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PROSPECTUS May 1, 1999 as supplemented through October 7, 1999
A Portfolio of MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
[MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS LOGO APPEARS HERE]
HIGH YIELD PORTFOLIO
Above-average total return over a market cycle of
three to five years by investing primarily in a
diversified portfolio of high yield securities.
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 High Yield 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
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<S> <C>
INVESTMENT SUMMARY
High Yield Portfolio 1
Additional Risk Factors and Information 2
INVESTMENT ADVISER 5
MANAGEMENT FEE 5
PORTFOLIO MANAGERS 6
SHAREHOLDER INFORMATION 7
FINANCIAL HIGHLIGHTS 8
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INVESTMENT SUMMARY
HIGH YIELD PORTFOLIO
The High Yield Portfolio seeks above-average total return over a market cycle
of three to five years by investing primarily in a diversified portfolio of
high yield securities.
Approach
The Portfolio invests primarily in high yield securities (commonly referred to
as "junk bonds"). The Portfolio also may invest in other fixed income
securities, including U.S. Government securities, mortgage securities, and
investment grade corporate bonds. The Portfolio may invest to a limited extent
in foreign fixed income securities, including emerging market securities. The
Adviser may use derivatives in managing the Portfolio. The average weighted
maturity of the Portfolio will generally be greater than 5 years.
Process
The Adviser uses equity and fixed income valuation techniques, together with
analyses of economic and industry trends, to determine the Portfolio's overall
structure, sector allocation and desired maturity. The Adviser emphasizes
securities of companies that have strong industry positions and favorable
outlooks for cash flow and asset values. The Adviser conducts a credit analysis
for each security considered for investment to evaluate its attractiveness
relative to the level of risk it presents. The Portfolio maintains a high level
of diversification to minimize its exposure to the risks associated with any
particular issuer.
Risk
Investing in the Portfolio may be appropriate for you if you are willing to
accept the risks associated with high yield securities in the hope of earning
above-average total return. Market prices of the Portfolio's fixed income
securities holdings respond to economic developments, especially changes in
interest rates, as well as to perceptions of the creditworthiness of individual
issuers. As a result of this price volatility, there is a risk that you may
lose money by investing in the Portfolio. The Portfolio's investments in high
yield securities expose it to a substantial degree of credit risk. These
investments are considered speculative under
traditional investment standards. Prices of high yield
securities will rise and fall primarily in response to
changes in the issuer's financial health, although changes
in market interest rates also will affect prices. High yield
securities may experience reduced liquidity, and sudden and
substantial decreases in price, during certain market
conditions.
PERFORMANCE
Commenced operations on January 2, 1997
13.53% 4.80%
- ---------------------------------------
1997 1998
HIGH (QUARTER) LOW (QUARTER)
<TABLE>
<S> <C>
4/97 - 6/97 7/98 - 9/98
5.91% -4.55%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN for
periods ended December 31, 1998
<TABLE>
<CAPTION>
HIGH YIELD SALOMON SMITH BARNEY
PORTFOLIO HIGH-YIELD MARKET INDEX*
- ------------------------------------------------------
<S> <C> <C>
Past One Year 4.80% 3.61%
- ------------------------------------------------------
Since Inception 9.10% 8.49%
</TABLE>
The bar chart and table above show the
performance of the Portfolio year-by-
year and as an average over different
periods of time. This performance in-
formation does not include the impact
of any charges deducted by your insur-
ance company. If it did, returns would
be lower. The bar chart and table dem-
onstrate the variability of perfor-
mance over time and provide an indica-
tion of the risks of investing in the
Portfolio. How the Portfolio has per-
formed in the past does not necessar-
ily indicate how the Portfolio will
perform in the future.
* The Salomon Smith Barney High Yield
Market Index includes public, non-
convertible corporate bond issues
with at least one year remaining to
maturity and $50 billion in par
amount outstanding which carry a
below investment grade quality
rating from either Standard & Poor's
or Moody's Rating Services. An index
is a hypothetical measure of
performance based on the ups and
downs of securities that make up a
particular market. The index does
not show actual investment returns
or reflect payment of management or
brokerage fees, which would lower
the index's performance.
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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.
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.
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, some 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.
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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 no 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.
Emerging market risks
Emerging market countries are countries that major international financial
institutions, such as the World Bank, generally consider to be less
economically mature than developed nations, such as the United States or most
nations in Western Europe. Emerging market countries can include every nation
in the world except the United States, Canada, Japan, Australia, New Zealand
and most nations located in Western Europe. Emerging market countries may be
more likely to experience political turmoil or rapid changes in economic
conditions than more developed countries, and the financial condition of
issuers in emerging market countries may be more precarious than in other
countries. These characteristics result in greater risk of price volatility in
emerging market countries, which may be heightened by currency fluctuations
relative to the U.S. dollar.
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, the
ability 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 a Portfolio holds, these price movements may
be significantly greater than that experienced by mortgage-backed securities
generally.
Year 2000 risk
The advisory 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
3
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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 defensive 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.
