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As Filed With the Securities and Exchange Commission on August 16, 1999
File No. 333-03013
811-7607
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
POST-EFFECTIVE AMENDMENT NO. 11 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 12 [X]
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
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(Exact Name of Registrant as Specified in Charter)
1221 Avenue of the Americas
New York, New York 10020
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(Address of Principal Executive Offices)(Zip Code)
Registrant's Telephone Number, including Area Code: (800) 548-7786
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Harold J. Schaaff, Jr., Esq.
Morgan Stanley Dean Witter Investment Management Inc.
1221 Avenue of the Americas, New York, New York 10020
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(Name and Address of Agent for Service)
Copy to:
Michael F. Klein, Esq. Richard W. Grant, Esq.
Morgan Stanley Dean Witter Morgan, Lewis & Bockius LLP
Investment Management Inc. 1701 Market Street
1221 Avenue of the Americas Philadelphia, PA 19103
New York, NY 10020
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It is proposed that this filing will become effective (check appropriate box)
___ immediately upon filing pursuant to paragraph (b) of Rule 485.
___ on [date] pursuant to paragraph (b) of Rule 485.
___ 60 days after filing pursuant to paragraph (a)(1) of Rule 485.
X 75 days after filing pursuant to paragraph (a)(2) of Rule 485.
---
___ on [date] pursuant to paragraph (a) of Rule 485.
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<PAGE>
PROSPECTUS November [ ], 1999
A Portfolio of [GRAPHIC APPEARS HERE]
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
TARGETED DURATION PORTFOLIO
Above average total return consistent with reasonable risk.
Investment Adviser
Miller Anderson & Sherrerd, LLP
Distributor
Morgan Stanley & Co. Incorporated
Morgan Stanley Dean Witter Universal Funds, Inc. (the "Fund") is a mutual
fund that provides investment vehicles for variable annuity contracts and
variable life insurance policies and for certain tax-qualified investors. The
Targeted Duration Portfolio (the "Portfolio") is one portfolio of the Fund
managed by Miller Anderson & Sherrerd, LLP ("MAS" or the "Adviser"), an
affiliate of Morgan Stanley Dean Witter Investment Management Inc.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation
to the contrary is a criminal offense.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT SUMMARY
Targeted Duration Portfolio 1
Additional Risk Factors and Information 2
INVESTMENT ADVISER 5
MANAGEMENT FEE 5
PORTFOLIO MANAGERS 6
SHAREHOLDER INFORMATION 7
</TABLE>
<PAGE>
INVESTMENT SUMMARY
TARGETED DURATION PORTFOLIO
The Targeted Duration Portfolio seeks above average total return consistent
with reasonable risk.
Approach
The Portfolio invests in a broad range of fixed income securities, including
U.S. Government securities, corporate bonds and mortgage securities. It may also
invest to a limited extent in foreign fixed income securities. All fixed income
securities will be rated investment grade at the time of investment. The Adviser
will use futures, swaps and other derivatives in managing the Portfolio. The
Portfolio intends to approximate the duration of the Merrill Lynch 1-3 Year
Government Bond Index (currently 1.7 years).
Process
The Adviser tries to achieve the Portfolio's objectives by allocating its
assets among broad fixed income sectors, as well as by selecting attractive
individual securities within each of those sectors. The portfolio management
team makes both the sector allocation decision and the security selections
based on relative value. The Adviser uses U.S. Treasury securities and Treasury
futures to try to make the Portfolio's sensitivity to changes in interest rates
equal to that of the Merrill Lynch 1-3 Year Government Bond Index. The Adviser
may sell securities when it believes that expected risk-adjusted return is low
compared to other investment opportunities.
Risk
Investing in the Portfolio may be appropriate for you if you are willing to
accept the risks associated with fixed income securities in the hope of earning
above average total return. Market prices of the Portfolio's holdings respond
to economic developments, especially changes in interest rates, as well as to
perceptions of the creditworthiness of individual issuers. Generally, fixed
income securities decrease in value as interest rates rise and vice versa.
Prices of fixed income securities also generally will fall if an issuer's
credit rating declines, and rise if it improves. As a result of this price
volatility, there is a risk that you may lose money by investing in the
Portfolio. The prices of mortgage securities may be particularly sensitive to
changes in interest rates because of the risk that borrowers will become more
or less likely to refinance their mortgages. For example, an increase in
interest rates generally will reduce prepayments, effectively lengthening the
maturity of some mortgage securities, and making them subject to more drastic
price movements. Because of prepayment issues, it is not possible to predict
the ultimate maturity of mortgage securities.
No performance information is provided because the Targeted Duration Portfolio
had not commenced operations as of the date of this Prospectus.
1
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INVESTMENT SUMMARY
ADDITIONAL RISK FACTORS AND INFORMATION
This section discusses additional risk factors and information relating to the
Portfolio. The Portfolio's investment practices and limitations are described
in more detail in the Statement of Additional Information ("SAI") which is
legally part of this Prospectus. For details on how to obtain a copy of the
SAI and other reports and information, see the back cover of this Prospectus.
Price volatility
The value of your investment in the Portfolio is based on the market prices of
the securities the Portfolio holds. These prices change daily due to economic
and other events that affect markets generally, as well as those that affect
particular regions, countries, industries, companies or governments. These
price movements, sometimes called volatility, may be greater or lesser
depending on the types of securities the Portfolio owns and the markets in
which the securities trade. Fixed income securities, regardless of credit
quality, experience price volatility, especially in response to interest rate
changes.
Derivatives
The Portfolio may use various instruments that derive their values from those
of specified securities, indices, currencies or other points of reference for
both hedging and non-hedging purposes. Derivatives include futures, options,
forward contracts, swaps, and structured notes. These derivatives, including
those used to manage risk, are themselves subject to risks of the different
markets in which they trade and, therefore, may not serve their intended
purposes.
The primary risks of derivatives are: (i) changes in the market value of
securities held by the Portfolio, and of derivatives relating to those
securities, may not be proportionate, (ii) there may not be a liquid market
for the Portfolio to sell a derivative, which could result in difficulty
closing a position and (iii) certain derivatives can magnify the extent of
losses incurred due to changes in the market value of the securities to which
they relate. In addition, derivatives are subject to counterparty risk. To
minimize this risk, the Portfolio may enter into derivatives transactions with
counterparties that meet certain requirements for credit quality and
collateral. Also, the Portfolio may invest in certain derivatives that require
the Portfolio to segregate some or all of its cash or liquid securities to
cover its obligations under those instruments. At certain levels, this can
cause the Portfolio to lose flexibility in managing its investments properly,
responding to shareholder redemption requests, or meeting other obligations.
If the Portfolio is in that position, it could be forced to sell other
securities that it wanted to retain.
The Portfolio will not enter into futures to the extent that the Portfolio's
outstanding obligations to purchase securities under these contracts, in
combination with its outstanding obligations with respect to options, would
exceed 50% of its total assets. While the use of derivatives may be
advantageous to the Portfolio, if the Adviser is not successful in employing
them, the Portfolio's performance may be worse than if it did not make such
investments. See the Statement of Additional Information for more about the
risks of different types of derivatives.
Fixed income securities
Generally, fixed income securities decrease in value as interest rates rise
and vice versa. Certain types of fixed income securities, such as inverse
floaters, are designed to respond differently to changes in interest rates.
Fixed income securities generally are subject to risks related to changes in
interest rates and in the financial health or credit rating of the issuers.
The value of a fixed income security typically moves in the opposite direction
of prevailing interest rates: if rates rise, the value of a fixed income
security falls; if rates fall, the value increases. The maturity and duration
of a fixed income instrument also affect the extent to which the price of the
security will change in response to these and other factors. Longer term
securities tend to experience larger changes than shorter term securities
because they are more sensitive to changes in interest rates or in the credit
ratings of the issuers. The average duration of a fixed income portfolio
measures its exposure to the risk of changing interest rates. A portfolio with
a lower average duration generally will experience less price volatility in
response to changes in interest rates as compared with a portfolio with a
higher duration.
2
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Foreign investing
Investing in foreign countries entails the risk that news and events unique to
a country or region will affect those markets and their issuers. These same
events will not necessarily have an effect on the U.S. economy or similar
issuers located in the United States. In addition, the Portfolio's investments
in foreign countries generally will be denominated in foreign currencies. As a
result, changes in the value of a country's currency compared to the U.S.
dollar may affect the value of the Portfolio's investments. These changes may
occur separately from and in response to events that do not otherwise affect
the value of the security in the issuer's home country. The Adviser may invest
in certain instruments, such as derivatives and may use certain techniques
such as hedging, to manage these risks. However, the Adviser cannot guarantee
that it will be practical to hedge these risks in certain markets or under
particular conditions or that it will succeed in doing so. The Adviser may use
derivatives for other purposes such as gaining exposure to foreign markets.
Mortgage securities
Mortgage securities are fixed income securities representing an interest in a
pool of underlying mortgage loans. They are sensitive to changes in interest
rates, but may respond to these changes differently from other fixed income
securities due to the possibility of prepayment of the underlying mortgage
loans. As a result, it may not be possible to determine in advance the actual
maturity date or average life of a mortgage security. Rising interest rates
tend to discourage refinancings, with the result that the average life and
volatility of the security will increase and its market price will decrease.
When interest rates fall, however, mortgage securities may not gain as much in
market value because additional mortgage prepayments must be reinvested at lower
interest rates. Prepayment risk may make it difficult to calculate the average
maturity of a portfolio of mortgage securities and, therefore, to assess the
volatility risk of that portfolio.
Collateralized Mortgage Obligations ("CMOs") and Stripped Mortgage Backed
Securities ("SMBSs") are derivatives based on mortgage securities. Both CMOs
and SMBSs are subject to the risks of price movements in response to changing
interest rates and the level of prepayments made by borrowers. Depending on
the class of CMOs or SMBSs that the Portfolio holds, these price movements may
be significantly greater than that experienced by mortgage-backed securities
generally.
Year 2000 risk
The management and distribution services that the Adviser and Morgan Stanley &
Co. Incorporated ("Morgan Stanley") provide to the Fund depend on the smooth
functioning of their computer systems. Many computer software systems in use
today cannot recognize the year 2000, but revert to 1900 or some other date, due
to the manner in which dates were encoded and calculated. That failure could
have a negative impact on the handling of securities trades, pricing and account
services. The Adviser and Morgan Stanley have been actively working on necessary
changes to their own computer systems to deal with the year 2000 problem and
expect that their systems will be adapted before that date. There can be no
assurance, however, that they will be successful. In addition, other
unaffiliated service providers may be faced with similar problems. The Adviser
and Morgan Stanley are monitoring their remedial efforts, however, there can be
no assurance that they and the services they provide will not be adversely
affected.
In addition, it is possible that the markets for securities in which the
Portfolio invests may be detrimentally affected by computer failures
throughout the financial services industry beginning January 1, 2000.
Improperly functioning trading systems may result in settlement problems and
liquidity issues. In addition, corporate and governmental data processing
errors may result in production problems for individual companies and overall
economic uncertainties. Earnings of individual issuers will be affected by
remediation costs, which may be substantial and may be reported inconsistently
in U.S. and foreign financial statements. Accordingly, the Portfolio's
investments may be adversely affected.
Temporary defensive investments
When the Adviser believes that changes in economic, financial or political
conditions warrant, the Portfolio may invest without limit in certain short-
and medium-term fixed income securities for temporary purposes. If the Adviser
incorrectly predicts the effects of these changes, such defensive investments
may adversely affect the Portfolio's performance and the Portfolio may not
achieve its investment objective.
3
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Portfolio turnover
Consistent with its investment policies, the Portfolio will purchase and sell
securities without regard to the effect on portfolio turnover. Higher
portfolio turnover (e.g., over 100% per year) will cause the Portfolio to incur
additional transaction costs.
4
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INVESTMENT ADVISER
MAS, with principal offices at One Tower Bridge, West Conshohocken,
Pennsylvania 19428 provides investment advisory services to employee benefit
plans, endowment funds, foundations and other institutional investors and has
served as investment adviser to several open-end investment companies since
1984. MAS is a subsidiary of Morgan Stanley Dean Witter & Co. ("MSDW"). MSDW
is a preeminent global financial services firm that maintains leading market
positions in each of its three primary businesses -- securities, asset
management and credit services. As of [ ], 1999, MAS and its
institutional advisory affiliates had approximately $[ ] billion in assets
under management or fiduciary advice.
MANAGEMENT FEE
The Adviser is entitled to receive a management fee at an annual percentage of
the Portfolio's average daily net assets as follows:
<TABLE>
<CAPTION>
ASSETS FEE
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First $500 million [ ]%
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From $500 million to $1 billion [ ]%
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More than $1 billion [ ]%
</TABLE>
However, the Adviser has voluntarily agreed to reduce its management fee
and/or reimburse the Portfolio so that total annual operating expenses of the
Portfolio will not exceed [ ]% of its average daily assets. For purposes of
determining the amount of the voluntary management fee waiver and/or
reimbursement, if any, the annual operating expenses of the Portfolio exclude
certain investment related expenses such as foreign country tax expense and
interest expense on amounts borrowed. As a result, the expense ratio,
including these expenses, after fee waivers and/or reimbursements may be
higher than [ ]%. Fee waivers and/or expense reimbursements are voluntary and
the Adviser reserves the right to terminate any waiver and/or reimbursement at
any time without notice.
5
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PORTFOLIO MANAGERS
The following individuals have primary day-to-day portfolio management
responsibility for the Portfolio:
TARGETED DURATION PORTFOLIO
Michele A. Kreisler and Scott F. Richard
Michele A. Kreisler, Principal, Morgan Stanley Dean Witter and Co. ("MSDW"),
joined MAS in 1994. She received her Ph.D. in Finance from The Wharton School
of the University of Pennsylvania in 1996. She served as a Fixed Income
Analyst from 1994 to 1995 and as a Portfolio Manager from 1995 to 1998. She
joined the management team of the Targeted Duration Portfolio in 1998. Scott F.
Richard, Managing Director, MSDW, joined MAS in 1993. He joined the management
team for the Targeted Duration Portfolio in 1998. Ms. Kreisler and Mr. Richard
have shared primary responsibility for managing the Portfolio since its
inception.
6
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SHAREHOLDER INFORMATION
Purchasing and selling Fund shares
Shares are offered on each day that the New York Stock Exchange (the "NYSE")
is open for business.
The Portfolio offers its shares only to insurance companies for separate
accounts they establish to fund variable life insurance and variable annuity
contracts and to other entities under qualified pension and retirement plans.
An insurance company purchases or redeems shares of the Portfolio based on,
among other things, the amount of net contract premiums or purchase payments
allocated to a separate account investment division, transfers to or from a
separate account investment division, contract loans and repayments, contract
withdrawals and surrenders, and benefit payments. The contract prospectus
describes how contract owners may allocate, transfer and withdraw amounts to,
and from, separate accounts.
The price per share will be the net asset value per share (NAV) next
determined after the Fund receives the insurance company's purchase order. In
some cases, an insurance company's order for Portfolio shares may be executed
at the NAV next computed after the order is actually transmitted to the
Portfolio. NAV for one share is the value of that share's portion of all of
the assets in the Portfolio. The Fund determines the net asset value for the
Portfolio as of one hour after the close of the bond markets (normally 4:00
p.m. Eastern Time) on each day that the Portfolio is open for business.
About net asset value
The net asset value ("NAV") per share of the Portfolio is determined by dividing
the total market value of the Portfolio's investments and other assets
attributable to the class, less any liabilities by the total number of
outstanding shares of the Portfolio. In making this calculation, the Portfolio
generally values securities at market price. If market prices are unavailable or
may be unreliable because of events occurring after the close of trading, fair
value prices may be determined in good faith using methods approved by the Board
of Directors. The Portfolio may hold portfolio securities that are listed on
foreign exchanges. These securities may trade on weekends or other days when the
Portfolio does not calculate NAV. As a result, the value of these investments
may change on days when you cannot purchase or sell shares.
Dividends and distributions
The Portfolio distributes its investment income annually as dividends and
makes distributions of capital gains, if any, at least annually.
Taxes
Please consult your tax advisor regarding your specific questions about
federal, state and local income taxes. Below is summarized some important tax
issues that affect the Portfolio and its shareholders. The summary is based on
current tax laws, which may change.
The Portfolio expects that it will not have to pay income taxes if it
distributes all of its income and gains. Net income and realized capital gains
that the Portfolio distributes are not currently taxable when left to
accumulate within a variable annuity or variable life insurance contract 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 Portfolio and federal income
taxation of owners of variable annuity or variable life insurance contracts,
refer to the contract prospectus.
7
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WHERE TO FIND ADDITIONAL INFORMATION
Statement of Additional Information
In addition to this Prospectus, the Fund has a Statement of Additional
Information ("SAI"), dated May 1, 1999, as supplemented through , which
contains additional, more detailed information about the Fund and the
Portfolio. The SAI is incorporated by reference into this Prospectus and,
therefore, legally forms a part of this Prospectus.
Shareholder Reports
The Fund publishes annual and semi-annual reports containing additional
information about the Portfolio's investments. In the Fund's shareholder
reports, you will find a discussion of the market conditions and the
investment strategies that significantly affected the Portfolio's performance
during that period.
For additional Fund information, including information regarding the
investments comprising the Portfolio, please call 1-800-281-2715 or contact
your insurance company.
You may obtain the SAI and shareholder reports without charge by contacting
the Fund at the toll-free number above or your insurance company.
Information about the Fund, including the SAI, and the annual and semi-annual
reports, may be obtained from the Securities and Exchange Commission in any of
the following ways: (1) In person: you may review and copy documents in the
Commission's Public Reference Room in Washington, D.C. (for information call
1-800-SEC-0330); (2) On-line: you may retrieve information from the
Commission's web site at "http://www.sec.gov"; or (3) By mail; you may request
documents, upon payment of a duplicating fee, by writing to Securities
Exchange Commission, Public Reference Section, Washington, D.C. 20549-6009. To
aid you in obtaining this information, the Fund's Investment Company Act
registration number is 811-7607.
[GRAPHIC APPEARS HERE]
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
P.O. Box 2798
Boston, Massachusetts 02208-2798
For information call 1-800-281-2715
<PAGE>
Morgan Stanley Dean Witter Universal Funds, Inc.
P.O. Box 2798, Boston, MA 02208-2798
STATEMENT OF ADDITIONAL INFORMATION
Morgan Stanley Dean Witter Universal Funds, Inc. (the "Fund") is a no-load,
open-end management investment company with diversified and non-diversified
series ("Portfolios"). The Fund currently consists of 21 Portfolios offering a
broad range of investment choices. Shares of each Portfolio are offered with no
sales charge or exchange or redemption fee. This Statement of Additional
Information relates to one investment portfolio of the Fund, the Targeted
Duration Portfolio (the "Portfolio").
Shares of each Portfolio may be purchased only by insurance companies for the
purpose of funding variable annuity contracts and variable life insurance
policies and by certain tax-qualified investors. The variable annuity contract
and variable life insurance policy holders incur fees and expenses separate
from the fees and expenses charged by the Portfolios.
The Fund was incorporated under the laws of the State of Maryland on March 26,
1996. The Fund filed a registration statement with the Securities and Exchange
Commission (the "SEC") registering itself as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
and its shares under the Securities Act of 1933, as amended (the "1933 Act").
The Portfolios are managed by either Morgan Stanley Dean Witter Investment
Management Inc. ("MSDW Investment Management" or an "Adviser") or Miller
Anderson & Sherrerd, LLP ("MAS" or an "Adviser") thereby making available in a
single product the combined strength of these leading investment management
firms. The Portfolio is one investment portfolio of the Fund managed by MAS.
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the prospectus for the Fund's Portfolio(s) (the
"Prospectus"). This Statement of Additional Information is incorporated by
reference into the Prospectus in its entirety. To obtain the Prospectus, please
contact the Fund or your insurance company.
<TABLE>
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Table of Contents Page
Investment Policies 2
Investments and Strategies 2
Taxes 14
Purchase of Shares 16
Redemption of Shares 16
Investment Limitations 16
Management of the Fund 18
Portfolio Transactions 26
Performance Information 29
General Performance Information 29
General Information 30
Description of Ratings 31
</TABLE>
Statement of Additional Information dated November , 1999, relating to the
Targeted Duration Portfolio's Prospectus dated November , 1999.
<PAGE>
Investment Policies
Under normal circumstances, the Portfolio will invest at least 65% of its total
assets in Fixed Income Securities. The Portfolio may invest up to 50% of its
assets in MBSs.
Investments and Strategies
This Statement of Additional Information provides additional information about
the investment policies and operations of the Portfolio (the "Portfolio").
Investment Strategies
Foreign Fixed Income Investing: The Adviser invests in foreign bonds and other
fixed-income securities denominated in foreign currencies, where, in the
opinion of the Adviser, the combination of current yield and currency value
offer attractive expected returns. When the total return opportunities in a
foreign bond market appear attractive in local currency terms, but where in the
Adviser's judgment unacceptable currency risk exists, currency futures &
options, forwards and swaps may be used to hedge the currency risk.
Foreign Investing: Investors should recognize that investing in Foreign bonds
and foreign equities involves certain special considerations which are not
typically associated with investing in domestic securities.
As 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 securities than about U.S. securities. Foreign bonds and
foreign equities may be less liquid and more volatile than securities of
comparable U.S. companies. There is generally less government supervision and
regulation of stock exchanges, brokers and listed companies than in the U.S.
With respect to certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments which could affect U.S. investments in those countries.
Additionally, there may be difficulty in obtaining and enforcing judgments
against foreign issuers.
Since foreign bonds and foreign equities may be denominated in foreign
currencies, and since the Portfolio may temporarily hold uninvested reserves in
bank deposits of foreign currencies prior to reinvestment or conversion to U.S.
dollars, the Portfolio may be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations, and may incur costs in
connection with conversions between various currencies.
Maturity and Duration Management: One of two primary components of the
Adviser's fixed-income investment strategy is maturity and duration management.
The maturity and duration structure of a Portfolio investing in fixed-income
securities is actively managed in anticipation of cyclical interest rate
changes. Adjustments are not made in an effort to capture short-term, day-to-
day movements in the market, but instead are implemented in anticipation of
longer term shifts in the levels of interest rates. Adjustments made to shorten
portfolio maturity and duration are made to limit capital losses during periods
when interest rates are expected to rise. Conversely, adjustments made to
lengthen maturity are intended to produce capital appreciation in periods when
interest rates are expected to fall. The foundation for maturity and duration
strategy lies in analysis of the U.S. and global economies, focusing on levels
of real interest rates, monetary and fiscal policy actions, and cyclical
indicators. See Value Investing for a description of the second primary
component of the Adviser's fixed-income strategy.
