such securities are subject to guarantees, may entail greater risk. If
there is no guarantee provided by the issuer, MBSs purchased by a Portfolio
will be those which at the time of purchase are rated investment grade by one
or more NRSRO, or, if unrated, are deemed by the Adviser to be of comparable
quality.
Due to the possibility that prepayments on home mortgages will alter cash flow
on MBSs, it is not possible to determine in advance the actual final maturity
date or average life. Like Fixed Income Securities in general, MBSs will
generally decline in price when interest rates rise. Due to prepayment risk,
rising interest rates also tend to discourage refinancings of home mortgages,
with the result that the average life of MBSs held by a Portfolio may be
lengthened. This extension of average life causes the market price of the MBSs
to decrease further than if their average lives were fixed. However, when
interest rates fall, mortgages may not enjoy as large a gain in market value
due to prepayment risk because additional mortgage prepayments must be
reinvested at lower interest rates. Faster prepayment will shorten the average
life and slower prepayments will lengthen it. However, it is possible to
determine what the range of that movement could be and to calculate the effect
that it will have on the price of the MBS. In selecting these MBSs, the Adviser
will look for those that offer a higher yield to compensate for any variation
in average maturity.
There are two methods of trading MBSs. A specified pool transaction is a trade
in which the pool number of the security to be delivered on the settlement date
is known at the time the trade is made. This is in contrast with the typical
MBS transaction, called a TBA (to be announced) transaction, in which the type
of MBS to be delivered is specified at the time of trade but the actual pool
numbers of the securities that will be delivered are not known at the time of
the trade. The pool numbers of the pools to be delivered at settlement will be
announced shortly before settlement takes place. The terms of the TBA trade may
be made more specific if desired. Generally, agency pass-through MBSs are
traded on a TBA basis.
CMOs. CMOs are debt securities that are issued by a thrift or other financial
institution and are collateralized as follows. The bondholder has a first
priority perfected security interest in collateral, usually consisting of
agency mortgage pass-through securities, although other assets, including U.S.
Treasuries (including Zero Coupons), Agencies, Cash Equivalents, whole loans
and Corporate Bonds, may qualify. The amount of collateral must be continuously
maintained at levels from 115% to 150% of the principal amount of the bonds
issued, depending on the specific issue structure and collateral type. See
"CMOs" above.
MUNICIPALS. Municipal securities ("Municipals") are debt obligations issued by
local, state and regional governments that provide interest income that is
exempt from federal income taxes. Municipals include both municipal bonds
(those securities with maturities of five years or more) and municipal notes
(those securities 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
taxes. Industrial development bonds are issued by or on behalf of public
authorities to obtain funds for various privately-operated manufacturing
facilities, housing, sports arenas, convention centers, airports, mass
transportation systems and water, gas or sewer works. Industrial development
bonds are ordinarily dependent on the credit quality of a private user, not the
public issuer.
NON-DIVERSIFIED STATUS. The Emerging Markets Debt, International Magnum and
Emerging Markets Equity Portfolios are non-diversified portfolios under the
1940 Act, which means that the Portfolios are not limited by the 1940 Act in
the proportion of their assets that may be invested in the obligations of a
single issuer. Thus, the Portfolios may invest a greater proportion of their
assets in the securities of a small number of issuers and, as a result, will be
subject to greater risk with respect to their portfolio securities. However,
the Portfolios intend to comply with diversification requirements imposed by
the Internal Revenue Code of 1986, as amended (the "Code"), for qualification
as regulated investment companies. See "Investment Limitations" and "Taxes" in
the SAI.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Portfolios may invest in securities that are neither listed on
a stock exchange nor traded over-the-counter, including privately placed
securities. Such unlisted securities may involve a higher degree of business
and financial risk that can result in substantial losses. As a result of the
absence of a public trading market for these securities, they may be less
liquid than publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices realized from these sales
could be less than those originally paid by the Portfolio or less than what may
be considered the fair value of such securities. Furthermore, companies whose
securities are not publicly traded may not be subject to the disclosure
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<PAGE>
and other investor protection requirements which might be applicable if their
securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Portfolio may be required to bear the expenses of registration.