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 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 July 31, 1999, MAS and its institutional
advisory affiliates had approximately $175 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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<S> <C>
First $500 million 0.50%
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From $500 million to $1 billion 0.45%
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More than $1 billion 0.40%
</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 0.80% 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 0.80%. 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.
For the fiscal year ended December 31, 1998, MAS received a fee (net of fee
waivers) equal to 0.15% of the Portfolio's average daily net assets for
management services.
5
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PORTFOLIO MANAGERS
The following individuals have primary day-to-day portfolio management
responsibility for the Portfolio:
HIGH YIELD PORTFOLIO
Stephen F. Esser, Robert E. Angevine and Gordon W. Loery
Stephen F. Esser, a Managing Director of Morgan Stanley, joined MAS in 1988.
He assumed responsibility for the MAS Funds High Yield Portfolio in 1989. Mr.
Esser is a member of the New York Society of Security Analysts and holds a
B.S. degree (Summa Cum Laude and Phi Beta Kappa) from the University of
Delaware. Robert Angevine, a Principal of Morgan Stanley and MSDW Investment
Management, and a Portfolio Manager for high yield investments, joined Morgan
Stanley in October 1988. Mr. Angevine received a B.A. in Economics from
Lafayette College and an M.B.A. from Fairleigh Dickinson University. Gordon W.
Loery, a Principal of MSDW Investment Management, joined MAS in 1996. He
served as a Fixed Income Analyst at MSDW Investment Management (formerly
Morgan Stanley Asset Management Inc.) from 1990 to 1996. Messrs. Esser,
Bennett and Angevine have shared primary responsibility for managing the
Portfolio's assets since its inception. Mr. Loery has shared primary
responsibility for managing the Portfolio since April 1999.
6
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SHAREHOLDER INFORMATION
Shares are offered on each day that the New York Stock Exchange (the "NYSE")
is open for business.
Purchasing and selling Fund shares
The Portfolio offers its shares only to insurance companies for separate
accounts they establish to fund variable life insurance and variable annuity
contracts and by 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 (NAV) per share next
determined after the Fund receives the insurance company's purchase order. In
some cases, an insurance company's order may be executed at the NAV that was
computed at the close of the previous business day. 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
In calculating NAV, the Portfolio generally values its portfolio securities at
their market price. If market prices are unavailable or the Portfolio thinks
that they are unreliable because of events occurring after the close of
trading, the Portfolio may determine fair value prices 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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FINANCIAL HIGHLIGHTS
HIGH YIELD PORTFOLIO
The financial highlights table is intended to help you understand the
Portfolio's financial performance since its inception. Certain information
reflects financial results for a single Portfolio share. The total returns in
the table represent the rate that an investor would have earned (or lost) on
an investment in the Portfolio (assuming reinvestment of all dividends and
distributions). This information has been audited by PricewaterhouseCoopers
LLP, whose unqualified report thereon appears in the Portfolio's Annual Report
to Shareholders and is incorporated by reference in the Statement of
Additional Information. The Annual Report and the financial statements
therein, as well as the Statement of Additional Information, are available at
no cost from the Fund at the toll free number noted on the back cover to this
Prospectus or from your insurance company.
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<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 2, 1997* TO
DECEMBER 31, 1998 DECEMBER 31, 1997
<S> <C> <C>
SELECTED PER SHARE DATA AND RATIOS
Net Asset Value, Beginning of Period $ 10.59 $ 10.00
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Income From Investment Operations
Net Investment Income 0.63 0.63
Net Realized and Unrealized Gain (Loss) (0.13) 0.72
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Total From Investment Operations 0.50 1.35
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Distributions
Net Investment Income (0.62) (0.63)
Net Realized Gain (0.08) (0.13)
In Excess of Realized Gain (0.04) --
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Total Distributions (0.74) (0.76)
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Net Asset Value, End of Period $ 10.35 $ 10.59
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Total Return 4.80 % 13.53 %
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RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) $33,059 $12,490
Ratio of Expenses to Average Net Assets 0.80 % 0.81 %**
Ratio of Expenses to Average Net Assets
Excluding Interest Expense N/A 0.80 %**
Ratio of Net Investment Income to
Average Net Assets 8.42 % 7.41 %**
Portfolio Turnover Rate 48 % 78 %
Effect of Voluntary Expense Limitation
During the Period:
Per Share Benefit to Net Investment
Income $ 0.03 $ 0.08
Ratios Before Expense Limitation:
Expenses to Average Net Assets 1.15 % 1.68 %**
Net Investment Income to Average Net
Assets 8.07 % 6.53 %**
</TABLE>
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* Commencement of operations
** Annualized
8
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WHERE TO FIND ADDITIONAL INFORMATION
Statement of Additional Information
In addition to this Prospectus, the Fund has an SAI, dated May 1, 1999, as
supplemented through September 2, 1999, 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 financial
statements. These reports contain 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, when available, 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.
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
[MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC. LOGO APPEARS HERE]
P.O. Box 2798
Boston, Massachusetts 02208-2798
For information call 1-800-281-2715
