MAY 11, 1998 PROSPECTUS
J.P. MORGAN GLOBAL 50 FUND
-----------------------------------
A global equity fund seeking high
total return from a concentrated
portfolio of stocks
This prospectus contains essential information for anyone investing in the fund.
Please read it carefully and keep it for reference.
Shares in the fund are not bank deposits and are not guaranteed or insured by
any bank, government entity, or the FDIC.
As with all mutual funds, the fact that these shares are registered with the
Securities and Exchange Commission does not mean that the commission approves
them as an investment or guarantees that the information in this prospectus is
correct or adequate. It is a criminal offense for anyone to state or suggest
otherwise.
Distributed by Funds Distributor, Inc. JPMORGAN
<PAGE>
CONTENTS
- --------------------------------------------------------------------------------
2
- ----
INTRODUCTION
J.P. Morgan Global 50 Fund . . . . . . . . . . . . . . . . . . . . . . . . 2
Who may want to invest . . . . . . . . . . . . . . . . . . . . . . . . . . 2
J.P. Morgan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3
- ----
GLOBAL EQUITY MANAGEMENT APPROACH
Global equity investment process . . . . . . . . . . . . . . . . . . . . . 3
4
- ----
The fund's goal, investment approach, risks and expenses
J.P. MORGAN GLOBAL 50 FUND
Fund description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Investor expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6
- ----
Investing in the J.P. Morgan Global 50 Fund
YOUR INVESTMENT
Investing through a financial professional . . . . . . . . . . . . . . . . 6
Investing through an employer-sponsored retirement plan. . . . . . . . . . 6
Investing through an IRA or rollover IRA . . . . . . . . . . . . . . . . . 6
Investing directly . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Opening your account . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Adding to your account . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Selling shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Account and transaction policies . . . . . . . . . . . . . . . . . . . . . 7
Dividends and distributions. . . . . . . . . . . . . . . . . . . . . . . . 8
Tax considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
9
- ----
More about risk and the fund's business operations
FUND DETAILS
Business structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Management and administration. . . . . . . . . . . . . . . . . . . . . . . 9
Risk and reward elements . . . . . . . . . . . . . . . . . . . . . . . . . 10
FOR MORE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . back cover
1
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
J.P. MORGAN GLOBAL 50 FUND
This fund invests primarily in approximately fifty U.S. and foreign stocks. As a
shareholder, you should anticipate risks and rewards beyond those of a typical
equity fund investing solely in U.S. stocks.
WHO MAY WANT TO INVEST
The fund is designed for investors who:
- - are pursuing a long-term goal
- - want to add a non-U.S. investment with growth potential to further
diversify a portfolio
- - are looking for the added rewards and are willing to accept the added risks
of a fund that invests in a relatively small number of stocks
The fund is NOT designed for investors who:
- - require regular income or stability of principal
- - are pursuing a short-term goal or investing emergency reserves
- - are uncomfortable with the risks of international investing
- - are looking for a less aggressive stock investment
- - want a fund that consistently focuses on particular industries or sectors
J.P. MORGAN
Known for its commitment to proprietary research and its disciplined investment
strategies, J.P. Morgan is the asset management choice for many of the world's
most respected corporations, financial institutions, governments, and
individuals. Today, J.P. Morgan employs over 300 analysts and portfolio managers
around the world and has more than $285 billion in assets under management,
including assets managed by the fund's advisor, J.P. Morgan Investment
Management, Inc.
BEFORE YOU INVEST
Investors considering the fund should understand that:
- - The value of the fund's shares will fluctuate over time. You could lose
money if you sell when the fund's share price is lower than when you
invested.
- - There is no assurance that the fund will meet its investment goal.
- - Future returns will not necessarily resemble past performance.
2 INTRODUCTION
<PAGE>
GLOBAL EQUITY MANAGEMENT APPROACH
- --------------------------------------------------------------------------------
The J.P. Morgan Global 50 Fund invests in approximately fifty stocks throughout
the world.
J.P. Morgan, as advisor, selects approximately fifty stocks, primarily of large
and mid-cap companies, for the fund's investment. J.P. Morgan uses the
investment process described below to determine which companies are most likely
to provide high total return to shareholders. In order to maximize return
potential, the fund is not constrained by geographic limits and will not
concentrate in any one industry; the fund may invest in both developed and
emerging markets. Under normal market conditions, the fund will remain fully
invested.
GLOBAL EQUITY INVESTMENT PROCESS
RESEARCH AND VALUATION Research findings allow J.P. Morgan to rank companies
according to their relative value; combined with J.P. Morgan's qualitative view,
the most attractive investment opportunities in a universe of 2,500 stocks are
identified.
[GRAPHIC]
J.P. Morgan analysts develop proprietary fundamental research
J.P. Morgan takes an in-depth look at company prospects over a relatively long
period -- often as much as five years -- rather than focusing on near-term
expectations. This approach is designed to provide insight into a company's
growth potential. J.P. Morgan's in-house research is developed by an extensive
worldwide network of over 85 career analysts following 2,500 stocks in 22
countries. J.P. Morgan produces valuation rankings of issuers with a market
capitalization generally greater than $1.5 billion with the help of a variety of
models that quantify its research team's findings.
STOCK SELECTION Using research as the basis for investment decisions, J.P.
Morgan portfolio managers construct a concentrated stock portfolio representing
companies which in their view have an exceptional return potential relative to
other companies. J.P. Morgan's stock selection focuses on highly rated
undervalued companies which also meet certain other criteria, such as
responsiveness to industry themes (e.g. consolidation/restructuring), conviction
in management, and the company's product positioning.
[GRAPHIC]
Using research and valuations, the fund's management team chooses stocks for its
fund
CURRENCY MANAGEMENT J.P. Morgan actively manages the fund's currency exposure
in an effort to manage risk and enhance total return. The fund has access to
J.P. Morgan's currency specialists to determine the extent and nature of its
exposure to various foreign currencies.
[GRAPHIC]
Morgan may adjust currency exposure to seek to manage risks and enhance returns
GLOBAL EQUITY MANAGEMENT APPROACH 3
<PAGE>
J.P. MORGAN GLOBAL 50 FUND
- --------------------------------------------------------------------------------
REGISTRANT: J.P. MORGAN SERIES TRUST
(J.P. MORGAN GLOBAL 50 FUND: SELECT SHARES)
[GRAPHIC]
GOAL
The fund seeks to provide high total return from a concentrated portfolio of
global equity securities.
[GRAPHIC]
INVESTMENT APPROACH
The fund invests in approximately fifty equity securities of primarily large and
mid-cap companies located throughout the world. Using its global perspective,
J.P. Morgan uses the investment process described on page 2 to identify those
stocks which in its view have an exceptional return potential.
Under normal conditions, the fund invests in stocks of at least 3 countries,
including the United States, and in a variety of industries; the fund is not
constrained by geographic limits and will not concentrate in any one industry.
The fund may invest in both developed and emerging markets. The fund may invest
substantially in securities denominated in foreign currencies and actively seeks
to enhance returns through managing currency exposure.
[GRAPHIC]
POTENTIAL RISKS AND REWARDS
The value of your investment in the fund will fluctuate in response to movements
in global stock markets. Fund performance will also depend on the effectiveness
of J.P. Morgan's research and the management team's stock picking decisions.
The fund may invest in fewer stocks than other global equity funds. This
concentration increases both the risk and reward potential of the fund. With a
concentrated portfolio of securities, it is possible that the fund could have
returns that are significantly higher or lower than relevant market indices and
other, more diversified mutual funds. Because the fund holds a relatively small
number of securities, a large movement in the price of a stock in the portfolio
could have a larger impact on the fund's share price then would occur if the
fund held more securities.
In general, international investing involves higher risks than investing in U.S.
markets but offers attractive potential rewards and opportunities for
diversification. Foreign markets tend to be more volatile than those of the
U.S., and changes in currency exchange rates could reduce or increase market
performance. These risks are higher in emerging markets. To the extent that the
fund hedges its currency exposure into the U.S. dollar, it may reduce the
effects of currency fluctuations which could protect the fund from losses but
could also reduce opportunities for gains. The fund may also hedge from one
foreign currency to another which could result in gains or losses.
The fund's investments and their main risks, as well as fund strategies, are
described in more detail on page 10.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $285
billion.
The portfolio management team is led by Andrew Cormie, vice president, who has
been an international equity portfolio manager since 1977 and employed by J.P.
Morgan since 1984, Thomas Madsen, Managing Director, who has been an
international equity portfolio manager since 1984 and employed by J.P. Morgan
since 1979 and Shawn Lytle. vice president, who has been an international equity
portfolio manager since 1998 and employed by J.P. Morgan since 1992.
4 J.P. MORGAN GLOBAL 50 FUND
<PAGE>
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
The current expenses you should expect to pay as an investor in the fund are
shown at right. The fund has no sales, exchange, or account fees, although some
institutions may charge you a fee for shares you buy through them. The annual
fund expenses shown are deducted from fund assets prior to performance
calculations.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
ANNUAL EXPENSES(1) (% OF FUND ASSETS)
Management fees (actual) 1.25
Marketing (12b-1) fees none
Other expenses(2)
(after reimbursement) 0.25
- -------------------------------------------------
TOTAL OPERATING EXPENSES(2)
(AFTER REIMBURSEMENT) 1.50
- -------------------------------------------------
</TABLE>
(1) This table shows the estimated expenses for the current fiscal year ending
10/31/98, expressed as a percentage of estimated average net assets and
reflecting reimbursement for ordinary expenses over 1.50%.
(2) Without reimbursement, other expenses and total operating expenses for the
current fiscal year are estimated to be 0.63% and 1.88%, respectively, on
an annualized basis. There is no guarantee that reimbursement will continue
beyond 2/28/99.
EXPENSE EXAMPLE
The example below uses the same assumptions as other fund prospectuses: $1,000
initial investment, 5% annual total return, expenses unchanged, all shares sold
at the end of each time period. The example is for comparison only; the fund's
actual return and expenses will be different.
- --------------------------------------------------
1 yr. 3 yrs.
YOUR COST($) 15 47
- --------------------------------------------------
J.P. MORGAN GLOBAL 50 FUND 5
<PAGE>
YOUR INVESTMENT
- --------------------------------------------------------------------------------
For your convenience, the J.P. Morgan Funds offer several ways to start and
maintain fund investments.
INVESTING THROUGH A FINANCIAL PROFESSIONAL
If you work with a financial professional, either at J.P. Morgan or elsewhere,
he or she is prepared to handle your planning and transaction needs. Your
financial professional will be able to assist you in establishing your fund
account, executing transactions, and monitoring your investment. If your fund
investment is not held in the name of your financial professional and you prefer
to place a transaction order yourself, please use the instructions for investing
directly.
INVESTING THROUGH AN EMPLOYER-SPONSORED RETIREMENT PLAN
Your fund investments are handled through your plan. Refer to your plan
materials or contact your benefits office for information on buying, selling, or
exchanging fund shares.
INVESTING THROUGH AN IRA OR ROLLOVER IRA
Please contact a J.P. Morgan Retirement Services Specialist at 1-888-576-4472
for information on J.P. Morgan's comprehensive IRA services, including lower
minimum investments.
INVESTING DIRECTLY
Investors may establish accounts without the help of an intermediary by using
the instructions below and at right:
- - Determine the amount you are investing. The minimum amount for initial
investments in the fund is $2,500 and for additional investments $500,
although these minimums may be less for some investors. For more
information on minimum investments, call 1-800-521-5411.
- - Complete the application, indicating how much of your investment you want
to allocate to which fund(s). Please apply now for any account privileges
you may want to use in the future, in order to avoid the delays associated
with adding them later on.
- - Mail in your application, making your initial investment as shown at right.
For answers to any questions, please speak with a J.P. Morgan Funds Services
Representative at 1-800-521-5411.
OPENING YOUR ACCOUNT
BY WIRE
- - Mail your completed application to the Shareholder Services Agent.
- - Call the Shareholder Services Agent to obtain an account number and to
place a purchase order. FUNDS THAT ARE WIRED WITHOUT A PURCHASE ORDER WILL
BE RETURNED UNINVESTED.
- - After placing your purchase order, instruct your bank to wire the amount of
your investment to:
State Street Bank & Trust Company
ROUTING NUMBER: 011-000-028
CREDIT: J.P. Morgan Funds
ACCOUNT NUMBER: 9904-226-9
FFC: your account number, name of registered owner(s) and fund name
BY CHECK
- - Make out a check for the investment amount payable to J.P. Morgan Funds.
- - Mail the check with your completed application to the Transfer Agent.
BY EXCHANGE
- - Call the Shareholder Services Agent for an exchange.
ADDING TO YOUR ACCOUNT
BY WIRE
- - Call the Shareholder Services Agent to place a purchase order. FUNDS THAT
ARE WIRED WITHOUT A PURCHASE ORDER WILL BE RETURNED UNINVESTED.
- - Once you have placed your purchase order, instruct your bank to wire the
amount of your investment as described above.
BY CHECK
- - Make out a check for the investment amount payable to J.P. Morgan Funds.
- - Mail the check with a completed investment slip to the Transfer Agent. If
you do not have an investment slip, attach a note indicating your account
number and how much you wish to invest in which fund(s).
BY EXCHANGE
- - Call the Shareholder Services Agent for an exchange.
6 YOUR INVESTMENT
<PAGE>
- --------------------------------------------------------------------------------
SELLING SHARES
BY WIRE
- - Call the Shareholder Services Agent to verify that the wire redemption
privilege is in place on your account. If it is not, a representative can
help you add it.
- - Place your wire request. If you are transferring money to a non-Morgan
account, you will need to provide the representative with the personal
identification number (PIN) that was provided to you when you opened your
fund account.
BY PHONE
- - Call the Shareholder Services Agent and place your request. Once your
request has been verified, a check for the net cash amount, payable to the
registered owner(s), will be mailed to the address of record. For checks
payable to any other party or mailed to any other address, please make your
request in writing (see below).
IN WRITING
- - Write a letter of instruction that includes the following information: The
name of the registered owner(s) of the account; the account number; the
fund name; the amount you want to sell; and the recipient's name and
address or wire information, if different from those of the account
registration.
- - Indicate whether you want any cash proceeds sent by check or by wire.
- - Make sure the letter is signed by an authorized party. The Shareholder
Services Agent may require additional information, such as a signature
guarantee.
- - Mail the letter to the Shareholder Services Agent.
ACCOUNT AND TRANSACTION POLICIES
TELEPHONE ORDERS The fund accepts telephone orders from all shareholders. To
guard against fraud, the fund requires shareholders to use a PIN, and may record
telephone orders or take other reasonable precautions. However, if the fund does
take such steps to ensure the authenticity of an order, you may bear any loss if
the order later proves fraudulent.
BUSINESS HOURS AND NAV CALCULATIONS The fund's regular business days and hours
are the same as those of the New York Stock Exchange. The fund calculates its
net asset value per share (NAV) every business day as of the close of trading on
the New York Stock Exchange (generally 4:00 p.m.).
TIMING OF ORDERS Orders to buy or sell shares are executed at the next NAV
calculated after the order has been accepted. Orders are accepted until the
close of trading on the New York Stock Exchange (generally 4:00 p.m.) every
business day and are executed the same day, at that day's NAV. The fund has the
right to suspend redemption of shares and to postpone payment of proceeds for up
to seven days or as permitted by law.
- --------------------------------------------------------------------------------
TRANSFER AGENT SHAREHOLDER SERVICES AGENT
STATE STREET BANK AND TRUST COMPANY J.P. MORGAN FUNDS SERVICES
P.O. Box 8411 522 Fifth Avenue
Boston, MA 02266-8411 New York, NY 10036
Attention: J.P. Morgan Funds Services 1-800-521-5411
Representatives are available
8:00 a.m. to 5:00 p.m. eastern
time on fund business days.
YOUR INVESTMENT 7
<PAGE>
TIMING OF SETTLEMENTS When you buy shares, you will become the owner of
record when the fund receives your payment, generally the day following
execution. When you sell shares, the proceeds are generally available the day
following execution and will be forwarded according to your instructions.
When you sell shares that you recently purchased by check, your order will be
executed at the next NAV but the proceeds will not be available until your
check clears. This may take up to 15 days.
STATEMENTS AND REPORTS The fund sends monthly account statements as well as
confirmations after each purchase or sale of shares (except reinvestments).
Every six months the fund sends out an annual or semi-annual report,
containing information on the fund's holdings and a discussion of recent and
anticipated market conditions and fund performance.
ACCOUNTS WITH BELOW-MINIMUM BALANCES If your account balance falls below the
minimum for 30 days as a result of selling shares (and not because of
performance), the fund may request that you buy more shares or close your
account. If your account balance is still below the minimum 60 days after
notification, the fund may close out your account and send the proceeds to the
address of record.