As a general matter, a Portfolio may not invest more than 15% of its net assets
in illiquid securities, including securities for which there is no readily
available secondary market and securities that are restricted from sale to the
public without registration ("Restricted Securities") under the Securities Act
of 1933, as amended (the "1933 Act") and are deemed to be illiquid. Restricted
Securities that can be offered and sold to qualified institutional buyers under
Rule 144A under the 1933 Act ("Rule 144A Securities") may be deemed to be
liquid under guidelines adopted by the Fund's Board of Directors. The Emerging
Markets Debt, International Magnum and Emerging Markets Equity Portfolios may
each invest up to 25% of their total assets in Rule 144A Securities that are
deemed to be liquid.
The Fund's Board of Directors has adopted guidelines and delegated to each
Adviser, subject to the supervision of the Board of Directors, the daily
function of determining and monitoring the liquidity of Rule 144A Securities.
Rule 144A Securities may become illiquid if qualified institutional buyers are
not interested in acquiring the securities. Investors should note that
investment of 5% of a Portfolio's total assets in Restricted Securities may be
considered a speculative activity and may involve greater risk and expense to
that Portfolio.
PREFERRED STOCKS. Preferred Stocks are non-voting securities which evidence
ownership in a corporation and which pay a fixed or variable stream of
dividends.
REPURCHASE AGREEMENTS. Repurchase Agreements are transactions in which a
Portfolio purchases a security and simultaneously commits to resell that
security to the seller (a bank, broker or dealer) at a mutually agreed upon
date and price. The term of these agreements is usually from overnight to one
week, and never exceeds one year. Repurchase Agreements may be viewed as a
fully collateralized loan of money by the Portfolio to the seller. The resale
price reflects the purchase price plus an agreed upon market rate of interest
which is unrelated to the coupon rate or date of maturity of the purchased
security.
In these transactions, the securities received by a Portfolio have a market
value at least equal to the purchase price (including accrued interest) of the
Repurchase Agreement as collateral, and this value is maintained during the
term of the agreement. These securities are held by the Portfolio's Custodian
or an approved third party for the benefit of the Portfolio until repurchased.
Repurchase Agreements permit a Portfolio to keep all its assets invested while
retaining overnight flexibility in pursuit of investments of a longer- term
nature. If the seller defaults and the collateral value declines, the Portfolio
might incur a loss. If bankruptcy proceedings are commenced with respect to the
seller, the Portfolio's realization upon the collateral may be delayed or
limited.
Pursuant to an order expected to be issued by the SEC, the Portfolios,
including the twelve portfolios of the Fund not described in this Prospectus,
may pool their daily uninvested cash balances in order to invest in Repurchase
Agreements on a joint basis. By entering into Repurchase Agreements on a joint
basis, it is expected that the Portfolios will incur lower transaction costs
and potentially obtain higher rates of interest on such Repurchase Agreements.
Each Portfolio's participation in the income from jointly purchased Repurchase
Agreements will be based on that Portfolio's percentage share in the total
Repurchase Agreement. The Portfolios' 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 liquid assets 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 NAV.
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.
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
20
<PAGE>
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 Russian law
to employ an independent registrar, 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 Equity Securities of a Russian company unless that issuer's
registrar has entered into a contract with the Fund's sub-custodian containing
certain protective conditions, including, among other things, the sub-
custodian's right to conduct regular share confirmations on behalf of the
Portfolio. This requirement will likely have the effect of precluding
investments in certain Russian companies that a Portfolio would otherwise make.
SMBSS. Stripped Mortgage-Backed Securities ("SMBSs") are Derivatives in the
form of multi-class mortgage securities. SMBSs may be issued by agencies or
instrumentalities of the U.S. Government and private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose entities of the
foregoing.
SMBSs are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. One type of SMBS will have one class receiving some of the interest and
most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In some cases,
one class will receive all of the interest ("interest-only" or "IO class"),
while the other class will receive all of the principal ("principal-only" or
"PO class"). The yield to maturity on IO classes and PO classes is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal repayments
may have a material adverse effect on the portfolio yield to maturity. If the
underlying mortgage assets experience greater than anticipated prepayments of
principal, a Portfolio may fail to fully recoup its initial investment in these
securities, even if the security is in one of the highest rating categories.