About Maturity and Duration: Most debt obligations provide interest (coupon)
payments in addition to a final (par) payment at maturity. Some obligations
also have call provisions. Depending on the relative magnitude of these
payments and the nature of the call provisions, the market values of debt
obligations may respond differently to changes in the level and structure of
interest rates. Traditionally, a debt security's term-to-maturity has been used
as a proxy for the sensitivity of the security's price to changes in interest
rates (which is the interest rate risk or volatility of the security). However,
term-to-maturity measures only the time until a debt security provides its
final payment, taking no account of the pattern of the security's payments
prior to maturity.
Duration is a measure of the expected life of a fixed-income security that was
developed as a more precise alternative to the concept of term-to-maturity.
Duration incorporates a bond's yield, coupon interest payments, final maturity
and call features into one measure. Duration is one of the fundamental tools
used by the Adviser in the selection of fixed-income securities. Duration is a
measure of the expected life of a fixed-income security on a present value
basis. Duration takes the length of the time intervals between the present time
and the time that the interest and principal payments are scheduled or, in the
case of a callable bond, expected to be received, and weights them by the
present values of the cash to be received at each future point in time. For any
Fixed-income security with interest payments occurring prior to the payment of
principal, duration is always less than maturity. In general, all other factors
being the same, the lower the stated or coupon rate of interest of a fixed-
income security, the longer the duration of the security; conversely, the
higher the stated or coupon rate of interest of a fixed-income security, the
shorter the duration of the security.
There are some situations where even the standard duration calculation does not
properly reflect the interest rate exposure
2
<PAGE>
of a security. For example, floating and variable rate securities often have
final maturities of ten or more years; however, their interest rate exposure
corresponds to the frequency of the coupon reset. Another example where the
interest rate exposure is not properly captured by duration is the case of
mortgage pass-through securities. The stated final maturity of such securities
is generally 30 years, but current prepayment rates are more critical in
determining the securities' interest rate exposure. In these and other similar
situations, the Adviser will use sophisticated analytical techniques that
incorporate the economic life of a security into the determination of its
interest rate exposure.
Mortgage Investing: The Portfolio may invest greater than 50% of its assets,
and other Portfolios also may invest, in mortgage-related securities. These
include mortgage securities representing interests in pools of mortgage loans
made by lenders such as commercial banks, savings and loan associations,
mortgage bankers and others. The pools are assembled by various organizations,
including the Government National Mortgage Association ("GNMA"), Federal Home
Loan Mortgage Corporation ("FHLMC"), Fannie Mae, other government agencies, and
private issuers. It is expected that a Portfolio's primary emphasis will be in
mortgage securities issued by the various government-related organizations.
However, a Portfolio may invest, without limit, in mortgage securities issued
by private issuers when the Adviser deems that the quality of the investment,
the quality of the issuer, and market conditions warrant such investments.
Securities issued by private issuers will be rated investment grade by Moody's
or Standard & Poor's or be deemed by the Adviser to be of comparable investment
quality.
Value Investing: One of two primary components of the Adviser's fixed-income
strategy is value investing. The Adviser seeks to identify undervalued sectors
and securities through analysis of credit quality, option characteristics and
liquidity. Quantitative models are used in conjunction with judgment and
experience to evaluate and select securities with embedded put or call options
which are attractive on a risk- and option-adjusted basis. Successful value
investing will permit a Portfolio to benefit from the price appreciation of
individual securities during periods when interest rates are unchanged.
Equity Securities
Equity Securities generally represent an ownership interest in an issuer, or
may be convertible into or represent a right to acquire an ownership interest
in an issuer. While there are many types of Equity Securities, prices of all
equity securities will fluctuate. Economic, political and other events may
affect the prices of broad equity markets. For example, changes in inflation or
consumer demand may affect the prices of all Equity Securities in the United
States. Similar events also may affect the prices of particular equity
securities. For example, news about the success or failure of a new product may
affect the price of a particular issuer's Equity Securities.
Common Stocks. Common Stocks represent an ownership interest in a corporation,
entitling the stockholder to voting rights and receipt of dividends paid based
on proportionate ownership.
Investment Company Securities. Investment Company Securities are securities of
other open-end or closed-end investment companies. The Investment Company Act
of 1940, as amended (the "1940 Act"), generally prohibits an Underlying Fund
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. To the extent the Portfolio invests a portion of its
assets in Investment Company Securities, those assets will be subject to the
risks of the purchased investment company's portfolio securities. The Portfolio
also will bear its proportionate share of the expenses of the purchased
investment company in addition to its own expenses.
Fixed Income Securities
Fixed Income Securities generally represent an issuer's obligation to repay
money that it has borrowed together with interest on the amount borrowed. Fixed
Income Securities come in many varieties and may differ in the way that
interest is calculated, the amount and frequency of payments, the type of
collateral, if any, and some Fixed Income Securities may have other novel
features such as conversion rights. Prices of Fixed Income Securities fluctuate
and, in particular, are subject to credit risk and market risk. Credit risk is
the possibility that an issuer may be unable to meet scheduled interest and
principal payments. Market risk is the possibility that a change in interest
rates or the market's perception of the issuer's prospects may adversely affect
the value of a fixed income security. Economic, political and other events also
may affect the prices of broad fixed income markets. Generally, the values of
Fixed Income Securities vary inversely with changes in interest rates. During
periods of falling interest rates, the values of outstanding Fixed Income
Securities generally rise and during periods of rising interest rates, the
values of such securities generally decline. Prepayments also will affect the
maturity and value of Fixed Income Securities. Prepayments generally rise in
response to a decline in interest rates as debtors take advantage of the
opportunity to refinance their obligations. When this happens, the Portfolio
may be forced to reinvest in lower yielding Fixed Income Securities.
The length of time to the final payment, or maturity, of a Fixed Income
Security also affects its price volatility. While
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securities with longer maturities tend to produce higher yields, the prices of
longer maturity securities are subject to greater market fluctuation,
especially as a result of changes in interest rates. Traditionally, term to
maturity has been used as a barometer of a Fixed Income Security's sensitivity
to interest rate changes. However, this measure considers only the time until
final payment and takes no account of the pattern of payments prior to
maturity. Duration is a more precise measure of the expected life of a Fixed
Income Security that combines consideration of yield, coupon, interest
payments, final maturity and call features and measures the expected life of a
Fixed Income Security on a present value basis. The duration of a Fixed Income
Security ordinarily is shorter than its maturity.
Agencies. Agencies are Fixed Income Securities which are not guaranteed by, or
backed by the full faith and credit of the U.S. Government, but which are
issued, sponsored or guaranteed by a federal agency or federally sponsored
agency such as the Student Loan Marketing Association, or any of several other
agencies.
Asset-Backed Securities. Asset-Backed Securities ("Asset-Backeds") are
securities collateralized by shorter-term loans such as automobile loans, home
equity loans, equipment or computer leases or credit card receivables. The
payments from the collateral are passed through to the security holder. The
collateral underlying Asset-Backeds tends to have prepayment rates that usually
do not vary with interest rates. In addition, the short-term nature of the
loans reduces the impact of any change in prepayment level. However, it is
possible that prepayments (on automobile loans and other collateral) will alter
the cash flow on Asset-Backeds and 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. The maturity of
Asset-Backeds will be based on the expected average life of the instrument. In
selecting these securities, the Adviser will look for those securities that
offer a higher yield to compensate for any variation in average maturity.
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).
The Portfolio may invest in obligations of U.S. banks, of foreign branches of
U.S. banks (Eurodollars) and of U.S. branches of foreign banks (Yankee
dollars). Euro and Yankee dollar investments will involve some of the same
risks of investing in international securities that are discussed in the
foreign investing section of the Prospectus.
The Portfolio will not invest in any security issued by a commercial bank
unless (i) the bank has total assets of at least $1 billion, or the equivalent
in other currencies, or, in the case of domestic banks which do not have total
assets of at least $1 billion, the aggregate investment made in any one such
bank is limited to $100,000 and the principal amount of such investment is
insured in full by the Federal Deposit Insurance Corporation ("FDIC"), (ii) in
the case of U.S. banks, it is a member of the FDIC, and (iii) in the case of
foreign branches of U.S. banks, the security is deemed by the Adviser to be of
an investment quality comparable with other fixed income securities which the
Portfolio may purchase.
(2) Commercial paper rated at time of purchase by one or more Nationally
Recognized Statistical Rating Organizations ("NRSRO") in one of their two
highest categories, (e.g., A-l or A-2 by Standard & Poor's or Prime 1 or Prime
2 by Moody's), or, if not rated, issued by a corporation having an outstanding
unsecured debt issue rated high-grade by a NRSRO (e.g., A or better by Moody's,
Standard & Poor's or Fitch).
(3) Short-term corporate obligations rated high-grade at the time of purchase
by a NRSRO (e.g., A or better by Moody's, Standard & Poor's or Fitch);
(4) U.S. Government obligations including bills, notes, bonds and other debt
securities issued by the U.S. Treasury. These are direct obligations of the
U.S. Government and differ mainly in interest rates, maturities and dates of
issue;
(5) Government Agency securities issued or guaranteed by U.S. Government
sponsored instrumentalities and Federal agencies. These include securities
issued by the Federal Home Loan Banks, Federal Land Bank, Farmers Home
Administration, Farm Credit Banks, Federal Intermediate Credit Bank, Fannie
Mae, Federal Financing Bank, the Tennessee Valley Authority, and others;
(6) Repurchase agreements collateralized by securities listed above; and
Commercial paper refers to short-term fixed income securities with maturities
ranging from 2 to 270 days. They
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are primarily issued by corporations needing to finance large amounts of
receivables, but may be issued by banks and other borrowers. Commercial paper
is issued either directly or through broker-dealers, and may be discounted or
interest-bearing. Commercial paper is unsecured, but is almost always backed by
bank lines of credit. Virtually all commercial paper is rated by Moody's or
Standard & Poor's.
Collateralized Mortgage Obligations. Collateralized mortgage obligations
("CMOs") are debt obligations or multiclass pass-through certificates issued by
agencies or instrumentalities of the U.S. Government or by private originators
or investors in mortgage loans. They are backed by mortgage-backed securities
(discussed below) or whole loans (all such assets, the "Mortgage Assets") and
are evidenced by a series of bonds or certificates issued in multiple classes.
Each class of a CMO, often referred to as a "tranche," may be issued with a
specific fixed or floating coupon rate and has a stated maturity or final
scheduled distribution date. The principal and interest on the underlying
Mortgage Assets may be allocated among the several classes of a series of CMOs
in many ways. Interest is paid or accrues on CMOs on a monthly, quarterly or
semi-annual basis.
CMOs may be issued by agencies or instrumentalities of the U.S. Government, or
by private originators of, or investors in, mortgage loans, including savings
and loan associations, mortgage bankers, commercial banks, investment banks and
special purpose subsidiaries of the foregoing. CMOs that are issued by private
sector entities and are backed by assets lacking a guarantee of an entity
having the credit status of a governmental agency or instrumentality are
generally structured with one or more types of credit enhancement as described
below. An issuer of CMOs may elect to be treated for federal income tax
purposes as a Real Estate Mortgage Investment Conduit (a "REMIC"). An issuer of
CMOs issued after 1991 must elect to be treated as a REMIC or it will be
taxable as a corporation under rules regarding taxable mortgage pools.
The principal and interest on the Mortgage Assets may be allocated among the
several classes of a CMO in many ways. The general goal in allocating cash
flows on Mortgage Assets to the various classes of a CMO is to create certain
tranches on which the expected cash flows have a higher degree of
predictability than do the underlying Mortgage Assets. As a general matter, the
more predictable the cash flow is on a particular CMO tranche, the lower the
anticipated yield on that tranche at the time of issue will be relative to
prevailing market yields on Mortgage Assets. As part of the process of creating
more predictable cash flows on certain tranches of a CMO, one or more tranches
generally must be created that absorb most of the changes in the cash flows on
the underlying Mortgage Assets. The yields on these tranches are generally
higher than prevailing market yields on other mortgage related securities with
similar average lives. Principal prepayments on the underlying Mortgage Assets
may cause the CMOs to be retired substantially earlier than their stated
maturities or final scheduled distribution dates. Because of the uncertainty of
the cash flows on these tranches, the market prices and yields of these
tranches are more volatile. In addition, some inverse floating rate obligation
CMOs exhibit extreme sensitivity to changes in prepayments. As a result, the
yield to maturity of these CMOs is sensitive not only to changes in interest
rates, but also to changes in prepayment rates on the related underlying
Mortgage Assets.
Included within the category of CMOs are PAC Bonds. PAC Bonds are a type of CMO
tranche or series designed to provide relatively predictable payments, provided
that, among other things, the actual prepayment experience on the underlying
Mortgage Assets falls within a predefined range. If the actual prepayment
experience on the underlying Mortgage Assets is faster or slower than the
predefined range or if deviations from other assumptions occur, payments on the
PAC Bond may be earlier or later than predicted and the yield may rise or fall.
The magnitude of the predefined range varies from one PAC Bond to another; a
narrower range increases the risk that prepayments on the PAC Bond will be
greater or smaller than predicted. Because of these features, PAC Bonds
generally are less subject to the risk of prepayment than are other types of
mortgage related securities.
Corporates. Corporates are Fixed Income Securities issued by private
businesses. Holders, as creditors, have a prior legal claim over holders of
Equity Securities of the issuer as to both income and assets for the principal
and interest due the holder.
Floaters. Floaters are Fixed Income Securities with a rate of interest that
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."
While High Yield Securities offer higher yields, they carry a high degree of
credit risk and are considered speculative by the major credit rating agencies.
High Yield Securities are often issued by smaller, less credit worthy issuers,
or by highly leveraged (indebted) issuers that are generally less able than
more established or less leveraged issuers to make scheduled payments of
interest and principal. In comparison to Investment Grade Securities, the price
movement of these securities is influenced less by changes in interest rates
and more by the financial and business position of the issuer. The values of
High Yield Securities are more volatile and may react with greater sensitivity
to market changes.
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Inverse Floaters. Inverse floating rate obligations ("Inverse Floaters") are
Fixed Income Securities that 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 other mortgage-related securities.
Investment Grade Securities. Investment Grade Securities are Fixed Income
Securities rated by one or more of the rating agencies in one of the four
highest rating categories at the time of purchase (e.g., AAA, AA, A or BBB by
Standard & Poor's Ratings Group ("S&P") or Fitch Investors Service, Inc.
("Fitch"), or Aaa, Aa, A or Baa by Moody's Investors Service, Inc. ("Moody's"))
or determined to be of equivalent quality by the Adviser. 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. Ratings assigned to Fixed
Income Securities represent only the opinion of the rating agency assigning the
rating and are not dispositive of the credit risk associated with the purchase
of a particular Fixed Income Security. Moreover, market risk also will affect
the prices of even the highest rated Fixed Income Securities so that their
prices may rise or fall even if the issuer's capacity to repay its obligations
remains unchanged.
Loan Participations and Assignments. Loan Participations are interests in loans
or other direct debt instruments ("Loans") relating to amounts owed by a
corporate, governmental or other borrower to another party. Loans may represent
amounts owed to lenders or lending syndicates, to suppliers of goods or
services (trade claims or other receivables), or to other parties ("Lenders")
and may be fixed rate or floating rate. Loans also may be arranged through
private negotiations between an issuer of sovereign debt obligations and
Lenders.
The Portfolio's investments in Loans are expected in most instances to be in
the form of a participation in Loans ("Participations") and assignments of all
or a portion of Loans ("Assignments") from third parties. In the case of a
Participation, the 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 an insolvency of the Lender selling a
Participation, the 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
a Lender's insolvency, the Lender's servicing of the Participation may be
delayed and the assignability of the Participation may be impaired. The
Portfolio will acquire Participations only if the Lender interpositioned
between a Portfolio and the borrower is determined by the Adviser to be
creditworthy.
When the 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 the 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, it is likely 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 the Portfolio's
ability to dispose of particular Assignments or Participations when necessary
to meet the 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 the Portfolio to assign a value to these securities
for purposes of valuing the Portfolio's securities and calculating its NAV.
Loan Participations and Assignments involve a risk of loss in case of default
or insolvency of the borrower. In addition, they may offer less legal
protection to the Portfolio in the event of fraud or misrepresentation and may
involve a risk of insolvency of the Lender. Certain Loan Participations and
Assignments 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 Lenders
that are themselves subject to political and economic risks, including the risk
of currency devaluation, expropriation, or failure. Such Loan Participations
and Assignments present additional risk of default or loss.
Money Market Instruments. Money Market Instruments are high quality short-term
Fixed Income Securities. Money Market Instruments may include obligations of
governments, government agencies, banks, corporations and special purpose
entities and Repurchase Agreements relating to these obligations. Certain Money
Market Instruments may be denominated in a foreign currency.
Mortgage-Backed Securities. With mortgage-backed securities ("MBSs"), many
mortgagees' obligations to make
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monthly payments to their lending institution are pooled together and passed
through to investors. The pools are assembled by various governmental,
Government-related and private organizations. A Portfolio may invest in
securities issued or guaranteed by Government National Mortgage Association
("GNMA" or "Ginnie Mae"), Federal Home Loan Mortgage Corporation ("FHLMC" or
"Freddie Mac"), Fannie Mae, private issuers and other government agencies. MBSs
issued by non-agency issuers, whether or not such securities are subject to
guarantees, may entail greater risk, since private issuers may not be able to
meet their obligations under the policies. If there is no guarantee provided by
the issuer, a Portfolio will purchase only MBSs which at the time of purchase
are rated investment grade by one or more NRSROs or, if unrated, are deemed by
the Adviser to be of comparable quality.
MBSs are issued or guaranteed by private sector originators of or investors in
mortgage loans and structured similarly to governmental pass-through
securities. Because private pass-throughs typically lack a guarantee by an
entity having the credit status of a governmental agency or instrumentality,
however, they are generally structured with one or more of the types of credit
enhancement described below. Fannie Mae and FHLMC obligations are not backed by
the full faith and credit of the U.S. Government as GNMA certificates are.
FHLMC securities are supported by its right to borrow from the U.S. Treasury.
Each of GNMA, Fannie Mae and FHLMC guarantees timely distributions of interest
to certificate holders. Each of GNMA and Fannie Mae also guarantees timely
distributions of scheduled principal. Although FHLMC has in the past guaranteed
only the ultimate collection of principal of the underlying mortgage loan,
FHLMC now issues MBSs (FHLMC Gold PCS) which also guarantee timely payment of
monthly principal reductions. Resolution Funding Corporation ("REFCORP")
obligations are backed, as to principal payments, by zero coupon U.S. Treasury
bonds, and as to interest payment, ultimately by the U.S. Treasury.
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 are
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.
Like fixed income securities in general, MBSs will generally decline in price
when interest rates rise. 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. As average life extends, price
volatility generally increases. This extension of average life causes the
market price of the MBSs to decrease further when interest rates rise 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 the average
life movement could be and to calculate the effect that it will have on the
price of the MBS. In selecting MBSs, the Advisers look for those that offer a
higher yield to compensate for any variation in average 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. A
Portfolio may invest, without limit, in MBSs issued by private issuers when the
Adviser deems that the quality of the investment, the quality of the issuer,
and market conditions warrant such investments. The Portfolios will purchase
securities issued by private issuers which are rated investment grade at the
time of purchase by Moody's or S&P or be deemed by the Advisers to be of
comparable investment quality.
Mortgage Related Securities. Mortgage related securities are securities that,
directly or indirectly, represent a participation in, or are secured by and
payable from, mortgage loans on real property. Mortgage related securities
include collateralized mortgage obligations and mortgage-backed securities
issued or guaranteed by agencies or instrumentalities of the U.S. Government or
by private sector entities.
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 and in certain instances, from state and local
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
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ordinarily dependent on the credit quality of a private user, not the public
issuer.
Repurchase Agreements. Repurchase Agreements are transactions in which the
Portfolio purchases a security or basket of securities and simultaneously
commits to resell that security or basket to the seller (a bank, broker or
dealer) at a mutually agreed upon date and price. 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. Repurchase
Agreements may be viewed as a fully collateralized loan of money by the
Portfolio to the seller at a mutually agreed upon rate and price. The term of
these agreements is usually from overnight to one week, and never exceeds one
year. Repurchase Agreements with a term of over seven days are considered
illiquid.
In these transactions, the Portfolio receives as collateral securities that
have a market value at least equal to the purchase price (including accrued
interest) of the Repurchase Agreement, 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 the Portfolio to remain fully invested while
retaining overnight flexibility to pursue 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 issued by the Securities and Exchange Commission (the
"SEC"), the Portfolio may pool its daily uninvested cash balances in order to
invest in Repurchase Agreements on a joint basis with other investment
companies advised by the Portfolio's Adviser. By entering into Repurchase
Agreements on a joint basis, the Portfolio expects to incur lower transaction
costs and potentially obtain higher rates of interest on such Repurchase
Agreements. The Portfolio's participation in the income from jointly purchased
Repurchase Agreements will be based on the Portfolio's percentage share in the
total Repurchase Agreement.
Stripped Mortgage-Backed Securities. Stripped Mortgage-Backed Securities
("SMBSs") are multi-class mortgage securities issued by agencies or
instrumentalities of the U.S. Government and private originators of, or
investors in, mortgage loans. SMBSs are usually structured with two classes
that receive different proportions of the interest and principal distributions
on a pool of Mortgage Assets. 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
significant changes in the rate of principal repayments will have a
corresponding effect on the SMBSs' yield to maturity.
Temporary Investments. When the Adviser believes that changes in economic,
financial or political conditions make it advisable, the Portfolio may invest
up to 100% of its assets in cash and certain short- and medium-term Fixed
Income Securities for temporary defensive purposes. These Temporary Investments
may consist of obligations of the U.S. or foreign governments, their agencies
or instrumentalities; Money Market Instruments; and instruments issued by
international development agencies.
U.S. Government Securities. U.S. Government Securities 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. Government Securities
may include securities issued by the U.S. Treasury and securities issued by
federal agencies and U.S. Government sponsored instrumentalities.
Yankee Dollar Obligations. Yankee dollar bank obligations are dollar-
denominated obligations issued in the U.S. capital markets by foreign banks.
Yankee dollar obligations are subject to the same risks as domestic issues,
notably credit risk, market risk and liquidity risk. To a limited extent, they
are also subject to certain sovereign risks. One such risk is the possibility
that a sovereign country might prevent capital, in the form of dollars, from
flowing across its borders. Other risks include adverse political and economic
developments; the extent and quality of government regulations of financial
markets and institutions; the imposition of foreign withholding taxes; and the
expropriation or nationalization of foreign issuers. The Portfolio may consider
Yankee dollar obligations to be domestic securities for purposes of its
investment policies.
Zero Coupons. Zero Coupons are fixed income securities that do not make regular
interest payments. Instead, Zero Coupons are sold at a discount 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 a higher yield than that available on ordinary interest-
paying obligations of similar credit quality and maturity.