DIVIDENDS AND DISTRIBUTIONS
The fund typically pays income dividends and makes capital gains
distributions, if any, once per year (usually in December). However, the fund
may make more or fewer payments in a given year, depending on its investment
results and its tax compliance situation. These dividends and distributions
consist of most or all of the fund's net investment income and net realized
capital gains.
Dividends and distributions are automatically paid in additional fund shares.
Alternatively, you may instruct your financial professional or J.P. Morgan
Funds Services to have them sent to you by check, credited to a separate
account, or invested in another J.P. Morgan fund.
TAX CONSIDERATIONS
In general, selling shares for cash, exchanging shares, and receiving
distributions (whether reinvested or taken in cash) are all taxable events.
These transactions typically create the following tax liabilities:
TRANSACTION TAX STATUS
- --------------------------------------------------------------------------------
Income dividends Ordinary income
- --------------------------------------------------------------------------------
Short-term capital gains Ordinary income
distributions
- --------------------------------------------------------------------------------
Long-term capital gains Capital gains
distributions
- --------------------------------------------------------------------------------
Sales or exchanges of shares Capital gains or losses
owned for more than one year
- --------------------------------------------------------------------------------
Sales or exchanges of shares Gains are treated as ordinary
owned for one year or less income; losses are subject
to special rules
- --------------------------------------------------------------------------------
Because long-term capital gains distributions are taxable as capital gains
regardless of how long you have owned your shares, you may want to avoid
making a substantial investment when the fund is about to declare a long-term
capital gains distribution.
Every January, the fund issues tax information on its distributions for the
previous year.
Any investor for whom the fund does not have a valid taxpayer identification
number will be subject to backup withholding for taxes.
The tax considerations described in this section do not apply to tax-deferred
accounts or other non-taxable entities.
Because each investor's tax circumstances are unique, please consult your tax
professional about your fund investment.
8 YOUR INVESTMENT
<PAGE>
FUND DETAILS
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
The fund is a series of J.P. Morgan Series Trust, a Massachusetts business
trust. Information about other series or classes is available by calling 1-800-
521-5411. In the future, the trustees could create other series or share
classes, which would have different expenses. Fund shareholders are entitled to
one full or fractional vote for each dollar or fraction of a dollar invested.
MANAGEMENT AND ADMINISTRATION
The fund and the other series of J.P. Morgan Series Trust are governed by the
same trustees. The trustees are responsible for overseeing business activities.
The trustees are assisted by Pierpont Group, Inc., which they own and operate on
a cost basis; costs are shared by all funds governed by these trustees. Funds
Distributor, Inc., as co-administrator, provides certain fund officers. J.P.
Morgan, as co-administrator, oversees the fund's other service providers.
J.P. Morgan, subject to the expense reimbursements described earlier in this
prospectus, receives the following fees for investment advisory and other
services:
ADVISORY SERVICES 1.25% of the fund's
average net assets
- --------------------------------------------------------------------------------
ADMINISTRATIVE SERVICES Fund's pro-rata portion of 0.09% of
(fee shared with Funds the first $7 billion in J.P. Morgan-
Distributor, Inc.) advised portfolios plus 0.04% of
average net assets over $7 billion
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES 0.25% of the fund's average
net assets
- --------------------------------------------------------------------------------
J.P. Morgan may pay fees to certain firms and professionals for providing
recordkeeping or other services in connection with investments in the fund.
FUND DETAILS 9
<PAGE>
- --------------------------------------------------------------------------------
RISK AND REWARD ELEMENTS
This table identifies the main elements that make up the fund's overall risk and
reward characteristics (described on page 4). It also outlines the fund's
policies toward various investments, including those that are designed to
help the fund manage risk.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
POTENTIAL RISKS POTENTIAL REWARDS POLICIES TO BALANCE RISK AND REWARD
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FOREIGN AND OTHER MARKET
CONDITIONS
- - The fund's share price and - Stocks have generally - Under normal circumstances the fund plans to
performance will fluctuate outperformed more stable remain fully invested, with at least 65% in
in response to stock market investments (such as bonds and stocks of at least three countries, including the
movements cash equivalents) over the United States; stock investments may include
long term convertible securities, preferred stocks,
- - The fund could lose money depository receipts (such as ADRs and EDRs),
because of foreign government - Foreign investments, which trust or partnership interests, warrants,
actions, political instability, represent a major portion of rights, and investment company securities
or lack of adequate and/or the world's securities,
accurate information offer attractive potential - During severe market downturns, the fund has
performance and opportunities the option of investing up to 100% of
- - Investment risks tend to be for diversification assets in investment-grade short-term securities
higher in emerging markets.
These markets also present - Emerging markets can offer
higher liquidity and valuation higher returns
risks
- These same stocks could
- - The fund invests in a outperform the general
relatively small number of market and provide
stocks. If these stocks greater returns than more
underperform the general market, diversified funds
the fund could underperform
more diversified funds
- -----------------------------------------------------------------------------------------------------------------------------------
FOREIGN CURRENCIES
- - Currency exchange rate - Favorable exchange rate - The fund actively manages the currency exposure
movements could reduce gains movements could generate of its foreign investments and may hedge a
or create losses gains or reduce losses portion of its foreign currency exposure into
the U.S. dollar or other currencies which
- - Currency risks tend to be the Advisor deems more attractive (see
higher in emerging markets also "Derivatives")
</TABLE>
10 FUND DETAILS
<PAGE>
<TABLE>
<CAPTION>
POTENTIAL RISKS POTENTIAL REWARDS POLICIES TO BALANCE RISK AND REWARD
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
DERIVATIVES
- - Derivatives such as futures, - Hedges that correlate well with - The fund uses derivatives, such as futures,
options, swaps, and forward underlying positions can reduce options, and forward foreign currency contracts,
foreign currency contracts1 that or eliminate losses at low cost for hedging and for risk management (i.e., to
are used for hedging the portfolio establish or adjust exposure to particular
or specific securities may not securities, markets or currencies)
fully offset the underlying
positions and this could result - The fund could make money - The fund only establishes hedges that
in losses to the fund that would and protect against losses if it expects will be highly correlated
not have otherwise occurred the Investment analysis proves with underlying positions
correct
- - Derivatives used for risk - While the fund may use derivatives that
management may not have the - Derivates that involve leverage incidentally involve leverage, it does
intended effects and may result could generate substantial gains not use them for the specific purpose
in losses or missed opportunities at low cost of leveraging its portfolio
- - The counterparty to a derivatives
contract could default
- - Derivatives that involve
leverage could magnify losses
- - Certain types of derivatives
involve costs to the fund
which can reduce returns
- -----------------------------------------------------------------------------------------------------------------------------------
ILLIQUID HOLDINGS
- - The fund could have difficulty - These holdings may offer more - The fund may not invest more than
valuing these holdings precisely attractive yields or potential 15% of net assets in illiquid holdings
growth than comparable widely
- - The fund could be unable traded securities - To maintain adequate liquidity, the
to sell these holdings at the fund may hold investment-grade short-term
time or price it desired securities (including repurchase agreements)
and may borrow from banks up to 33 1/3%
of the value of its total assets
- -----------------------------------------------------------------------------------------------------------------------------------
WHEN-ISSUED AND DELAYED
DELIVERY SECURITIES
- - When the fund buys securities - The fund can take advantage - The fund uses segregated accounts to offset
before issue or for delayed of attractive transaction leverage risk
delivery, it could be exposed opportunities
to leverage risk if it does not
use segregated accounts
- -----------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM TRADING
- - Increased trading could raise - The fund could realize gains - The fund anticipates a portfolio turnover
the fund's brokerage and related in a short period of time rate of approximately 100%
costs
- The fund could protect against - The fund generally avoids short-term
- - Increased short-term capital losses if a stock is overvalued trading, except to take advantage of attractive
gains distributions could raise and its value later falls or unexpected opportunities or to meet
shareholders' income tax liability demands generated by shareholder activity
</TABLE>
(1) A futures contract is an agreement to buy or sell a set quantity of an
underlying instrument at a future date, or to make or receive a cash payment
based on changes in the value of a securities index. An option is the right
to buy or sell a set quantity of an underlying instrument at a predetermined
price. A swap is a privately negotiated agreement to exchange one stream of
payments for another. A forward foreign currency contract is an obligation
to buy or sell a given currency on a future date and at a set price.
11 FUND DETAILS
<PAGE>
- --------------------------------------------------------------------------------
(THIS PAGE IS INTENTIONALLY LEFT BLANK)
12
<PAGE>
- --------------------------------------------------------------------------------
(THIS PAGE IS INTENTIONALLY LEFT BLANK)
13
<PAGE>
FOR MORE INFORMATION
For investors who want more information on the fund, the following documents are
available free upon request:
ANNUAL/SEMI-ANNUAL REPORTS Contain financial statements, performance data,
information on portfolio holdings, and a written analysis of market conditions
and fund performance for the fund's most recently completed fiscal year or half-
year.
Statement of Additional Information (SAI) Provides a fuller technical and legal
description of the fund's policies, investment restrictions, and business
structure. This prospectus incorporates the SAI by reference.
Copies of the current versions of these documents may be obtained by contacting:
J.P. MORGAN GLOBAL 50 FUND
J.P. Morgan Funds Services
522 Fifth Avenue
New York, NY 10036
TELEPHONE: 1-800-521-5411
HEARING IMPAIRED: 1-888-468-4015
EMAIL: [email protected]
Text-only versions of these documents and this prospectus are available from the
Public Reference Room of the Securities and Exchange Commission in Washington,
D.C. (1-800-SEC-0330) and may be viewed on-screen or downloaded from the SEC's
Internet site at http://www.sec.gov. The fund's investment company and 1933 Act
registration numbers are 811-07795 and 333-11125.
J.P. MORGAN FUNDS AND THE MORGAN TRADITION
The J.P. Morgan Funds combine a heritage of integrity and financial leadership
with comprehensive, sophisticated analysis and management techniques. Drawing on
J.P. Morgan's extensive experience and depth as an investment manager, the J.P.
Morgan Funds offer a broad array of distinctive opportunities for mutual fund
investors.
JPMorgan
- --------------------------------------------------------------------------------
J.P. Morgan Funds
ADVISOR DISTRIBUTOR
J.P. Morgan Investmtnet Management, Inc. Funds Distributor, Inc.
522 Fifth Avenue 60 State Street
New York, NY 10036 Boston, MA 02109
1-800-521-5411 1-80-221-7930
<PAGE>
J.P. MORGAN SERIES TRUST
J.P. MORGAN GLOBAL 50 FUND: SELECT SHARES
STATEMENT OF ADDITIONAL INFORMATION
MAY 11, 1998
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT CONTAINS
ADDITIONAL INFORMATION WHICH SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS
DATED MAY 11, 1998 FOR THE FUND LISTED ABOVE, AS SUPPLEMENTED FROM TIME TO TIME,
WHICH MAY BE OBTAINED UPON REQUEST FROM FUNDS DISTRIBUTOR, INC., ATTENTION: J.P.
MORGAN SERIES TRUST (800)221-7930.
I:\dsfndlgl\jpmst\0298gl50.pea\Global2.doc
<PAGE>
Table of Contents
Page
General . . . . . . . . . . . . . . . . . . . 1
Investment Objective and Policies . . . . . . 1
Investment Restrictions . . . . . . . . . . . 17
Trustees and Officers . . . . . . . . . . . . 18
Investment Advisor . . . . . . . . . . . . . . 21
Distributor . . . . . . . . . . . . . . . . . 23
Co-Administrator . . . . . . . . . . . . . . . 23
Services Agent . . . . . . . . . . . . . . . . 24
Custodian and Transfer Agent . . . . . . . . . 24
Shareholder Servicing . . . . . . . . . . . . 25
Independent Accountants . . . . . . . . . . . 26
Expenses . . . . . . . . . . . . . . . . . . . 26
Purchase of Shares . . . . . . . . . . . . . . 26
Redemption of Shares . . . . . . . . . . . . . 27
Exchange of Shares . . . . . . . . . . . . . . 28
Dividends and Distributions . . . . . . . . . 28
Net Asset Value . . . . . . . . . . . . . . . 28
Performance Data . . . . . . . . . . . . . . . 29
Portfolio Transactions . . . . . . . . . . . . 30
Massachusetts Trust . . . . . . . . . . . . . 32
Description of Shares . . . . . . . . . . . . 32
Taxes . . . . . . . . . . . . . . . . . . . . 33
Additional Information . . . . . . . . . . . 37
Appendix A - Description of Securities
Ratings . . . . . . . . . . . . . . . . . . . A-1
<PAGE>
GENERAL
J.P. Morgan Global 50 Fund (the "Fund") is a series of J.P. Morgan
Series Trust, an open-end management investment company organized as a
Massachusetts business trust (the "Trust"). The Trustees of the Trust have
authorized the issuance and sale of shares of two classes of the Fund (Select
Shares and Institutional Shares); currently, only Select Shares are available
for sale to the public.
This Statement of Additional Information describes the financial
history, investment objective and policies, management and operation of the Fund
and provides additional information with respect to the Fund and should be read
in conjunction with the Fund's current Prospectus (the "Prospectus").
Capitalized terms not otherwise defined herein have the meanings accorded to
them in the Prospectus. The Fund's executive offices are located at 60 State
Street, Suite 1300, Boston, Massachusetts 02109.
The Fund is advised by J.P. Morgan Investment Management, Inc. ("JPMIM" or
the "Advisor").
Investments in the Fund are not deposits or obligations of, or
guaranteed or endorsed by, JPMIM. Shares of the Fund are not federally insured
by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other governmental agency. An investment in the Fund is subject to risk that may
cause the value of the investment to fluctuate, and when the investment is
redeemed, the value may be higher or lower than the amount originally invested
by the investor.
INVESTMENT OBJECTIVE AND POLICIES
J.P. Morgan Global 50 Fund (the "Fund") is designed for investors with
a long term investment horizon who want to diversify their investment portfolio
by investing in an actively managed portfolio of approximately 50 global equity
securities. The Fund's investment objective is to provide high total return.
The Fund seeks to achieve its investment objective by investing
primarily in equity securities. Equity securities consist of common stocks and
other securities with equity characteristics such as preferred stocks,
depository receipts, warrants, rights, convertible securities, trust or limited
partnership interests and equity participations (collectively, "Equity
Securities". Under normal circumstances, the Fund expects to invest at least 65%
of its total assets in such securities.
Investment Process for the Global 50 Fund
Stock selection: JPMIM's more than 85 career analysts forecast
normalized earnings and dividend payouts for roughly 2,500 companies -- taking a
long-term perspective rather than the short time frame common to consensus
estimates. These forecasts are converted into comparable expected returns by a
dividend discount model, and then companies are ranked from most to least
attractive. The universe of stocks is narrowed to a group of roughly 500 which
JPMIM's analysts believe have an exceptional return potential relative to other
companies. The portfolio manager's objective is to select from these 500 stocks
the approximately fifty stocks with the greatest potential for high total
return. These selections are not constrained by country or sector weightings,
although under normal conditions the Fund will invest in securities of at least
three countries, including the United States. Where available, warrants and
convertibles may be purchased instead of common stock if they are deemed a more
attractive means of investing in a company.
Currency management: Currency is actively managed with the
goal of protecting and possibly enhancing the Fund's total return. JPMIM's
currency decisions are supported by a proprietary tactical model which forecasts
currency movements based on an analysis of four fundamental factors -- trade
balance trends, purchasing power parity, real short-term interest differentials
and real bond yields -- plus a technical factor designed to improve the timing
of transactions. Combining the output of this model with a subjective assessment
of economic, political and market factors, JPMIM's currency specialists
recommend currency strategies that are implemented in conjunction with the
Fund's investment strategy.
Equity Investments
The Equity Securities in which the Fund invests includes those listed
on any domestic or foreign securities exchange or traded in the over-the-counter
(OTC) market as well as certain restricted or unlisted securities.
Equity Securities. The Equity Securities in which the Fund may invest may
or may not pay dividends and may or may not carry voting rights. Common stock
occupies the most junior position in a company's capital structure.
The convertible securities in which the Fund may invest include any
debt securities or preferred stock which may be converted into common stock or
which carry the right to purchase common stock. Convertible securities entitle
the holder to exchange the securities for a specified number of shares of common
stock, usually of the same company, at specified prices within a certain period
of time.
The terms of any convertible security determine its ranking in a
company's capital structure. In the case of subordinated convertible debentures,
the holders' claims on assets and earnings are subordinated to the claims of
other creditors, and are senior to the claims of preferred and common
shareholders. In the case of convertible preferred stock, the holders' claims on
assets and earnings are subordinated to the claims of all creditors and are
senior to the claims of common shareholders.
Common Stock Warrants
The Fund may invest in common stock warrants that entitle the holder to
buy common stock from the issuer of the warrant at a specific price (the strike
price) for a specific period of time. The market price of warrants may be
substantially lower than the current market price of the underlying common
stock, yet warrants are subject to similar price fluctuations. As a result,
warrants may be more volatile investments than the underlying common stock.