Although SMBSs are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, certain of these securities may be deemed
illiquid and subject to a Portfolio's limitations on investment in illiquid
securities.
TEMPORARY INVESTMENTS. During periods in which the Adviser believes changes in
economic, financial or political conditions make it advisable, each Portfolio
may reduce its holdings for temporary defensive purposes and may invest in
certain short-term (less than twelve months to maturity) and medium-term (not
greater than five years to maturity) debt securities or may hold cash. The
short-term and medium-term debt obligations in which a Portfolio may invest
consist of (a) obligations of the U.S. or foreign governments, their respective
agencies or instrumentalities; (b) bank deposits and bank obligations
(including certificates of deposit, time deposits and bankers' acceptances) of
U.S. or foreign banks denominated in any currency; (c) Floaters and other
instruments denominated in any currency issued by international development
agencies; (d) finance company and corporate commercial paper and other short-
term corporate debt obligations of U.S. and foreign corporations meeting a
Portfolio's credit quality standards; and (e) Repurchase Agreements with banks
and broker-dealers with respect to such securities. For temporary defensive
purposes, the Portfolios intend to invest only in short-term and medium-term
debt obligations that the Adviser believes to be of high quality, i.e., subject
to relatively low risk of loss of interest or principal (there is currently no
rating system for foreign debt obligations).
U.S. GOVERNMENTS. U.S. Governments are Fixed Income Securities that are backed
by the full faith and credit of the U.S. Government as to the payment of both
principal and interest. U.S. Governments may include securities issued by the
U.S. Treasury and securities issued by federal agencies and U.S. Government
sponsored instrumentalities. For further information on these securities, see
"Description of U.S. Government Securities" in the SAI.
WARRANTS. Warrants are instruments giving holders the right, but not the
obligation, to buy shares of a company at a given price during a specified
period.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. When-Issued and Delayed Delivery
Securities are securities purchased with payment and delivery taking place in
the future in order to secure what is considered to be an
21
<PAGE>
advantageous yield or price at the time of the transaction. Delivery of and
payment for these securities may take as long as a month or more after the date
of the purchase commitment, but will take place no more than 120 days after the
trade date. The payment obligation and the interest rates that will be received
are each fixed at the time a Portfolio enters into the commitment and no
interest accrues to the Portfolio until settlement. Thus, it is possible that
the market value at the time of settlement could be higher or lower than the
purchase price if the general level of interest rates has changed. The
Portfolio will maintain with the Custodian a separate account with a segregated
portfolio of liquid securities or cash in an amount at least equal to these
commitments. The Portfolios will not enter into When-Issued or Delayed Delivery
Securities commitments exceeding, in the aggregate, 15% of the Portfolio's
total assets other than the obligations created by these commitments.
ZERO COUPONS, PAY-IN-KIND SECURITIES OR DEFERRED PAYMENT SECURITIES. Zero
Coupons are Fixed Income Securities that do not make regular interest payments.
Instead, Zero Coupons are sold at substantial discounts from their face value.
The difference between a Zero Coupon's issue or purchase price and its face
value represents the imputed interest an investor will earn if the obligation
is held until maturity. Zero Coupons may offer investors the opportunity to
earn higher yields than those available on ordinary interest-paying obligations
of similar credit quality and maturity. However, Zero Coupon prices may also
exhibit greater price volatility than ordinary Fixed Income Securities because
of the manner in which their principal and interest are returned to the
investor. Pay-In-Kind Securities are securities that have interest payable by
delivery of additional securities. Upon maturity, the holder is entitled to
receive the aggregate par value of the securities. Deferred Payment Securities
are securities that remain Zero Coupons until a predetermined date, at which
time the stated coupon rate becomes effective and interest becomes payable at
regular intervals. Zero Coupon, Pay-In-Kind and Deferred Payment Securities may
be subject to greater fluctuation in value and lesser liquidity in the event of
adverse market conditions than comparably rated securities paying cash interest
at regular interest payment periods.
FUNDAMENTAL INVESTMENT LIMITS
The investment objective of each Portfolio discussed under "Portfolio
Summaries" above is a fundamental policy, that is, a policy subject to change
only by shareholder approval. The policy for each Portfolio in the following
paragraph is also fundamental. All policies stated throughout this Prospectus,
other than those identified as fundamental, can be changed without shareholder
approval. For additional fundamental and non-fundamental investment limits, see
"Investment Limitations" in the SAI.