Foreign Investment
Investing in foreign securities involves certain special considerations which
are not typically associated with investing in the Equity Securities or Fixed
Income Securities of U.S. issuers. Foreign issuers are not generally subject to
uniform accounting, auditing and financial reporting standards and may have
policies that are not comparable to those of domestic issuers. As a result,
there may be less information available about foreign issuers than about
domestic issuers. Securities of some foreign issuers are
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generally less liquid and more volatile than securities of comparable domestic
issuers. There is generally less government supervision and regulation of stock
exchanges, brokers and listed issuers than in the United States. In addition,
with respect to certain foreign countries, there is a possibility of
expropriation or confiscatory taxation, political and social instability, or
diplomatic developments which could affect U.S. investments in those countries.
The costs of investing in foreign countries frequently is higher than the costs
of investing in the United States. Although the Advisers endeavor to achieve
the most favorable execution costs in portfolio transactions, fixed commissions
on many foreign stock exchanges are generally higher than negotiated
commissions on U.S. exchanges.
Investments in securities of foreign issuers generally are denominated in
foreign currencies. Accordingly, 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. The Portfolio may
incur costs in connection with conversions between various currencies.
Certain foreign governments levy withholding or other taxes on dividend and
interest income. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from investments in such countries. The Portfolio may be
able to claim a credit for U.S. tax purposes with respect to any such foreign
taxes.
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. They may be
collateralized or uncollateralized and issued in various currencies (although
most are U.S. dollar-denominated) and they are actively traded in the over-the-
counter secondary market. The Portfolio will invest in Brady Bonds only if they
are consistent with the Portfolio's quality specifications. However, Brady
Bonds should be viewed as speculative in light of the history of defaults with
respect to commercial bank loans by public and private entities of countries
issuing Brady Bonds.
Foreign Bonds. Foreign Bonds are Fixed Income Securities issued by a foreign
government or a private issuer in a foreign country.
Foreign Currency Transactions. The U.S. dollar value of the assets of the
Portfolio, to the extent it invests in securities denominated in foreign
currencies, may be affected favorably or unfavorably by changes in foreign
currency exchange rates and exchange control regulations, and the Portfolio may
incur costs in connection with conversions between various currencies. The
Portfolio may conduct its foreign currency exchange transactions either on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market, or may enter into forward contracts to purchase or sell
foreign currencies. The Portfolio also may manage its foreign currency
transactions using the instruments and techniques described under "Derivatives"
below and may purchase and sell foreign currency forward contracts in
combination with other derivatives in order to gain exposure to an investment
in lieu of actually purchasing such investment.
A foreign currency forward contract involves an obligation to purchase or sell
a specific currency at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties, at a price set at the
time of the contract. These contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks)
and their customers. A forward contract generally has no deposit requirement,
and no commissions are charged at any stage for such trades. The Portfolio may
enter into foreign currency forward contracts in many circumstances. For
example, when the Portfolio enters into a contract for the purchase or sale of
a security denominated in a foreign currency, or when the Portfolio anticipates
the receipt in a foreign currency of dividends or interest payments on a
security which it holds, the Portfolio may desire to "lock-in" the U.S. dollar
price of the security or the U.S. dollar equivalent of such dividend or
interest payment, as the case may be. By entering into a forward contract for a
fixed amount of dollars, for the purchase or sale of the amount of foreign
currency involved in the underlying transactions, the Portfolio will be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during
the period between the date on which the security is purchased or sold, or on
which the dividend or interest payment is declared, and the date on which such
payments are made or received. Additionally, when the Portfolio anticipates
that the currency of a particular foreign country may suffer a decline against
the U.S. dollar, it may enter into a forward contract for a fixed amount of
dollars, to sell the amount of foreign currency approximating the value of some
or all of such Portfolio's securities denominated in such foreign currency.
However, it may not be practicable to hedge currency risk in all markets,
particularly emerging markets.
The term hedging, generally, means that the Portfolio is using a derivative
product as a way to reduce or limit risk. For example, the Portfolio may hedge
in order to limit the effects of a change in the value of a particular foreign
currency versus the U.S. dollar. The Portfolio also may use certain complex
hedging techniques. For example, the Portfolio may use a type of hedge known as
a cross hedge or a proxy hedge, where the Portfolio hedges the risk associated
with one underlying by purchasing or selling a derivative product with an
underlying that is different. There is no limit on the use of foreign currency
forward contracts or other derivative products for hedging purposes.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
securities in foreign currencies will change as a consequence of market
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movements in the value of these securities between the date on which the
forward contract is entered into and the date it matures. The projection of
short-term currency market movement is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain.
Under normal circumstances, consideration of the prospect for changes in the
values of currency will be incorporated into the long-term investment decisions
made with regard to overall diversification strategies. However, the management
of the Fund believes that it is important to have the flexibility to enter into
such forward contracts when it determines that it is in the best interests of
the Portfolio. Except under circumstances where a segregated account is not
required under the 1940 Act or the rules adopted thereunder, the Portfolio will
earmark cash or liquid securities or place them into a segregated account in an
amount necessary to cover the Portfolio's obligations under such foreign
currency forward contracts.
The Portfolio generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, the Portfolio may
either sell the portfolio security and make delivery of the foreign currency,
or it may retain the security and terminate its contractual obligation to
deliver the foreign currency by purchasing an "offsetting" contract with the
same currency trader obligating it to purchase, on the same maturity date, the
same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly,
it may be necessary for the Portfolio to purchase additional foreign currency
on the spot market (and bear the expense of such purchase) if the market value
of the security is less than the amount of foreign currency that such Portfolio
is obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency.
If the Portfolio retains the portfolio security and engages in an offsetting
transaction, such Portfolio will incur a gain or a loss (as described below) to
the extent that there has been movement in forward contract prices. Should
forward prices decline during the period between the Portfolio entering into a
forward contract for the sale of a foreign currency and the date it enters into
an offsetting contract for the purchase of the foreign currency, such Portfolio
will realize a gain to the extent that the price of the currency it has agreed
to sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, such Portfolio would suffer a loss to the extent that
the price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
The Portfolio is not required to enter into such transactions with regard to
its foreign currency-denominated securities. It also should be realized that
this method of protecting the value of portfolio securities against a decline
in the value of a currency does not eliminate fluctuations in the underlying
prices of the securities. It simply establishes a rate of exchange which one
can achieve at some future point in time. Additionally, although such contracts
tend to minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might
result should the value of such currency increase.
Foreign Equity Securities. Foreign Equity Securities are Equity Securities of
an issuer in a foreign country.
Other Securities and Investment Techniques
Convertible Securities. Convertible Securities are securities that may be
exchanged under certain circumstances for a fixed number of shares of Common
Stock or other Equity Securities. Convertible Securities generally represent a
feature of some other type of security, such as a Fixed Income Security or
Preferred Stock, so that, for example, a Convertible Fixed Income Security
would be a Fixed Income Security that is convertible into Common Stock.
Convertible Securities may be viewed as an investment in the current security
or the security into which the Convertible Securities may be exchanged and,
therefore, are included in both the definition of Equity Security and Fixed
Income Security.
Loans of Portfolio Securities. The Portfolio may lend its investment securities
to qualified institutional investors that need to borrow securities in order to
complete certain transactions, such as covering short sales, avoiding failures
to deliver securities or completing arbitrage operations. By lending its
investment securities, the Portfolio attempts to increase its net investment
income through the receipt of interest of the loan. Any gain or loss in the
market price of the securities loaned that might occur during the term of the
loan would be for the account of the Portfolio. The Portfolio may lend its
investment securities to qualified brokers, dealers, domestic and foreign banks
or other financial institutions, so long as the terms, structure and the
aggregate amount of such loans are not inconsistent with the 1940 Act or the
Rules and Regulations or interpretations of the SEC thereunder, which currently
require that (i) the borrower pledge and maintain with the Portfolio collateral
consisting of liquid, unencumbered assets having a value at all times not less
than 100% of the value of the securities loaned; (ii) the borrower add to such
collateral whenever the price of the securities loaned rises (i.e., the
borrower "marks to market" on a daily basis); (iii) the loan be made subject to
termination by the Portfolio at any time; and (iv) the Portfolio receive
reasonable interest on the loan (which may include the Portfolio investing any
cash collateral in interest bearing short-term investments), any distributions
on the loaned securities and any increase in their market value. There may be
risks of delay in recovery of the securities or even loss of rights in the
collateral should the borrower of the securities fail financially. However,
loans will be made only to borrowers deemed by the Adviser to be of good
standing and when, in the judgment of the Adviser, the consideration
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which can be earned currently from such securities loans justifies the
attendant risk. All relevant facts and circumstances, including the
creditworthiness of the broker, dealer or institution, will be considered in
making decisions with respect to the lending of securities, subject to review
by the Board of Directors.
At the present time, the staff of the SEC does not object if an investment
company pays reasonable negotiated fees in connection with loaned securities,
so long as such fees are set forth in a written contract and approved by the
investment company's Board of Directors. In addition, voting rights may pass
with the loaned securities, but if a material event will occur affecting an
investment on loan, the loan must be called and the securities voted.
Preferred Stocks. Preferred Stocks are securities that evidence ownership in a
corporation and pay a fixed or variable stream of dividends. Preferred Stocks
have a preference over Common Stocks in the event of the liquidation of an
issuer and usually do not carry voting rights. Because Preferred Stocks pay a
fixed or variable stream of dividends they have many of the characteristics of
a Fixed Income Security and are, therefore, included in both the definition of
Equity Security and Fixed Income Security.
Reverse Repurchase Agreements. Under a Reverse Repurchase Agreement, the
Portfolio sells a security and promises to repurchase that security at an
agreed upon future date and price. The price paid to repurchase the security
reflects interest accrued during the term of the agreement. The Portfolio will
earmark cash or liquid assets or establish a segregated account holding cash
and other liquid assets in an amount not less than the purchase obligations of
the agreement. Reverse Repurchase Agreements may be viewed as a speculative
form of borrowing called leveraging. The Portfolio may invest in reverse
repurchase agreements if (i) interest earned from leveraging exceeds the
interest expense of the original reverse repurchase transaction and (ii)
proceeds from the transaction are not invested for longer than the term of the
Reverse Repurchase Agreement.
Short Sales. A short sale is a transaction in which the Portfolio sells
securities it owns or has the right to acquire at no added cost (i.e., "against
the box") or does not own (but has borrowed) in anticipation of a decline in
the market price of the securities. To deliver the securities to the buyer, the
Portfolio arranges through a broker to borrow the securities and, in so doing,
the Portfolio becomes obligated to replace the securities borrowed at their
market price at the time of replacement. When selling short, the Portfolio
intends to replace the securities at a lower price and therefore, profit from
the difference between the cost to replace the securities and the proceeds
received from the sale of the securities. When the Portfolio makes a short
sale, the proceeds it receives from the sale will be held on behalf of a broker
until the Portfolio replaces the borrowed securities. The Portfolio may have to
pay a premium to borrow the securities and must pay any dividends or interest
payable on the securities until they are replaced.
The Portfolio's obligation to replace the securities borrowed in connection
with a short sale will be secured by collateral deposited with the broker that
consists of cash or other liquid securities. In addition, the Portfolio will
earmark cash or liquid assets or place in a segregated account an amount of
cash or other liquid securities equal to the difference, if any, between (i)
the market value of the securities sold at the time they were sold short, and
(ii) any cash or other liquid securities deposited as collateral with the
broker in connection with the short sale. Short sales by the Portfolio involve
certain risk and special considerations. If the Adviser incorrectly predicts
that the price of the borrowed security will decline, the Portfolio will have
to replace the securities with securities with a greater value than the amount
received from the sale. As a result, losses from short sales differ from losses
that could be incurred from a purchase of a security, because losses from short
sales may be unlimited, whereas losses from purchases can equal only the total
amount invested.
Structured Notes. Structured Notes are derivative securities for which the
amount of principal repayment and/or interest payments is based upon the
movement of one or more "factors." These factors include, but are not limited
to, currency exchange rates, interest rates (such as the prime lending rate and
LIBOR) and stock indices, such as the S&P 500. In some cases, the impact of the
movements of these factors may increase or decrease through the use of
multipliers or deflators. Structured Notes may be designed to have particular
quality and maturity characteristics and may vary from money market quality to
below investment grade. Depending on the factor used and the use of multipliers
or deflators, however, changes in interest rates and movement of the factor may
cause significant price fluctuations or may cause particular Structured Notes
to become illiquid. The Portfolios will use Structured Notes to tailor their
investments to the specific risks and returns the Adviser wishes to accept
while avoiding or reducing certain other risks.
When-Issued and Delayed Delivery Securities. When-Issued and Delayed Delivery
Securities are securities purchased with payment and delivery taking place in
the future in order to secure what is considered to be an advantageous yield or
price at the time of the transaction. Delivery of and payment for these
securities may take as long as a month or more after the date of the purchase
commitment, but will take place no more than 120 days after the trade date. The
payment obligation and the interest rates that will be received are each fixed
at the time the 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. When the Portfolio agrees to
purchase When-Issued or delayed delivery securities, it will earmark or
segregate cash or liquid securities in an amount equal to the Portfolio's
commitment to purchase these securities.
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Derivatives
The Portfolio is permitted to utilize various exchange-traded and over-the-
counter derivative instruments and derivative securities, both for hedging and
non-hedging purposes. Permitted derivative products include, but are not
limited to futures contracts ("futures"); forward contracts ("forwards");
options; swaps, caps, collars and floors; structured notes; and other
derivative products yet to be developed, so long as these new products are used
in a manner consistent with the objective of the Portfolio. These derivative
products may be based upon a wide variety of underlying rates, indices,
instruments, securities and other products, such as interest rates, foreign
currencies, foreign and domestic fixed income and equity securities, groups or
"baskets" of securities and securities indices (for each derivative product,
the "underlying"). The Portfolio will not enter into futures to the extent that
the Portfolio's outstanding obligations to purchase securities under these
contracts, in combination with its outstanding obligations with respect to
options, would exceed 50% of its total assets. The Portfolio's investments in
foreign currency forward contracts and derivatives used for hedging purposes
are not subject to the foregoing limits.
The term hedging, generally, means that the Portfolio is using a derivative
product as a way to reduce or limit risk. For example, the Portfolio may hedge
in order to limit the effects of a change in the value of a particular foreign
currency versus the U.S. dollar or the Portfolio could use a portion of its
cash to buy securities futures in order to hedge the risk of not being fully
invested. The Portfolio also may use certain complex hedging techniques. For
example, the Portfolio may use a type of hedge known as a cross hedge or a
proxy hedge, where the Portfolio hedges the risk associated with one underlying
by purchasing or selling a derivative product with an underlying that is
different. There is no limit on the use of foreign currency forward contracts
or other derivative products for hedging purposes.
The Portfolio may use derivative products under a number of different
circumstances to further its investment objectives. For example, a Portfolio
may purchase derivatives to gain exposure to a market or currency quickly in
response to changes in the Portfolio's investment strategy, upon the inflow of
investable cash or when the derivative provides greater liquidity than the
underlying market. The Portfolio may use derivatives when it is restricted from
directly owning the "underlying" or when derivatives provide a pricing
advantage or lower transaction costs. The Portfolio also may purchase
combinations of derivatives in order to gain exposure to an investment in lieu
of actually purchasing such investment. Derivatives may also be used by the
Portfolio for hedging or risk management purposes and in other circumstances
when the Adviser believes it advantageous to do so consistent with the
Portfolio's investment objectives and policies. Except under circumstances
where a segregated account is not required under the 1940 Act or the rules
adopted thereunder, the Portfolio will earmark cash or liquid securities or
place them in a segregated account in an amount necessary to cover the
Portfolio's obligations under such derivative transactions.
The use of derivative products is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Adviser is incorrect in forecasts of
market values, interest rates, and currency exchange rates, the investment
performance of the Portfolio will be less favorable than it would have been in
these investment techniques had not been used.
Some of the derivative products in which the Portfolios may invest and some of
the risks related thereto are described in further detail below.
Futures Contracts (Futures) and Forward Contracts (Forwards). The Portfolio may
purchase and sell futures contracts, including futures on securities indices,
baskets of securities, foreign currencies and interest rates of the type
generally known as financial futures. These are standardized contracts that are
bought and sold on organized exchanges. A futures contract obligates a party to
buy or sell a specific amount of the "underlying," such as a particular foreign
currency, on a specified future date at a specified price or to settle the
value in cash.
The Portfolio may also purchase and sell forward contracts, such as forward
rate agreements and other financial forward contracts. The Portfolio may also
use foreign currency forward contracts which are separately discussed under
"Foreign Currency Transactions." These forward contracts are privately
negotiated and are bought and sold in the over-the-counter market. Like a
future, a forward contract obligates a party to buy or sell a specific amount
of the underlying on a specified future date at a specified price. The terms of
the forward contract are customized. Forward contracts, like other over-the-
counter contracts that are negotiated directly with an individual counterparty,
subject the Portfolio to the risk of counterparty default.
In some cases, the Portfolio may be able to use either futures contracts,
forward contracts or exchange-traded or over-the-counter options to accomplish
similar purposes. In all cases, the Portfolio will use these products only as
permitted by applicable laws and regulations. Some of the ways in which the
Portfolio may use futures contracts, forward contracts and related options are
as follows:
The Portfolio 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 may purchase
securities index futures or options in order to gain market exposure. There
currently are limited securities index futures and options on such futures in
many countries, particularly emerging markets. The nature of the strategies
adopted by the Adviser and the extent to which those strategies are used, may
depend
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on the development of such markets. The Portfolio may also purchase and sell
foreign currency futures to lock in rates or to adjust their exposure to a
particular currency.
The Portfolio may engage in transactions in interest rate futures and related
products. The value of these contracts rises and falls inversely with change in
interest rates. The Portfolio may engage in such transactions to hedge their
holdings of debt instruments against future changes in interest rates or for
other purposes.
Gains and losses on future contracts, forward contracts and related options
depend on the Adviser's ability to predict correctly the direction of movement
of securities prices, interest rates and other economic factors. Other risks
associated with the use of these instruments include (i) imperfect correlation
between the changes in market value of investments held by the Portfolio and
the prices of derivative products relating to investments purchased or sold by
the Portfolio, and (ii) possible lack of a liquid secondary market for a
derivative product and the resulting inability to close out a position. The
Portfolio will seek to minimize the risk by only entering into transactions for
which there appears to be a liquid exchange or secondary market. In some
strategies, the risk of loss in trading on futures and related transactions can
be substantial, due both to the low margin deposits required and the extremely
high degree of leverage involved in pricing.
Under rules adopted by the Commodity Futures Trading Commission (the "CFTC"),
the Portfolio may, without registering with the CFTC as a Commodity Pool
Operator, enter into futures contracts and options thereon for both hedging and
non-hedging purposes, provided that not more than 5% of the 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-bona
fide hedging activities.
Options. The Portfolio may seek to increase their returns or may hedge their
portfolio investments through options transactions with respect to individual
securities, indices or baskets in which the Portfolio may invest; other
financial instruments; and foreign currency. Various options may be purchased
and sold on exchanges or over-the-counter markets.
The Portfolio may purchase put and call options. Purchasing a put option gives
the Portfolio the right, but not the obligation, to sell the underlying (such
as a securities index or a particular foreign currency) at the exercise price
either on a specific date or during a specified exercise period. The purchaser
pays a premium to the seller (also known as the writer) of the option.
The Portfolio also may write put and call options on investments held in the
portfolio, as well as foreign currency options. The Portfolio that has written
an option receives a premium that increases the Portfolio's return on the
underlying in the event the option expires unexercised or is closed out at a
profit. However, by writing a call option, the Portfolio will limit its
opportunity to profit from an increase in the market value of the underlying
above the exercise price of the option. By writing a put option, the Portfolio
will be exposed to the amount by which the price of the underlying is less than
the strike price.
By writing an option, the Portfolio incurs an obligation either to buy (in the
case of a put option) or sell (in the case of a call option) the underlying
from the purchaser of the option at the option's exercise price, upon exercise
by the purchaser. Pursuant to guidelines established by the Board of Directors,
the Portfolio may only write options that are "covered." A covered call option
means that until the expiration of the option, the Portfolio will either
earmark or segregate sufficient liquid assets to cover its obligations under
the option or will continue to own (i) the underlying; (ii) securities or
instruments convertible or exchangeable without the payment of any
consideration into the underlying; or (iii) a call option on the same
underlying with a strike price no higher than the price at which the underlying
was sold pursuant to a short option position. In the case of a put option, the
Portfolio will either earmark or segregate sufficient liquid assets to cover
its obligations under the option or will own another put option on the same
underlying with an equal or higher strike price.
There currently are limited options markets in many countries, particularly
emerging market countries, and the nature of the strategies adopted by the
Adviser and the extent to which those strategies are used will depend on the
development of these options markets. The primary risks associated with the
Portfolio's use of options as described include (i) imperfect correlation
between the change in market value of investments held, purchased or sold by
the Portfolio and the prices of options relating to such investments, and (ii)
possible lack of a liquid secondary market for an option.
Swaps, Caps, Collars and Floors. Swaps are privately negotiated over-the-
counter derivative products in which two parties agree to exchange payment
streams calculated in relation to a rate, index, instrument or certain
securities and a particular "notional amount." As with many of the other
derivative products available to the Portfolio, the underlying may include an
interest rate (fixed or floating), a currency exchange rate, a commodity price
index, and a security, securities index or a combination thereof. A great deal
of flexibility is possible in the way the products may be structured, with the
effect being that the parties may have exchanged amounts equal to the return on
one rate, index or group of securities for another. For example, in a simple
fixed-to-floating interest rate swap, one party makes payments equivalent to a
fixed interest rate, and the other make payments equivalent to a specified
interest rate index. The Portfolio may engage in simple or more complex swap
transactions involving a wide variety of underlyings. The currency swaps that
the Portfolio may enter will generally
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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.
Caps, collars and floors are privately-negotiated option-based derivative
products. The Portfolio may use one or more of these products in addition to or
in lieu of a swap involving a similar rate or index. As in the case of a put or
call option, the buyer of a cap or floor pays a premium to the writer. In
exchange for that premium, the buyer receives the right to a payment equal to
the differential if the specified index or rate rises above (in the case of a
cap) or falls below (in the case of a floor) a pre-determined strike level. As
in the case of swaps, obligations under caps and floors are calculated based
upon an agreed notional amount, and like most swaps (other than foreign
currency swaps), the entire notional amount is not exchanged and thus is not at
risk. A collar is a combination product in which the same party, such as the
Portfolio, buys a cap from and sells a floor to the other party. As with put
and call options, the amount at risk is limited for the buyer, but, if the cap
or floor in not hedged or covered, may be unlimited for the seller. Under
current market practice, caps, collars and floors between the same two parties
are generally documented under the same "master agreement." In some cases,
options and forward agreements may also be governed by the same master
agreement. In the event of a default, amounts owed under all transactions
entered into under, or covered by, the same master agreement would be netted
and only a single payment would be made.