Warrants generally do not entitle the holder to dividends or voting
rights with respect to the underlying common stock and do not represent any
rights in the assets of the issuer company. A warrant will expire worthless if
it is not exercised on or prior to the expiration date.
Foreign Investments
The Fund will make substantial investments in foreign countries.
Investors should realize that the value of the Fund's investments in foreign
securities may be adversely affected by changes in political or social
conditions, diplomatic relations, confiscatory taxation, expropriation,
nationalization, limitation on the removal of funds or assets, or imposition of
(or change in) exchange control or tax regulations in those foreign countries.
In addition, changes in government administrations or economic or monetary
policies in the United States or abroad could result in appreciation or
depreciation of portfolio securities and could favorably or unfavorably affect
the Fund's operations. Furthermore, the economies of individual foreign nations
may differ from the U.S. economy, whether favorably or unfavorably, in areas
such as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position; it may
also be more difficult to obtain and enforce a judgment against a foreign
issuer. Any foreign investments made by the Fund must be made in compliance with
U.S. and foreign currency restrictions and tax laws restricting the amounts and
types of foreign investments.
Generally, investment in securities of foreign issuers involves
somewhat different investment risks from those affecting securities of U.S.
domestic issuers. There may be limited publicly available information with
respect to foreign issuers, and foreign issuers are not generally subject to
uniform accounting, auditing and financial standards and requirements comparable
to those applicable to domestic companies. Dividends and interest paid by
foreign issuers may be subject to withholding and other foreign taxes which may
decrease the net return on foreign investments as compared to dividends and
interest paid to the Fund by domestic companies.
In addition, while the volume of transactions effected on foreign stock
exchanges has increased in recent years, in most cases it remains appreciably
below that of domestic security exchanges. Accordingly, the Fund's foreign
investments may be less liquid and their prices may be more volatile than
comparable investments in securities of U.S. companies. Moreover, the settlement
periods for foreign securities, which are often longer than those for securities
of U.S. issuers, may affect portfolio liquidity. In buying and selling
securities on foreign exchanges, purchasers normally pay fixed commissions that
are generally higher than the negotiated commissions charged in the United
States. In addition, there is generally less government supervision and
regulation of securities exchanges, brokers and issuers located in foreign
countries than in the United States.
Foreign investments may be made directly in securities of foreign
issuers or in the form of American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs") or other
similar securities of foreign issuers. ADRs are securities, typically issued by
a U.S. financial institution (a "depositary"), that evidence ownership interests
in a security or a pool of securities issued by a foreign issuer and deposited
with the depositary. ADRs include American Depositary Shares and New York
Shares. EDRs are receipts issued by a European financial institution. GDRs,
which are sometimes referred to as Continental Depositary Receipts ("CDRs"), are
securities, typically issued by a non-U.S. financial institution, that evidence
ownership interests in a security or a pool of securities issued by either a
U.S. or foreign issuer. ADRs, EDRs, GDRs and CDRs may be available for
investment through "sponsored" or "unsponsored" facilities. A sponsored facility
is established jointly by the issuer of the security underlying the receipt and
a depositary, whereas an unsponsored facility may be established by a depositary
without participation by the issuer of the receipt's underlying security.
Holders of an unsponsored depositary receipt generally bear all costs
of the unsponsored facility. The depositary of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited security or to pass through to the
holders of the receipts voting rights with respect to the deposited securities.
Since investments in foreign securities may involve foreign currencies,
the value of the Fund's assets as measured in U.S. dollars may be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations, including currency blockage. The Fund may enter into forward
commitments for the purchase or sale of foreign currencies in connection with
the settlement of foreign securities transactions or to manage the Fund's
currency exposure related to foreign investments.
The Fund may also invest in countries with emerging economies or
securities markets. Political and economic structures in many of such countries
may be undergoing significant evolution and rapid development, and such
countries may lack the social, political and economic stability characteristic
of more developed countries. Certain of such countries may have in the past
failed to recognize private property rights and have at times nationalized or
expropriated the assets of private companies. As a result, the risks described
above, including the risks of nationalization or expropriation of assets, may be
heightened. In addition, unanticipated political or social developments may
affect the values of the Fund's investments in those countries and the
availability to such Fund of additional investments in those countries. The
small size and inexperience of the securities markets in certain of such
countries and the limited volume of trading in securities in those countries may
make the Fund's investments in such countries illiquid and more volatile than
investments in more developed countries, and the Fund may be required to
establish special custodial or other arrangements before making certain
investments in those countries. There may be little financial or accounting
information available with respect to issuers located in certain of such
countries, and it may be difficult as a result to assess the value or prospects
of an investment in such issuers.
Foreign Currency Exchange Transactions. Because the Fund buys and sells
securities and receives interest and dividends in currencies other than the U.S.
dollar, the Fund may enter from time to time into foreign currency exchange
transactions. The Fund either enters into these transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange market,
or uses forward contracts to purchase or sell foreign currencies. The cost of
the Fund's spot currency exchange transactions is generally the difference
between the bid and offer spot rate of the currency being purchased or sold.
A foreign currency forward exchange contract is an obligation by the
Fund 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. Foreign currency forward
exchange contracts establish an exchange rate at a future date. These contracts
are derivative instruments, as their value derives from the spot exchange rates
of the currencies underlying the contracts. These contracts are entered into in
the interbank market directly between currency traders (usually large commercial
banks) and their customers. A foreign currency forward exchange contract
generally has no deposit requirement, and is traded at a net price without
commission. Neither spot transactions nor foreign currency forward exchange
contracts eliminate fluctuations in the prices of the Fund's securities or in
foreign exchange rates, or prevent loss if the prices of these securities should
decline.
The Fund may enter into foreign currency forward exchange contracts in
connection with settlements of securities transactions and other anticipated
payments or receipts. In addition, from time to time, the Advisor may reduce the
Fund's foreign currency exposure by entering into forward foreign currency
exchange contracts to sell a foreign currency in exchange for the U.S. dollar.
Forward foreign currency exchange contracts may involve the purchase or sale of
a foreign currency in exchange for U.S. dollars or may involve two foreign
currencies.
Although these transactions are intended to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time they
limit any potential gain that might be realized should the value of the hedged
currency increase. In addition, forward contracts that convert a foreign
currency into another foreign currency will cause the Fund to assume the risk of
fluctuations in the value of the currency purchased vis a vis the hedged
currency and the U.S. dollar. The precise matching of the forward contract
amounts and the value of the securities involved will not generally be possible
because the future value of such securities in foreign currencies will change as
a consequence of market movements in the value of such securities between the
date the forward contract is entered into and the date it matures. The
projection of currency market movements is extremely difficult, and the
successful execution of a hedging strategy is highly uncertain.
Money Market Instruments
Although the Fund intends under normal circumstances and to the extent
practicable, to be fully invested in Equity Securities, it may, for defensive
purposes, invest in money market instruments to the extent consistent with its
investment objective and policies. The Fund may make money market investments
pending other investment or settlement, for liquidity or in adverse market
conditions. A description of the various types of money market instruments that
may be purchased by the Fund appears below. Also see "Quality and
Diversification Requirements."
U.S. Treasury Securities. The Fund may invest in direct obligations of the
U.S. Treasury, including Treasury bills, notes and bonds, all of which are
backed as to principal and interest payments by the full faith and credit of the
United States.
Additional U.S. Government Obligations. The Fund may invest in
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities. These obligations may or may not be backed by the "full faith
and credit" of the United States. Securities which are backed by the full faith
and credit of the United States include obligations of the Government National
Mortgage Association, the Farmers Home Administration, and the Export-Import
Bank. In the case of securities not backed by the full faith and credit of the
United States, the Fund must look principally to the federal agency issuing or
guaranteeing the obligation for ultimate repayment and may not be able to assert
a claim against the United States itself in the event the agency or
instrumentality does not meet its commitments. Securities in which the Fund may
invest that are not backed by the full faith and credit of the United States
include, but are not limited to: (i) obligations of the Tennessee Valley
Authority, the Federal Home Loan Mortgage Corporation, the Federal Home Loan
Bank and the U.S. Postal Service, each of which has the right to borrow from the
U.S. Treasury to meet its obligations; (ii) securities issued by the Federal
National Mortgage Association, which are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; and (iii)
obligations of the Federal Farm Credit System and the Student Loan Marketing
Association, each of whose obligations may be satisfied only by the individual
credits of the issuing agency.
Foreign Government Obligations. The Fund may also invest in short-term
obligations of foreign sovereign governments or of their agencies,
instrumentalities, authorities or political subdivisions. These securities may
be denominated in the U.S. dollar or in another currency. See "Foreign
Investments."
Bank Obligations. The Fund may invest in negotiable certificates of
deposit, time deposits and bankers' acceptances of (i) banks, savings and loan
associations and savings banks which have more than $2 billion in total assets
and are organized under the laws of the United States or any state, (ii) foreign
branches of these banks or of foreign banks of equivalent size (Euros) and (iii)
U.S. branches of foreign banks of equivalent size (Yankees). The Fund will not
invest in obligations for which the Advisor, or any of its affiliated persons,
is the ultimate obligor or accepting bank. The Fund may also invest in
international banking institutions designated or supported by national
governments to promote economic reconstruction, development or trade between
nations (e.g., the European Investment Bank, the Inter-American Development
Bank, or the World Bank).
Commercial Paper. The Fund may invest in commercial paper, including
master demand obligations. Master demand obligations are obligations that
provide for a periodic adjustment in the interest rate paid and permit daily
changes in the amount borrowed. Master demand obligations are governed by
agreements between the issuer and JPMIM acting as agent, for no additional fee,
in its capacity as investment advisor to the Fund and as fiduciary for other
clients for whom it exercises investment discretion. The monies loaned to the
borrower come from accounts managed by the Advisor or its affiliates, pursuant
to arrangements with such accounts. Interest and principal payments are credited
to such accounts. The Advisor, acting as a fiduciary on behalf of its clients,
has the right to increase or decrease the amount provided to the borrower under
an obligation. The borrower has the right to pay without penalty all or any part
of the principal amount then outstanding on an obligation together with interest
to the date of payment. Since these obligations typically provide that the
interest rate is tied to the Federal Reserve commercial paper composite rate,
the rate on master demand obligations is subject to change. Repayment of a
master demand obligation to participating accounts depends on the ability of the
borrower to pay the accrued interest and principal of the obligation on demand
which is continuously monitored by the Advisor. Since master demand obligations
typically are not rated by credit rating agencies, the Fund may invest in such
unrated obligations only if at the time of an investment the obligation is
determined by the Advisor to have a credit quality which satisfies the Fund's
quality restrictions. See "Quality and Diversification Requirements." Although
there is no secondary market for master demand obligations, such obligations are
considered by the Fund to be liquid because they are payable upon demand. The
Fund does not have any specific percentage limitation on investments in master
demand obligations. It is possible that the issuer of a master demand obligation
could be a client of Morgan Guaranty Trust Company of New York ("Morgan"), an
affiliate of the Advisor, to whom Morgan, in its capacity as a commercial bank,
has made a loan.
Repurchase Agreements. The Fund may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines approved by the
Trustees of the Trust. In a repurchase agreement, the Fund buys a security from
a seller that has agreed to repurchase the same security at a mutually agreed
upon date and price. The resale price normally is in excess of the purchase
price, reflecting an agreed upon interest rate. This interest rate is effective
for the period of time the Fund is invested in the agreement and is not related
to the coupon rate on the underlying security. A repurchase agreement may also
be viewed as a fully collateralized loan of money by the Fund to the seller. The
period of these repurchase agreements will usually be short, from overnight to
one week, and at no time will the Fund invest in repurchase agreements for more
than thirteen months. The securities which are subject to repurchase agreements,
however, may have maturity dates in excess of thirteen months from the effective
date of the repurchase agreement. The Fund will always receive securities as
collateral whose market value is, and during the entire term of the agreement
remains, at least equal to 100% of the dollar amount invested by the Fund in
each agreement plus accrued interest, and the Fund will make payment for such
securities only upon physical delivery or upon evidence of book entry transfer
to the account of the Custodian. If the seller defaults, the Fund might incur a
loss if the value of the collateral securing the repurchase agreement declines
and might incur disposition costs in connection with liquidating the collateral.
In addition, if bankruptcy proceedings are commenced with respect to the seller
of the security, realization upon disposal of the collateral by a Fund may be
delayed or limited.
The Fund may make investments in other debt securities with remaining
effective maturities of not more than thirteen months, including without
limitation corporate and foreign bonds, asset-backed securities and other
obligations described in this Statement of Additional Information.
Corporate Bonds and Other Debt Securities
The Fund may invest in bonds and other debt securities of domestic and
foreign issuers when the Advisor believes that such securities offer a more
attractive return potential than equity securities. A description of these
investments appears below. See "Quality and Diversification Requirements." For
information on short-term investments in these securities, see "Money Market
Instruments."
Corporate Fixed Income Securities. The Fund may invest in publicly and
privately issued high grade, investment grade and below investment grade debt
obligations of U.S. and non-U.S. corporations, including obligations of
industrial, utility, banking and other financial issuers. The Fund will not
invest in debt securities rated below B by Moody's or Standard & Poor's. See
Appendix A for a description of securities ratings. These securities are subject
to the risk of an issuer's inability to meet principal and interest payments on
the obligation and may also be subject to price volatility due to such factors
as market interest rates, market perception of the creditworthiness of the
issuer and general market liquidity.
The Fund may purchase privately issued corporate fixed income
securities pursuant to Rule 144A of the Securities Act of 1933 ("Rule 144A") or
pursuant to a directly negotiated agreement between the investors, including the
Fund, and the corporate issuer. At times, the Fund may be the only investor in a
privately issued fixed income security, or one of only a few institutional
investors. In this circumstance, there may be restrictions on the Fund's ability
to resell the privately issued fixed income security that result from
contractual limitations in the offering agreement and a limited trading market.
The Advisor will monitor the liquidity of privately issued fixed income
securities in accordance with guidelines established by the Advisor and
monitored by the Trustees. See Illiquid Investments; Privately Placed and Other
Unregistered Securities.
Mortgage-Backed Securities. The Fund may invest in mortgage-backed
securities. Each mortgage pool underlying mortgage-backed securities consists of
mortgage loans evidenced by promissory notes secured by first mortgages or first
deeds of trust or other similar security instruments creating a first lien on
owner occupied and non-owner occupied one-unit to four-unit residential
properties, multifamily (i.e., five or more) properties, agriculture properties,
commercial properties and mixed use properties. The investment characteristics
of adjustable and fixed rate mortgage-backed securities differ from those of
traditional fixed income securities. The major differences include the payment
of interest and principal on mortgage-backed securities on a more frequent
(usually monthly) schedule and the possibility that principal may be prepaid at
any time due to prepayments on the underlying mortgage loans or other assets.
These differences can result in significantly greater price and yield volatility
than is the case with traditional fixed income securities. As a result, a faster
than expected prepayment rate will reduce both the market value and the yield to
maturity from those which were anticipated. A prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity and
market value.
Government Guaranteed Mortgage-Backed Securities. Government National
Mortgage Association mortgage-backed certificates ("Ginnie Maes") are supported
by the full faith and credit of the United States. Certain other U.S. Government
securities, issued or guaranteed by federal agencies or government sponsored
enterprises, are not supported by the full faith and credit of the United
States, but may be supported by the right of the issuer to borrow from the U.S.
Treasury. These securities include obligations of instrumentalities such as the
Federal Home Loan Mortgage Corporation ("Freddie Macs") and the Federal National
Mortgage Association ("Fannie Maes"). No assurance can be given that the U.S.
Government will provide financial support to these federal agencies,
authorities, instrumentalities and government sponsored enterprises in the
future.
There are several types of guaranteed mortgage-backed securities
currently available, including guaranteed mortgage pass-through certificates and
multiple class securities, which include guaranteed real estate mortgage
investment conduit certificates ("REMIC Certificates"), other collateralized
mortgage obligations ("CMOs") and stripped mortgage-backed securities.
Mortgage pass-through securities are fixed or adjustable rate
mortgage-backed securities which provide for monthly payments that are a
"pass-through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans, net
of any fees or other amounts paid to any guarantor, administrator and/or
servicer of the underlying mortgage loans.
Multiple class securities include CMOs and REMIC Certificates issued by
U.S. Government agencies, instrumentalities (such as Fannie Mae) and sponsored
enterprises (such as Freddie Mac) or by trusts formed by private originators of,
or investors in, mortgage loans, including savings and loan associations,
mortgage bankers, commercial banks, insurance companies, investment banks and
special purpose subsidiaries of the foregoing. In general, CMOs are debt
obligations of a legal entity that are collateralized by, and multiple class
mortgage-backed securities represent direct ownership interests in, a pool of
mortgage loans or mortgaged-backed securities and payments on which are used to
make payments on the CMOs or multiple class mortgage-backed securities.
CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie
Mac are types of multiple class mortgage-backed securities. Investors may
purchase beneficial interests in REMICs, which are known as "regular" interests
or "residual" interests. The Funds do not intend to purchase residual interests
in REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed mortgage-backed securities (the "Mortgage Assets"). The
obligations of Fannie Mae and Freddie Mac under their respective guaranty of the
REMIC Certificates are obligations solely of Fannie Mae and Freddie Mac,
respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class
of CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Principal prepayments on the assets underlying
the CMOs or REMIC Certificates may cause some or all of the classes of CMOs or
REMIC Certificates to be retired substantially earlier than their final
scheduled distribution dates. Generally, interest is paid or accrues on all
classes of CMOs or REMIC Certificates on a monthly basis.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed
securities ("SMBS") are derivative multiclass mortgage securities, issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or by
private issuers. Although the market for such securities is increasingly liquid,
SMBS may not be readily marketable and may be considered illiquid for purposes
of the Fund's limitation on investments in illiquid securities, in accordance
with procedures adopted by the Board of Trustees. The market value of the class
consisting entirely of principal payments generally is unusually volatile in
response to changes in interest rates. The yields on a class of SMBS that
receives all or most of the interest from Mortgage Assets are generally higher
than prevailing market yields on other mortgage-backed securities because their
cash flow patterns are more volatile and there is a greater risk that the
initial investment will not be fully recouped.
Zero Coupon, Pay-in-Kind and Deferred Payment Securities. Zero coupon
securities are securities that are sold at a discount to par value and on which
interest payments are not made during the life of the security. Upon maturity,
the holder is entitled to receive the par value of the security. Pay-in-kind
securities are securities that have interest payable by delivery of additional
securities. Upon maturity, the holder is entitled to receive the aggregate par
value of the securities. The Fund accrues income with respect to zero coupon and
pay-in-kind securities prior to the receipt of cash payments. Deferred payment
securities are securities that remain zero coupon securities until a
predetermined date, at which time the stated coupon rate becomes effective and
interest becomes payable at regular intervals. While interest payments are not
made on such securities, holders of such securities are deemed to have received
"phantom income." Because the Fund will distribute "phantom income" to
shareholders, to the extent that shareholders elect to receive dividends in cash
rather than reinvesting such dividends in additional shares, the Fund will have
fewer assets with which to purchase income producing securities. Zero coupon,
pay-in-kind and deferred payment securities may be subject to greater
fluctuation in value and lesser liquidity in the event of adverse market
conditions than comparably rated securities paying cash interest at regular
interest payment periods.
Asset-Backed Securities. Asset-backed securities directly or indirectly
represent a participation interest in, or are secured by and payable from, a
stream of payments generated by particular assets such as motor vehicle or
credit card receivables or other asset-backed securities collateralized by such
assets. Payments of principal and interest may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution unaffiliated with the entities issuing the securities. The
asset-backed securities in which the Fund may invest are subject to the Fund's
overall credit requirements. However, asset-backed securities, in general, are
subject to certain risks. Most of these risks are related to limited interests
in applicable collateral. For example, credit card debt receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts on credit card debt thereby reducing the
balance due. Additionally, if the letter of credit is exhausted, holders of
asset-backed securities may also experience delays in payments or losses if the
full amounts due on underlying sales contracts are not realized. Because
asset-backed securities are relatively new, the market experience in these
securities is limited and the market's ability to sustain liquidity through all
phases of the market cycle has not been tested.
Additional Investments
When-Issued and Delayed Delivery Securities. The Fund may purchase
securities on a when-issued or delayed delivery basis. For example, delivery of
and payment for these securities can take place a month or more after the date
of the purchase commitment. The purchase price and the interest rate payable, if
any, on the securities are fixed on the purchase commitment date or at the time
the settlement date is fixed. The value of such securities is subject to market
fluctuation and for money market instruments and other fixed income securities
no interest accrues to the Fund until settlement takes place. At the time the
Fund makes the commitment to purchase securities on a when-issued or delayed
delivery basis, it will record the transaction, reflect the value each day of
such securities in determining its net asset value and calculate the maturity
for the purposes of average maturity from that date. At the time of settlement a
when-issued security may be valued at less than the purchase price. To
facilitate such acquisitions, the Fund will maintain with the Custodian a
segregated account with liquid assets, consisting of cash, U.S. Government
securities or other appropriate securities, in an amount at least equal to such
commitments. On delivery dates for such transactions, the Fund will meet its
obligations from maturities or sales of the securities held in the segregated
account and/or from cash flow. If the Fund chooses to dispose of the right to
acquire a when-issued security prior to its acquisition, it could, as with the
disposition of any other portfolio obligation, incur a gain or loss due to
market fluctuation. It is the current policy of the Fund not to enter into
when-issued commitments exceeding in the aggregate 15% of the market value of
the Fund's total assets, less liabilities other than the obligations created by
when-issued commitments.
Investment Company Securities. Securities of other investment companies
may be acquired by the Fund to the extent permitted under the 1940 Act. These
limits require that, as determined immediately after a purchase is made, (i) not
more than 5% of the value of the Fund's total assets will be invested in the
securities of any one investment company, (ii) not more than 10% of the value of
its total assets will be invested in the aggregate in securities of investment
companies as a group, and (iii) not more than 3% of the outstanding voting stock
of any one investment company will be owned by the Fund. As a shareholder of
another investment company, the Fund would bear, along with other shareholders,
its pro rata portion of the other investment company's expenses, including
advisory fees. These expenses would be in addition to the advisory and other
expenses that the Fund bears directly in connection with its own operations.
Reverse Repurchase Agreements. The Fund may enter into reverse
repurchase agreements. In a reverse repurchase agreement, the Fund sells a
security and agrees to repurchase the same security at a mutually agreed upon
date and price. For purposes of the 1940 Act a reverse repurchase agreement is
also considered as the borrowing of money by the Fund and, therefore, a form of
leverage. The Fund will invest the proceeds of borrowings under reverse
repurchase agreements. In addition, the Fund will enter into a reverse
repurchase agreement only when the interest income to be earned from the
investment of the proceeds is greater than the interest expense of the
transaction. Investors should keep in mind that the counterparty to a contract
could default on its obligation. The Fund will not invest the proceeds of a
reverse repurchase agreement for a period which exceeds the duration of the
reverse repurchase agreement. The Fund will establish and maintain with the
Custodian a separate account with a segregated portfolio of securities in an
amount at least equal to its purchase obligations under its reverse repurchase
agreements. See "Investment Restrictions" for the Fund's limitations on reverse
repurchase agreements and bank borrowings.
Loans of Securities. The Fund may lend its securities if such loans are
secured continuously by cash or equivalent collateral or by a letter of credit
in favor of the Fund at least equal at all times to 100% of the market value of
the securities loaned, plus accrued interest. While such securities are on loan,
the borrower will pay the Fund any income accruing thereon. Loans will be
subject to termination by the Fund in the normal settlement time, generally
three business days after notice, or by the borrower on one day's notice.
Borrowed securities must be returned when the loan is terminated. Any gain or
loss in the market price of the borrowed securities which occurs during the term
of the loan inures to the Fund and its respective investors. The Fund may pay
reasonable finders' and custodial fees in connection with a loan. In addition,
the Fund will consider all facts and circumstances, including the
creditworthiness of the borrowing financial institution, and the Fund will not
make any loans in excess of one year. The Fund will not lend securities to any
officer, Trustee, Director, employee or other affiliate of the Fund or the
Trust, the Advisor or the Distributor, unless otherwise permitted by applicable
law.
Privately Placed and Certain Unregistered Securities. The Fund may not
acquire any illiquid holdings if, as a result thereof, more than 15% of the
Fund's net assets would be in illiquid investments. Subject to this
non-fundamental policy limitation, the Fund may acquire investments that are
illiquid or have limited liquidity, such as private placements or investments
that are not registered under the 1933 Act and cannot be offered for public sale
in the United States without first being registered under the 1933 Act. An
illiquid investment is any investment that cannot be disposed of within seven
days in the normal course of business at approximately the amount at which it is
valued by the Fund. The price the Fund pays for illiquid holdings or receives
upon resale may be lower than the price paid or received for similar holdings
with a more liquid market. Accordingly the valuation of these holdings will
reflect any limitations on their liquidity.
The Fund may also purchase Rule 144A securities sold to institutional
investors without registration under the 1933 Act. These securities may be
determined to be liquid in accordance with guidelines established by the Advisor
and approved by the Trustees. The Trustees will monitor the Advisor's
implementation of these guidelines on a periodic basis.
As to illiquid investments, the Fund is subject to a risk that should
the Fund decide to sell them when a ready buyer is not available at a price the
Fund deems representative of their value, the value of the Fund's net assets
could be adversely affected. Where an illiquid security must be registered under
the 1933 Act before it may be sold, the Fund may be obligated to pay all or part
of the registration expenses, and a considerable period may elapse between the
time of the decision to sell and the time the Fund may be permitted to sell a
holding under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell.
Quality and Diversification Requirements
The Fund does not intend to meet the diversification requirements of
the 1940 Act. A "non-diversified" Fund may have no more than 25% of its total
assets invested in the securities (other than U.S. government securities or the
shares of other investment companies) of any one issuer and must invest 50% of
its total assets subject to the following fundamental limitations: (1) the Fund
may not invest more than 5% of its total assets in the securities of any one
issuer, except obligations of the U.S. Government, its agencies and
instrumentalities, and (2) the Fund may not own more than 10% of the outstanding
voting securities of any one issuer.
The Fund will comply with the diversification requirements imposed by the
Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a
regulated investment company. See "Taxes."
The Fund may invest in convertible debt securities, for which there are
no specific quality requirements. In addition, at the time the Fund invests in
any commercial paper, bank obligation or repurchase agreement, the issuer must
have outstanding debt rated A or higher by Moody's or Standard & Poor's, the
issuer's parent corporation, if any, must have outstanding commercial paper
rated Prime-1 by Moody's or A-1 by Standard & Poor's, or if no such ratings are
available, the investment must be of comparable quality in the Advisor's
opinion. At the time the Fund invests in any other short-term debt securities,
they must be rated A or higher by Moody's or Standard & Poor's, or if unrated,
the investment must be of comparable quality in the Advisor's opinion. At the
time the Fund invests in any corporate debt securities, they must be rated B or
better by Standard & Poor's or Moody's. See Appendix A for a description of
securities ratings.
Below Investment Grade Debt. Although the Fund has no current intention
to do so, it may purchase certain lower rated securities, such as those rated Ba
or B by Moody's or BB or B by Standard & Poor's (commonly known as junk bonds),
which may be subject to certain risks with respect to the issuing entity's
ability to make scheduled payments of principal and interest and to greater
market fluctuations. While generally providing greater income than investments
in higher quality securities, lower quality fixed income securities involve
greater risk of loss of principal and income, including the possibility of
default or bankruptcy of the issuers of such securities, and have greater price
volatility, especially during periods of economic uncertainty or change. These
lower quality fixed income securities tend to be affected by economic changes
and short-term corporate and industry developments to a greater extent than
higher quality securities, which react primarily to fluctuations in the general
level of interest rates. To the extent that the Fund invests in such lower
quality securities, the achievement of its investment objective may be more
dependent on the Advisor's own credit analysis.
Lower quality fixed income securities are affected by the market's
perception of their credit quality, especially during times of adverse
publicity, and the outlook for economic growth. Economic downturns or an
increase in interest rates may cause a higher incidence of default by the
issuers of these securities, especially issuers that are highly leveraged. The
market for these lower quality fixed income securities is generally less liquid
than the market for investment grade fixed income securities. It may be more
difficult to sell these lower rated securities to meet redemption requests, to
respond to changes in the market, or to determine accurately the Fund's net
asset value.
In determining suitability of investment in a particular unrated
security, the Advisor takes into consideration asset and debt service coverage,
the purpose of the financing, history of the issuer, existence of other rated
securities of the issuer, and other relevant conditions, such as comparability
to other issuers.
Options and Futures Transactions
Exchange Traded and OTC Options. All options purchased or sold by the
Fund will be traded on a securities exchange or will be purchased or sold by
securities dealers (OTC options) that meet creditworthiness standards approved
by the Trust's Board of Trustees. While exchange-traded options are obligations
of the Options Clearing Corporation, in the case of OTC options, the Fund relies
on the dealer from which it purchased the option to perform if the option is
exercised. Thus, when the Fund purchases an OTC option, it relies on the dealer
from which it purchased the option to make or take delivery of the underlying
securities. Failure by the dealer to do so would result in the loss of the
premium paid by the Fund as well as loss of the expected benefit of the
transaction.
Provided that the Fund has arrangements with certain qualified dealers
who agree that the Fund may repurchase any option it writes for a maximum price
to be calculated by a predetermined formula, the Fund may treat the underlying
securities used to cover written OTC options as liquid. In these cases, the OTC
option itself would only be considered illiquid to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the option.
Futures Contracts and Options on Futures Contracts. The Fund may
purchase or sell (write) futures contracts and purchase or sell (write) put and
call options, including put and call options on futures contracts. Futures
contracts obligate the buyer to take and the seller to make delivery at a future
date of a specified quantity of a financial instrument or an amount of cash
based on the value of a securities index. Currently, futures contracts are
available on various types of fixed income securities, including but not limited
to U.S. Treasury bonds, notes and bills, Eurodollar certificates of deposit and
on indexes of fixed income securities and indexes of equity securities.
Unlike a futures contract, which requires the parties to buy and sell a
security or make a cash settlement payment based on changes in a financial
instrument or securities index on an agreed date, an option on a futures
contract entitles its holder to decide on or before a future date whether to
enter into such a contract. If the holder decides not to exercise its option,
the holder may close out the option position by entering into an offsetting
transaction or may decide to let the option expire and forfeit the premium
thereon. The purchaser of an option on a futures contract pays a premium for the
option but makes no initial margin payments or daily payments of cash in the
nature of "variation" margin payments to reflect the change in the value of the
underlying contract as does a purchaser or seller of a futures contract.
The seller of an option on a futures contract receives the premium paid
by the purchaser and may be required to pay initial margin. Amounts equal to the
initial margin and any additional collateral required on any options on futures
contracts sold by the Fund are paid into a segregated account, in the name of
the Futures Commission Merchant, as required by the 1940 Act and the Security
and Exchange Commission's (the "SEC") interpretations thereunder.
Combined Positions. The Fund is permitted to purchase and write options
in combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of the overall
position. For example, the Fund may purchase a put option and write a call
option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call option
at one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial price
increase. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
Correlation of Price Changes. Because there are a limited number of
types of exchange-traded options and futures contracts, it is likely that the
standardized options and futures contracts available will not match the Fund's
current or anticipated investments exactly. The Fund may invest in options and
futures contracts based on securities with different issuers, maturities, or
other characteristics from the securities in which it typically invests, which
involves a risk that the options or futures position will not track the
performance of the Fund's other investments.
Options and futures contracts prices can also diverge from the prices
of their underlying instruments, even if the underlying instruments match the
Fund's investments well. Options and futures contracts prices are affected by
such factors as current and anticipated short term interest rates, changes in
volatility of the underlying instrument, and the time remaining until expiration
of the contract, which may not affect security prices the same way. Imperfect
correlation may also result from differing levels of demand in the options and
futures markets and the securities markets, from structural differences in how
options and futures and securities are traded, or from imposition of daily price
fluctuation limits or trading halts. The Fund may purchase or sell options and
futures contracts with a greater or lesser value than the securities it wishes
to hedge or intends to purchase in order to attempt to compensate for
differences in volatility between the contract and the securities, although this
may not be successful in all cases. If price changes in the Fund's options or
futures positions are poorly correlated with its other investments, the
positions may fail to produce anticipated gains or result in losses that are not
offset by gains in other investments.
Liquidity of Options and Futures Contracts. There is no assurance a
liquid market will exist for any particular option or futures contract at any
particular time even if the contract is traded on an exchange. In addition,
exchanges may establish daily price fluctuation limits for options and futures
contracts and may halt trading if a contract's price moves up or down more than
the limit in a given day. On volatile trading days when the price fluctuation
limit is reached or a trading halt is imposed, it may be impossible for the Fund
to enter into new positions or close out existing positions. If the market for a
contract is not liquid because of price fluctuation limits or otherwise, it
could prevent prompt liquidation of unfavorable positions, and could potentially
require the Fund to continue to hold a position until delivery or expiration
regardless of changes in its value. As a result, the Fund's access to other
assets held to cover its options or futures positions could also be impaired.
(See "Exchange Traded and OTC Options" above for a discussion of the liquidity
of options not traded on an exchange.)
Position Limits. Futures exchanges can limit the number of futures and
options on futures contracts that can be held or controlled by an entity. If an
adequate exemption cannot be obtained, the Fund or the Advisor may be required
to reduce the size of its futures and options positions or may not be able to
trade a certain futures or options contract in order to avoid exceeding such
limits.