The Global Equity Portfolio is a diversified investment company and is
therefore subject to the following fundamental limitations: as to 75% of its
total assets, a Portfolio may not (a) invest more than 5% of its total assets
in the securities of any one issuer, except obligations of the U.S. Government,
its agencies and instrumentalities, or (b) own more than 10% of the outstanding
voting securities of any one issuer.
INTERNAL REVENUE SERVICE ("IRS") LIMITATIONS. In addition to the above, each
Portfolio also follows certain limitations imposed by the IRS on separate
accounts of insurance companies relating to the tax-deferred status of variable
annuity contracts and variable life insurance policies. For additional
information, see "Investment Limitations" in the SAI.
MANAGEMENT OF THE FUND
The Fund is governed by a Board of Directors which is responsible for the
management of the business and affairs of the Fund as provided in the laws of
the State of Maryland and the Fund's Articles of Incorporation and By-Laws. The
Board of Directors of the Fund has undertaken to monitor the Fund for the
existence of any material irreconcilable conflict among the interests of
variable annuity contract owners, variable life insurance policy owners and
qualified plans that invest in the Fund due to differences in tax treatment and
other considerations, and shall report any such conflict to the boards of the
respective life insurance companies that use the Fund as an investment vehicle
for their respective variable annuity contracts and variable life insurance
policies and to qualified plans. The boards of directors of those life
insurance companies and the fiduciaries of certain qualified plans and the
Adviser have agreed or will agree to be responsible for reporting any potential
or existing conflicts to the Directors of the Fund. If a material
irreconcilable conflict exists that affects those life insurance companies,
they will be required, at their own cost, to remedy such conflict up to and
including establishing a new registered management investment company and
segregating the assets underlying the variable annuity contracts and the
variable life insurance policies. Qualified plans which acquire more than 10%
of the assets of the Fund will be required to report any potential or existing
conflicts to the Directors of the Fund, and if a material irreconcilable
conflict exists, to remedy such conflict, up to and including redeeming shares
of the Portfolios held by the qualified plans. The majority of the Fund's
Directors are not affiliated with MSAM, MAS, any of their affiliates, any of
the other companies that provide services to the Fund or any of their
affiliates. The officers of the Fund conduct and supervise its daily business
operations.
THE FUND MAY HOLD SPECIAL MEETINGS. The Fund will not hold annual shareholder
meetings, but may call special meetings when required by law, when requested by
a sufficient number of shareholders or for other reasons. An insurance company
issuing a variable annuity contract or variable life insurance policy that
participates in the Portfolios will vote shares held in its separate account as
22
<PAGE>
required by law and interpretations thereof, as may be amended or changed from
time to time. In accordance with current law and interpretations thereof, a
participating insurance company is required to request voting instructions from
contract or policy owners and must vote shares in the separate account in
proportion to the voting instructions received. For a further discussion,
please refer to your insurance company's separate account prospectus.
INVESTMENT MANAGEMENT
INVESTMENT ADVISER. MSAM serves as the adviser for the Portfolios. It 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, 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,
Dean Witter, Discover & Co. ("MSDWD"), which is a publicly owned financial
services corporation listed on the New York 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. Also as of May 31, 1997, MSAM and all of its affiliated
asset management companies had assets under management or fiduciary advice
totaling approximately $303 billion. See "Management of the Fund" in the SAI.
PORTFOLIO MANAGERS. The following individuals have primary responsibility for
the Portfolios as indicated below.
EMERGING MARKETS DEBT PORTFOLIO -- Paul Ghaffari. Paul Ghaffari is a Managing
Director 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. He holds a B.A. in International
Relations from Pomona 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, a Principal of
Morgan Stanley, joined MSAM in January 1990 as a Global Equity Fund Manager.
Her responsibilities include day-to-day management of the Global Equity
product. She is a graduate of University of College, Dublin. Ms. Campion has
had primary responsibility for managing the Portfolio's assets since inception.