Swaps, caps, collars and floors are credit-intensive products. If the Portfolio
enters into a swap transaction it will bear the risk of default, i.e.
nonpayment, by the other party. The guidelines under which the Portfolio enters
derivative transactions, along with some features of the transactions
themselves, are intended to reduce these risks to the extent reasonably
practicable, although they cannot eliminate the risks entirely. Under
guidelines established by the Board of Directors, the Portfolio may enter into
swaps only with parties that meet certain credit rating guidelines. Consistent
with current market practices, the Portfolio will generally enter into swap
transactions on a net basis, and all swap transactions with the same party will
be documented under a single master agreement to provide for net payment upon
default. In addition, the Portfolio's obligations under an agreement will be
accrued daily (offset against any amounts owing to the Portfolio) and any
accrued, but unpaid, net amounts owed to the other party to a master agreement
will be covered by the maintenance of a segregated account consisting of cash
or liquid securities.
Interest rate and total rate of return (fixed income or equity) swaps generally
do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate
of return swap defaults, the Portfolio's risk of loss will consist of the
payments that the Portfolio is contractually entitled to receive from the other
party. This may not be true for currency swaps that require the delivery of the
entire notional amount of one designated currency in exchange for the other. If
there is a default by the other party, the Portfolio may have contractual
remedies under the agreements related to the transaction.
Taxes
The following is only a summary of certain additional federal income tax
considerations generally affecting the Portfolio and its shareholders that are
not described in the Portfolio's prospectus. No attempt is made to present a
detailed explanation of the tax treatment of the Portfolio or its shareholders,
and the discussion here and in the Portfolio's prospectus is not intended as a
substitute for careful tax planning. Shareholders are urged to consult their
tax advisors with specific reference to their own tax situations, including
their state and local tax liabilities.
Federal Income Tax Treatment of Dividends and Distributions
The following general discussion of certain federal income tax consequences is
based on the Internal Revenue Code of 1986, as amended (the "Code"), and the
regulations issued thereunder as in effect on the date of this Statement of
Additional Information. New legislation, as well as administrative charges or
court decisions, may significantly change the conclusions expressed herein, and
may have a retroactive effect with respect to the transactions contemplated
herein.
The Portfolio is generally treated as a separate corporation for federal income
tax purposes, and thus the provisions of the Code generally will be applied to
the Portfolio separately rather than to the Fund as a whole.
Qualification as a Regulated Investment Company
The Fund intends that the Portfolio qualify and elect to be treated for each
taxable year as a regulated investment company ("RIC") under Subchapter M of
the Code. Accordingly, the Portfolio must, among other things, (a) derive at
least 90% of its gross income each taxable year from dividends, interest,
payments with respect to security loans, gains from the sale or other
disposition of stock, securities or foreign currencies, and certain other
related income, including generally, certain gains from options, futures and
forward contracts; and (b) diversify its holdings so that, at the end of each
fiscal quarter of the Portfolio's taxable year, (i) at least 50% of the market
value of the Portfolio's total assets is represented by cash and cash items,
United States Government securities, securities or other RICs, and other
securities, with such other securities limited, in respect to any one issuer,
to an amount not greater than 5% of the value of the Portfolio's total assets
or 10% of the
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outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its total assets is invested in the securities (other than United
States Government securities or securities of other RICs) of any one issuer or
two or more issuers which the Portfolio controls and which are engaged in the
same, similar, or related trades or business. For purposes of the 90% of gross
income requirement described above, foreign currency gains which are not
directly related to the Portfolio's principal business of investing in stock or
securities (or options or futures with respect to stock or securities) may be
excluded from income that qualifies under the 90% requirement.
In addition to the requirements described above, in order to qualify as a RIC,
the Portfolio must distribute at least 90% of the Portfolio's net investment
income (that generally includes dividends, taxable interest, and the excess of
net short-term capital gains over net long-term capital losses less operating
expenses) and at least 90% of its net tax-exempt interest income, if any, to
shareholders. If a Portfolio meets all of the RIC requirements, it will not be
subject to federal income tax on any of its net investment income or capital
gains that it distributes to shareholders.
The Portfolio may make investments in securities (such as STRIPS) that bear
"original issue discount" or "acquisition discount" (collectively, "OID
Securities"). The holder of such securities is deemed to have received interest
income even though no cash payments have been received. Accordingly, OID
Securities may not produce sufficient current cash receipts to match the amount
of distributable net investment income the Portfolio must distribute to satisfy
the Distribution Requirement. In some cases, the Portfolio may have to borrow
money or dispose of other investments in order to make sufficient cash
distributions to satisfy the Distribution Requirement.
Although the Portfolio intends to distribute substantially all of its net
investment income and may distribute its capital gains for any taxable year,
the Portfolio will be subject to federal income taxation to the extent any such
income or gains are not distributed.
If the Portfolio fails to qualify for any taxable year as a RIC, all of its
taxable income will be subject to tax at regular corporate income tax rates
without any deduction for distributions to shareholders and such distributions
generally will be taxable to shareholders as ordinary dividends to the extent
of such Portfolio's current and accumulated earnings and profits. In this
event, distributions generally will be eligible for the dividends-received
deduction for corporate shareholders.
For certain transactions, the Portfolio is required for federal income tax
purposes to recognize as gain or loss its net unrealized gains or losses on
forward currency and futures contracts as of the end of each taxable year, as
well as those actually realized during the year. In most cases, any such gain
or loss recognized with respect to a regulated futures contract is considered
to be 60% long-term capital gain or loss and 40% short-term capital gain or
loss, without regard to the holding period of the contract. Realized gain or
loss attributable to a foreign currency forward contract is treated as 100%
ordinary income. Furthermore, foreign currency futures contracts which are
intended to hedge against a change in the value of securities held by the
Portfolio may affect the holding period of such securities and, consequently,
the nature of the gain or loss on such securities upon disposition.
Short sales engaged in by the Portfolio may reduce the holding period of
property held by the Portfolio which is substantially identical to the property
sold short. This rule may have the effect of converting capital gains
recognized by the Portfolio from long-term to short-term as well as converting
capital losses recognized by the Portfolio from short-term to long-term.
The Portfolio will provide a statement annually to shareholders as to the
federal tax status of distributions paid (or deemed to be paid) by the
Portfolio during the year, including the amount of dividends eligible for the
corporate dividends-received deduction.
Federal Excise Tax
If the Portfolio fails to distribute in a calendar year at least 98% of its
ordinary income for the year and 98% of its capital gain net income (the excess
of short and long term capital gains over short and long term capital losses)
for the one-year period ending October 31 of that year (and any retained amount
from the prior calendar year), the Portfolio will be subject to a nondeductible
4% Federal excise tax on the undistributed amounts. Each Portfolio intends to
make sufficient distributions to avoid imposition of this tax, or to retain, at
most its net capital gains and pay tax thereon.
Foreign Income Taxes
If the Portfolio invests in foreign securities it may be subject to foreign
withholding taxes with respect to its dividend and interest income from foreign
countries, thus reducing the net amount available for distribution to a
Portfolio's shareholders. The United States has entered into tax treaties with
many foreign countries that may entitle the Portfolio to a reduced rate of, or
exemption from, taxes on such income. It is impossible to determine the
effective rate of foreign tax in advance because the amount of the Portfolio's
assets to be invested within various countries is not known.
If more than 50% of the value of the Portfolio's total assets at the close of
its taxable year consists of the stock or securities of foreign corporations,
the Portfolio may elect to "pass through" to its shareholders the amount of
foreign income taxes paid by the Portfolio (the "Foreign Tax Election").
Pursuant to the Foreign Tax Election, shareholders would be required to (i)
include in gross income, even though not actually received, their respective
pro-rata shares of the foreign income taxes paid by the
15
<PAGE>
Portfolio; (ii) either deduct their pro-rata share of foreign taxes in
computing their taxable income, or use such share (subject to various Code
limitations) as a foreign tax credit against federal income tax (but not both).
In determining the source and character of distributions received from the
Portfolio for purposes of the foreign tax credit limitation rules of the Code,
shareholders would, if the Portfolio makes the Foreign Tax Election, be
required to treat their pro-rata shares of such foreign taxes and allocable
portions of Portfolio distributions as foreign source income.
Purchase of the Shares of the Portfolio
Shares of the Portfolio will be purchased by life insurance companies for their
separate accounts under variable annuity contracts and variable life insurance
policies and by other entities under qualified pension and retirement plans.
Under the provisions of the Code currently in effect, net income and realized
capital gains of Portfolio of the Fund are not currently taxable when left to
accumulate within a variable annuity contract or variable life insurance policy
or under a qualified pension or retirement plan.
For information on federal income taxation of a life insurance company with
respect to its receipt of distributions from the Fund and federal income
taxation of owners of the company's variable annuity contracts or variable life
insurance policies, refer to the life insurance company's variable annuity
contract or variable life insurance policy prospectus.
State and Local Tax Considerations
Rules of U.S. state and local taxation of dividend and capital gains
distributions from regulated investment companies often differ from the rules
for U.S. federal income taxation described above. Shareholders are urged to
consult their tax advisers as to the consequences of these and other U.S. state
and local tax rules regarding an investment in the Portfolio.
Purchase of Shares
The purchase price of the Portfolio is the net asset value next determined
after the order is received. An order received prior to the close of the New
York Stock Exchange (the "NYSE") (normally 4:00 pm Eastern Time) will be
executed at the price computed on the date of receipt; and an order received
after the close of the NYSE will be executed at the price computed on the next
day the NYSE is open as long as the Fund's transfer agent receives payment by
check or in Federal Funds prior to the close of the NYSE on such day. Shares of
the Fund may be purchased on any day the NYSE is open. The NYSE will be closed
on the following days: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day, and on the preceding Friday or subsequent Monday when any of
these holidays falls on a Saturday or Sunday, respectively.
The Portfolio reserves the right in its sole discretion to suspend the offering
of its shares and to reject purchase orders when in the judgment of management
such rejection is in the best interest of the Portfolio.
Redemption of Shares
Redemptions. The Portfolio may suspend redemption privileges or postpone the
date of payment (i) during any period that the NYSE is closed, or trading on
the NYSE is restricted as determined by the SEC, (ii) during any period when an
emergency exists as defined by the rules of the SEC as a result of which it is
not reasonably practicable for the Portfolio to dispose of securities owned by
it, or fairly to determine the value of its assets, and (iii) for such other
periods as the SEC may permit.
Distributions In Kind. If the Board of Directors determines that it would be
detrimental to the best interests of the shareholders of the Portfolio to make
a redemption payment wholly in cash, and subject to applicable agreements with
life insurance companies and other qualified investors, the Fund may pay a
portion of a redemption by distribution in kind of portfolio securities in lieu
of cash. Securities issued in a distribution in kind will be readily
marketable, although shareholders receiving distributions in kind may incur
brokerage commissions when subsequently selling shares of those securities.
Investment Limitations
Fundamental Limitations
The Portfolio has adopted the following restrictions, which are fundamental
policies and may not be changed without the approval of the lesser of: (1) at
least 67% of the voting securities of the Portfolio present at a meeting if the
holders of more than 50% of the outstanding voting securities of the Portfolio
are present or represented by proxy, or (2) more than 50% of the outstanding
voting securities of the Portfolio. The Portfolio of the Fund will not:
(1) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (except this shall not prevent the
Portfolio from purchasing or selling futures contracts or options thereon or
from investing in securities or other instruments backed by physical
commodities);
(2) purchase or sell real estate, although it may purchase and sell securities
of companies that deal in real estate and may purchase and sell securities that
are secured by interests in real estate;
(3) lend any security or make any other loan if, as a result, more than 33
1/3% of its total assets would be lent to other parties, but this limitation
does not apply to purchases of debt securities or repurchase agreements;
16
<PAGE>
(4) (i) purchase more than 10% of any class of the outstanding voting
securities of any issuer and (ii) purchase securities of an issuer (except
obligations of the U.S. Government and its agencies and instrumentalities) if
as a result, with respect to 75% of its total assets, more than 5% of the
Portfolio's total assets, at market value, would be invested in the securities
of such issuer;
(5) issue senior securities and will not borrow, except from banks in an
amount not in excess of 33 1/3% of its total assets (including the amount
borrowed) less liabilities;
(6) underwrite securities issued by others, except to the extent that the
Portfolio may be considered an underwriter within the meaning of the 1933 Act
in the disposition of restricted securities; and
(7) acquire any securities of companies within one industry if, as a result of
such acquisition, more than 25% of the value of the Portfolio's total assets
would be invested in securities of companies within such industry; provided,
that (i) there shall be no limitation on the purchase of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities; (ii)
utility companies will be divided according to their services, for example,
gas, gas transmission, electric and telephone will each be considered a
separate industry; (iii) financial service companies will be classified
according to the end users of their services, for example, automobile finance,
bank finance and diversified finance will each be considered a separate
industry; and (iv) ABSs will be classified according to the underlying assets
securing such securities.
Non-fundamental Limitations
In addition, the Portfolio has adopted non-fundamental investment limitations
as stated below. Such limitations may be changed without shareholder approval.
The Portfolio of the Fund will not:
(1) sell short (other than "against the box") unless the Portfolio's
obligation is covered by unencumbered liquid assets in a segregated account and
by collateral held by the lending broker; provided that transactions in futures
contracts and options are not deemed to constitute selling securities short;
(2) invest for the purpose of exercising control over management of any
company;
(3) invest its assets in securities of any investment company except as may be
permitted by the 1940 Act;
(4) invest more than an aggregate or 15% of the net assets of the Portfolio,
determined at the time of investment, in illiquid securities;
(5) make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitations as
described in the prospectus) that are publicly distributed, and (ii) by lending
its portfolio securities to banks, brokers, dealers and other financial
institutions so long as such loans are not inconsistent with the 1940 Act or
the Rules and Regulations or interpretations of the SEC thereunder;
(6) purchase on margin, except for use of short-term credit as may be
necessary for the clearance of purchases and sales of securities, but it may
make margin deposits in connection with transactions in options, futures, and
options on futures; and
(7) borrow money, other than temporarily or for extraordinary or emergency
purposes or purchase additional securities when borrowings exceed 5% of total
(gross) assets.
The percentage limitations contained in these restrictions apply at the time of
purchase of securities. Future Portfolios of the Fund may adopt different
limitations.
The investments of life insurance company separate accounts made under variable
annuity contracts and variable life insurance policies are subject to state
insurance laws and regulations. The Fund and its Portfolios will, when
required, comply with investment restrictions imposed under such laws and
regulations on life insurance company separate accounts investing in the
Portfolios.
In addition, Section 817(h) of the Internal Revenue Code requires that the
assets of the Portfolio be adequately diversified so that insurance companies,
and not variable contract owners, are considered the owners for federal income
tax purposes of the assets held in the separate accounts. To meet the
diversification requirements of regulations issued under Section 817(h), the
Portfolio will meet the following test: no more than 55% of the assets will be
invested in any one investment; no more than 70% of the assets will be invested
in any two investments; no more than 80% of the assets will be invested in any
three investments; and no more than 90% will be invested in any four
investments. The Portfolio must meet the above diversification requirements
within 30 days of the end of each calendar quarter.
17
<PAGE>
Management Of The Fund
Officers and Directors
The Fund's officers, under the supervision of the Board of Directors, manage
the day-to-day operations of the Fund. The Directors set broad policies for the
Fund and choose its officers. Directors and officers of the Fund are also
directors and officers of some or all of the other investment companies
managed, administered, advised or distributed by the Advisers or their
affiliates. Two Directors and all of the officers of the Fund are directors,
officers or employees of the Fund's advisers, distributor or administrators.
The other Directors have no affiliation with the Fund's advisers, distributor
or administrators. A list of the Directors and officers of the Fund and a brief
statement of their present positions and principal occupations during the past
five years is set forth below:
<TABLE>
<CAPTION>
Name, Address and
Date of Birth Position with Fund Principal Occupation During Past Five Years
----------------- ---------------------------- -------------------------------------------
<S> <C> <C>
Barton M. Biggs* Chairman and Director Chairman, Director and Managing Director of Morgan
Morgan Stanley Dean Witter Stanley Dean Witter Investment Management Inc. and
Investment Management Morgan Stanley Dean Witter Investment Management
1221 Avenue of the Americas Limited; Managing Director of Morgan Stanley & Co.
New York, NY 10020 Incorporated; Director of Rand McNally Company;
11/26/32 Member of the Yale Development Board; Chairman and
Director of various U.S. registered investment
companies managed by Morgan Stanley Dean Witter
Investment Management Inc.
Michael F. Klein* Director and President Principal of Morgan Stanley & Co. Incorporated and
Morgan Stanley Dean Witter Morgan Stanley Dean Witter Investment Management
Investment Management Inc.; President and Officer of various U.S.
1221 Avenue of the Americas registered investment companies managed by Morgan
New York, NY 10020 Stanley Dean Witter Investment Management Inc.
12/12/58 Previously practiced law with the New York law
firm of Rogers & Wells.
John D. Barrett, II Director Chairman and Director of Barrett Associates, Inc.
Barrett Associates Inc. (investment counseling); Director of the Ashforth
521 Fifth Avenue Company (real estate); Director of Morgan Stanley
New York, NY 10135 Dean Witter Institutional Fund, Inc. and Morgan
8/21/35 Stanley Dean Witter Strategic Adviser Fund, Inc.
Gerard E. Jones Director Partner in Richards & O'Neil LLP (law firm);
Richards & O'Neil LLP Director of Morgan Stanley Dean Witter
43 Arch Street Institutional Fund, Inc. and Morgan Stanley Dean
Greenwich, CT 06830 Witter Strategic Adviser Fund, Inc.
1/23/37
Andrew McNally IV Director Director of Mercury Finance (consumer finance);
333 North Michigan Zenith Electronics, Hubbell, Inc. (industrial
Avenue, Suite 501 electronics); Director of Morgan Stanley Dean
Chicago, IL 60601 Witter Institutional Fund, Inc. and Morgan Stanley
11/11/39 Dean Witter Strategic Adviser Fund, Inc.; Formerly
Chairman and Chief Executive Officer of Rand
McNally & Company (publishing).
Samuel T. Reeves Director President, Pinnacle Trading L.L.C. (investments);
8211 North Fresno Street Director of Morgan Stanley Dean Witter
Fresno, CA 93720 Institutional Fund, Inc. and Morgan Stanley Dean
7/28/34 Witter Strategic Adviser Fund, Inc. and Morgan
Stanley India Investment Fund, Inc.
Fergus Reid Director Chairman and Chief Executive Officer of LumeLite
85 Charles Colman Blvd Plastics Corporation (injection molding); Trustee
Pawling, NY 12564 and Director of Vista Mutual Fund Group; Director
8/12/32 of Morgan Stanley Dean Witter Institutional Fund,
Inc. and Morgan Stanley Dean Witter Strategic
Adviser Fund, Inc.
Frederick O. Robertshaw Director Of Counsel, Copple, Chamberlin & Boehm, P.C.;
2025 North Third Street Formerly, of Counsel, Bryan, Cave LLP (law firms);
Suite 300 Director of Morgan Stanley Dean Witter
Phoenix, AZ 85004 Institutional Fund, Inc. and Morgan Stanley Dean
1/24/34 Witter Strategic Adviser Fund, Inc.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Name, Address and
Date of Birth Position with Fund Principal Occupation During Past Five Years
----------------- -------------------------- -------------------------------------------
<S> <C> <C>
Harold J. Schaaff, Jr. Vice President Principal of Morgan Stanley & Co. Incorporated
Morgan Stanley Dean Witter and Morgan Stanley Dean Witter Investment
Investment Management Management Inc.; General Counsel and Secretary
1221 Avenue of the Americas of Morgan Stanley Dean Witter Investment
New York, NY 10020 Management Inc.; Vice President of various U.S.
6/10/60 registered investment companies managed by
Morgan Stanley Dean Witter Investment Management
Inc.
Joseph P. Stadler Vice President Principal of Morgan Stanley & Co. Incorporated
Morgan Stanley Dean Witter and Morgan Stanley Dean Witter Investment
Investment Management Management Inc.; Previously with Price
1221 Avenue of the Americas Waterhouse LLP (now PricewaterhouseCoopers LLP)
New York, NY 10020 (accounting); Vice President of various U.S.
6/7/54 registered investment companies managed by
Morgan Stanley Dean Witter Investment Management
Inc.
Richard J. Shoch Vice President Vice President of Morgan Stanley Dean Witter &
Miller Anderson & Sherrerd, Co.; Fund Administration Manager, Miller
LLP Anderson & Sherrerd, LLP; Secretary of MAS
One Tower Bridge Funds; formerly Fund Legal Administrator and
West Conshohocken, PA 19428 then Counsel, Vice President and Assistant
10/28/66 Secretary, SEI Corporation.
Stefanie V. Chang Vice President Vice President of Morgan Stanley & Co.
Morgan Stanley Dean Witter Incorporated and Morgan Stanley Dean Witter
Investment Management Investment Management Inc.; Vice President of
1221 Avenue of the Americas various U.S. registered investment companies
New York, NY 10020 managed by Morgan Stanley Dean Witter Investment
11/30/66 Management Inc. Previously practiced law with
the New York law firm of Rogers & Wells.
Mary E. Mullin Secretary Vice President of Morgan Stanley & Co.
Morgan Stanley Dean Witter Incorporated and Morgan Stanley Dean Witter
Investment Management Inc. Investment Management Inc.; Secretary of various
1221 Avenue of the Americas U.S. registered investment companies managed by
New York, NY 10020 Morgan Stanley Dean Witter Investment Mangement
3/22/67 Inc. Previously practiced law with the New York
law firms of McDermott, Will & Emery and
Skadden, Arps, Slate, Meagher & Flom LLP.
James A. Gallo Vice President Vice President of Morgan Stanley Dean Witter &
Miller Anderson & Sherrerd, Co.; Head of Fund Administration, Miller
LLP Anderson & Sherrerd, LLP; Vice President and
One Tower Bridge Treasurer MAS Funds; formerly Manager, Internal
West Conshohocken, PA 19428 Accounting and then Vice President and Director
6/18/64 of Investment Accounting, PFPC, Inc.
Karl O. Hartmann Assistant Secretary Senior Vice President, Secretary and General
Chase Global Funds Services Counsel of Chase Global Funds Services Company;
Company Previously President, Secretary and General
73 Tremont Street Counsel, Leland, O'Brien, Rubinstein Associates,
Boston, MA 02108-3913 Inc. (investments).