Asset Coverage for Futures Contracts and Options Positions. The Fund
intends to comply with Section 4.5 of the regulations under the Commodity
Exchange Act, which limits the extent to which the Fund can commit assets to
initial margin deposits and option premiums. In addition, the Fund will comply
with guidelines established by the SEC with respect to coverage of options and
futures contracts by mutual funds, and if the guidelines so require, will set
aside appropriate liquid assets in a segregated custodial account in the amount
prescribed. Securities held in a segregated account cannot be sold while the
futures contract or option is outstanding, unless they are replaced with other
suitable assets. As a result, there is a possibility that segregation of a large
percentage of the Fund's assets could impede portfolio management or the Fund's
ability to meet redemption requests or other current obligations.
Swaps and Related Swap Products. The Fund may engage in swap
transactions, including, but not limited to, interest rate, currency, index,
basket, specific security and commodity swaps, interest rate caps, floors and
collars and options on interest rate swaps(collectively defined as "swap
transactions").
The Fund may enter into swap transactions for any legal purpose
consistent with its investment objective, such as for the purpose of attempting
to obtain or preserve a particular return or spread at a lower cost than
investing directly in an instrument that yields that return or spread, or to
protect against currency fluctuations, as a duration management technique, to
protect against any increase in the price of securities the Fund anticipates
purchasing at a later date, or to gain exposure to certain markets in the most
economical way possible. The Fund will not sell interest rate caps, floors or
collars if it does not own securities with coupons which yield the interest that
the Fund may be required to pay.
Swap agreements are two-party contracts entered into primarily by
institutional investors for periods ranging from a few weeks to several years.
In a standard swap transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments. The gross returns to be exchanged or "swapped"
between the parties are calculated with respect to a "notional amount," i.e.,
the return on or increase in value of a particular dollar amount invested at a
particular interest rate, in a particular foreign currency or commodity, or in a
"basket" of securities representing a particular index. The purchaser of an
interest rate cap or floor, upon payment of a fee, has the right to receive
payments (and the seller of the cap is obligated to make payments) to the extent
a specified interest rate exceeds (in the case of a cap) or is less than (in the
case of a floor) a specified level over a specified period of time or at
specified dates. The purchaser of an interest rate collar, upon payment of a
fee, has the right to receive payments (and the seller of the collar is
obligated to make payments) to the extent that a specified interest rate falls
outside an agreed upon range over a specified period of time or at specified
dates. The purchaser of an option on an interest rate swap, upon payment of a
fee (either at the time of purchase or in the form of higher payments or lower
receipts within an interest rate swap transaction) has the right, but not the
obligation, to initiate a new swap transaction of a prespecified notional amount
with prespecified terms with the seller of the option as the counterparty.
The "notional amount" of the swap transaction is the agreed upon basis
for calculating the obligations that the parties to a swap agreement have agreed
to exchange. An example would be the obligation to pay a floating rate of
interest (e.g., U.S. 3 month LIBOR) on a quarterly basis in exchange for receipt
of a fixed rate of interest on a semi-annual basis. In the event the Fund is
obligated to make payments more frequently than it receives payments from the
other party, the Fund will incur incremental credit exposure to that swap
counterparty. This risk may be mitigated somewhat by the use of swap agreements
which call for a net payment to be made by the party with the larger payment
obligation when the obligations of the parties fall due on the same date. Under
most swap agreements entered into by the Fund, the obligations of the parties
will be exchanged on a "net basis". That is, the two payment streams are netted
out in a cash settlement on the payment date or dates specified in the
instrument. The Fund will receive or pay, as the case may be, only the net
amount of the two payments.
The amount of the Fund's potential gain or loss on any swap transaction
is not subject to any fixed limit. Nor is there any fixed limit on the Fund's
potential loss if it sells a cap, floor or collar. If the Fund buys a cap, floor
or collar, however, the Fund's potential loss is limited to the amount of the
fee that it has paid. When measured against the initial amount of cash required
to initiate the transaction, which is typically zero in the case of most
conventional interest rate swaps, swap transactions tend to be more volatile
than many other types of investments.
The use of swap transactions involves investment techniques and risks
which are similar to those associated with other portfolio security
transactions. If the Advisor is incorrect in its forecasts of market values,
interest rates, currency rates and other applicable factors, the investment
performance of the Fund will be less favorable than if these techniques had not
been used. These instruments are typically not traded on exchanges. Accordingly,
there is a risk that the other party to certain of these instruments will not
perform its obligations to the Fund or that the Fund may be unable to enter into
offsetting positions to terminate its exposure or liquidate its investment under
certain of these instruments when it wishes to do so. Such occurrences could
result in losses to the Fund. The Advisor will, however, consider such risks and
will enter into swap transactions only when it believes that the risks are not
unreasonable.
The Fund will maintain cash or liquid assets in a segregated account
with its custodian in an amount sufficient at all times to cover its current
obligations under its swap transactions. If the Fund enters into a swap
agreement on a net basis, it will segregate assets with a daily value at least
equal to the excess, if any, of the Fund's accrued obligations under the swap
agreement over the accrued amount the Fund is entitled to receive under the
agreement. If the Fund enters into a swap agreement on other than a net basis,
or sells a cap, floor or collar, it will segregate assets with a daily value at
least equal to the full amount of the Fund's accrued obligations under the
agreement.
The Fund will not enter into any swap transaction, unless the
counterparty to the transaction is deemed creditworthy by the Advisor. If a
counterparty defaults, the Fund may have contractual remedies pursuant to the
agreements related to the transaction. The markets in which swap transactions
are traded have grown substantially in recent years, with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized documentation. As a result, these markets have become
relatively liquid.
The liquidity of swap transactions will be determined by the Advisor
based on various factors, including (1) the frequency of trades and quotations,
(2) the number of dealers and prospective purchasers in the marketplace, (3)
dealer undertakings to make a market, (4) the nature of the instrument
(including any demand or tender features) and (5) the nature of the marketplace
for trades (including the ability to assign or offset the Fund's rights and
obligations relating to the investment). Such determination will govern whether
the instrument will be deemed within the 15% restriction on investments in
securities that are not readily marketable.
During the term of a swap, changes in the value of the swap are
recognized as unrealized gains or losses by marking to market to reflect the
market value of the swap. When the swap is terminated, the Fund will record a
realized gain or loss equal to the difference, if any, between the proceeds from
(or cost of) the closing transaction and the Fund's basis in the contract.
The federal income tax treatment with respect to swap transactions may
impose limitations on the extent to which the Fund may engage in such
transactions.
Risk Management
The Fund may employ non-hedging risk management techniques. Risk
management strategies are used to keep the Fund fully invested and to reduce the
transaction costs associated with cash flows into and out of the Fund. The
objective where equity futures are used to "equitize" cash is to match the
notional value of all futures contracts to the Fund's cash balance. The notional
value of futures and of the cash is monitored daily. As the cash is invested in
securities and/or paid out to participants in redemptions, the Advisor
simultaneously adjusts the futures positions. Through such procedures, the Fund
not only gains equity exposure from the use of futures, but also benefits from
increased flexibility in responding to client cash flow needs. Additionally,
because it can be less expensive to trade a list of securities as a package or
program trade rather than as a group of individual orders, futures provide a
means through which transaction costs can be reduced. Such non-hedging risk
management techniques are not speculative, but because they involve leverage
include, as do all leveraged transactions, the possibility of losses as well as
gains that are greater than if these techniques involved the purchase and sale
of the securities themselves rather than their synthetic derivatives.
Portfolio Turnover
The portfolio turnover rate for the Fund is estimated to be 100%.
INVESTMENT RESTRICTIONS
The investment restrictions below have been adopted by the Trust with respect to
the Fund. Except where otherwise noted, these investment restrictions are
"fundamental" policies which, under the 1940 Act, may not be changed without the
vote of a majority of the outstanding voting securities of the Fund. A "majority
of the outstanding voting securities" is defined in the 1940 Act as the lesser
of (a) 67% or more of the voting securities present at a security holders
meeting if the holders of more than 50% of the outstanding voting securities are
present or represented by proxy, or (b) more than 50% of the outstanding voting
securities. The percentage limitations contained in the restrictions below apply
at the time of the purchase of securities.
1. The Fund may not purchase any security which would cause the Fund to
concentrate its investments in the securities of issuers primarily engaged in
any particular industry except as permitted by the SEC.
2. The Fund may not issue senior securities, except as permitted under the 1940
Act or any rule, order or interpretation thereunder.
3. The Fund may not borrow money, except to the extent permitted by applicable
law.
4. The Fund may not underwrite securities of other issuers, except to the extent
that the Fund, in disposing of portfolio securities, may be deemed an
underwriter within the meaning of the 1933 Act.
5. The Fund may not purchase or sell real estate, except that, to the extent
permitted by applicable law, the Fund may invest in (a) securities directly or
indirectly secured by real estate or (b) securities issued by issuers that
invest in real estate.
6. The Fund may not purchase or sell commodities or commodity contracts unless
acquired as a result of ownership of securities or other instruments issued by
persons that purchase or sell commodities or commodity contracts; but this shall
not prevent the Fund from purchasing, selling and entering into financial
futures contracts (including futures contracts on indices of securities,
interest rates and currencies), options on financial futures contracts
(including futures contracts on indices of securities, interest rates and
currencies), warrants, swaps, forward contracts, foreign currency spot and
forward contracts or other derivative instruments that are not related to
physical commodities.
7. The Fund may make loans to other persons, in accordance with the Fund's
investment objectives and policies and to the extent permitted by applicable
law.
Non-Fundamental Investment Restrictions. The investment restriction described
below is not a fundamental policy of the Fund and may be changed by the
Trustees. This non-fundamental investment policy requires that the Fund not
acquire any illiquid securities, such as repurchase agreements with more than
seven days to maturity or fixed time deposits with a duration of over seven
calendar days, if as a result thereof, more than 15% of the market value of the
Fund's net assets would be in investments that are illiquid.
There will be no violation of any investment restriction if that
restriction is complied with at the time the relevant action is taken
notwithstanding a later change in market value of an investment, in net or total
assets, in the securities rating of the investment, or any other later change.
For purposes of fundamental investment restrictions regarding industry
concentration, the Advisor may classify issuers by industry in accordance with
classifications set forth in the Directory of Companies Filing Annual Reports
With the Securities and Exchange Commission or other sources. In the absence of
such classification or if the Advisor determines in good faith based on its own
information that the economic characteristics affecting a particular issuer make
it more appropriately considered to be engaged in a different industry, the
Advisor may classify an issuer accordingly. For instance, personal credit
finance companies and business credit finance companies are deemed to be
separate industries and wholly owned finance companies are considered to be in
the industry of their parents if their activities are primarily related to
financing the activities of their parents.
TRUSTEES AND OFFICERS
The Trustees of the Trust, their business addresses, principal
occupations during the past five years and dates of birth are set forth below.
Frederick S. Addy -- Trustee; Retired; Prior to April 1994, Executive
Vice President and Chief Financial Officer, Amoco Corporation. His address is
5300 Arbutus Cove, Austin, TX 78746, and his date of birth is January 1, 1932.
William G. Burns -- Trustee; Retired; Former Vice Chairman and Chief
Financial Officer, NYNEX. His address is 2200 Alaqua Drive, Longwood, FL 32779,
and his date of birth is November 2, 1932.
Arthur C. Eschenlauer -- Trustee; Retired; Former Senior Vice
President, Morgan Guaranty Trust Company of New York. His address is 14 Alta
Vista Drive, RD #2, Princeton, NJ 08540, and his date of birth is May 23, 1934.
Matthew Healey (*) -- Trustee; Chairman and Chief Executive Officer;
Chairman, Pierpont Group, Inc. ("Pierpont Group") since prior to 1993. His
address is Pine Tree Club Estates, 10286 Saint Andrews Road, Boynton Beach, FL
33436, and his date of birth is August 23, 1937.
Michael P. Mallardi -- Trustee; Retired; Prior to April 1996, Senior Vice
President, Capital Cities/ABC, Inc. and President, Broadcast Group. His address
is 10 Charnwood Drive, Suffern, NY 10910, and his date of birth is March 17,
1934.
Each Trustee is currently paid an annual fee of $75,000 for serving as Trustee
of the Trust, each of the Master Portfolios (as defined below), J.P. Morgan
Funds and J.P. Morgan Institutional Funds and is reimbursed for expenses
incurred in connection with service as a Trustee. The Trustees may hold various
other directorships unrelated to these funds.
- ----------------------
* Mr. Healey is an "interested person" of the Trust and the Advisor as that
term is defined in the 1940 Act.
Trustee compensation expenses paid by the Trust for the calendar year
ended December 31, 1997 are set forth below.
<TABLE>
<S> <C> <S>
- -------------------------------------------------- ------------------------ ---------------------------------------
TOTAL TRUSTEE COMPENSATION ACCRUED BY
AGGREGATE TRUSTEE THE MASTER PORTFOLIOS(*), J.P. MORGAN
COMPENSATION FUNDS, J.P. MORGAN INSTITUTIONAL
PAID BY THE TRUST FUNDS AND THE TRUST 1997(**)
DURING 1997
NAME OF TRUSTEE
- -------------------------------------------------- ------------------------ ---------------------------------------
- -------------------------------------------------- ------------------------ ---------------------------------------
Frederick S. Addy, Trustee $90.92 $72,500
- -------------------------------------------------- ------------------------ ---------------------------------------
- -------------------------------------------------- ------------------------ ---------------------------------------
William G. Burns, Trustee $90.92 $72,500
- -------------------------------------------------- ------------------------ ---------------------------------------
- -------------------------------------------------- ------------------------ ---------------------------------------
Arthur C. Eschenlauer, Trustee $90.92 $72,500
- -------------------------------------------------- ------------------------ ---------------------------------------
- -------------------------------------------------- ------------------------ ---------------------------------------
Matthew Healey, Trustee (***) $90.92 $72,500
Chairman and Chief Executive
Officer
- -------------------------------------------------- ------------------------ ---------------------------------------
- -------------------------------------------------- ------------------------ ---------------------------------------
Michael P. Mallardi, Trustee $90.92 $72,500
- -------------------------------------------------- ------------------------ ---------------------------------------
- --------------------------------------------- ------------------------------ -------------------------------------------
- --------------------------------------------- ------------------------------ -------------------------------------------
</TABLE>
(*) Includes each portfolio in which a series of J.P. Morgan Funds or J.P.
Morgan Institutional Funds invests.
(**) No investment company within the fund complex has a pension or
retirement plan. Currently there are 18 investment companies (15 investment
companies comprising the Master Portfolios, J.P. Morgan Funds, J.P. Morgan
Institutional Funds and the Trust) in the fund complex.
(***) During 1997, Pierpont Group, Inc. paid Mr. Healey, in his role as
Chairman of Pierpont Group, Inc., compensation in the amount of $147,500,
contributed $22,100 to a defined contribution plan on his behalf and paid
$20,500 in insurance premiums for his benefit.
The Trustees, in addition to reviewing actions of the Trust's various
service providers, decide upon matters of general policy. The Trust has entered
into a Fund Services Agreement with Pierpont Group, Inc. to assist the Trustees
in exercising their overall supervisory responsibilities over the affairs of the
Trust. Pierpont Group, Inc. was organized in July 1989 to provide services for
the J.P. Morgan Funds (formerly "The Pierpont Family of Funds"), and the
Trustees are the equal and sole shareholders of Pierpont Group, Inc. The Trust,
J.P. Morgan Funds, J.P. Morgan Institutional Funds and each Master Portfolio
have agreed to pay Pierpont Group, Inc. a fee in an amount representing its
reasonable costs in performing these services. These costs are periodically
reviewed by the Trustees.
Officers
The Trust's executive officers (listed below), other than the Chief
Executive Officer and the officers who are employees of the Advisor, are
provided and compensated by Funds Distributor, Inc. ("FDI"), a wholly owned
indirect subsidiary of Boston Institutional Group, Inc. The officers conduct and
supervise the business operations of the Trust. The Trust has no employees.
The officers of the Trust, their principal occupations during the past
five years and dates of birth are set forth below. The business address of each
of the officers unless otherwise noted is Funds Distributor, Inc., 60 State
Street, Suite 1300, Boston, Massachusetts 02109.
MATTHEW HEALEY; Chief Executive Officer; Chairman, Pierpont Group,
since prior to 1993. His address is Pine Tree Club Estates, 10286 Saint Andrews
Road, Boynton Beach, FL 33436. His date of birth is August 23, 1937.
MARGARET W. CHAMBERS, Vice President and Secretary. Senior Vice President
and General Counsel of FDI since April, 1998. From August 1996 to March 1998,
Ms. Chambers was Vice President and Assistant General Counsel for Loomis, Sayles
& Company, L.P. From January 1986 to July 1996, she was an associate with the
law firm of Ropes & Gray. Her date of birth is October 12, 1959. Address: 60
State Street, Boston, MA 02109.