INTERNATIONAL MAGNUM PORTFOLIO -- Francine J. Bovich. Francine Bovich joined
Morgan Stanley as a Principal in 1993. She is responsible for product
development, portfolio management and communication of MSAM's asset allocation
strategy to institutional investor clients. Previously, Ms. Bovich was a
Principal and Executive Vice President of Westwood Management Corp. 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 and Marianne L. Hay. Madhav
Dhar is a Managing Director of MSAM and Morgan Stanley. He joined MSAM in 1984
to focus on global asset allocation and investment strategy and now is a co-
head of MSAM's emerging markets group. He holds a B.S. (honors) from St.
Stephens College, Delhi University (India), and an M.B.A. from Carnegie-Mellon
University. Marianne L. Hay, a Managing Director of Morgan Stanley, is a co-
head of the Adviser's emerging markets group. She joined the Adviser in June,
1993 to work with the Adviser's senior management covering all emerging markets
assets allocation, product development and client services. Ms. Hay has 17
years of investment experience. Prior to joining the Adviser, she was a
director of Martin Currie Investment Management, Ltd. where her
responsibilities included geographic asset allocation and portfolio management
for global and emerging markets funds, as well as being director in charge of
the company's North American clients. She graduated with an honors degree in
genetics from Edinburgh University and holds a Diploma in Education and the
qualification of the Association of the Institute of Bankers in Scotland. Mr.
Dhar and Ms. Hay have shared primary responsibility for managing the
Portfolio's assets since its inception.
OTHER SERVICES
DISTRIBUTOR. Under its Distribution Agreement with the Fund, Morgan Stanley &
Co. ("Morgan Stanley"), a subsidiary of MSDWD, 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 an affiliate of Morgan Stanley, 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.
ADMINISTRATOR. MSAM also provides the Portfolios of the Fund with
administrative services pursuant to an Administration Agreement. The services
provided under the Administration Agreement 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,
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<PAGE>
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 Agreement also
provides that the 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 a monthly fee which on an annual
basis equals 0.25% of the average daily net assets of each Portfolio.
MSAM has entered into a Sub-Administration Agreement with Chase Global Funds
Services Company ("Chase Global"), a corporate affiliate of The Chase Manhattan
Bank ("Chase"), pursuant to which Chase Global has agreed to provide certain
administrative services to the Fund. MSAM supervises and monitors such
administrative services provided by Chase Global. The services provided under
the Administration Agreement and the Sub-Administration Agreement 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 Agreement and the Sub-Administration Agreement
as being in the best interests of the Fund. Chase Global's business address is
73 Tremont Street, Boston, Massachusetts 02108-3913. For additional information
regarding the Administration Agreement or the Sub-Administration Agreement, see
"Management of the Fund" in the SAI.
Certain administrative and recordkeeping services that would otherwise be
performed by MSAM or its service providers, may be performed by insurance
companies that purchase shares of the Portfolio. MSAM may make payments to
these insurance companies to defray the cost of providing these services.
Chase Global calculates the NAV and dividends, maintains the general accounting
records and administers the securities lending program for each Portfolio.
CUSTODIANS. Chase serves as the Custodian of domestic securities and cash of
the Portfolios. Chase is not an affiliate of the Adviser or the Distributor.
Morgan Stanley Trust Company, Brooklyn, New York ("MSTC"), an affiliate of MSAM
and the Distributor, acts as the Fund's Custodian for foreign assets held
outside the United States (including, through sub-custodians, securities held
in Russia) and employs sub-custodians approved by the Board of Directors of the
Fund in accordance with regulations of the SEC for the purpose of providing
custodial services for such assets. MSTC may also hold certain domestic assets
for the Fund. For more information on the Custodians, see "General
Information--Custody Arrangements" in the SAI.
DIVIDEND DISBURSING AND TRANSFER AGENT. Chase Global acts as dividend
disbursing and transfer agent for the Fund.
INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP serves as independent accountants
for the Fund and will audit the annual financial statements of each Portfolio.
LEGAL COUNSEL. Morgan, Lewis & Bockius LLP serves as legal counsel to the Fund.
BREAKDOWN OF EXPENSES
The Portfolios pay fees and other costs related to their daily operations.
Expenses paid out of a Portfolio's assets are reflected in its share price.