3/7/55
Belinda A. Brady Assistant Treasurer Fund Administration Manager, Chase Global Funds
Chase Global Funds Services Services Company; Assistant Treasurer of various
Company U.S. registered investment companies managed by
73 Tremont Street Morgan Stanley Dean Witter Investment Management
Boston, MA 02108-3913 Inc. Previously was senior auditor at Price
1/23/68 Waterhouse LLP (now PricewaterhouseCoopers LLP).
</TABLE>
- -------
* "Interested Person" within the meaning of the 1940 Act.
19
<PAGE>
Remuneration of Directors and Officers
Members of the Board of Directors who are not "interested persons" within the
meaning of the 1940 Act ("Non-interested Directors") receive compensation from
the Fund and from other investment companies advised by MSDW Investment
Management or MAS (or by affiliated companies) (the Fund and such other
investment companies are referred to as the "Fund Complex"). The open-end
investment companies in the Fund Complex pay each of the Noninterested
Directors an annual aggregate compensation of $65,000, plus out-of-pocket
expenses, and pay each of the Noninterested Directors on the Board Audit
Committees additional annual aggregate compensation of $10,000 for serving on
such committees. The aggregate of such compensation for each Noninterested
Director is allocated among the open-end investment companies in direct
proportion to their respective average annual net assets. For the fiscal year
ended December 31, 1998, the Fund paid approximately $8,655 in Directors fees
and expenses. Column (2) in the following table sets forth the portions of the
annual aggregate compensation paid by the Fund to each Director for serving as
a Director of the Fund for the fiscal year ended December 31, 1998. Column (5)
in the table sets forth aggregate compensation paid by the Fund and Fund
Complex to each Director during the fiscal year ended December 31, 1998.
Compensation amounts do not include reimbursements of out-of-pocket expenses.
Directors who are officers or otherwise "interested persons" receive no
remuneration for their services as Directors. Directors and Officers of the
Fund do not own shares of the Fund.
Compensation Table
<TABLE>
<CAPTION>
(5)
Total
(3) (4) Compensation
Pension or Estimated From Fund
(2) Retirement Annual and Fund
Aggregate Benefits Accrued Benefits Complex
(1) Compensation as Part of Fund Upon Paid to
Name of Director From Fund Expenses Retirement Directors
---------------- ------------ ---------------- ---------- ------------
<S> <C> <C> <C> <C>
Barton M. Biggs $ 0 $ 0 $ 0 $ 0
Michael F. Klein 0 0 0 0
John D. Barrett, II(a) 1,340 0 0 65,000(c)
Gerard E. Jones(a) 1,340 0 0 72,100(c)(d)
Andrew McNally, IV(a)(b) 1,545 0 0 81,808(c)
Samuel T. Reeves(a)(b) 1,545 0 0 95,078(c)
Fergus Reid(a) 1,340 0 0 107,774(c)(d)
Frederick O. 1,545 0 0 75,000(c)
Robertshaw(a)(b)
</TABLE>
- -------
(a) Of the amounts payable to Messrs. Barrett, Jones, McNally, Reeves, Reid and
Robertshaw, nothing was deferred pursuant to the Fund's deferred
compensation plan in the fiscal year ended December 31, 1998.
(b) Member of Audit Committee of the Board of Directors of the Fund.
(c) Number of other investment companies in Fund Complex from whom Director
received compensation: Mr. Barrett--2; Mr. Jones--3; Mr. McNally--2; Mr.
Reeves--3; Mr. Reid--3; Mr. Robertshaw--2.
(d) Includes amounts paid for service as Director of a closed-end investment
company in the Fund Complex, in addition to amounts paid by the open-end
investment companies.
The Fund maintains an unfunded Deferred Compensation Plan which allows each
independent Director to defer payment of all, or a portion, of the fees he or
she receives for attending meetings of the Board of Directors throughout the
year. Each eligible Director generally may elect to have the deferred amounts
credited with a return equal to either of the following: (i) a rate equal to
the prevailing rate for 90-day U.S. Treasury Bills, or (ii) a rate equal to the
total return on one or more portfolios of the Fund or other funds in the Fund
Complex selected by the Director. Distributions generally are in the form of
equal annual installments over a period of five years beginning on the first
day of the year following the year in which the Director's service terminates,
except that the Board of Directors, in its sole discretion, may accelerate or
extend such distribution. The Fund intends that the Deferred Compensation Plan
shall be maintained at all times on an unfunded basis for federal income tax
purposes under the Internal Revenue Code of 1986, as amended (the "Code"). The
rights of an eligible Director and the beneficiaries to the amounts held under
the Deferred Compensation Plan are unsecured and such amounts are subject to
the claims of the creditors of the Fund.
Investment Advisory, Sub-Advisory And Administrative Agreements
MSDW Investment Management is a wholly owned subsidiary of Morgan Stanley Dean
Witter & Co. ("MSDW"). The principal offices of MSDW are located at 1585
Broadway, New York, N.Y. 10036 and the principal offices of MSDW Investment
Management are located at 1221 Avenue of the Americas, New York, N.Y. 10020.
Miller Anderson & Sherrerd, LLP ("MAS"), with principal offices located at One
Tower Bridge, West Conshohocken, Pennsylvania 19428, is also a subsidiary of
MSDW.
20
<PAGE>
Pursuant to an investment advisory agreement, MSDW Investment Management and
MAS receive compensation for providing investment advisory services in the
amounts described below.
Advisory Fees
The following table shows the advisory fee paid by the Portfolios for each of
the past three fiscal years.
MSDW Investment Management Advised Portfolios:*
<TABLE>
<CAPTION>
Advisory Fee Paid (000)
---------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
Portfolio 1998 1997 1996
- --------- -------------------------------- --------------------------------- --------------------------------
<S> <C> <C> <C>
Equity Growth Portfolio $26 (net of fee waivers of $136) $0/1/ (net of fee waivers of $30 N/A
and reimbursements of $36)
U.S. Real Estate $24 (net of fee waivers of $92) $0/2/ (net of fee waivers of $49 N/A
Portfolio and reimbursements of $26)
Emerging Markets Debt $74 (net of fee waivers of $143) $8/3/ (net of fee waivers of $63) N/A
Portfolio
Global Equity Portfolio $95 (net of fee waivers of $141) $0/1/ (net of fee waivers of $62 N/A
and reimbursements of $37)
International Magnum $51 (net of fee waivers of $220) $0/1/ (net of fee waivers of $116 N/A
Portfolio and reimbursements of $119)
Emerging Markets Equity $0 (net of fee waivers of $447 $0 (net of fee waivers of $279 $0/4/ (net of fee waivers of $32
Portfolio and reimbursements of $87) and reimbursements of $240) and reimbursements of $82)
Asian Equity Portfolio $0 (net of fee waivers of $93 $0/2/ (net of fee waivers of $68 N/A
and reimbursements of $91) and reimbursements of $81)
</TABLE>
- -------
* The Money Market, Latin American, Active International Allocation and
Technology Portfolios were not operational in the fiscal years ended December
31, 1998, 1997 and 1996. Consequently, no advisory fees were paid by these
Portfolios.
/1/For the period from January 2, 1997 to December 31, 1997.
/2/For the period from March 3, 1997 to December 31, 1997.
/3/For the period from June 16, 1997 to December 31, 1997.
/4/For the period from October 1, 1996 to December 31, 1996.
MAS Advised Portfolios:**
<TABLE>
<CAPTION>
Advisory Fee Paid (000)
-----------------------------------------------------------------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
Portfolio 1998 1997 1996
- --------- ------------------------------- -------------------------------- ------------
<S> <C> <C> <C>
Fixed Income Portfolio $17 (net of fee waivers of $93) $0/1/ (net of fee waivers of $38 N/A
and reimbursements of $58)
High Yield Portfolio $34 (net of fee waivers of $77) $0/1/ (net of fee waivers of $49 N/A
and reimbursements of $36)
Value Portfolio $14 (net of fee waivers of $86) $0/1/ (net of fee waivers of $38 N/A
and reimbursements of $32)
Mid Cap Value Portfolio $44 (net of fee waivers of $99) $0/1/ (net of fee waivers of $47 N/A
and reimbursements of $22)
</TABLE>
- -------
** The Balanced, Core Equity, International Fixed Income, Mid Cap Growth,
Multi-Asset-Class and Targeted Duration Portfolios were not operational in
the fiscal years ended December 31, 1998, 1997 and 1996. Consequently, no
advisory fees were paid by these Portfolios.
/1/For the period from January 2, 1997 to December 31, 1997.
Sub-Advisory Fees
Morgan Stanley Dean Witter Advisors Inc. ("MSDW Advisors"), with principal
offices at Two World Trade Center, New York, New York 10048, serves as the
investment sub-adviser to the Money Market Portfolio pursuant to an investment
sub-advisory agreement with MSDW Investment Management. As compensation for
managing the day-to-day investments of the Money Market Portfolio, MSDW
Investment Management pays MSDW Advisors 40% of the investment advisory fee
that MSDW Investment Management receives from this Portfolio.
21
<PAGE>
Administration Fees
Pursuant to separate Administration Agreements with the Fund, MSDW Investment
Management and MAS provide administrative services to MSDW Investment
Management Advised Portfolios and MAS Advised Portfolios, respectively. For its
services under the Administration agreement, the Fund pays each Adviser a
monthly fee which on an annual basis equals 0.25% of the average daily net
assets of each Portfolio managed by that Adviser.
Under a Sub-Administration Agreement between each Adviser and Chase Global
Funds Services Company ("Chase Global"), a corporate affiliate of The Chase
Manhattan Bank, Chase Global provides certain administrative services to the
Fund. Chase Global's business address is 73 Tremont Street, Boston,
Massachusetts 02108-3913.
European Currency Transition. On January 1, 1999, the European Monetary Union
(EMU) implemented a new currency unit, the Euro, which is expected to reshape
financial markets, banking systems and monetary policies in Europe and other
parts of the world. Implementation of this plan means that financial
transactions and market information, including share quotations and company
accounts, in participating countries are now denominated in Euros. Monetary
policy for participating countries is uniformly managed by a new central bank,
the European Central Bank (ECB).
The transition to the Euro may change the economic environment and behavior of
investors, particularly in European markets. For example, the process of
implementing the Euro may adversely affect financial markets world-wide and may
result in changes in the relative strength and value of the U.S. dollar or
other major currencies, as well as possible adverse tax consequences. The
transition to the Euro is likely to have a significant impact on fiscal and
monetary policy in the participating countries and may produce unpredictable
effects on trade and commerce generally. These resulting uncertainties could
create increased volatility in financial markets world-wide.
Year 2000
The management and distribution services provided to the Fund by the Advisers,
MSDW Advisors and Morgan Stanley & Co. Incorporated ("'Morgan Stanley") depend
on the smooth functioning of their computer systems. Many computer software
systems in use today cannot recognize the year 2000, but revert to 1900 or some
other date, due to the manner in which dates were encoded and calculated. That
failure could have a negative impact on the handling of securities trades,
pricing and account services. The Advisers, MSDW Advisors and Morgan Stanley
have been actively working on necessary changes to their own computer systems
to deal with the year 2000 problem and expect that their systems will be
adapted before that date. There can be no assurance, however, that they will be
successful. In addition, other unaffiliated service providers may be faced with
similar problems. The Advisers, MSDW Advisors and Morgan Stanley are monitoring
their remedial efforts, however, there can be no assurance that they and the
services they provide will not be adversely affected.
In addition, it is possible that the markets for securities in which the
Portfolios invest may be detrimentally affected by computer failures throughout
the financial services industry beginning January 1, 2000. Improperly
functioning trading systems may result in settlement problems and liquidity
issues. In addition, corporate and governmental data processing errors may
result in production problems for individual companies and overall economic
uncertainties. Earnings of individual issuers will be affected by remediation
costs, which may be substantial and may be reported inconsistently in U.S. and
foreign financial statements. Accordingly, the Portfolios' investments may be
adversely affected.
Distribution of Fund Shares
Under a Distribution Agreement with the Fund, Morgan Stanley, a subsidiary of
MSDW, serves as exclusive distributor of the Portfolio and sells shares of the
Portfolio on the terms described in the Fund's Prospectus.
Code of Ethics
The Board of Directors of the Fund has adopted a Code of Ethics under Rule 17j-
I of the 1940 Act which incorporates the Code of Ethics of each Adviser
(together, the "Codes"). The Codes restrict the personal investing activities
of all employees of each Adviser and, as described below, impose additional,
more onerous, restrictions on the Fund's investment personnel.
The Codes require that all employees of each Adviser preclear any personal
securities investment (with limited exceptions, such as government securities).
The preclearance requirement and associated procedures are designed to identify
any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Adviser include a ban on acquiring any securities in a "hot" initial public
offering and a prohibition from profiting on short-term trading in securities.
22
<PAGE>
In addition, no employee may purchase or sell any security that at the time is
being purchased or sold (as the case may be), or to the knowledge of the
employee is being considered for purchase or sale, by any fund advised by the
Adviser. Furthermore, the Codes provide for trading "blackout periods" that
prohibit trading by investment personnel of the Fund within periods of trading
by the Fund in the same (or equivalent) security.
Principal Holders of Securiites
As of July 31, 1999, the following persons were beneficial owners of 5% or more
of the outstanding shares of the following Portfolios:
<TABLE>
<CAPTION>
Percent of
Outstanding
Portfolio Name of Beneficial Owner Shares
--------- ------------------------ -----------
<C> <S> <C>
Fixed Income Portfolio Allmerica Financial Life 41%
Insurance & Annuity Company*/1/
440 Lincoln St., S-310
Worcester, MA 01653
General American Life Insurance Company* 21%
700 Market Street
St. Louis, MO 63101
Transamerica Life Insurance and Annuity Company* 9%
Separate Account VA6
401 North Tryon Street
Charlotte, NC 28210
ICMG Registered Variable Life* 8%
Separate Account
PO Box 2999
Hartford, CT 06104
Annuity Investors Life Insurance Company* 7%
PO Box 5423
Cincinnati, OH 45201
American General Life Insurance Company* 6%
PO Box 1591
Houston, TX 77251
High Yield Portfolio Hartford Life & Annuity Insurance Company*/2/ 38%
Separate Account Three
PO Box 2999
Hartford, CT 06104
American General Life Insurance Company* 18%
PO Box 1591
Houston, TX 77251
Integrity Life Insurance Company* 18%
515 West Market Street
Louisville, KY 40202
National Integrity Life Insurance Company* 9%
515 West Market Street
Louisville, KY 40202
Transamerica Life Insurance and Annuity Company* 9%
Separate Account VA6
401 North Tryon Street
Charlotte, NC 28210
Equity Growth Portfolio Northbrook Life Insurance Company*/3/ 48%
3100 Sanders Road
Northbrook, IL 60062
American General Life Insurance Company* 24%
PO Box 1591
Houston, TX 77251
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Percent of
Outstanding
Portfolio Name of Beneficial Owner Shares
--------- ------------------------ -----------
<S> <C> <C>
AIG Life Insurance Company* 12%
1 Alico Plaza
Wilmington, DE 19801
Signature IIA* 6%
c/o Life Insurance Strategies
1610 Des Peres Road, Suite 370
Saint Louis, MO 63131
General American Life Insurance Company* 6%
700 Market Street
St. Louis, MO 63101
Value Portfolio American General Life Insurance Company*/4/ 43%
PO Box 1591
Houston, TX 77251
AIG Life Insurance Company* 22%
1 Alico Plaza
Wilmington, DE 19801
The Travelers Insurance Company* 13%
One Tower Square
Hartford, CT 06183
General American Life Insurance Company* 10%
700 Market Street
St. Louis, MO 63101
Mid Cap Value American General Life Insurance Company*/4/ 46%
Portfolio PO Box 1591
Houston, TX 77251
Hartford Life & Annuity Insurance Company*/2/ 33%
Separate Account Three
P.O. Box 2999
Hartford, CT 06104
The Travelers Insurance Company* 12%
One Tower Square
Hartford, CT 06183
U.S. Real Northbrook Life Insurance Company*/3/ 29%
Estate 3100 Sanders Road
Portfolio Northbrook, IL 60062
Ameritas Variable Life Insurance Company* 24%
Separate Account VA-2
P.O. Box 82550
Lincoln, NE 68501
Integrity Life Insurance Company* 14%
515 West Market Street
Louisville, KY 40202
CIGNA Corporate Insurance* 9%
PO Box 2975
Hartford, CT 06104
Annuity Investors Life Insurance Company* 9%
PO Box 5423
Cincinnati, OH 45201
Ameritas Variable Life Insurance Company* 5%
Separate Account V
P.O. Box 82550
Lincoln, NE 68501
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Percent of
Outstanding
Portfolio Name of Beneficial Owner Shares
--------- ------------------------ -----------
<S> <C> <C>
National Integrity Life Insurance Company* 5%
515 West Market Street
Louisville, KY 40202
Global Equity Fidelity Investments Life Insurance Company*/5/ 37%
Portfolio 82 Devonshire Street, R258
Boston, MA 02109
Ameritas Variable Life Insurance Company* 22%
Separate Account VA-2
P.O. Box 82550
Lincoln, NE 68501
American General Life Insurance Company* 19%
P.O. Box 1591
Houston, TX 77251
The Travelers Insurance Company* 8%
One Tower Square
Hartford, CT 06183
Ameritas Variable Life Insurance Company* 5%
P.O. Box 82550
Lincoln, NE 68501
International Fidelity Investments Life Insurance Company* 22%
Magnum 82 Devonshire Street, R258
Portfolio Boston, MA 02109
General American Life Insurance Company* 21%
700 Market Street
St. Louis, MO 63101
American General Life Insurance Company* 19%
P.O. Box 1591
Houston, TX 77251
Ameritas Variable Life Insurance Company* 13%
P.O. Box 82550
Lincoln, NE 68501
Northbrook Life Insurance Company* 12%
3100 Sanders Road
Northbrook, IL 60062
Emerging Fidelity Investments Life Insurance Company*/5/ 28%
Markets 82 Devonshire Street, R258
Equity Boston, MA 02109
Portfolio
New York Life Insurance and Annuity 27%
Corporation*/6/
300 Interpace Parkway
Parsippany, NJ 07054
Northbrook Life Insurance Company* 11%
3100 Sanders Road
Northbrook, IL 60062
Ameritas Variable Life Insurance Company* 7%
P.O. Box 82550
Lincoln, NE 68501
Empire Fidelity Investments Life Insurance Company* 6%
200 Liberty Street
One Financial Center
New York, NY 10281
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Percent of
Outstanding
Portfolio Name of Beneficial Owner Shares
--------- ------------------------ -----------
<S> <C> <C>
Penn Mutual Life Insurance Company* 5%
Variable Annuity Account 03
Independence Square
Philadelphia, PA 19172
Asian Equity Morgan Stanley Dean Witter & Co./7/ 37%
Portfolio 1585 Broadway
New York, NY 10036
Ameritas Variable Life Insurance Company* 22%
P.O. Box 82550
Lincoln, NE 68501
Integrity Life Insurance Company* 21%
515 West Market Street
Louisville, KY 40202
National Integrity Life Insurance Company* 10%
515 West Market Street
Louisville, KY 40202
American General Life Insurance Company* 6%
P.O. Box 1591
Houston, TX 77251
Emerging Nationwide Life Insurance Company*/8/ 29%
Markets Debt P.O. Box 182029
Portfolio Columbus, OH 43218
Nationwide Life Insurance Company* 18%
P.O. Box 182029
Columbus, OH 43218
Morgan Stanley Dean Witter & Co. 18%
1585 Broadway
New York, NY 10036
Integrity Life Insurance Company* 13%
515 West Market Street
Louisville, KY 40202
Fidelity Investments Life Insurance Company* 9%
82 Devonshire Street, R258
Boston, MA 02109
Money Market AIG Life Insurance Co.*/9/ 100%
Portfolio 1 Alico Plaza
Wilmington, DE 19801
</TABLE>
- -------
* Shares of the Portfolio are sold to insurance companies for their variable
annuity contracts and variable life insurance policies.
1 Allmerica Financial Life Insurance & Annuity Company's state of incorporation
is Massachusetts.
2 Hartford Life & Annuity Insurance Company's parent company is The Hartford
Financial Services Group and its state of incorporation is Connecticut.
3 Northbrook Life Insurance Company's parent company is Allstate Life Insurance
Company and its state of incorporation is Arizona.
4 American General Life Insurance Company's parent company is American General
Corporation and its state of incorporation is Texas.
5 Fidelity Investments Life Insurance Company's parent company is FMR
Corporation and its state of incorporation is Utah.
6 New York Life Insurance and Annuity Corporation's parent company is New York
Life Insurance company and its state of incorporation is Delaware.
7 Morgan Stanley Dean Witter & Co.'s state of incorporation is Delaware.
8 Nationwide Life Insurance Company's parent company is Nationwide Financial
Services, Inc. and its state of incorporation is Ohio.
9 AIG Life Insurance Company's parent company is American International Group
and its state of incorporation is Delaware.
As currently required under law, the insurance companies vote their shares of
the Portfolios in accordance with instructions received from their variable
annuity contract and variable life insurance policy owners. MSDW 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 MSDW nor
the insurance companies are deemed to be in control of the Portfolios.
26
<PAGE>
Portfolio Transactions
The policy of the Fund regarding purchase and sales of securities for the
Portfolio is that primary consideration will be given to obtaining the most
favorable prices and efficient executions of transactions. Consistent with this
policy, when securities transactions are effected on a stock exchange, the
Fund's policy is to pay commissions which are considered fair and reasonable
without necessarily determining that the lowest possible commissions are paid
in all circumstances. The Fund believes that a requirement always to seek the
lowest possible commission cost could impede effective portfolio management and
preclude the Fund and the Adviser from obtaining a high quality of brokerage
and research services. In seeking to determine the reasonableness of brokerage
commissions paid in any transaction, the Adviser relies upon its experience and
knowledge regarding commissions generally charged by various brokers and on its
judgment in evaluating the brokerage and research services received from the
broker effecting the transaction. Such determinations are necessarily
subjective and imprecise, as in most cases an exact dollar value for those
services is not ascertainable.
In seeking to implement the Fund's policies, the Adviser effects transactions
with those brokers and dealers who the Adviser believes provide the most
favorable prices and are capable of providing efficient executions. If the
Adviser believes such prices and executions are obtainable from more than one
broker or dealer, it may give consideration to placing portfolio transactions
with those brokers and dealers who also furnish research and other services to
the Fund or Adviser. The Adviser may pay broker-dealers (other than their
affiliates) higher commissions than another broker-dealer may have charged on
the Fund's brokerage transactions in recognition of research services. Such
services may include, but are not limited to, any one or more of the following:
reports on industries and companies, economic analyses and review of business
conditions, portfolio strategy, analytic computer software, account performance
services, computer terminal and various trading and/or quotation equipment.