MARIE E. CONNOLLY; Vice President and Assistant Treasurer. President,
Chief Executive Officer, Chief Compliance Officer and Director of FDI, Premier
Mutual Fund Services, Inc., an affiliate of FDI ("Premier Mutual") and an
officer of certain investment companies distributed or administered by FDI.
Prior to July 1994, she was President and Chief Compliance Officer of FDI. Her
date of birth is August 1, 1957.
DOUGLAS C. CONROY; Vice President and Assistant Treasurer. Assistant Vice
President and Assistant Department Manager of Treasury Services and
Administration of FDI and an officer of certain investment companies distributed
or administered by FDI. Prior to April 1997, Mr. Conroy was Supervisor of
Treasury Services and Administration of FDI. From April 1993 to January 1995,
Mr. Conroy was a Senior Fund Accountant for Investors Bank & Trust Company. His
date of birth is March 31, 1969.
KAREN JACOPPO-WOOD; Vice President and Assistant Secretary. Vice President
and Senior Counsel of FDI and an officer of certain investment companies
distributed or administered by FDI. From June 1994 to January 1996, Ms.
Jacoppo-Wood was a Manager of SEC Registration at Scudder, Stevens & Clark, Inc.
Prior to May 1994, Ms. Jacoppo-Wood was a senior paralegal at The Boston Company
Advisors, Inc. ("TBCA"). Her date of birth is December 29, 1966.
CHRISTOPHER J. KELLEY; Vice President and Assistant Secretary. Vice
President and Senior Associate General Counsel of FDI and Premier Mutual and an
officer of certain investment companies distributed or administered by FDI. From
April 1994 to July 1996, Mr. Kelley was Assistant Counsel at Forum Financial
Group. Prior to April 1994, Mr. Kelley was employed by Putnam Investments in
legal and compliance capacities. His date of birth is December 24, 1964.
MARY A. NELSON; Vice President and Assistant Treasurer. Vice President and
Manager of Treasury Services and Administration of FDI and Premier Mutual and an
officer of certain investment companies distributed or administered by FDI.
Prior to August 1994, Ms. Nelson was an Assistant Vice President and Client
Manager for The Boston Company, Inc. Her date of birth is April 22, 1964.
MARY JO PACE; Assistant Treasurer. Vice President, J.P. Morgan Investment
Management, Inc. Ms. Pace serves in the Funds Administration group as a Manager
for the Budgeting and Expense Processing Group. Prior to September 1995, Ms.
Pace served as a Fund Administrator for Morgan Guaranty Trust Company of New
York. Her address is 60 Wall Street, New York, New York 10260. Her date of birth
is March 13, 1966.
STEPHANIE D. PIERCE. Vice President and Assistant Secretary. Vice
President, Client Development Manager for FDI since April, 1998. From April 1997
to March, 1998, Ms. Pierce was employed by Citibank, NA as an officer of
Citibank and Relationship Manager on the Business and Professional Banking team
handling over 22,000 clients. Her date of birth is August 18, 1968. Address: 200
Park Avenue, 45th Floor, New York, NY 10166.
MICHAEL S. PETRUCELLI; Vice President and Assistant Secretary. Senior Vice
President and Director of Strategic Client Initiatives for FDI since December
1996. From December 1989 through November 1996, Mr. Petrucelli was employed with
GE Investments where he held various financial, business development and
compliance positions. He also served as Treasurer of the GE Funds and as
Director of GE Investment Services. Address: 200 Park Avenue, New York, New
York, 10166. His date of birth is May 18, 1961.
GEORGE A. RIO, President and Treasurer of the Trust. Executive Vice
President, Client Service Director of FDI (since April 1998). From June 1995 to
March 1998, Mr. Rio was Senior Vice President, Senior Key Account Manager for
Putnam Mutual Funds. From May 1994 to June 1995, Mr. Rio was Director of
Business Development for First Data Corporation. From September 1983 to May
1994, Mr. Rio was Senior Vice President & Manager of Client Services and
Director of Internal Audit at The Boston Company. His date of birth is January
2, 1955. Address: 60 State Street, Boston, MA 02109.
CHRISTINE ROTUNDO; Assistant Treasurer. Vice President, J.P. Morgan
Investment Management, Inc. Ms. Rotundo serves in the Funds Administration group
as a Manager of the Tax Group and is responsible for U.S. mutual fund tax
matters. Prior to September 1995, Ms. Rotundo served as a Senior Tax Manager in
the Investment Company Services Group of Deloitte & Touche LLP. Her address is
60 Wall Street, New York, New York 10260. Her date of birth is September 26,
1965.
JOSEPH F. TOWER III; Vice President and Assistant Treasurer. Senior Vice
President, Treasurer and Chief Financial Officer, Chief Administrative Officer
and Director of FDI. Senior Vice President, Treasurer and Chief Financial
Officer, Chief Administrative Officer and Director of Premier Mutual and an
officer of certain investment companies distributed or administered by FDI.
Prior to November 1993, Mr. Tower was Financial Manager of The Boston Company,
Inc. His date of birth is June 13, 1962.
INVESTMENT ADVISOR
The Advisor is a wholly owned subsidiary of J.P. Morgan & Co.
Incorporated ("J.P. Morgan"), a bank holding company organized under the laws of
the State of Delaware. The Advisor, whose principal offices are 522 Fifth
Avenue, New York, New York 10036, is a Delaware corporation. J.P. Morgan,
together with its predecessors, has been in the investment advisory business for
over 100 years and today, through JPMIM and its other subsidiaries, offers a
wide range of investment management services to governmental, institutional,
corporate and individual clients, managing over $285 billion in assets.
Through offices in New York City and abroad, the Advisor offers a wide
range of services, primarily to governmental, institutional, corporate and high
net worth individual customers in the United States and throughout the world.
The basis of the Advisor's investment process is fundamental investment
research as the firm believes that fundamentals should determine an asset's
value over the long term. J.P. Morgan currently employs over 100 full time
research analysts, among the largest research staffs in the money management
industry, in its investment management divisions located in New York, London,
Tokyo, Frankfurt, Melbourne and Singapore to cover companies, industries and
countries on site. In addition, the investment management divisions employ
approximately 300 capital market researchers, portfolio managers and traders.
The investment advisory services the Advisor provides to the Fund are
not exclusive under the terms of the Investment Advisory Agreement. The Advisor
is free to and does render similar investment advisory services to others, and
is a registered investment adviser under the Investment Advisers Act of 1940, as
amended. The Advisor also manages employee benefit funds of corporations, labor
unions and state and local governments and the accounts of other institutional
investors, including investment companies. Certain of the assets of employee
benefit accounts under its management are invested in commingled pension trust
funds for which Morgan serves as trustee; the Advisor advises Morgan on
investment of the commingled pension trust funds. The accounts which are managed
or advised by the Advisor have varying investment objectives and the Advisor
invests assets of such accounts in investments substantially similar to, or the
same as, those which are expected to constitute the principal investments of the
Fund. Such accounts are supervised by officers and employees of the Advisor who
may also be acting in similar capacities for the Fund. See "Portfolio
Transactions."
The Fund is managed by officers of the Advisor who, in acting for their
customers, including the Fund, do not discuss their investment decisions with
any personnel of J.P. Morgan or any personnel of other divisions of the Advisor
or with any of its affiliated persons, with the exception of certain other
investment management affiliates of J.P. Morgan.
.........As compensation for the services rendered and related expenses such as
salaries of advisory personnel borne by the Advisor under the Investment
Advisory Agreements, the Fund has agreed to pay the Advisor a fee, which is
computed daily and may be paid monthly, equal to 1.25% of the average daily net
assets of the Fund.
The Investment Advisory Agreement provides that it will continue in
effect for a period of two years after execution only if specifically approved
thereafter annually in the same manner as the Distribution Agreement. See
"Distributor" below. The Investment Advisory Agreement will terminate
automatically if assigned and is terminable at any time without penalty by a
vote of a majority of the Trustees, or by a vote of the holders of a majority of
the Fund's outstanding voting securities, on 60 days' written notice to the
Advisor and by the Advisor on 90 days' written notice to the Trust. See
"Additional Information."
The Glass-Steagall Act and other applicable laws generally prohibit
subsidiaries of bank holding companies, such as the Advisor, from engaging in
the business of underwriting or distributing securities, and the Board of
Governors of the Federal Reserve System has issued an interpretation to the
effect that under these laws a bank holding company registered under the federal
Bank Holding Company Act or certain subsidiaries thereof may not sponsor,
organize, or control a registered open-end investment company continuously
engaged in the issuance of its shares, such as the Trust. The interpretation
does not prohibit a holding company or a subsidiary thereof from acting as
investment advisor to such an investment company. The Advisor believes that it
may perform the services for the Fund contemplated by the Investment Advisory
Agreement without violation of the Glass-Steagall Act or other applicable
banking laws or regulations. State laws on this issue may differ from the
interpretation of relevant federal law, and bank holding company subsidiaries
and financial institutions may be required to register as dealers pursuant to
state securities laws. However, it is possible that future changes in either
federal or state statutes and regulations concerning the permissible activities
of bank holding company subsidiaries or trust companies, as well as further
judicial or administrative decisions and interpretations of present and future
statutes and regulations, might prevent the Advisor from continuing to perform
such services for the Fund.
If the Advisor were prohibited from acting as investment advisor to any
Fund, it is expected that the Trustees of the Trust would recommend to investors
that they approve the Fund's entering into a new investment advisory agreement
with another qualified investment advisor selected by the Trustees.
DISTRIBUTOR
FDI serves as the Trust's exclusive Distributor and holds itself
available to receive purchase orders for the Fund's shares. In that capacity,
FDI has been granted the right, as agent of the Trust, to solicit and accept
orders for the purchase of the Fund's shares in accordance with the terms of the
Distribution Agreement between the Trust and FDI. Under the terms of the
Distribution Agreement between FDI and the Trust, FDI receives no compensation
in its capacity as the Trust's distributor. FDI is a wholly owned indirect
subsidiary of Boston Institutional Group, Inc. FDI currently provides
administration and distribution services for a number of other investment
companies.
The Distribution Agreement shall continue in effect with respect to the
Fund for a period of two years after execution only if it is approved at least
annually thereafter (i) by a vote of the holders of a majority of the Fund's
outstanding shares or by its Trustees and (ii) by a vote of a majority of the
Trustees of the Trust who are not "interested persons" (as defined by the 1940
Act) of the parties to the Distribution Agreement, cast in person at a meeting
called for the purpose of voting on such approval (see "Trustees and Officers").
The Distribution Agreement will terminate automatically if assigned by either
party thereto and is terminable at any time without penalty by a vote of a
majority of the Trustees of the Trust, a vote of a majority of the Trustees who
are not "interested persons" of the Trust, or by a vote of the holders of a
majority of the Fund's outstanding shares as defined under "Additional
Information," in any case without payment of any penalty on 60 days' written
notice to the other party. The principal offices of FDI are located at 60 State
Street, Suite 1300, Boston, Massachusetts 02109.
CO-ADMINISTRATOR
Under Co-Administration Agreements with the Trust dated August 1, 1996,
FDI also serves as the Trust's Co-Administrator. The Co-Administration Agreement
may be renewed or amended by the Trustees without a shareholder vote. The
Co-Administration Agreement is terminable at any time without penalty by a vote
of a majority of the Trustees, as applicable, on not more than 60 days' written
notice nor less than 30 days' written notice to the other party. The
Co-Administrator may subcontract for the performance of its obligations,
provided, however, that unless the Trust expressly agrees in writing, the
Co-Administrator shall be fully responsible for the acts and omissions of any
subcontractor as it would for its own acts or omissions. See "Services Agent"
below.
FDI (i) provides office space, equipment and clerical personnel for
maintaining the organization and books and records of the Trust; (ii) provides
officers for the Trust; (iii) prepares and files documents required for
notification of state securities administrators; (iv) reviews and files
marketing and sales literature; (v) files Trust regulatory documents and mails
Trust communications to Trustees and investors; and (vi) maintains related books
and records.
For its services under the Co-Administration Agreements, the Fund has
agreed to pay FDI fees equal to its allocable share of an annual complex-wide
charge of $425,000 plus FDI's out-of-pocket expenses. The amount allocable to
the Fund is based on the ratio of its net assets to the aggregate net assets of
the Trust, the Master Portfolios and other investment companies subject to
similar agreements with FDI.
SERVICES AGENT
The Trust has entered into Administrative Services Agreement (the
"Services Agreements") with Morgan pursuant to which Morgan is responsible for
certain administrative and related services provided to the Fund. The Services
Agreement may be terminated at any time, without penalty, by the Trustees or
Morgan, in each case on not more than 60 days' nor less than 30 days' written
notice to the other party.
Under the Services Agreements, Morgan provides certain administrative
and related services to the Fund, including services related to tax compliance,
preparation of financial statements, calculation of performance data, oversight
of service providers and certain regulatory and Board of Trustee matters.
.........Under the amended Services Agreements, the Fund has agreed to pay
Morgan fees equal to its allocable share of an annual complex-wide charge. This
charge is calculated daily based on the aggregate net assets of the Master
Portfolios and the Trust in accordance with the following annual schedule: 0.09%
on the first $7 billion of their aggregate average daily net assets and 0.04% of
their average daily net assets in excess of $7 billion, less the complex-wide
fees payable to FDI. The portion of this charge payable by the Fund is
determined by the proportionate share that its net assets bear to the total net
assets of the Trust, the Master Portfolios, and the other investors in the
Master Portfolios for which Morgan provides similar services.
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company ("State Street"), 225 Franklin
Street, Boston, Massachusetts 02110, serves as the Trust's custodian and fund
accounting agent and transfer and dividend disbursing agent. Pursuant to the
Custodian Contract, State Street is responsible for maintaining the books of
account and records of portfolio transactions and holding portfolio securities
and cash. In addition, the Custodian has entered into a subcustodian agreements
on behalf of the Fund with Bankers Trust Company for the purpose of holding TENR
Notes and with Bank of New York and Chemical Bank, N.A. for the purpose of
holding certain variable rate demand notes. In the case of foreign assets held
outside the United States, the Custodian employs various subcustodians who were
approved by the Trustees in accordance with the regulations of the SEC. The
Custodian maintains portfolio transaction records. As Transfer Agent and
Dividend Disbursing Agent, State Street is responsible for maintaining account
records detailing the ownership of Fund shares and for crediting income, capital
gains and other changes in share ownership to shareholder accounts.
SHAREHOLDER SERVICING
The Trust has entered into a Shareholder Servicing Agreement with
Morgan pursuant to which Morgan acts as shareholder servicing agent for its
customers and for other Fund investors who are customers of a financial
professional. Under this agreement, Morgan is responsible for performing
shareholder account, administrative and servicing functions, which include but
are not limited to, answering inquiries regarding account status and history,
the manner in which purchases and redemptions of Fund shares may be effected,
and certain other matters pertaining to the Fund; assisting customers in
designating and changing dividend options, account designations and addresses;
providing necessary personnel and facilities to coordinate the establishment and
maintenance of shareholder accounts and records with the Fund's transfer agent;
transmitting purchase and redemption orders to the Funds' transfer agent and
arranging for the wiring or other transfer of funds to and from customer
accounts in connection with orders to purchase or redeem Fund shares; verifying
purchase and redemption orders, transfers among and changes in accounts;
informing the Distributor of the gross amount of purchase orders for Fund
shares; and providing other related services.
Under the Shareholder Servicing Agreement, the Fund has agreed to pay
Morgan a fee for these services at the annual rate of 0.25% (expressed as a
percentage of the average daily net assets of Fund shares). Morgan acts as
shareholder servicing agent for all shareholders.
As discussed under "Investment Advisor," the Glass-Steagall Act and
other applicable laws and regulations limit the activities of bank holding
companies and certain of their subsidiaries in connection with registered
open-end investment companies. The activities of Morgan in acting as shareholder
servicing agent for Fund shareholders under the Shareholder Servicing Agreement
and providing administrative services to the Fund under the Services Agreements
may raise issues under these laws. However, Morgan believes that it may properly
perform these services and the other activities described herein without
violation of the Glass-Steagall Act or other applicable banking laws or
regulations.
If Morgan were prohibited from providing any of the services under the
Shareholder Servicing Agreement and the Services Agreements, the Trustees would
seek an alternative provider of such services. In such event, changes in the
operation of the Fund might occur and a shareholder might no longer be able to
avail himself or herself of any services then being provided to shareholders by
Morgan.
The Fund may be sold to or through financial intermediaries who are
customers of Morgan ("financial professionals"), including financial
institutions and broker-dealers, that may be paid fees by Morgan or its
affiliates for services provided to their clients that invest in the Fund. See
"Financial Professionals" below. Organizations that provide recordkeeping or
other services to certain employee benefit or retirement plans that include the
Fund as an investment alternative may also be paid a fee.