Each Portfolio pays a management fee to its Adviser for managing its
investments and business affairs. MSAM pays fees to affiliates who provide
assistance with these services. Each Portfolio also pays other expenses, which
are explained below. The Adviser may, from time to time, reduce its fees or
reimburse the Portfolios for expenses above a specified limit. These fee
reductions or expense reimbursements, which may be terminated at any time
without notice, can decrease a Portfolio's expenses and boost its performance.
MANAGEMENT FEE
The Adviser assigned to a Portfolio is entitled to receive from such Portfolio
a management fee, payable quarterly, at an annual rate as a percentage of
average daily net assets as set forth in the table below.
PORTFOLIO ADVISORY FEES
<TABLE>
<CAPTION>
Emerging Emerging
Markets Global International Markets
Assets Debt Equity Magnum Equity
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
First $500
million 0.80% 0.80% 0.80% 1.25%
- ---------------------------------------------------------
From $500
million to $1
billion 0.75% 0.75% 0.75% 1.20%
- ---------------------------------------------------------
More than $1
billion 0.70% 0.70% 0.70% 1.15%
</TABLE>
However, the Adviser, with respect to certain of the Portfolios, has
voluntarily waived receipt of its management fees and agreed 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>
Emerging Markets Debt.................................. 1.30%
Global Equity.......................................... 1.15%
International Magnum................................... 1.15%
Emerging Markets Equity................................ 1.75%
</TABLE>
These fee reductions are voluntary and may be terminated by MSAM at any time
without notice.
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<PAGE>
OTHER EXPENSES
In addition to investment advisory and certain administrative expenses charged
by the Administrator, each Portfolio pays all expenses not assumed by MSAM.
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;
fees and expenses of its independent accountants and legal counsel; costs of
Directors and shareholder meetings; SEC fees; expenses of preparing and filing
registration statements; the cost of providing proxy statements, prospectuses
and statements of additional information to existing variable annuity contract
and variable life insurance policy owners; expenses of preparing and printing
the annual and semiannual shareholder reports to variable annuity contract and
variable life insurance policy owners; bank transaction charges and certain
custodians' fees and expenses; federal, state or local income or other taxes;
costs of maintaining the Portfolio's corporate existence; membership fees for
the Investment Company Institute and similar organizations; fidelity bond and
Directors' liability insurance premiums; and any extraordinary expenses such as
indemnification payments or damages awarded in litigation or settlements made.
All these expenses that are incurred by the Portfolio will be passed on to the
shareholders through a daily charge made to the assets held in the Portfolios,
which will be reflected in share prices.
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement authorizes MSAM to select the brokers or
dealers that will execute the purchases and sales of investment securities for
the Portfolios and directs MSAM to use its best efforts to obtain the best
available price and most favorable execution with respect to all transactions
for the Portfolios. The Fund has authorized MSAM to pay higher commissions in
recognition of brokerage services which, in the opinion of MSAM, are necessary
for the achievement of better execution, provided MSAM believes this to be in
the best interest of the Fund.
Since shares of the Portfolios are not marketed through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of shares which may be made through such firms.
In purchasing and selling securities for the Portfolios, it is the Fund's
policy to seek to obtain quality execution at the most favorable prices through
responsible broker-dealers. In selecting broker-dealers to execute the
securities transactions for the Portfolios, consideration will be given to such
factors as the price of the security, the rate of the commission, the size and
difficulty of the order, the reliability, integrity, financial condition,
general execution and operational capabilities of competing broker-dealers, and
the brokerage and research services which they provide to the Fund. Some
securities considered for investment by the Portfolios may also be appropriate
for other clients served by MSAM. If the purchase or sale of securities
consistent with the investment policies of the Portfolios and one or more of
these other clients serviced by the MSAM is considered at or about the same
time, transactions in such securities will be allocated among the Portfolios
and such other clients in a manner deemed fair and reasonable by MSAM. Although
there is no specified formula for allocating such transactions, the various
allocation methods used by MSAM, and the results of such allocations, are
subject to periodic review by the Fund's Board of Directors.