They also include advice from broker-dealers as to the value of securities,
availability of securities, availability of buyers, and availability of
sellers. In addition, they include recommendations as to purchase and sale of
individual securities and timing of such transactions.
The information and services received by the Adviser from brokers and dealers
may be of benefit to them in the management of accounts of some of their other
clients and may not in all cases benefit the Fund directly. While the receipt
of such information and services is useful in varying decrees and would
generally reduce the amount of research or services otherwise performed by the
Adviser and thereby reduce its expenses, it is of indeterminable value and the
advisory fees paid to an Adviser is not reduced by any amount that may be
attributable to the value of such services.
In over-the-counter transactions, orders are placed directly with a principal
market-maker and such purchases normally include a mark-up over the bid to the
broker-dealer based on the spread between the bid and the asked price for the
security.
Portfolio securities will not be purchased from, or through, or sold to or
through, the Adviser or MSDW or any of its affiliates when such entities are
acting as principals, except to the extent permitted by law.
Brokerage Fees
The following table shows the brokerage commissions paid by the Portfolios to
Morgan Stanley and its affiliates for the fiscal years ended December 31, 1998.
<TABLE>
<CAPTION>
Brokerage Commissions Paid During
Fiscal Year Ended December 31, 1998
------------------------------------------------
Commissions Paid to Morgan Stanley
------------------------------------
Percent of
Total Percent of Total
Commissions Total Total Brokered
Portfolio* Paid Commissions Commissions Transactions
---------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Global Equity $ 90,498.00 $11,900.00 13.15% 13.95%
International Magnum 92,226.00 8,842.00 9.58 9.01
Emerging Markets Equity 221,754.00 8,780.00 3.96 3.19
Asian Equity 106,953.00 3,438.00 3.21 4.05
</TABLE>
- -------
* The Fixed Income, High Yield, Equity Growth, Value, Mid Cap Value, U.S. Real
Estate and Emerging Markets Debt Portfolios did not pay any commissions to
affiliated brokers for the fiscal year ended December 31, 1998. The Money
Market, Latin American, Active International Allocation, Technology,
Balanced, Core Equity, International Fixed Income, Mid Cap Growth, Multi-
Asset-Class and Targeted Duration Portfolios were not operational in the
fiscal year ended December 31, 1998, and consequently, no brokerage fees
were paid by these Portfolios.
27
<PAGE>
The following table shows the brokerage commissions paid by the Portfolios to
Morgan Stanley and its affiliates for the fiscal years ended December 31, 1997.
<TABLE>
<CAPTION>
Brokerage Commissions Paid During
Fiscal Year Ended December 31, 1997
---------------------------------------------------
Commissions Paid to Morgan Stanley
------------------------------------
Percent of
Total Percent of Total
Commissions Total Total Brokered
Portfolio* Paid Commissions Commissions Transactions
---------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Fixed Income $ 143.75/1/ $ 0 0% 0%
Equity Growth 24,660.00/1/ 24.00 0.10 0.15
Global Equity 27,665.00/1/ 2,406.00 8.70 7.25
International Magnum 48,111.00/1/ 221.00 0.46 0.29
Emerging Markets Equity 170,785.00 7,454.00 4.37 3.86
Asian Equity 164,416.00 1,698.00 1.03 1.87
</TABLE>
- -------
* The High Yield, Value and Mid Cap Value Portfolios did not pay any
commissions to affiliated brokers for the period from January 2, 1997 to
December 31, 1997. The U.S. Real Estate Portfolio did not pay any
commissions to affiliated brokers for the period from March 3, 1997 to
December 31, 1997. The Emerging Markets Debt Portfolio did not pay any
commissions to affiliated brokers for the period from June 16, 1997 to
December 31, 1997. The Money Market, Latin American, Active International
Allocation, Technology, Balanced, Core Equity, International Fixed Income,
Mid Cap Growth, Multi-Asset-Class and Targeted Duration Portfolios were not
operational in the fiscal year ended December 31, 1997, and consequently, no
brokerage fees were paid by these Portfolios.
/1/For the period from January 2, 1997 to December 31, 1997.
The following table shows the brokerage commissions paid by the Emerging
Markets Equity Portfolio to Morgan Stanley and its affiliates for the period
from October 1, 1996 (commencement of operations) through December 31, 1996.
<TABLE>
<CAPTION>
Brokerage Commissions Paid for the Period from October 1, 1996
(commencement of operations) Through December 31, 1996
----------------------------------------------------------------
Commissions Paid to Morgan Stanley
------------------------------------------------
Percent of
Total Percent of Total
Commissions Total Total Brokered
Portfolio* Paid Commissions Commissions Transactions
---------- ------------------------------- --------------- ----------------
<S> <C> <C> <C> <C>
Emerging Markets Equity $42,941.00 $26.00 0.06% 0%
</TABLE>
- -------
* The Emerging Markets Equity Portfolio was the only Portfolio operational in
the fiscal year ended December 31, 1996.
Directed Brokerage. During the fiscal year ended December 31, 1998, the
Portfolios paid brokerage commissions to brokers because of research services
provided as follows:
<TABLE>
<CAPTION>
Brokerage Commissions in Aggregate Dollar Amount of
Connection with Research Transactions for Which Such
Services Provided for Fiscal Commissions were Paid for
Year Ended December 31, Fiscal Year Ended December 31,
Portfolio 1998 1998
--------- ---------------------------- ------------------------------
<S> <C> <C>
Equity Growth Portfolio $ 76,835 $ 64,149,719
Asian Equity Portfolio $ 35,930 $ 8,264,690
Emerging Markets Equity
Portfolio $221,981 $ 65,707,126
U.S. Real Estate
Portfolio $ 64,188 $ 26,679,693
Emerging Markets Debt
Portfolio $ 0 $ 0
Global Equity Portfolio $ 87,342 $ 32,064,291
International Magnum
Portfolio $ 86,762 $ 37,886,905
Value Portfolio $ 23,125 $ 15,870,713
Fixed Income Portfolio $ 3,864 $290,417,368
Mid Cap Value Portfolio $ 78,285 $ 60,144,010
High Yield Portfolio $ 69 $ 31,408,319
</TABLE>
28
<PAGE>
Portfolio Turnover
The Portfolio generally does not invest for short-term trading purposes,
however, when circumstances warrant, the Portfolio may sell investment
securities without regard to the length of time they have been held. Market
conditions in a given year could result in a higher or lower portfolio turnover
rate than expected and the Portfolio will not consider portfolio turnover rate
a limiting factor in making investment decisions consistent with their
investment objectives and policies. Higher portfolio turnover (e.g., over 100%)
necessarily will cause the Portfolio to pay correspondingly increased brokerage
and trading costs.
Performance Information
Performance figures for the Portfolio may be quoted from time to time to
illustrate their past performance.
Performance quotations by investment companies are subject to rules adopted by
the SEC, which require the use of standardized performance quotations. In the
case of total return, non-standardized performance quotations may be quoted but
must be accompanied by certain standardized performance information computed as
required by the SEC. Current yield and average annual compounded total return
quotations are based on the standardized methods of computing performance
mandated by the SEC. An explanation of those and other methods used by the Fund
to compute or express performance follows.
Total Return
Total return on an investment in the Portfolio may be advertised from time to
time. Total return figures are based on historical earnings and are not
intended to indicate future performance. The average annual total return is
determined by finding the average annual compounded rates of return over 1-, 5-
, and 10-year periods (or over the life of the Portfolio) that would equate an
initial hypothetical $1,000 investment to its ending redeemable value. The
calculation assumes that all dividends and distributions are reinvested when
paid. The quotation assumes the amount was completely redeemed at the end of
each 1-, 5-, and 10-year period (or over the life of the Portfolio) and the
deduction of all applicable Fund expenses on an annual basis.
These total returns are calculated according to the following formula:
P(1 + T)n = ERV
where:
P=a hypothetical initial payment of $1,000
T=average annual total return
n=number of years
ERV= ending redeemable value of hypothetical $1,000 payment made at the
beginning of the 1-, 5-, or
10-year periods at the end of the 1-, 5-, or 10-year periods (or
fractional portion thereof).
General Performance Information
The Portfolio's performance will fluctuate, unlike bank deposits or other
investments which pay a fixed yield for a stated period of time. Past
performance is not necessarily indicative of future return. Actual performance
will depend on such variables as portfolio quality, average portfolio maturity,
the type of portfolio instruments acquired, changes in interest rates,
portfolio expenses and other factors. Performance is one basis investors may
use to analyze the Portfolio as compared to other funds and other investment
vehicles. However, performance of other funds and other investment vehicles may
not be comparable because of the foregoing variables, and differences in the
methods used in valuing their portfolio instruments, computing net asset value
and determining performance.
From time to time, the investment performance of the Portfolio may be compared
to other mutual funds tracked by financial or business publications and
periodicals. For example, Morningstar, Inc. may be quoted in advertising
materials. Morningstar, Inc. is a mutual fund rating service that rates mutual
funds on the basis of risk-adjusted performance. Rankings that compare the
performance of funds to one another in appropriate categories over specific
periods of time may also be quoted in advertising.
Portfolio advertising may include data on historical returns of the capital
markets in the United States compiled or published by Ibbotson Associates of
Chicago, Illinois ("Ibbotson"), including returns on common stocks, small
capitalization stocks, long-term corporate bonds, intermediate-term government
bonds, long-term government bonds, Treasury bills, the U.S. rate of inflation
(based on the Consumer Price Index), and combinations of various capital
markets. The performance of these capital markets is based on the returns of
different indices. Performance of these capital markets may be used in order to
demonstrate general risk-versus-reward investment scenarios. Performance
comparisons may also include the value of a hypothetical investment in any of
these capital markets. The risks associated with the security types in any
capital market may or may not correspond directly to those of the Portfolio.
The Portfolio may also compare its performance to that of other compilations or
indices that may be developed and made available in the future.
Advertisements may include charts, graphs or drawings which illustrate the
potential risks and rewards of investment in various investment vehicles,
including but not limited to, foreign securities, stocks, bonds, treasury bills
and shares of the Portfolio. In addition, advertisements may include a
discussion of certain attributes or benefits to be derived by an investment in
the Portfolio and/or other mutual funds, shareholder profiles and hypothetical
investor scenarios, timely information on financial management, tax and
retirement planning and various investment alternatives.
29
<PAGE>
Advertisements may include discussions or illustrations of the potential
investment goals of a prospective investor (including materials that describe
general principles of investing, such as asset allocation, diversification,
risk tolerance, goal setting questionnaires designed to help create a personal
financial profile, worksheets used to project savings needs based on assumed
rates of inflation and hypothetical rates of return and action plans offering
investment alternatives), investment management techniques, policies or
investment suitability of the Portfolio (such as value investing, market
timing, dollar cost averaging, asset allocation, constant ratio transfer,
automatic account rebalancing, the advantages and disadvantages of investing in
tax- deferred and taxable investments). In addition, advertisements and sales
materials relating to the Portfolio may include information regarding the
background and experience of its portfolio managers; the resources, expertise
and support made available to the portfolio managers by MSDW Investment
Management and MAS; and the portfolio managers' goals, strategies and
investment techniques.
Advertisements may discuss economic and political conditions of the United
States and foreign countries, the relationship between sectors of the U.S., a
foreign, or the global economy and the U.S., a foreign, or the global economy
as a whole and the effects of inflation. Discussions and illustrations of the
growth potential of various global markets including, but not limited to,
Africa, Asia, Europe, Latin America, North America, South America, Emerging
Markets and individual countries, may be included in advertisements. These
discussions may include the past performance of the various markets or market
sectors; forecasts of population, gross national product and market
performance; and the underlying data which supports such forecasts. From time
to time, advertisements, sales literature, communications to shareholders or
other materials may summarize the substance of information contained in the
Portfolio's shareholder reports (including the investment composition of the
Portfolio), as well as the views of MSDW Investment Management and MAS as to
current market, economic, trade and interest rate trends, legislative,
regulatory and monetary developments, investment strategies and related matters
believed to be of relevance to a Portfolio.
The Portfolio's advertisements may quote various measures of volatility and
benchmark correlation and the measures may be compared to those of other funds.
Measures of volatility seek to compare the historical share price fluctuations
or total returns to those of a benchmark. Measures of benchmark correlation
indicate how valid a comparative benchmark may be. Measures of volatility and
correlation may be calculated using averages of historical data. The Portfolio
may also advertise their current interest rate sensitivity, duration, weighted
average maturity or similar maturity characteristics.
The Portfolio may advertise examples of the effects of periodic investment
plans, including the principal of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a Portfolio at periodic intervals,
thereby purchasing fewer shares when prices are high and more shares when
prices are low. While such a strategy does not assure a profit or guard against
loss in a declining market, the investor's average cost per share can be lower
than if fixed numbers of shares are purchased at the same intervals. In
evaluating such a plan, investors should consider their ability to continue
purchasing shares during periods of low price levels.
General Information
Description of Shares and Voting Rights
The Fund's Articles of Incorporation permit the Directors to issue 11 billion
shares of common stock, par value $.001 per share, from an unlimited number of
classes ("Portfolios") of shares. Currently the Fund consists of shares of 21
Portfolios.
The shares of each Portfolio of the Fund are fully paid and nonassessable, and
have no preference as to conversion, exchange, dividends, retirement or other
features. The shares of each Portfolio of the Fund have no pre-emptive rights.
The shares of the Fund have non-cumulative voting rights, which means that the
holders of more than 50% of the shares voting for the election of Directors can
elect 100% of the Directors if they choose to do so. A shareholder is entitled
to one vote for each full share held (and a fractional vote for each fractional
share held), then standing in his name on the books of the Fund.
Dividends and Capital Gains Distributions
The Fund's policy is to distribute substantially all of each Portfolio's net
investment income, if any. The Fund may also distribute any net realized
capital gains in the amount and at the times that will avoid both income
(including taxable gains) taxes on it and the imposition of the federal excise
tax on income and capital gains (see discussion under "Taxes" in this Statement
of Additional Information). However, the Fund may also choose to retain net
realized capital gains and pay taxes on such gains. The amounts of any income
dividends or capital gains distributions cannot be predicted. Any dividend or
distribution paid shortly after the purchase of shares of the Portfolio by an
investor may have the effect of reducing the per share net asset value of that
Portfolio by the per share amount of the dividend or distribution.
As set forth in the Prospectus, unless the shareholder elects otherwise in
writing, all dividends and capital gains distributions for a class of shares
are automatically received in additional shares of such class of that Portfolio
of the Fund at the net asset value as of the business day following the record
date. This automatic reinvestment of dividends and distributions will remain in
effect until the Fund is notified by the shareholder in writing at least three
days prior to the record date that either the Income Option (income dividends
30
<PAGE>
in cash and capital gains distributions in additional shares at net asset
value) or the Cash Option (both income dividends and capital gains
distributions in cash) has been elected.
Custody Arrangements
Chase serves as the Custodian of the assets of the Portfolios. Chase is not an
affiliate of either of the Advisers or the Distributor. In maintaining custody
of foreign assets held outside the United States, Chase 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.
Prior to October 1, 1998, Morgan Stanley Trust Company acted as the Fund's
custodian for foreign assets held outside the United States. MSTC, an affiliate
of MSDW, received custody fees of $369,055 for the period from January 1, 1998
through September 30, 1998.
In the selection of foreign sub-custodians, the Directors or their delegates
consider a number of factors, including, but not limited to, the reliability
and financial stability of the institution, the ability of the institution to
provide efficiently the custodial services required for the Fund, and the
reputation of the institution in the particular country or region.
Legal Matters
Morgan, Lewis & Bockius LLP serves as legal counsel to the Fund.
Description of Ratings
Description of Commercial Paper Ratings
Description of Moody's Ratings of State and Municipal Notes: Moody's ratings
for state and municipal notes and other short-term obligations are designated
Moody's Investment Grade ("MIG"). Symbols used are as follows: MIG-l--best
quality, enjoying strong protection from established cash flows of funds for
their servicing or from established broad-based access to the market for
refinancing, or both; MIG-2--high quality with margins of protection ample
although not so large as in the preceding group; MIG-3--favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades.
Description of Moody's Highest Commercial Paper Rating: Prime-1 ("P1")--Judged
to be of the best quality. Their short-term debt obligations carry the smallest
degree of investment risk.
Excerpt From S&P's Rating of Municipal Note Issues: SP-1+ --very strong
capacity to pay principal and interest; SP-2--strong capacity to pay principal
and interest.
Description of S&P's Highest Commercial Paper Ratings: A-1+ --this designation
indicates the degree of safety regarding timely payment is overwhelming. A-1--
this designation indicates the degree of safety regarding timely payment is
very strong.
Description of Moody's Corporate Bond Ratings:
AAA--Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt-
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA--Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as for Aaa securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A--Bonds rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA--Bonds rated Baa are considered as medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
BA--Bonds rated Ba are judged to have speculative elements. Their future cannot
be considered as well assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
B--Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
CAA--Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA--Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short-comings.
31
<PAGE>
C--Bonds rated C are the lowest-rated class of bonds and issued so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Moody's applies numerical modifiers 1, 2 and 3, in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Description of S&P's Corporate Bond Ratings:
AAA--Debt rated AAA has the highest rating assigned by S&P's to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher-rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB--Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions that could lead to
inadequate capacity to meet timely interest and principal payments.
B--Debt rated B has greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB- rating.
CCC--Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal.
CC--Debt rated CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating.
C--The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed but debt service
payments are continued.
CI--The rating CI is reserved for income bonds on which no interest is being
paid.
D--Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating will also be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
32
<PAGE>
PART C. OTHER INFORMATION
Item 23. Exhibits
(a) (1) Articles of Incorporation are incorporated by reference to
Exhibit 1(a) to Registrant's Registration Statement on Form
N-1A (File Nos. 333-3013 and 811-7607), as filed with the
Securities and Exchange Commission via EDGAR (Accession
#0000950109-96-002517) on May 1, 1996.
(2) Articles of Amendment to Articles of Incorporation (changing
"Growth Portfolio" to "Equity Growth Portfolio") are
incorporated by reference to Exhibit 1(b) to Post-Effective
Amendment No. 2 to the Registrant's Registration Statement
on Form N-1A (File Nos. 333-3013 and 811-7607), as filed
with the Securities and Exchange Commission via EDGAR
(Accession #0000950109-97-004685) on June 24, 1997.
(3) Articles Supplementary to Articles of Incorporation (adding
Latin American Portfolio and increasing number of authorized
shares) are incorporated by reference to Exhibit 1(c) to
Post-Effective Amendment No. 6 to the Registrant's
Registration Statement on Form N-1A (File Nos. 333-0313 and
811-7607), as filed with the Securities and Exchange
Commission via EDGAR (Accession #0001036050-98-00610) on
April 15, 1998.
(4) Articles of Amendment to Articles of Incorporation (changing
name of the Fund and one of the investment advisers) are
incorporated by reference to Exhibit a(4) to Post-Effective
Amendment No. 7 to the Registrant's Registration Statement
on Form N-1A (File Nos. 333-0313 and 811-7607), as filed
with the Securities and Exchange Commission via EDGAR
(Accession No. 0001036050-99-000128) on January 29, 1999.
(5) Articles Supplementary to Articles of Incorporation (adding
Active International Allocation Portfolio) are incorporated
by reference to Exhibit (a)(5) to Post-Effective Amendment
No. 10 to the Registrant's Registration Statement on Form
N-1A (File Nos. 333-3013 and 811-7607), as filed with the
Securities and Exchange Commission via EDGAR (Accession
No. 0001036050-99-001484) on July 16, 1999.
(6) Form of Articles Supplementary to Articles of Incorporation
(adding Technology Portfolio) are incorporated by reference
to Exhibit (a)(6) to Post-Effective Amendment No. 10 to the
Registrant's Registration Statement on Form N-1A (File Nos.
333-3013 and 811-7607), as filed with the Securities and
Exchange Commission via EDGAR (Accession No.
0001036050-99-001484) on July 16, 1999.
(7) Form of Articles Supplementary to Articles of Incorporation
(adding Targeted Duration Portfolio) is filed herewith.
(b) By-laws are incorporated by reference to Exhibit 2 to
Registrant's Registration Statement on Form N-1A (File Nos.
333-3013 and 811-7607), as filed with the Securities and Exchange
Commission via EDGAR (Accession #0000950109-96-002517) on May 1,
1996.
(c) Not applicable.
(d) (1) Investment Advisory Agreement between Registrant and Morgan
Stanley Asset Management Inc. ("MSAM") with respect to the
Money Market, Emerging Markets Debt, Equity Growth, U.S.
Real Estate, Global Equity, International Magnum, Emerging
Markets Equity and Asian Equity Portfolios is incorporated
by reference to Exhibit 5(a) to Post-Effective Amendment No.
5 to the Registrant's Registration Statement on Form N-1A
(File Nos. 333-3013 and 811-7607), as filed with the
Securities and Exchange Commission via EDGAR (Accession
#0001036050-98-000074) on January 28, 1998.
(2) Investment Advisory Agreement between Registrant and Miller
Anderson & Sherrerd, LLP ("MAS") with respect to the Fixed
Income, High Yield, International Fixed Income, Balanced,
Multi-Asset-Class, Value, Core Equity, Mid Cap Growth and
Mid Cap Value Portfolios is incorporated by reference to
Exhibit d(2) to Post-Effective Amendment No. 7 to the
Registrant's Registration Statement on Form N-1A (File Nos.
333-0313 and 811-7607), as filed with the Securities and
Exchange Commission via EDGAR (Accession No.
0001036050-99-000128) on January 29, 1999.
(3) Supplement to Investment Advisory Agreement (adding Latin
American Portfolio) is incorporated by reference to Exhibit
5(c) to Post-Effective Amendment No. 6 to the Registrant's
Registration Statement on Form N-1A (File Nos. 333-3013 and
811-7607), as filed with the
C-1
<PAGE>
Securities and Exchange Commission via EDGAR (Accession
#0001036050-98-000610) on April 15, 1998.
(4) Supplement to Investment Advisory Agreement (adding Active
International Allocation Portfolio) is incorporated by
reference to Exhibit (d)(4) to Post-Effective Amendment No.
10 to the Registrant's Registration Statement on Form N-1A
(File Nos. 333-3013 and 811-7607), as filed with the
Securities and Exchange Commission via EDGAR (Accession No.
0001036050-99-001484) on July 16, 1999.
(5) Form of Supplement to Investment Advisory Agreement (adding
Technology Portfolio) is incorporated by reference to
Exhibit (d)(5) to Post-Effective Amendment No. 10 to the
Registrant's Registration Statement on Form N-1A (File Nos.
333-3013 and 811-7607), as filed with the Securities and
Exchange Commission via EDGAR (Accession No. 0001036050-99-
001484) on July 16, 1999.