<PAGE>
Financial Professionals
The services provided by financial professionals may include
establishing and maintaining shareholder accounts, processing purchase and
redemption transactions, arranging for bank wires, performing shareholder
subaccounting, answering client inquiries regarding the Trust, assisting clients
in changing dividend options, account designations and addresses, providing
periodic statements showing the client's account balance and integrating these
statements with those of other transactions and balances in the client's other
accounts serviced by the financial professional, transmitting proxy statements,
periodic reports, updated prospectuses and other communications to shareholders
and, with respect to meetings of shareholders, collecting, tabulating and
forwarding executed proxies and obtaining such other information and performing
such other services as Morgan or the financial professional's clients may
reasonably request and agree upon with the financial professional.
Although there is no sales charge levied directly by the Fund,
financial professionals may establish their own terms and conditions for
providing their services and may charge investors a transaction-based or other
fee for their services. Such charges may vary among financial professionals but
in all cases will be retained by the financial professional and not remitted to
the Fund or Morgan.
The Fund has authorized one or more brokers to accept purchase and
redemption orders on its behalf. Such brokers are authorized to designate other
intermediaries to accept purchase and redemption orders on the Fund's behalf.
The Fund will be deemed to have received a purchase or redemption order when an
authorized broker or, if applicable, a broker's authorized designee, accepts the
order. These orders will be priced at the Fund's net asset value next calculated
after they are so accepted.
INDEPENDENT ACCOUNTANTS
The independent accountants of the Trust is Price Waterhouse LLP, 1177
Avenue of the Americas, New York, New York 10036. Price Waterhouse LLP conducts
an annual audit of the financial statements of the Fund, assists in the
preparation and/or review of the Fund's federal and state income tax returns and
consults with the Fund as to matters of accounting and federal and state income
taxation.
EXPENSES
In addition to the fees payable to Pierpont Group, Inc., JPMIM, Morgan and
FDI under various agreements discussed under "Trustees and Officers,"
"Investment Advisor," "Co-Administrator and Distributor," "Services Agent" and
"Shareholder Servicing" above, the Fund is responsible for usual and customary
expenses associated with their respective operations. Such expenses include
organization expenses, legal fees, accounting and audit expenses, insurance
costs, the compensation and expenses of the Trustees, registration fees under
federal securities laws, extraordinary expenses applicable to the Fund,
transfer, registrar and dividend disbursing costs, the expenses of printing and
mailing reports, notices and proxy statements to Fund shareholders, filing fees
under state securities laws, applicable registration fees under foreign
securities laws, custodian fees and brokerage expenses.
PURCHASE OF SHARES
Method of Purchase. Investors may open accounts with the Fund only
through the Distributor. All purchase transactions in Fund accounts are
processed by Morgan as shareholder servicing agent and the Fund is authorized to
accept any instructions relating to a Fund account from Morgan as shareholder
servicing agent for the customer. All purchase orders must be accepted by the
Distributor. Prospective investors who are not already customers of Morgan may
apply to become customers of Morgan for the sole purpose of Fund transactions.
There are no charges associated with becoming a Morgan customer for this
purpose. Morgan reserves the right to determine the customers that it will
accept, and the Trust reserves the right to determine the purchase orders that
it will accept.
References in the Prospectus and this Statement of Additional
Information to customers of Morgan or a financial professional include customers
of their affiliates and references to transactions by customers with Morgan or a
financial professional include transactions with their affiliates. Only Fund
investors who are using the services of a financial institution acting as
shareholder servicing agent pursuant to an agreement with the Trust on behalf of
the Fund may make transactions in shares of the Fund.
The Fund may, at its own option, accept securities in payment for
shares. The securities delivered in such a transaction are valued by the method
described in "Net Asset Value" as of the day the Fund receives the securities.
This is a taxable transaction to the shareholder. Securities may be accepted in
payment for shares only if they are, in the judgment of JPMIM, appropriate
investments for the Fund. In addition, securities accepted in payment for shares
must: (i) meet the investment objective and policies of the acquiring Fund; (ii)
be acquired by the Fund for investment and not for resale; (iii) be liquid
securities which are not restricted as to transfer either by law or liquidity of
market; and (iv) if stock, have a value which is readily ascertainable as
evidenced by a listing on a stock exchange, OTC market or by readily available
market quotations from a dealer in such securities. The Fund reserves the right
to accept or reject at its own option any and all securities offered in payment
for its shares.
Prospective investors may purchase shares with the assistance of a
financial professional, and the financial professional may establish its own
minimums and charge the investor a fee for this service and other services it
provides to its customers. Morgan may pay fees to financial professionals for
services in connection with fund investments. See "Financial Professionals"
above.
REDEMPTION OF SHARES
If the Trust on behalf of the Fund determines that it would be
detrimental to the best interest of the remaining shareholders of the Fund to
make payment wholly or partly in cash, payment of the redemption price may be
made in whole or in part by a distribution in kind of securities from the Fund,
in lieu of cash, in conformity with the applicable rule of the SEC. If shares
are redeemed in kind, the redeeming shareholder might incur transaction costs in
converting the assets into cash. The method of valuing portfolio securities is
described under "Net Asset Value," and such valuation will be made as of the
same time the redemption price is determined.
Further Redemption Information. Investors should be aware that
redemptions from the Fund may not be processed if a redemption request is not
submitted in proper form. To be in proper form, the Fund must have received the
shareholder's taxpayer identification number and address. In addition, if a
shareholder sends a check for the purchase of fund shares and shares are
purchased before the check has cleared, the transmittal of redemption proceeds
from the shares will occur upon clearance of the check which may take up to 15
days. The Trust, on behalf of the Fund, reserve the right to suspend the right
of redemption and to postpone the date of payment upon redemption as follows:
(i) for up to seven days, (ii) during periods when the New York Stock Exchange
is closed for other than weekends and holidays or when trading on such Exchange
is restricted as determined by the SEC by rule or regulation, (iii) during
periods in which an emergency, as determined by the SEC, exists that causes
disposal by the Fund of, or evaluation of the net asset value of, its portfolio
securities to be unreasonable or impracticable, or (iv) for such other periods
as the SEC may permit.
For information regarding redemption orders placed through a financial
professional, please see "Financial Professionals" above.
EXCHANGE OF SHARES
An investor may exchange shares from the Fund into shares of any other
J.P. Morgan Series Trust Fund, J.P. Morgan Institutional Fund or J.P. Morgan
Fund without charge. An exchange may be made so long as after the exchange the
investor has shares, in each fund in which he or she remains an investor, with a
value of at least that fund's minimum investment amount. Shareholders should
read the prospectus of the fund into which they are exchanging and may only
exchange between fund accounts that are registered in the same name, address and
taxpayer identification number. Shares are exchanged on the basis of relative
net asset value per share. Exchanges are in effect redemptions from one fund and
purchases of another fund and the usual purchase and redemption procedures and
requirements are applicable to exchanges. Shareholders subject to federal income
tax who exchange shares in one fund for shares in another fund may recognize
capital gain or loss for federal income tax purposes. Shares of the fund to be
acquired are purchased for settlement when the proceeds from redemption become
available. The Trust reserves the right to discontinue, alter or limit the
exchange privilege at any time.
DIVIDENDS AND DISTRIBUTIONS
The Fund declares and pays dividends and distributions as described
under "Dividends and Distributions" in the Prospectus.
Dividends and capital gains distributions paid by the Fund are
automatically reinvested in additional shares of the Fund unless the shareholder
has elected to have them paid in cash. Dividends and distributions to be paid in
cash are credited to the shareholder's account at Morgan or at his financial
professional or, in the case of certain Morgan customers, are mailed by check in
accordance with the customer's instructions. The Fund reserve the right to
discontinue, alter or limit the automatic reinvestment privilege at any time.
If a shareholder has elected to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service is unable to
deliver checks to the shareholder's address of record, such shareholder's
distribution option will automatically be converted to having all dividend and
other distributions reinvested in additional shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
NET ASSET VALUE
The Fund computes its net asset value once daily on Monday through
Friday as described below. The net asset value will not be computed on the day
the following legal holidays are observed: New Year's Day, Martin Luther King,
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, and Christmas Day. The Fund may close for purchases and
redemptions at such other times as may be determined by the Board of Trustees to
the extent permitted by applicable law. The days on which net asset value is
determined are the Funds' business days.
The value of investments listed on a domestic securities exchange is
based on the last sale prices on such exchange. In the absence of recorded
sales, investments are valued at the average of readily available closing bid
and asked prices on such exchange. Securities listed on a foreign exchange are
valued at the last quoted sale prices on such exchange. Unlisted securities are
valued at the average of the quoted bid and asked prices in the OTC market. The
value of each security for which readily available market quotations exist is
based on a decision as to the broadest and most representative market for such
security. For purposes of calculating net asset value, all assets and
liabilities initially expressed in foreign currencies will be converted into
U.S.
dollars at the prevailing currency exchange rate on the valuation date.
Securities or other assets for which market quotations are not readily
available (including certain restricted and illiquid securities) are valued at
fair value in accordance with procedures established by and under the general
supervision and responsibility of the Trustees. Such procedures include the use
of independent pricing services which use prices based upon yields or prices of
securities of comparable quality, coupon, maturity and type; indications as to
values from dealers; and general market conditions. Short-term investments which
mature in 60 days or less are valued at amortized cost if their original
maturity was 60 days or less, or by amortizing their value on the 61st day prior
to maturity, if their original maturity when acquired by the Fund was more than
60 days, unless this is determined not to represent fair value by the Trustees.
Trading in securities on most foreign exchanges and OTC markets is
normally completed before the close of trading of the New York Stock Exchange
and may also take place on days on which the New York Stock Exchange is closed.
If events materially affecting the value of securities occur between the time
when the exchange on which they are traded closes and the time when a
Portfolio's net asset value is calculated, such securities will be valued at
fair value in accordance with procedures established by and under the general
supervision of the Trustees.
PERFORMANCE DATA
From time to time, the Fund may quote performance in terms of actual
distributions, total return or capital appreciation in reports, sales literature
and advertisements published by the Trust. Shareholders may obtain current
performance information by calling Morgan at (800) 766-7722.
The classes of shares of the Fund may bear different shareholder
servicing fees and other expenses, which may cause the performance of a class to
differ from the performance of another class. Performance quotations will be
computed separately for each class of the Fund's shares. Any fees charged by an
institution directly to its customers' accounts in connection with investments
in the Funds will not be included in calculations of total return.
The Fund may make historical performance information available and may
compare its performance to other investments or relevant indexes, including the
Fund's benchmark (the MSCI World Index) or data from Lipper Analytical Services,
Inc., Micropal Inc., Morningstar Inc., Ibbotson Associates, Standard & Poor's
500 Composite Stock Price Index, the Dow Jones Industrial Average, the Frank
Russell Index and other industry publications.
Total Return Quotations. As required by regulations of the SEC, the
annualized total return of the Fund for a period is computed by assuming a
hypothetical initial payment of $1,000. It is then assumed that all of the
dividends and distributions by the Fund over the period are reinvested. It is
then assumed that at the end of the period, the entire amount is redeemed. The
annualized total return is then calculated by determining the annual rate
required for the initial payment to grow to the amount which would have been
received upon redemption.
Aggregate total returns, reflecting the cumulative percentage change
over a measuring period, may also be calculated.
General. The Fund's performance will vary from time to time depending
upon market conditions and its operating expenses. Consequently, any given
performance quotation should not be considered representative of the Fund's
performance for any specified period in the future. In addition, because
performance will fluctuate, it may not provide a basis for comparing an
investment in the Fund with certain bank deposits or other investments that pay
a fixed yield or return for a stated period of time.
From time to time, the Fund may, in addition to any other permissible
information, include the following types of information in advertisements,
supplemental sales literature and reports to shareholders: (1) discussions of
general economic or financial principles (such as the effects of compounding and
the benefits of dollar-cost averaging); (2) discussions of general economic
trends; (3) presentations of statistical data to supplement such discussions;
(4) descriptions of past or anticipated portfolio holdings for one or more of
the funds; (5) descriptions of investment strategies for one or more of the
funds; (6) descriptions or comparisons of various savings and investment
products (including, but not limited to, qualified retirement plans and
individual stocks and bonds), which may or may not include the Fund; (7)
comparisons of investment products (including the Fund) with relevant markets or
industry indices or other appropriate benchmarks; (8) discussions of fund
rankings or ratings by recognized rating organizations; and (9) discussions of
various statistical methods quantifying the Fund's volatility relative to its
benchmark or to past performance, including risk adjusted measures. The Fund may
also include calculations, such as hypothetical compounding examples, which
describe hypothetical investment results in such communications. Such
performance examples will be based on an express set of assumptions and are not
indicative of the performance of the Fund.
PORTFOLIO TRANSACTIONS
The Advisor places orders for all purchases and sales of portfolio
securities, enters into repurchase agreements, and may enter into reverse
repurchase agreements and execute loans of portfolio securities on behalf of the
Fund. See "Investment Objectives and Policies."
Portfolio transactions for the Fund will be undertaken principally to
accomplish the Fund's objectives The Fund may engage in short-term trading
consistent with its objective. See "Investment Objectives and Policies --
Portfolio Turnover".
In connection with portfolio transactions, the overriding objective is
to obtain the best execution of purchase and sales orders.
In selecting a broker, the Advisor considers a number of factors
including: the price per unit of the security; the broker's reliability for
prompt, accurate confirmations and on-time delivery of securities; the firm's
financial condition; as well as the commissions charged. A broker may be paid a
brokerage commission in excess of that which another broker might have charged
for effecting the same transaction if, after considering the foregoing factors,
the Advisor decides that the broker chosen will provide the best execution. The
Advisor monitors the reasonableness of the brokerage commissions paid in light
of the execution received. The Trustees of the Trust review regularly the
reasonableness of commissions and other transaction costs incurred by the Fund
in light of facts and circumstances deemed relevant from time to time, and, in
that connection, will receive reports from the Advisor and published data
concerning transaction costs incurred by institutional investors generally.
Research services provided by brokers to which the Advisor has allocated
brokerage business in the past include economic statistics and forecasting
services, industry and company analyses, portfolio strategy services,
quantitative data, and consulting services from economists, political analysts
and electronic trading tools. Research services furnished by brokers are used
for the benefit of all the Advisor's clients and not solely or necessarily for
the benefit of the Fund. The Advisor believes that the value of research
services received is not determinable and does not significantly reduce its
expenses. The Fund does not reduce its fee to the Advisor by any amount that
might be attributable to the value of such services.
Subject to the overriding objective of obtaining the best execution of
orders, the Advisor may allocate a portion of the Fund's brokerage transactions
to affiliates of the Advisor. In order for affiliates of the Advisor to effect
any portfolio transactions, the commissions, fees or other remuneration received
by such affiliates must be reasonable and fair compared to the commissions,
fees, or other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. Furthermore, the
Trustees, including a majority of the Trustees who are not "interested persons,"
have adopted procedures which are reasonably designed to provide that any
commissions, fees, or other remuneration paid to such affiliates are consistent
with the foregoing standard.
Portfolio securities will not be purchased from or through or sold to
or through the Co-Administrator, the Distributor or the Advisor or any other
"affiliated person" (as defined in the 1940 Act) of the Co-Administrator,
Distributor or Advisor when such entities are acting as principals, except to
the extent permitted by law. In addition, the Fund will not purchase securities
during the existence of any underwriting group relating thereto of which the
Advisor or an affiliate of the Advisor is a member, except to the extent
permitted by law.
On those occasions when the Advisor deems the purchase or sale of a
security to be in the best interests of the Fund as well as other customers, the
Advisor to the extent permitted by applicable laws and regulations, may, but is
not obligated to, aggregate the securities to be sold or purchased for the Fund
with those to be sold or purchased for other customers in order to obtain best
execution, including lower brokerage commissions if appropriate. In such event,
allocation of the securities so purchased or sold as well as any expenses
incurred in the transaction will be made by the Advisor in the manner it
considers to be most equitable and consistent with its fiduciary obligations to
the Fund. In some instances, this procedure might adversely affect the Fund.
If the Fund effects a closing purchase transaction with respect to an
option written by it, normally such transaction will be executed by the same
broker-dealer who executed the sale of the option. The writing of options by the
Fund will be subject to limitations established by each of the exchanges
governing the maximum number of options in each class which may be written by a
single investor or group of investors acting in concert, regardless of whether
the options are written on the same or different exchanges or are held or
written in one or more accounts or through one or more brokers. The number of
options which the Fund may write may be affected by options written by the
Advisor for other investment advisory clients. An exchange may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
MASSACHUSETTS TRUST
The Trust is a trust fund of the type commonly known as a
"Massachusetts business trust" of which the Fund is a separate and distinct
series. A copy of the Declaration of Trust for the Trust is on file in the
office of the Secretary of The Commonwealth of Massachusetts. The Declaration of
Trust and the By-Laws of the Trust are designed to make the Trust similar in
most respects to a Massachusetts business corporation. The principal distinction
between the two forms concerns shareholder liability described below.