Subject to the overriding objective of obtaining the best possible execution of
orders, MSAM may allocate a portion of the Portfolio's brokerage transactions
to Morgan Stanley or broker affiliates of Morgan Stanley. In order for Morgan
Stanley or its affiliates to effect any portfolio transactions for the Fund,
the commissions, fees or other remuneration received by Morgan Stanley or such
affiliates must be reasonable and fair compared to the commissions, fees or
other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. Furthermore, the Board
of Directors of the Fund, including a majority of those Directors who are not
"interested persons", as defined in the 1940 Act, have adopted procedures which
are reasonably designed to provide that any commissions, fees or other
remuneration paid to Morgan Stanley or such affiliates are consistent with the
foregoing standard.
Portfolio securities will not be purchased from or through, or sold to or
through, MSAM or Morgan Stanley or any "affiliated persons", as defined in the
1940 Act of Morgan Stanley when such entities are acting as principals, except
to the extent permitted by law.
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 its investment strategy, the Emerging Markets Debt Portfolio's annual
portfolio turnover rate is expected to be as high as 200%. 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 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.
25
<PAGE>
PERFORMANCE OF PORTFOLIOS
Each Portfolio's total return and yield may be quoted in advertising if
accompanied by performance of your insurance company's separate account.
Performance is based on historical results and is not intended to indicate
future performance. For additional performance information, contact your
insurance company for a free annual report.
TOTAL RETURN. 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. Yield refers to the income generated by an investment in a Portfolio
over a given period of time, expressed as an annual percentage rate. When a
yield assumes that income is reinvested, it is called an effective yield.
Total returns and yields quoted for the Portfolios include each Portfolio's
expenses, but may not include charges and expenses attributable to any
particular insurance product. Since shares of the Portfolios may be purchased
only through variable annuity contracts and variable life insurance policies
and by tax qualified investors, such as qualified pension and retirement plans,
you should carefully review the prospectus of the insurance product you have
chosen for information on relevant charges and expenses. Excluding these
charges from quotations of each Portfolio's performance has the effect of
increasing the performance quoted. You should bear in mind the effect of these
charges when comparing a Portfolio's performance to that of other mutual funds.
26
<PAGE>
PERFORMANCE OF INVESTMENT ADVISER
The Adviser manages portfolios of Morgan Stanley Institutional Fund, Inc.
("MSIF"), which served as the models for the Portfolios of the Fund. The
portfolios of MSIF have substantially the same investment objectives, policies
and strategies as the Portfolios of the Fund. In addition, the Adviser intends
the Portfolios of the Fund and the corresponding portfolios of MSIF to be
managed by the same personnel and to continue to have closely similar
investment strategies, techniques and characteristics. The following table sets
forth the name of each Portfolio of the Fund and the name of the corresponding
portfolio of MSIF from which the Portfolio is cloned.
<TABLE>
<CAPTION>
Corresponding
MSIF
Fund Portfolio portfolio
-------------- -------------
<S> <C>
Emerging Markets Debt Emerging Markets Debt
Global Equity Global Equity
International Magnum International Magnum
Emerging Markets Equity Emerging Markets
</TABLE>
Past investment performance of the Class A Shares of the portfolios of MSIF, as
shown in the table below, may be relevant to your consideration of the
Portfolios. The investment performance of the Class A Shares of the portfolios
of MSIF is not necessarily indicative of future performance of the Portfolios
of the Fund. Also, the operating expenses of each of the Portfolios of the Fund
will be different from, and may be higher than, the operating expenses of the
corresponding Class A Shares of the portfolio of MSIF. The investment
performance of the Class A Shares of the portfolios of MSIF is provided merely
to indicate the experience of the Adviser in managing similar portfolios.
<TABLE>
<CAPTION>
Average
Total Return Total Return Annual
Five Months One Year Total Return
Inception Ended Ended Since
MSIF Fund Name Date 5/31/97 12/31/96 Inception
- -------------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Emerging Markets Debt.......... 2/01/94 12.87 50.52% 18.94%
Global Equity.................. 7/15/92 11.39 22.83% 19.22%
International Magnum........... 3/15/96 11.16 8.25%* NA
Emerging Markets............... 9/25/92 18.78 12.19% 12.93%
</TABLE>
- -------
* Cumulative (unannualized) total return since inception.