(6) Form of Supplement to Investment Advisory Agreement (adding
Targeted Duration Portfolio) is filed herewith.
(e) Distribution Agreement between Registrant and Morgan Stanley &
Co. Incorporated is incorporated by reference to Exhibit 6 to
Post-Effective Amendment No. 6 to the Registrant's Registration
Statement on Form N-1A (File Nos. 333-3013 and 811-7607), as
filed with the Securities and Exchange Commission via EDGAR
(Accession #0001036050-98-000610) on April 15, 1998.
(f) Not applicable.
(g) (1) Domestic Mutual Fund Custody Agreement between Registrant
and Chase Manhattan Bank, N.A. is incorporated by reference
to Exhibit (g)(1) to Post-Effective Amendment No. 8 to the
Registrant's Registration Statement on Form N-1A (File Nos.
333-3013 and 811-7607), as filed with the Securities and
Exchange Commission via EDGAR (Accession #
0001036050-99-000715) on April 1, 1999.
(2) Form of International Custody Agreement between the
Registrant and Morgan Stanley Trust Company (as assumed by
The Chase Manhattan Bank) is incorporated by reference to
Exhibit 8(b) to Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form N-1A (File Nos.
333-3013 and 811-7607), as filed with the Securities and
Exchange Commission via EDGAR (Accession
#0000950109-96-005973) on September 16, 1996.
(h) (1) Administration Agreement between Registrant and Morgan
Stanley Asset Management Inc. is incorporated by reference
to Exhibit h(1) to Post-Effective Amendment No. 8 to the
Registrant's Registration Statement on Form N-1A (File Nos.
333-3013 and 811-7607), as filed with the Securities and
Exchange Commission via EDGAR (Accession #
0001036050-99-000715) on April 1, 1999.
(2) Administration Agreement between Registrant and Miller
Anderson & Sherrerd, LLP is incorporated by reference to
Exhibit h(2) to Post-Effective Amendment No. 8 to the
Registrant's Registration Statement on Form N-1A (File Nos.
333-3013 and 811-7607), as filed with the Securities and
Exchange Commission via EDGAR (Accession #
0001036050-99-000715) on April 1, 1999.
(3) Sub-Administration Agreement between Morgan Stanley Asset
Management Inc. and Chase Global Funds Services Company is
incorporated by reference to Exhibit h(3) to Post-Effective
Amendment No. 7 to the Registrant's Registration Statement
on Form N-1A (File Nos. 333-0313 and 811-7607), as filed
with the Securities and Exchange Commission via EDGAR
(Accession No. 0001036050-99-000128) on January 29, 1999.
(4) Sub-Administration Agreement between Miller Anderson &
Sherrerd LLP and Chase Global Funds Services Company is
incorporated by reference to Exhibit (h)(4) to
Post-Effective Amendment No. 8 to the Registrant's
Registration Statement on Form N-1A (File Nos. 333-3013 and
811-7607), as filed with the Securities and Exchange
Commission via EDGAR (Accession # 0001036050-99-000715) on
April 1, 1999.
(i) Opinion of Counsel is incorporated by reference to Exhibit (i) to
Post-Effective Amendment No. 9 to the Registrant's Registration
Statement on Form N-1A(file Nos. 333-3013 and 811-7607), as filed
with the Securities and Exchange Commission via EDGAR (Accession
#0001036050-99-001249) on June 8, 1999.
C-2
<PAGE>
(j) Consent of PricewaterhouseCoopers LLP (formerly, Price
Waterhouse, LLP), Independent Accountants is incorporated by
reference to Exhibit (j) to Post-Effective Amendment No. 8 to the
Registrant's Registration Statement on Form N-1A (File Nos.
333-3013 and 811-7607), as filed with the Securities and Exchange
Commission via EDGAR (Accession # 0001036050-99-000715) on April
1, 1999.
(k) Not applicable.
(l) Not applicable.
(m) Not applicable.
(n) Not applicable.
(o) Not applicable.
(p) Powers of Attorney are filed herewith.
- ----------------------------
C-3
<PAGE>
Item 24. Persons Controlled by or Under Common Control with Registrant
Provide a list or diagram of all persons directly or indirectly
controlled by or under common control with the Registrant. For any person
controlled by another person, disclose the percentage of voting securities owned
by the immediately controlling person or other basis of that person's control.
For each company, also provide the state or other sovereign power under the laws
of which the company is organized.
As of July 31, 1999 Morgan Stanley Dean Witter & Co. ("MSDW"), a
Delaware corporation located at 1585 Broadway, New York, New York 10036, owned
of record 37% of the outstanding voting securities of the Asian Equity
Portfolio. MSDW will vote shares of the Portfolios that it owns in the same
proportion as shares of the Portfolios are voted by insurance companies.
Insurance companies vote shares of the Portfolios held in their separate
accounts in accordance with voting instructions of their variable annuity
contract and variable life insurance policy owners. Accordingly, MSDW is not
viewed as in control of the Portfolios and therefore MSDW's affiliates are not
viewed as under common control with the Portfolios.
Item 25. Indemnification
State the general effect of any contract, arrangements or statute under
which any director, officer, underwriter or affiliated person of the Registrant
is insured or indemnified against any liability incurred in their official
capacity, other than insurance provided by any director, officer, affiliated
person, or underwriter for their own protection.
Reference is made to Article SEVEN of the Registrant's Articles of
Incorporation. Insofar as indemnification for liability arising under the
Securities Act of 1933, as amended (the "1933 Act"), may be permitted to
directors, officers and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission (the "Commission") such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
Item 26. Business and Other Connections of Investment Advisers
Describe any other business, profession, vocation or employment of a
substantial nature in which the investment adviser and each director, officer or
partner of the investment adviser, is or has been, engaged within the last two
fiscal years for his or her own account or in the capacity of director, officer,
employee, partner or trustee. (Disclose the name and principal business address
of any company for which a person listed above serves in the capacity of
director, officer, employee, partner or trustee, and the nature of the
relationship.)
Reference is made to the caption "Management of the Fund--Investment
Advisers" in the Prospectuses constituting Part A which is incorporated by
reference to this Registration Statement and "Management of the Fund" in Part B
which is incorporated by reference to this Registration Statement.
C-4
<PAGE>
Listed below are the officers and Directors of Morgan Stanley Dean Witter
Investment Management Inc.:
<TABLE>
<CAPTION>
Name and Position with MSDW
Investment Management Inc. Name of other Company Position with Other Company
-------------------------- --------------------- ---------------------------
<S> <C> <C>
Barton M. Biggs Morgan Stanley & Co. Incorporated Managing Director
Chairman, Director and Managing
Director
Dennis G. Sherva Morgan Stanley & Co. Incorporated Managing Director
Director and Managing Director
Harold J. Schaaff, Jr. Morgan Stanley & Co. Incorporated Principal
General Counsel, Secretary and
Principal
Donald P. Ryan Morgan Stanley & Co. Incorporated Principal
Compliance Officer and Principal
Alexander C. Frank Morgan Stanley & Co. Managing Director
Treasurer Incorporated
Marna C. Whittington Miller Anderson & Sherrerd, LLP Executive Committee Member
Chief Operating Officer, Managing
Director and Member of Executive
Committee
Richard B. Worley Miller Anderson & Sherrerd, LLP Portfolio Manager and Executive
President, Director and Member of Committee Member
Executive Committee
MAS Fund Distribution, Inc. Registered Representative
Morgan Stanley & Co. Incorporated Managing Director
Peter D. Caldecott Morgan Stanley Dean Witter Managing Director
Managing Director and Member of Investment Management Limited
Executive Committee
Thomas L. Bennett Morgan Stanley & Co. Incorporated Managing Director
Member of Executive Committee and
Portfolio
Manager
MAS Fund Distribution, Inc. Director
Miller Anderson & Sherrerd, LLP Portfolio Manager
Frank P. L. Minard Morgan Stanley & Co. Incorporated Managing Director
Managing Director and Member of
Executive Committee
Alan E. Goldberg Morgan Stanley & Co. Incorporated Managing Director
Member of Executive Committee
</TABLE>
In addition, MSDW Investment Management acts as investment adviser or
sub-adviser to the following registered investment companies: American Advantage
International Equity Fund; Fountain Square International Equity Fund; The Latin
American Discovery Fund, Inc.; The Malaysia Fund, Inc.; Morgan Stanley Dean
Witter Africa Investment Fund, Inc.; Morgan Stanley Dean Witter Asia-Pacific
Fund, Inc.; Morgan Stanley Dean Witter Emerging Markets Debt Fund, Inc.;
C-5
<PAGE>
Morgan Stanley Dean Witter Emerging Markets Fund, Inc.; Morgan Stanley Dean
Witter Global Opportunity Bond Fund, Inc.; The Morgan Stanley Dean Witter High
Yield Fund, Inc.; Morgan Stanley Dean Witter Eastern Europe Fund, Inc.(formerly,
Morgan Stanley Russia and New Europe Fund Inc.); Morgan Stanley Dean Witter
India Investment Fund, Inc.; certain portfolios of Morgan Stanley Dean Witter
Universal Funds, Inc.; Morgan Stanley Dean Witter Strategic Adviser Fund, Inc.;
The Pakistan Investment Fund, Inc.; The Thai Fund, Inc.; The Turkish Investment
Fund, Inc.; Aggressive Growth and Asset Allocation Fund, Inc.; Accounts of
Principal Variable Contracts Fund, Inc.; certain portfolios of the SunAmerica
Series Trust; Fortis Series Fund, Inc. - Global Asset Allocation Series; Morgan
Stanley Dean Witter International Fund; Morgan Stanley Dean Witter International
SmallCap Fund; Morgan Stanley Dean Witter Pacific Growth Fund, Inc.; Morgan
Stanley Dean Witter Real Estate Fund; Morgan Stanley Dean Witter Variable
Investment Series - Pacific Growth Portfolio; Morgan Stanley Dean Witter Japan
Fund, Inc.; Morgan Stanley Dean Witter European Growth Fund Inc.; Morgan Stanley
Dean Witter Variable Investment Series - European Growth Portfolio; Morgan
Stanley Dean Witter Growth Fund; Morgan Stanley Dean Witter Select Dimensions
Investment Series -- The Growth Portfolio; Morgan Stanley Dean Witter Worldwide
High Income Fund; Endeavor Series Trust Endeavor Money Market Portfolio;
Endeavor Series Trust - Endeavor Asset Allocation Portfolio; EQ Advisors Trust -
Morgan Stanley Dean Witter Emerging Markets Equity Portfolio; Frank Russell
Investment Company - Diversified Equity Fund; Frank Russell Investment Company -
Equity I Fund; NASL Series Trust - Global Equity Trust; New England Zenith Fund
- - Morgan Stanley Dean Witter International Magnum Equity Series; North American
Funds - Global Equity Fund; Pacific Select Fund The International Portfolio;
Pacific Select Fund - Real Estate Investment Trust ("REIT") Portfolio; SEI
Institutional Investments Trust - Emerging Markets Equity Fund; SEI
Institutional International Trust - Emerging Markets Equity Portfolio; Style
Select Series Inc. - Large Cap Blend Portfolio; TCW/DW Emerging Markets
Opportunities Trust; Van Kampen World Portfolio Series Trust - Global Government
Securities Fund; Van Kampen Life Investment Trust - Global Equity Fund; Van
Kampen Life Investment Trust - Real Estate Securities Fund; Van Kampen Global
Managed Assets Fund; Van Kampen Real Estate Securities Fund; certain portfolios
of the Van Kampen Series Fund, Inc.
MAS is a Pennsylvania limited liability partnership founded in 1969. MAS
provides investment services to employee benefit plans, endowment funds,
foundations and other institutional investors as well as serving as investment
adviser to MAS Funds, a registered investment company.
<TABLE>
<CAPTION>
Name and Position with MSDW Name of Other Company Position with Other Company
Investment Management Inc. --------------------- ---------------------------
- --------------------------
<S> <C> <C>
Richard Brown Worley Morgan Stanley & Co. Incorporated Managing Director
Portfolio Manager Morgan Stanley Dean Witter Investment Portfolio Manager
Executive Committee Member Management Inc.
MAS Fund Distribution, Inc. Registered Representative
Thomas Leonard Bennett Morgan Stanley Dean Witter Universal Director
Portfolio Manager Funds, Inc. Managing Director
Executive Committee Member Morgan Stanley & Co. Incorporated Portfolio Manager
Morgan Stanley Dean Witter Investment
Management Inc. Chairman
MAS Funds Director
MAS Fund Distribution, Inc.
Gilbert Schlarbaum Morgan Stanley & Co. Incorporated Managing Director
Portfolio Manager Morgan Stanley Dean Witter Investment Portfolio Manager
Executive Committee Member Management Inc.
MAS Fund Distribution, Inc. Director
Robert J. Marcin Morgan Stanley Dean Witter Investment Portfolio Manager
Portfolio Manager Management Inc. Managing Director
Executive Committee Member Morgan Stanley & Co. Incorporated Registered Representative
MAS Fund Distribution, Inc.
Marna C. Whittington Morgan Stanley & Co. Incorporated Managing Director
Executive Committee Member MAS Fund Distribution, Inc. CEO
Rohm Haas Director
</TABLE>
C-6
<PAGE>
Item 27. Principal Underwriters
(a) State the name of each investment company (other than the Registrant)
for which each principal underwriter currently distributing securities of the
Registrant also acts as a principal underwriter, depositor or investment
adviser.
Morgan Stanley & Co. Incorporated ("MS&Co.") is distributor for Morgan
Stanley Dean Witter Universal Funds, Inc., Morgan Stanley Dean Witter
Institutional Fund, Inc. and Morgan Stanley Dean Witter Strategic Adviser Fund,
Inc.
(b) Provide the information with respect to each director, officer or
partner of each principal underwriter named in answer to Item 20.
<TABLE>
<CAPTION>
Name and Principal Business Position and Offices with Principal Position and Offices with
Address* Underwriter Registrant
- --------------------------- ----------------------------------- -------------------------
<S> <C> <C>
Barton M. Biggs Chairman and Director Chairman and Director
Bruce D. Fiedorek Director and Vice Chairman
Richard B. Fisher Director and Chairman of the Board
Takeo Kani Director
Peter F. Karches Director and President and Chief
Operating Officer
John J. Mack Director
Robert A. Metzler Director
Stephan F. Newhouse Director and Vice Chairman
Ralph L. Pellechio Director and General Counsel and
Secretary
Joseph R. Perella Director
Robert G. Scott Director and Chief Financial Officer
John S. Wadsworth, Jr. Director
Sir David Alan Walker Director
J. Steven W. Ward Director
</TABLE>
*Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
C-7
<PAGE>
Item 28. Location of Accounts and Records
State the name and address of each person maintaining principal
possession of each account, book or other document required to be maintained by
section 31(a) of the 1940 Act [15 U.S.C. 80a-30(a)] and the rules under that
section.
The books, accounts and other documents required by Section 31(a) under
the Investment Company Act of 1940, as amended, and the rules promulgated
thereunder are maintained in the physical possession of the Registrant;
Registrant's Transfer Agent, Chase Global Funds Services Company, P.O. Box 2798,
Boston, Massachusetts 02208-2798; and the Registrant's custodian banks,
including sub-custodians.
Item 29. Management Services
Provide a summary of the substantive provisions of any management-
related service contract not discussed in Part A or Part B, disclosing the
parties to the contract and the total amount paid and by whom, for the Fund's
last three fiscal years.
Each of MSDW Investment Management and MAS have entered into Sub-
Administration Agreements with Chase Global Funds Services Companies ("Chase")
(filed as Exhibit Nos. 9(c) and 9(d) to Pre-Effective Amendment No.1 to the
Registration Statement) pursuant to which Chase will provide fund
administration, fund accounting and transfer agency services to specified
Portfolios of the Registrant.
Item 30. Undertakings
In initial registration statements filed under the Securities Act,
provide an undertaking to file an amendment to the registration statement with
certified financial statements showing the initial capital received before
accepting subscriptions from more than 25 persons if the Fund intends to raise
its initial capital under section 14(a)(3)[15U.S.C. 80a-14(a)(3)].
(a) Not Applicable.
(b) Registrant hereby undertakes that whenever a Shareholder or
Shareholders who meet the requirements of Section 16(c) of the 1940 Act inform
the Board of Directors of his or their desire to communicate with other
Shareholders of the Fund, the Directors will inform such Shareholder(s) as to
the approximate number of Shareholders of record and the approximate costs of
mailing or afford said Shareholders access to a list of Shareholders.
(c) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's annual report to
shareholders, upon request and without charge.
C-8
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933, as amended (the
"1933 Act"), and the Investment Company Act of 1940, as amended, the Registrant
has duly caused this Amendment to its Registration Statement to be signed on its
behalf by the undersigned, duly authorized, in the City of New York and State of
New York, on August 16, 1999.
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
By: /s/Michael F. Klein
-----------------------
Michael F. Klein
President and Director
Pursuant to the requirements of the 1933 Act, this Amendment to the
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title(s) Date
- --------- -------- ----
<S> <C> <C>
/s/ Michael F. Klein Director, President August 16, 1999
- ------------------------------------ (Chief Executive
Michael F. Klein Officer)
*/s/ Barton M. Biggs Director (Chairman) August 16, 1999
- ------------------------------------
Barton M. Biggs
*/s/ Fergus Reid Director August 16, 1999
- ------------------------------------
Fergus Reid
*/s/ Frederick O. Robertshaw Director August 16, 1999
- ------------------------------------
Frederick O. Robertshaw
*/s/ Andrew McNally, IV Director August 16, 1999
- ---------------------------
Andrew McNally, IV
*/s/ John D. Barrett, II Director August 16, 1999
- ------------------------------------
John D. Barrett, II
*/s/ Gerard E. Jones Director August 16, 1999
- ------------------------------------
Gerard E. Jones
*/s/ Samuel T. Reeves Director August 16, 1999
- ------------------------------------
Samuel T. Reeves
/s/ Belinda Anne Brady Treasurer August 16, 1999
- ------------------------------------
Belinda Anne Brady
</TABLE>
*By: /s/Michael F. Klein
----------------------------
Michael F. Klein
Attorney-In-Fact
C-9
<PAGE>
EXHIBIT INDEX
EDGAR
Exhibit
Number
- -------
Description
-----------
(a)(1) Articles of Incorporation are incorporated by reference to
Exhibit 1(a) to Registrant's Registration Statement on Form
N-1A (File Nos. 333-3013 and 811-7607), as filed with the
Securities and Exchange Commission via EDGAR (Accession
#0000950109-96-002517) on May 1, 1996.
(2) Articles of Amendment to Articles of Incorporation (changing
"Growth Portfolio" to "Equity Growth Portfolio") are
incorporated by reference to Exhibit 1(b) to Post-Effective
Amendment No. 2 to the Registrant's Registration Statement
on Form N-1A (File Nos. 333-3013 and 811-7607), as filed
with the Securities and Exchange Commission via EDGAR
(Accession #0000950109-97-004685) on June 24, 1997.
(3) Articles Supplementary to Articles of Incorporation (adding
Latin American Portfolio and increasing number of authorized
shares) are incorporated by reference to Exhibit 1(c) to
Post-Effective Amendment No. 6 to the Registrant's
Registration Statement on Form N-1A (File Nos. 333-0313 and
811-7607), as filed with the Securities and Exchange
Commission via EDGAR (Accession #0001036050-98-00610) on
April 15, 1998.
(4) Articles of Amendment to Articles of Incorporation (changing
name of the Fund and one of the investment advisers) are
incorporated by reference to Exhibit a(4) to Post-Effective
Amendment No. 7 to the Registrant's Registration Statement
on Form N-1A (File Nos. 333-0313 and 811-7607), as filed
with the Securities and Exchange Commission via EDGAR
(Accession No. 0001036050-99-000128) on January 29, 1999.
(5) Articles Supplementary to Articles of Incorporation (adding
Active International Allocation Portfolio) are incorporated
by reference to Exhibit (a)(5) to Post-Effective Amendment
No. 10 to the Registrant's Registration Statement on Form
N-1A (File Nos. 333-3013 and 811-7607), as filed with the
Securities and Exchange Commission via EDGAR (Accession No.
0001036050-99-001484) on July 16, 1999.
(6) Form of Articles Supplementary to Articles of Incorporation
(adding Technology Portfolio) are incorporated by reference
to Exhibit (a)(6) to Post-Effective Amendment No. 10 to the
Registrant's Registration Statement on Form N-1A (File Nos.
333-3013 and 811-7607), as filed with the Securities and
Exchange Commission via EDGAR (Accession No.
0001036050-99-001484) on July 16, 1999.
EX-99 (7) Form of Articles Supplementary to Articles of Incorporation
(adding Targeted Duration Portfolio) are filed herewith.
(b) By-laws are incorporated by reference to Exhibit 2 to Registrant's
Registration Statement on Form N-1A (File Nos. 333-3013 and 811-7607),
as filed with the Securities and Exchange Commission via EDGAR
(Accession #0000950109-96-002517) on May 1, 1996.
(c) Not applicable.
(d)(1) Investment Advisory Agreement between Registrant and Morgan
Stanley Asset Management Inc. ("MSAM") with respect to the
Money Market, Emerging Markets Debt, Equity Growth, U.S.
Real Estate, Global Equity, International Magnum, Emerging
Markets Equity and Asian Equity Portfolios is incorporated
by reference to Exhibit 5(a) to Post-Effective Amendment No.
5 to the Registrant's Registration Statement on Form N-1A
(File Nos. 333-3013 and 811-7607), as filed with the
Securities and Exchange Commission via EDGAR (Accession
#0001036050-98-000074) on January 28, 1998.
(2) Investment Advisory Agreement between Registrant and Miller
Anderson & Sherrerd, LLP ("MAS") with respect to the Fixed
Income, High Yield, International Fixed Income, Balanced,
Multi-Asset-Class, Value, Core Equity, Mid Cap Growth and
Mid Cap Value Portfolios is incorporated by reference to
C-10
<PAGE>
Exhibit d(2) to Post-Effective Amendment No. 7 to the
Registrant's Registration Statement on Form N-1A (File Nos.
333-0313 and 811-7607), as filed with the Securities and
Exchange Commission via EDGAR (Accession No.
0001036050-99-000128) on January 29, 1999.
(3) Supplement to Investment Advisory Agreement (adding Latin
American Portfolio) is incorporated by reference to Exhibit
5(c) to Post-Effective Amendment No. 6 to the Registrant's
Registration Statement on Form N-1A (File Nos. 333-3013 and
811-7607), as filed with the Securities and Exchange
Commission via EDGAR (Accession #0001036050-98-000610) on
April 15, 1998.
(4) Supplement to Investment Advisory Agreement (adding Active
International Allocation Portfolio) is incorporated by
reference to Exhibit (d)(4) to Post-Effective Amendment No.