Effective January 1, 1998, the name of the Trust was changed from "JPM
Series Trust" to "J.P. Morgan Series Trust."
Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for the obligations
of the trust which is not the case for a corporation. However, the Trust's
Declaration of Trust provides that the shareholders shall not be subject to any
personal liability for the acts or obligations of any Fund and that every
written agreement, obligation, instrument or undertaking made on behalf of any
Fund shall contain a provision to the effect that the shareholders are not
personally liable thereunder.
No personal liability will attach to the shareholders under any
undertaking containing such provision when adequate notice of such provision is
given, except possibly in a few jurisdictions. With respect to all types of
claims in the latter jurisdictions, (i) tort claims, (ii) contract claims where
the provision referred to is omitted from the undertaking, (iii) claims for
taxes, and (iv) certain statutory liabilities in other jurisdictions, a
shareholder may be held personally liable to the extent that claims are not
satisfied by the Fund. However, upon payment of such liability, the shareholder
will be entitled to reimbursement from the general assets of the Fund. The
Trustees intend to conduct the operations of the Trust in such a way so as to
avoid, as far as possible, ultimate liability of the shareholders for
liabilities of the Funds.
The Trust's Declaration of Trust further provides that the name of the
Trust refers to the Trustees collectively as Trustees, not as individuals or
personally, that no Trustee, officer, employee or agent of the Fund is liable to
the Fund or to a shareholder, and that no Trustee, officer, employee, or agent
is liable to any third persons in connection with the affairs of the Fund,
except as such liability may arise from his or its own bad faith, willful
misfeasance, gross negligence or reckless disregard of his or its duties to such
third persons. It also provides that all third persons shall look solely to Fund
property for satisfaction of claims arising in connection with the affairs of
the Fund. With the exceptions stated, the Trust's Declaration of Trust provides
that a Trustee, officer, employee, or agent is entitled to be indemnified
against all liability in connection with the affairs of the Fund.
The Trust shall continue without limitation of time subject to the
provisions in the Declaration of Trust concerning termination by action of the
shareholders or by action of the Trustees upon notice to the shareholders.
DESCRIPTION OF SHARES
The Fund represents a separate series of shares of beneficial interest of
the Trust. Fund shares are further divided into separate classes. See
"Massachusetts Trust."
The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares ($0.001 par value) of one or more series
and classes within any series and to divide or combine the shares of any series
without changing the proportionate beneficial interest of each shareholder in
the Fund.
Each share represents an equal proportional interest in the Fund with
each other share of the same class. Upon liquidation of the Fund, holders are
entitled to share pro rata in the net assets of the Fund available for
distribution to such shareholders. Shares of the Fund have no preemptive or
conversion rights.
The shareholders of the Trust are entitled to one full or fractional
vote for each dollar or fraction of a dollar invested in shares. Subject to the
1940 Act, the Trustees have the power to alter the number and the terms of
office of the Trustees, to lengthen their own terms, or to make their terms of
unlimited duration, subject to certain removal procedures, and to appoint their
own successors. However, immediately after such appointment, the requisite
majority of the Trustees must have been elected by the shareholders of the
Trust. The voting rights of shareholders are not cumulative. The Trust does not
intend to hold annual meetings of shareholders. The Trustees may call meetings
of shareholders for action by shareholder vote if required by either the 1940
Act or the Trust's Declaration of Trust.
Shareholders of the Trust have the right, upon the declaration in
writing or vote of shareholders whose shares represent two-thirds of the net
asset value of the Trust, to remove a Trustee. The Trustees will call a meeting
of shareholders to vote on removal of a Trustee upon the written request of the
shareholders whose shares represent 10% of the net asset value of the Trust. The
Trustees are also required, under certain circumstances, to assist shareholders
in communicating with other shareholders.
For information relating to mandatory redemption of Fund shares or
their redemption at the option of the Trust under certain circumstances, see
"Redemption of Shares".
TAXES
The Fund intends to qualify as a regulated investment company under
Subchapter M of the Code. As a regulated investment company, the Fund must,
among other things, (a) derive at least 90% of its gross income from dividends,
interest, payments with respect to loans of stock and securities, gains from the
sale or other disposition of stock, securities or foreign currency and other
income (including but not limited to gains from options, futures, and forward
contracts) derived with respect to its business of investing in such stock,
securities or foreign currency; and (b) diversify its holdings so that, at the
end of each quarter of its taxable year, (i) at least 50% of the value of the
Fund's total assets is represented by cash, cash items, U.S. Government
securities, securities of other regulated investment companies, and other
securities limited, in respect of any one issuer, to an amount not greater than
5% of the Fund's total assets, and 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its total assets is
invested in the securities of any one issuer (other than U.S. Government
securities or securities of other regulated investment companies.
As a regulated investment company, the Fund (as opposed to its
shareholders) will not be subject to federal income taxes on the net investment
income and capital gain that it distributes to its shareholders, provided that
at least 90% of its net investment income and realized net short-term capital
gain in excess of net long-term capital loss for the taxable year is distributed
in accordance with the Code's timing requirements.
Under the Code, the Fund will be subject to a 4% excise tax on a
portion of its undistributed taxable income and capital gains if it fails to
meet certain distribution requirements by the end of the calendar year. The Fund
intends to make distributions in a timely manner and accordingly does not expect
to be subject to the excise tax.
For federal income tax purposes, dividends that are declared by the
Fund in October, November or December as of a record date in such month and
actually paid in January of the following year will be treated as if they were
paid on December 31 of the year declared. Therefore, such dividends will be
taxable to a shareholder in the year declared rather than the year paid.
Distributions of net investment income, certain foreign currency gains,
and realized net short-term capital gain in excess of net long-term capital loss
(other than exempt interest dividends) are generally taxable to shareholders of
the Fund as ordinary income whether such distributions are taken in cash or
reinvested in additional shares. The Fund expects that a portion of these
distributions to corporate shareholders will be eligible for the
dividends-received deduction, subject to applicable limitations under the Code.
If dividend payments exceed income earned by the Fund, the over distribution
would be considered a return of capital rather than a dividend payment. The Fund
intends to pay dividends in such a manner so as to minimize the possibility of a
return of capital. Distributions of net long-term capital gain (i.e., net
long-term capital gain in excess of net short-term capital loss) are taxable to
shareholders of the Fund as long-term capital gain, regardless of whether such
distributions are taken in cash or reinvested in additional shares and
regardless of how long a shareholder has held shares in the Fund. As a result of
the enactment of the Taxpayer Relief Act of 1997 (the "Act"), long-term capital
gain of an individual is generally subject to a maximum rate of 28% in respect
of a capital asset held directly by such individual for more than one year but
not more than eighteen months, and the maximum rate is reduced to 20% in respect
of a capital asset held in excess of 18 months. The Act authorizes the Treasury
department to promulgate regulations that would apply these rules in the case of
long-term capital gain distributions made by the Fund. The Treasury department
has indicated that, under such regulations, individual shareholders will be
taxed at a maximum rate of 28% in respect of capital gains distributions
designated as 28% rate gain distributions and will be taxed at a maximum rate of
20% in respect of capital gains distributions designated as 20% rate gain
distributions, regardless of how long they have held their shares in the Fund.
In addition, no loss will be allowed on the redemption or exchange of shares of
the Fund if, within a period beginning 30 days before the date of such
redemption or exchange and ending 30 days after such date, the shareholder
acquires (such as through dividend reinvestment) securities that are
substantially identical to shares of the Fund.
Gains or losses on sales of portfolio securities will be treated as
long-term capital gains or losses if the securities have been held for more than
one year except in certain cases where a put is acquired or a call option is
written thereon or the straddle rules described below are otherwise applicable.
Other gains or losses on the sale of securities will be short-term capital gains
or losses. Gains and losses on the sale, lapse or other termination of options
on securities will be treated as gains and losses from the sale of securities.
Except as described below, if an option written by the Fund lapses or is
terminated through a closing transaction, such as a repurchase by the Fund of
the option from its holder, the Fund will realize a short-term capital gain or
loss, depending on whether the premium income is greater or less than the amount
paid by the Fund in the closing transaction. If securities are purchased by the
Fund pursuant to the exercise of a put option written by it, the Fund will
subtract the premium received from its cost basis in the securities purchased.
Any distribution of net investment income or capital gains will have
the effect of reducing the net asset value of Fund shares held by a shareholder
by the same amount as the distribution. If the net asset value of the shares is
reduced below a shareholder's cost as a result of such a distribution, the
distribution, although constituting a return of capital to the shareholder, will
be taxable as described above.
Any gain or loss realized on the redemption or exchange of Fund shares
by a shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held for more than one year, and
otherwise as short-term capital gain or loss. As noted above, long-term capital
gain of an individual holder is subject to a maximum tax rate of 28% in respect
of shares held for more than one year. The maximum rate is reduced to 20% in
respect of shares held for more than 18 months. However, any loss realized by a
shareholder upon the redemption or exchange of shares in the Fund held for six
months or less will be treated as a long-term capital loss to the extent of any
long-term capital gain distributions received by the shareholder with respect to
such shares. In addition, no loss will be allowed on the redemption or exchange
of shares of the Fund, if within a period beginning 30 days before the date of
such redemption or exchange and ending 30 days after such date, the shareholder
acquires (such as through dividend reinvestment) securities that are
substantially identical to shares of the Fund.
Under the Code, gains or losses attributable to disposition of foreign
currency or to certain foreign currency contracts, or to fluctuations in
exchange rates between the time the Fund accrues income or receivables or
expenses or other liabilities denominated in a foreign currency and the time the
Fund actually collects such income or pays such liabilities, are generally
treated as ordinary income or ordinary loss. Similarly, gains or losses on the
disposition of debt securities held by the Fund, if any, denominated in foreign
currency, to the extent attributable to fluctuations in exchange rates between
the acquisition and disposition dates are also treated as ordinary income or
loss.
Forward currency contracts, options and futures contracts entered into
by the Fund may create "straddles" for U.S. federal income tax purposes and this
may affect the character and timing of gains or losses realized by the Portfolio
on forward currency contracts, options and futures contracts or on the
underlying securities.
Certain options, futures and foreign currency contracts held by the
Fund at the end of each taxable year will be required to be "marked to market"
for federal income tax purposes -- i.e., treated as having been sold at market
value. For options and futures contracts, 60% of any gain or loss recognized on
these deemed sales and on actual dispositions will be treated as long-term
capital gain or loss, and the remainder will be treated as short-term capital
gain or loss regardless of how long the Portfolio has held such options or
futures. However, gain or loss recognized on certain foreign currency contracts
will be treated as ordinary income or loss.
The Fund may invest in Equity Securities of foreign issuers. If the
Fund purchases shares in certain foreign corporations (referred to as passive
foreign investment companies ("PFICs") under the Code), it may be subject to
federal income tax on a portion of an "excess distribution" from such foreign
corporation, including any gain from the disposition of such shares, even though
a portion of such income may have to be distributed as a taxable dividend by the
Fund to its shareholders. In addition, certain interest charges may be imposed
on the Fund as a result of such distributions. Alternatively, the Fund may in
some cases be permitted to include each year in its income and distribute to
shareholders a pro rata portion of the foreign investment fund's income, whether
or not distributed to the Fund.
The Fund will be permitted to "mark to market" any marketable stock
held by it in a PFIC. The Fund will include in income each year an amount equal
to its share of the excess, if any, of the fair market value of the PFIC stock
as of the close of the taxable year over the adjusted basis of such stock. The
Fund would be allowed a deduction for its share of the excess, if any, of the
adjusted basis of the PFIC stock over its fair market value as of the close of
the taxable year, but only to the extent of any net mark-to-market gains with
respect to the stock included by the Fund for prior taxable years.
Foreign Shareholders. Dividends of net investment income and
distributions of realized net short-term gain in excess of net long-term loss to
a shareholder who, as to the United States, is a nonresident alien individual,
fiduciary of a foreign trust or estate, foreign corporation or foreign
partnership (a "foreign shareholder") will be subject to U.S. withholding tax at
the rate of 30% (or lower treaty rate) unless the dividends are effectively
connected with a U.S. trade or business of the shareholder, in which case the
dividends will be subject to tax on a net income basis at the graduated rates
applicable to U.S. individuals or domestic corporations. Distributions treated
as long term capital gains to foreign shareholders will not be subject to U.S.
tax unless the distributions are effectively connected with the shareholder's
trade or business in the United States or, in the case of a shareholder who is a
nonresident alien individual, the shareholder was present in the United States
for more than 182 days during the taxable year and certain other conditions are
met.
If a correct and certified taxpayer identification number is not on
file, the Fund is required, subject to certain exemptions, to withhold 31% of
certain payments made or distributions declared to non-corporate shareholders.
In the case of a foreign shareholder who is a nonresident alien
individual or foreign entity, the Fund may be required to withhold U.S. federal
income tax as "backup withholding" at the rate of 31% from distributions treated
as long-term capital gains and from the proceeds of redemptions, exchanges or
other dispositions of Fund shares unless IRS Form W-8 is provided. Transfers by
gift of shares of the Fund by a foreign shareholder who is a nonresident alien
individual will not be subject to U.S. federal gift tax, but the value of shares
of the Fund held by such a shareholder at his or her death will be includible in
his or her gross estate for U.S. federal estate tax purposes.
Foreign Taxes. It is expected that the Fund may be subject to foreign
withholding taxes or other foreign taxes with respect to income (possibly
including, in some cases, capital gains) received from sources within foreign
countries.
State and Local Taxes. The Fund may be subject to state or local taxes
in jurisdictions in which the Fund is deemed to be doing business. In addition,
the treatment of the Fund and its shareholders in those states which have income
tax laws might differ from treatment under the federal income tax laws.
Shareholders should consult their own tax advisors with respect to any state or
local taxes.
Other Taxation. The Trust is organized as a Massachusetts business
trust and, under current law, neither the Trust nor the Fund is liable for any
income or franchise tax in The Commonwealth of Massachusetts, provided that the
Fund continues to qualify as a regulated investment company under Subchapter M
of the Code.
ADDITIONAL INFORMATION
As used in this Statement of Additional Information and the Prospectus,
the term "majority of the outstanding voting securities" means the vote of (i)
67% or more of the Fund's shares present at a meeting, if the holders of more
than 50% of the Fund's outstanding shares are present or represented by proxy,
or (ii) more than 50% of the Fund's outstanding shares, whichever is less.
Telephone calls to the Fund, Morgan or a financial professional as
shareholder servicing agent may be tape recorded. With respect to the securities
offered hereby, this Statement of Additional Information and the Prospectus do
not contain all the information included in the Trust's Registration Statement
filed with the SEC under the 1933 Act and the Trust's Registration Statements
filed under the 1940 Act. Pursuant to the rules and regulations of the SEC,
certain portions have been omitted. The Registration Statements including the
exhibits filed therewith may be examined at the office of the SEC in Washington
D.C.
Statements contained in this Statement of Additional Information and
the Prospectus concerning the contents of any contract or other document are not
necessarily complete, and in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the applicable
Registration Statements.
Each such statement is qualified in all respects by such reference.
No dealer, salesman or any other person has been authorized to give any
information or to make any representations, other than those contained in the
Prospectus and this Statement of Additional Information, in connection with the
offer contained therein and, if given or made, such other information or
representations must not be relied upon as having been authorized by any of the
Trust, the Fund or the Distributor. The Prospectus and this Statement of
Additional Information do not constitute an offer by the Fund or by the
Distributor to sell or solicit any offer to buy any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful for the Fund or
the Distributor to make such offer in such jurisdictions.
<PAGE>
APPENDIX A
Description of Security Ratings
STANDARD & POOR'S
Corporate and Municipal Bonds
AAA - Debt rated AAA have the highest ratings assigned by Standard & Poor's to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA - Debt rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in a small degree.
A - Debt rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB - Debt rated BBB are regarded as having an adequate capacity to pay interest
and repay principal. Whereas they normally exhibit 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 for debt in higher rated categories.
BB - Debt rated BB are regarded as having less near-term vulnerability to
default than other speculative issues. However, they face major ongoing
uncertainties or exposure to adverse business, financial or economic conditions
which could lead to inadequate capacity to meet timely interest and principal
payments.
B - An obligation rated B is more vulnerable to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
Commercial Paper
A - Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designations 1, 2, and 3 to indicate the relative degree of safety.
A-1 - This designation indicates that the degree of safety regarding timely
payment is very strong.
MOODY'S
Corporate and Municipal Bonds
Aaa - Bonds which are 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 which are 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 in 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 which are 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 which are 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 which are 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 which are 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.
Commercial Paper
Prime-1 - Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
- Leading market positions in well established industries. - High rates of
return on funds employed. - Conservative capitalization structures with moderate
reliance on debt and ample asset protection. - Broad margins in earnings
coverage of fixed financial charges and high internal cash generation. - Well
established access to a range of financial markets and assured sources of
alternate liquidity.