27
<PAGE>
PERSONS CONTROLLING CERTAIN PORTFOLIOS
As of May 28, 1997, Morgan Stanley Group, Inc. ("MSGI") owned more than 25% of
the outstanding voting securities of the Global Equity, International Magnum,
and Emerging Markets Equity Portfolios. Also, as of that date, the New York
Life and Annuity Corporation owned more than 25% of the Emerging Markets Equity
Portfolio pursuant to variable annuity contracts and variable life insurance
policies it has issued to the public.
As currently required under law, the New York Life and Annuity Corporation and
other insurance companies vote their shares of the Portfolios in accordance
with instructions received from their variable annuity contract and variable
life insurance policy owners. MSDWD, successor to MSGI, will vote the shares of
each Portfolio that it owns in the same proportions as shares of the Portfolio
are voted by the insurance companies. Accordingly, neither MSDWD nor the
insurance companies are deemed to be in control of the Portfolios.
For more information, see "Control Persons and Principal Holders of Securities"
in the SAI.
ACCOUNT POLICIES
DISTRIBUTIONS AND TAXES
The Fund intends each of its Portfolios to qualify as a separate entity under
the Internal Revenue Code of 1986, as amended (the "Code"), and to qualify as a
"regulated investment company" under Subchapter M of the Code. As a regulated
investment company under the Code, net income and net realized gains of each
Portfolio will be distributed to shareholders at least once a year.
As stated on the cover of this Prospectus, shares of the Portfolios will be
purchased by life insurance companies for their separate accounts under
variable annuity contracts and variable life insurance policies and by other
entities under qualified pension and retirement plans. Under the provisions of
the Code currently in effect, net income and realized capital gains are not
currently taxable when left to accumulate within a variable annuity contract or
variable life insurance policy or under a qualified pension or retirement plan.
For information on federal income taxation of a life insurance company with
respect to its receipt of distributions from the Fund and federal income
taxation of owners of variable annuity contracts or variable life insurance
policies, refer to the life insurance company's variable annuity contract or
variable life insurance policy prospectus.
TRANSACTION DETAILS
The Portfolios are open for business each day the New York Stock Exchange
("NYSE") is open. Each 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, Martin Luther King, Jr'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
Fund's Board of Directors believes accurately reflects fair value.
Each Portfolio's offering price (price to buy one share) and redemption price
(price to sell one share) are its NAV.
Each Portfolio reserves the right to suspend the offering of shares for a
period of time. Each Portfolio also reserves the right to reject any specific
order. Purchase orders may be refused if, in the Adviser's opinion, they would
disrupt management of a Portfolio.
INVESTMENTS AND REDEMPTIONS. Investments and redemptions are made by insurance
companies for their variable annuity contracts and variable life insurance
policies and by tax qualified investors, such as qualified pension and
retirement plans.
Each participating insurance company receives orders from its variable annuity
contract and variable life insurance policy owners to purchase or redeem shares
of the Portfolios each business day. That night, all orders received by that
insurance company on that business day are aggregated, and the insurance
company places a net purchase or redemption order for shares of one or more
Portfolios the morning of the next business day. These orders are normally
executed at the NAV that was computed at the close of the previous business day
in order to provide a match between the variable contract and policy owners'
orders to the insurance companies and the insurance companies' orders to a
Portfolio. In some cases, an insurance company's orders for Portfolio shares
may be executed at the NAV next computed after the order is actually
transmitted to a Portfolio.
Redemption proceeds will normally be wired to the insurance company on the next
business day after receipt of the redemption instructions by a Portfolio but in
no event later than seven days following receipt of instructions. Each
Portfolio may suspend redemptions or postpone payment dates on days when the
NYSE is closed (other than weekends or holidays), when trading on the NYSE is
restricted, or as permitted by the SEC.
28
<PAGE>
SUPPLEMENT DATED JULY 15, 1997
TO
STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1997
PREVIOUSLY SUPPLEMENTED JULY 1, 1997
MORGAN STANLEY UNIVERSAL FUNDS, INC. (THE "FUND")
P.O. BOX 2798
BOSTON, MA 02208-2798
----------------
The Statement of Additional Information ("SAI") is being supplemented to
reflect the creation of an additional prospectus of the Fund. The following
sentence is added at the end of the second column on the first page of the SAI:
Prospectus dated July 15, 1997 for the Emerging Markets Debt, Global Equity,
International Magnum and Emerging Markets Equity Portfolios.