10 to the Registrant's Registration Statement on Form N-1A
(File Nos. 333-3013 and 811-7607), as filed with the
Securities and Exchange Commission via EDGAR (Accession No.
0001036050-99-001484) on July 16, 1999.
(5) Form of Supplement to Investment Advisory Agreement (adding
Technology Portfolio) is incorporated by reference to
Exhibit (d)(5) to Post-Effective Amendment No. 10 to the
Registrant's Registration Statement on Form N-1A (File Nos.
333-3013 and 811-7607), as filed with the Securities and
Exchange Commission via EDGAR (Accession No. 0001036050-99-
001484) on July 16, 1999.
EX-99 (6) Form of Supplement to Investment Advisory Agreement (adding
Targeted Duration Portfolio) is filed herewith.
(e) Distribution Agreement between Registrant and Morgan Stanley & Co.
Incorporated is incorporated by reference to Exhibit 6 to Post-
Effective Amendment No. 6 to the Registrant's Registration Statement
on Form N-1A (File Nos. 333-3013 and 811-7607), as filed with the
Securities and Exchange Commission via EDGAR (Accession #0001036050-
98-000610) on April 15, 1998.
(f) Not applicable.
(g)(1) Domestic Mutual Fund Custody Agreement between Registrant and
Chase Manhattan Bank, N.A. is incorporated by reference to
Exhibit (g)(1) to Post-Effective Amendment No. 8 to the
Registrant's Registration Statement on Form N-1A (File Nos.
333-3013 and 811-7607), as filed with the Securities and
Exchange Commission via EDGAR (Accession # 0001036050-99-
000715) on April 1, 1999.
(2) Form of International Custody Agreement between the
Registrant and Morgan Stanley Trust Company (as assumed by
The Chase Manhattan Bank) is incorporated by reference to
Exhibit 8(b) to Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form N-1A (File Nos.
333-3013 and 811-7607), as filed with the Securities and
Exchange Commission via EDGAR (Accession #0000950109-96-
005973) on September 16, 1996.
(h)(1) Administration Agreement between Registrant and Morgan
Stanley Asset Management Inc. is incorporated by reference to
Exhibit h(1) to Post-Effective Amendment No. 8 to the
Registrant's Registration Statement on Form N-1A (File Nos.
333-3013 and 811-7607), as filed with the Securities and
Exchange Commission via EDGAR (Accession # 0001036050-99-
000715) on April 1, 1999.
(2) Administration Agreement between Registrant and Miller
Anderson & Sherrerd, LLP is incorporated by reference to
Exhibit h(2) to Post-Effective Amendment No. 8 to the
Registrant's Registration Statement on Form N-1A (File Nos.
333-3013 and 811-7607), as filed with the Securities and
Exchange Commission via EDGAR (Accession # 0001036050-99-
000715) on April 1, 1999.
(3) Sub-Administration Agreement between Morgan Stanley Asset
Management Inc. and Chase Global Funds Services Company is
incorporated by reference to Exhibit h(4) to Post-Effective
Amendment No. 7 to the Registrant's Registration Statement on
Form N-1A (File Nos. 333-0313 and 811-7607), as
C-11
<PAGE>
filed with the Securities and Exchange Commission via EDGAR
(Accession No. 0001036050-99-000128) on January 29, 1999.
(4) Sub-Administration Agreement between Miller Anderson &
Sherrerd LLP and Chase Global Funds Services Company is
incorporated by reference to Exhibit (h)(4) to Post-Effective
Amendment No. 8 to the Registrant's Registration Statement on
Form N-1A (File Nos. 333-3013 and 811-7607), as filed with
the Securities and Exchange Commission via EDGAR (Accession #
0001036050-99-000715) on April 1, 1999.
(i) Opinion of Counsel is incorporated by reference to Exhibit (i) to
Post-Effective Amendment No. 9 to the Registrant's Registration
Statement on Form N-1A(file Nos. 333-3013 and 811-7607) as filed with
the Securities and Exchange Commission via EDGAR (Accession
#0001036050-99-001249) on June 8, 1999.
(j) Consent of PricewaterhouseCoopers LLP (formerly, Price Waterhouse,
LLP), Independent Accountants is incorporated by reference to Exhibit
(j) to Post-Effective Amendment No. 8 to the Registrant's Registration
Statement on Form N-1A (File Nos. 333-3013 and 811-7607), as filed
with the Securities and Exchange Commission via EDGAR (Accession #
0001036050-99-000715) on April 1, 1999.
(k) Not applicable.
(l) Not applicable.
(m) Not applicable.
(n) Not applicable.
(o) Not applicable.
EX-99 (p) Powers of Attorney are filed herewith.
C-12
<PAGE>
Exhibit(a)(7)
FORM OF
ARTICLES SUPPLEMENTARY
TO
ARTICLES OF INCORPORATION
OF
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC. (the "Corporation"), a
corporation organized under the laws of the State of Maryland, having its
principal place of business at 1221 Avenue of the Americas, New York, NY 10020,
does hereby certify to the State Department of Assessments and Taxation of
Maryland that:
FIRST: The Corporation is registered as an open-end investment company under
the Investment Company Act of 1940, as amended.
SECOND: The Board of Directors of the Corporation at a meeting duly convened
and held on September , 1999 adopted a resolution adding one portfolio and
increasing the total number of shares of stock which the Corporation shall have
the authority to issue from ten billion five hundred million (10,500,000,000)
shares of common stock, par value $.001 per share, having an aggregate par value
of ten million five hundred thousand dollars ($10,500,000) designated and
classified in twenty portfolios as follows:
<TABLE>
<CAPTION>
Number of Shares
of Common Stock
Name of Class Classified and Allocated
- ------------- ------------------------
<S> <C>
Money Market Portfolio 1,000,000,000
Fixed Income Portfolio 500,000,000
High Yield Portfolio 500,000,000
International Fixed Income Portfolio 500,000,000
Emerging Markets Debt Portfolio 500,000,000
Balanced Portfolio 500,000,000
Multi-Asset-Class Portfolio 500,000,000
Equity Growth Portfolio 500,000,000
Value Portfolio 500,000,000
Core Equity Portfolio 500,000,000
Mid Cap Growth Portfolio 500,000,000
Mid Cap Value Portfolio 500,000,000
U.S. Real Estate Portfolio 500,000,000
Global Equity Portfolio 500,000,000
International Magnum Portfolio 500,000,000
Emerging Markets Equity Portfolio 500,000,000
Asian Equity Portfolio 500,000,000
Latin American Portfolio 500,000,000
Active International Allocation Portfolio 500,000,000
</TABLE>
<PAGE>
Technology Portfolio 500,000,000
to eleven billion (11,000,000,000) shares of common stock, par value $.001 per
share, having an aggregate par value of eleven million ($11,000,000) and
designated and classified in twenty one portfolios as follows:
Number of Shares
of Common Stock
Name of Class Classified and Allocated
- ------------- ------------------------
Money Market Portfolio 1,000,000,000
Fixed Income Portfolio 500,000,000
High Yield Portfolio 500,000,000
International Fixed Income Portfolio 500,000,000
Emerging Markets Debt Portfolio 500,000,000
Balanced Portfolio 500,000,000
Multi-Asset-Class Portfolio 500,000,000
Equity Growth Portfolio 500,000,000
Value Portfolio 500,000,000
Core Equity Portfolio 500,000,000
Mid Cap Growth Portfolio 500,000,000
Mid Cap Value Portfolio 500,000,000
U.S. Real Estate Portfolio 500,000,000
Global Equity Portfolio 500,000,000
International Magnum Portfolio 500,000,000
Emerging Markets Equity Portfolio 500,000,000
Asian Equity Portfolio 500,000,000
Latin American Portfolio 500,000,000
Active International Allocation Portfolio 500,000,000
Technology Portfolio 500,000,000
Targeted Duration Portfolio 500,000,000
THIRD: Such shares have been duly authorized and classified by the Board of
Directors pursuant to authority and power contained in Section 2-105(c) of the
Maryland General Corporation Law and the Corporation's Articles of
Incorporation.
FOURTH: The description of the shares of stock designated and classified as set
forth above, including any preference, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption is as set forth in the Articles of Incorporation and
has not changed in connection with these Articles Supplementary to the Articles
of Incorporation.
<PAGE>
IN WITNESS WHEREOF, Morgan Stanley Dean Witter Universal Funds, Inc. has caused
these Articles Supplementary to be signed in its name and on the behalf by its
President and attested by its Secretary on this day of , 1999.
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
By:
--------------------
Michael F. Klein
President
Attest:
- -------------------
Mary E. Mullin
Secretary
<PAGE>
THE UNDERSIGNED, President of MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.,
who executed on behalf of said corporation the foregoing Articles Supplementary
of which this certificate is made a part, hereby acknowledges, in the name and
on behalf of said corporation, the foregoing Articles Supplementary to be the
corporate act of said corporation and further certifies that, to the best of his
knowledge, information and belief, the matters and facts set forth herein with
respect to the approval thereof are true in all material respects, under the
penalties of perjury.
-----------------------
Michael F. Klein
President
<PAGE>
Exhibit (d)(6)
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
Form Of
SUPPLEMENT TO MSDW INVESTMENT MANAGEMENT INVESTMENT ADVISORY AGREEMENT
Targeted Duration Portfolio
SUPPLEMENT (the "Supplement") TO INVESTMENT ADVISORY AGREEMENT dated as
of May 31, 1997 by and between Morgan Stanley Universal Funds, Inc. (now known
as Morgan Stanley Dean Witter Universal Funds, Inc.) (the "Fund") and Morgan
Stanley Asset Management Inc. (now known as Morgan Stanley Dean Witter
Investment Management Inc.) (the "Adviser") (the "Agreement").
RECITALS
WHEREAS, the Fund has executed and delivered the Agreement which sets
forth the rights and obligations of the parties with respect to the management
of the portfolios of the Fund set forth on Schedule A to such Agreement, as
amended and supplemented from time to time.
WHEREAS, the Fund has created an additional portfolio, the Targeted
Duration Portfolio (the "Additional Portfolio").
AGREEMENTS
Now, therefore, the parties agree as follows:
As provided in Section 1 of the Agreement, the Fund hereby appoints the
Adviser to act as investment adviser to the Additional Portfolio.
The compensation of the Adviser as set forth in Paragraph 3 of the
Agreement with respect to the Additional Portfolio will be as set forth below:
Assets Targeted Duration Portfolio
------ ---------------------------
First $500 Million %
---------------
From $500 Million to
$1 Billion %
---------------
More than $1 Billion %
---------------
This supplement may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.
The parties listed below have executed this Supplement as of the day
--
of , 199
------------ --
MORGAN STANLEY DEAN WITTER MORGAN STANLEY DEAN WITTER
INVESTMENT MANAGEMENT INC. UNIVERSAL FUNDS, INC.
- --------------------------- ---------------------------
Name: Harold J. Schaaff, Jr. Name: Michael F. Klein
Title: Principal, General Title: President
Counsel and Secretary
<PAGE>
Exhibit (P)
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
POWER OF ATTORNEY
Michael F. Klein, whose signature appears below, does hereby constitute
and appoint Harold J. Schaaff, Jr., Stefanie V. Chang and Mary E. Mullin his
true and lawful attorneys and agents, each with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents may deem necessary or advisable or
which may be required to enable Morgan Stanley Dean Witter Universal Funds, Inc.
(the "Fund") to comply with the Securities Act of 1933, as amended (the "1933
Act") and the Investment Company Act of 1940, as amended (the "1940 Act"), and
any rules, regulations or requirements of the Securities and Exchange Commission
in respect thereof, in connection with the Fund's Registration Statement on Form
N-1A pursuant to the 1933 Act and the 1940 Act, together with any and all
amendments thereto, including within the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as a director of the Fund such
Registration Statement and any and all such amendments filed with the Securities
and Exchange Commission under the 1933 Act and the 1940 Act, and any other
instruments or documents related thereto, and the undersigned does hereby ratify
and confirm all that said attorney and agents shall do or cause to be done by
virtue hereof.
/s/ Michael F. Klein
--------------------
Michael F. Klein
Date: July 23, 1999
<PAGE>
Exhibit (P)
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
POWER OF ATTORNEY
Andrew McNally IV, whose signature appears below, does hereby constitute
and appoint Michael F. Klein, Harold J. Schaaff, Jr., Stefanie V. Chang and Mary
E. Mullin his true and lawful attorneys and agents, each with power of
substitution or resubstitution, to do any and all acts and things and to execute
any and all instruments which said attorneys and agents may deem necessary or
advisable or which may be required to enable Morgan Stanley Dean Witter
Universal Funds, Inc. (the "Fund") to comply with the Securities Act of 1933, as
amended (the "1933 Act") and the Investment Company Act of 1940, as amended (the
"1940 Act"), and any rules, regulations or requirements of the Securities and
Exchange Commission in respect thereof, in connection with the Fund's
Registration Statement on Form N-1A pursuant to the 1933 Act and the 1940 Act,
together with any and all amendments thereto, including within the foregoing,
the power and authority to sign in the name and on behalf of the undersigned as
a director of the Fund such Registration Statement and any and all such
amendments filed with the Securities and Exchange Commission under the 1933 Act
and the 1940 Act, and any other instruments or documents related thereto, and
the undersigned does hereby ratify and confirm all that said attorney and agents
shall do or cause to be done by virtue hereof.
/s/ Andrew McNally IV
---------------------
Andrew McNally IV
Date: July 23, 1999
<PAGE>
Exhibit (P)
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
POWER OF ATTORNEY
Belinda A. Brady, whose signature appears below, does hereby constitute
and appoint Michael F. Klein, Harold J. Schaaff, Jr., Stefanie V. Chang and Mary
E. Mullin her true and lawful attorneys and agents, each with power of
substitution or resubstitution, to do any and all acts and things and to execute
any and all instruments which said attorneys and agents may deem necessary or
advisable or which may be required to enable Morgan Stanley Dean Witter
Universal Funds, Inc. (the "Fund") to comply with the Securities Act of 1933, as
amended (the "1933 Act") and the Investment Company Act of 1940, as amended (the
"1940 Act"), and any rules, regulations or requirements of the Securities and
Exchange Commission in respect thereof, in connection with the Fund's
Registration Statement on Form N-1A pursuant to the 1933 Act and the 1940 Act,
together with any and all amendments thereto, including within the foregoing,
the power and authority to sign in the name and on behalf of the undersigned as
a director of the Fund such Registration Statement and any and all such
amendments filed with the Securities and Exchange Commission under the 1933 Act
and the 1940 Act, and any other instruments or documents related thereto, and
the undersigned does hereby ratify and confirm all that said attorney and agents
shall do or cause to be done by virtue hereof.
/s/ Belinda Anne Brady
----------------------
Belinda Anne Brady
Date: July 27, 1999
<PAGE>
Exhibit (P)
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
POWER OF ATTORNEY
Gerard E. Jones, whose signature appears below, does hereby constitute
and appoint Michael F. Klein, Harold J. Schaaff, Jr., Stefanie V. Chang and Mary
E. Mullin his true and lawful attorneys and agents, each with power of
substitution or resubstitution, to do any and all acts and things and to execute
any and all instruments which said attorneys and agents may deem necessary or
advisable or which may be required to enable Morgan Stanley Dean Witter
Universal Funds, Inc. (the "Fund") to comply with the Securities Act of 1933, as
amended (the "1933 Act") and the Investment Company Act of 1940, as amended (the
"1940 Act"), and any rules, regulations or requirements of the Securities and
Exchange Commission in respect thereof, in connection with the Fund's
Registration Statement on Form N-1A pursuant to the 1933 Act and the 1940 Act,
together with any and all amendments thereto, including within the foregoing,
the power and authority to sign in the name and on behalf of the undersigned as
a director of the Fund such Registration Statement and any and all such
amendments filed with the Securities and Exchange Commission under the 1933 Act
and the 1940 Act, and any other instruments or documents related thereto, and
the undersigned does hereby ratify and confirm all that said attorney and agents
shall do or cause to be done by virtue hereof.
/s/ Gerard E. Jones
-------------------
Gerard E. Jones
Date: July 23, 1999
<PAGE>
Exhibit (P)
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
POWER OF ATTORNEY
John D. Barrett II, whose signature appears below, does hereby
constitute and appoint Michael F. Klein, Harold J. Schaaff, Jr., Stefanie V.
Chang and Mary E. Mullin his true and lawful attorneys and agents, each with
power of substitution or resubstitution, to do any and all acts and things and
to execute any and all instruments which said attorneys and agents may deem
necessary or advisable or which may be required to enable Morgan Stanley Dean
Witter Universal Funds, Inc. (the "Fund") to comply with the Securities Act of
1933, as amended (the "1933 Act") and the Investment Company Act of 1940, as
amended (the "1940 Act"), and any rules, regulations or requirements of the
Securities and Exchange Commission in respect thereof, in connection with the
Fund's Registration Statement on Form N-1A pursuant to the 1933 Act and the 1940
Act, together with any and all amendments thereto, including within the
foregoing, the power and authority to sign in the name and on behalf of the
undersigned as a director of the Fund such Registration Statement and any and
all such amendments filed with the Securities and Exchange Commission under the
1933 Act and the 1940 Act, and any other instruments or documents related
thereto, and the undersigned does hereby ratify and confirm all that said
attorney and agents shall do or cause to be done by virtue hereof.
/s/ John D. Barrett II
----------------------
John D. Barrett II
Date: July 23, 1999
<PAGE>
Exhibit (P)
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
POWER OF ATTORNEY
Samuel T. Reeves, whose signature appears below, does hereby constitute
and appoint Michael F. Klein, Harold J. Schaaff, Jr., Stefanie V. Chang and
Mary E. Mullin his true and lawful attorneys and agents, each with power of
substitution or resubstitution, to do any and all acts and things and to execute
any and all instruments which said attorneys and agents may deem necessary or
advisable or which may be required to enable Morgan Stanley Dean Witter
Universal Funds, Inc. (the "Fund") to comply with the Securities Act of 1933, as
amended (the "1933 Act") and the Investment Company Act of 1940, as amended (the
"1940 Act"), and any rules, regulations or requirements of the Securities and
Exchange Commission in respect thereof, in connection with the Fund's
Registration Statement on Form N-1A pursuant to the 1933 Act and the 1940 Act,
together with any and all amendments thereto, including within the foregoing,
the power and authority to sign in the name and on behalf of the undersigned as
a director of the Fund such Registration Statement and any and all such
amendments filed with the Securities and Exchange Commission under the 1933 Act
and the 1940 Act, and any other instruments or documents related thereto, and
the undersigned does hereby ratify and confirm all that said attorney and agents
shall do or cause to be done by virtue hereof.
/s/ Samuel T. Reeves
--------------------
Samuel T. Reeves
Date: July 22, 1999
<PAGE>
Exhibit (P)
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
POWER OF ATTORNEY
Barton M. Biggs, whose signature appears below, does hereby constitute
and appoint Michael F. Klein, Harold J. Schaaff, Jr., Stefanie V. Chang and Mary
E. Mullin his true and lawful attorneys and agents, each with power of
substitution or resubstitution, to do any and all acts and things and to execute
any and all instruments which said attorneys and agents may deem necessary or
advisable or which may be required to enable Morgan Stanley Dean Witter
Universal Funds, Inc. (the "Fund") to comply with the Securities Act of 1933, as
amended (the "1933 Act") and the Investment Company Act of 1940, as amended (the
"1940 Act"), and any rules, regulations or requirements of the Securities and
Exchange Commission in respect thereof, in connection with the Fund's
Registration Statement on Form N-1A pursuant to the 1933 Act and the 1940 Act,
together with any and all amendments thereto, including within the foregoing,
the power and authority to sign in the name and on behalf of the undersigned as
a director of the Fund such Registration Statement and any and all such
amendments filed with the Securities and Exchange Commission under the 1933 Act
and the 1940 Act, and any other instruments or documents related thereto, and
the undersigned does hereby ratify and confirm all that said attorney and agents
shall do or cause to be done by virtue hereof.
/s/ Barton M. Biggs
-------------------
Barton M. Biggs
Date: July 21, 1999
<PAGE>
Exhibit (P)
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
POWER OF ATTORNEY
Fergus Reid, whose signature appears below, does hereby constitute
and appoint Michael F. Klein, Harold J. Schaaff, Jr., Stefanie V. Chang and Mary
E. Mullin his true and lawful attorneys and agents, each with power of
substitution or resubstitution, to do any and all acts and things and to execute
any and all instruments which said attorneys and agents may deem necessary or
advisable or which may be required to enable Morgan Stanley Dean Witter
Universal Funds, Inc. (the "Fund") to comply with the Securities Act of 1933, as
amended (the "1933 Act") and the Investment Company Act of 1940, as amended (the
"1940 Act"), and any rules, regulations or requirements of the Securities and
Exchange Commission in respect thereof, in connection with the Fund's
Registration Statement on Form N-1A pursuant to the 1933 Act and the 1940 Act,
together with any and all amendments thereto, including within the foregoing,
the power and authority to sign in the name and on behalf of the undersigned as
a director of the Fund such Registration Statement and any and all such
amendments filed with the Securities and Exchange Commission under the 1933 Act
and the 1940 Act, and any other instruments or documents related thereto, and
the undersigned does hereby ratify and confirm all that said attorney and agents
shall do or cause to be done by virtue hereof.
/s/ Fergus Reid
--------------------
Fergus Reid
Date: July 22, 1999
<PAGE>
Exhibit (P)
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
POWER OF ATTORNEY
Frederick O. Robertshaw, whose signature appears below, does hereby
constitute and appoint Michael F. Klein, Harold J. Schaaff, Jr., Stefanie V.
Chang and Mary E. Mullin his true and lawful attorneys and agents, each with
power of substitution or resubstitution, to do any and all acts and things and
to execute any and all instruments which said attorneys and agents may deem
necessary or advisable or which may be required to enable Morgan Stanley Dean
Witter Universal Funds, Inc. (the "Fund") to comply with the Securities Act of
1933, as amended (the "1933 Act") and the Investment Company Act of 1940, as
amended (the "1940 Act"), and any rules, regulations or requirements of the
Securities and Exchange Commission in respect thereof, in connection with the
Fund's Registration Statement on Form N-1A pursuant to the 1933 Act and the 1940
Act, together with any and all amendments thereto, including within the
foregoing, the power and authority to sign in the name and on behalf of the
undersigned as a director of the Fund such Registration Statement and any and
all such amendments filed with the Securities and Exchange Commission under the
1933 Act and the 1940 Act, and any other instruments or documents related
thereto, and the undersigned does hereby ratify and confirm all that said
attorney and agents shall do or cause to be done by virtue hereof.
/s/ Frederick O. Robertshaw
---------------------------
Frederick O. Robertshaw
Date: July 21, 1999
