- --------------------------------------------------------------------------------
|
OCTOBER 1, 1998 | PROSPECTUS
|
================================================================================
J.P. MORGAN INSTITUTIONAL TAX AWARE
DISCIPLINED EQUITY FUND
===================================
Seeking to outperform the market in
which it invests over the long term
through a disciplined management
approach
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.
[LOGO] JPMorgan
Distributed by Funds Distributor, Inc.
<PAGE>
CONTENTS
<TABLE>
====================================================================================================================================
<S> <C>
2 | U.S. EQUITY MANAGEMENT APPROACH
U.S. equity investment process ...........................................................2
Tax aware investing at J.P. Morgan .......................................................3
4 | J.P. MORGAN INSTITUTIONAL TAX AWARE DISCIPLINED EQUITY FUND
The fund's goal, investment approach, Fund description .........................................................................4
risks, expenses, performance
and financial highlights Investor expenses ........................................................................4
Performance ..............................................................................5
Financial highlights......................................................................5
6 | YOUR INVESTMENT
Investing in the J.P. Morgan Investing through a financial professional ...............................................6
Institutional Tax Aware
Disciplined Equity Fund 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 | FUND DETAILS
More about risk and the fund's Master/feeder structure ..................................................................9
business operations
Management and administration ............................................................9
Risk and reward elements ................................................................10
FOR MORE INFORMATION ............................................................back cover
</TABLE>
<PAGE>
INTRODUCTION
================================================================================
J.P. MORGAN INSTITUTIONAL TAX AWARE DISCIPLINED EQUITY FUND
This fund invests primarily in U.S. stocks. As a shareholder, you should
anticipate risks and rewards beyond those of a typical bond fund or a typical
balanced fund.
WHO MAY WANT TO INVEST
The fund is designed for investors who:
o are pursuing a long-term goal such as retirement
o want to add an investment with growth potential to further diversify a
portfolio
o want a fund that seeks to outperform the market in which it invests over
the long term
o are individuals that could benefit from a strategy that pursues returns
from an after-tax perspective
The fund is not designed for investors who:
o want a fund that pursues market trends or focuses only on particular
industries or sectors
o require regular income or stability of principal
o are pursuing a short-term goal or investing emergency reserves
o are investing through a tax-deferred account such as an IRA
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 $275 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:
o 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.
o There is no assurance that the fund
will meet its investment goal.
o Future returns will not necessarily
resemble past performance.
- ----------------------------------------
|
| 1
|
<PAGE>
U.S. EQUITY MANAGEMENT APPROACH
================================================================================
The J.P. Morgan Institutional Tax Aware
Disciplined Equity Fund invests
primarily in U.S. stocks while seeking
to enhance the after-tax returns of its
shareholders.
The fund's investment philosophy,
developed by its advisor, focuses on
stock picking while largely avoiding
sector or market-timing strategies.
Also, under normal market conditions,
the fund will remain fully invested.
U.S. EQUITY INVESTMENT PROCESS
In managing the fund, J.P. Morgan
employs a three-step process:
[GRAPHIC] Research J.P. Morgan takes an in-depth
look at company prospects over a
J.P. Morgan analysts develop relatively long period -- often as much
proprietary fundamental research as five years -- rather than focusing on
near-term expectations. This approach is
designed to provide insight into a
company's real growth potential. J.P.
Morgan's in-house research is developed
by an extensive worldwide network of
over 120 career analysts. The team of
analysts dedicated to U.S. equities
includes more than 20 members, with an
average of over ten years of experience.
[GRAPHIC] Valuation The research findings allow
J.P. Morgan to rank the companies in
Stocks in each industry are ranked each industry group according to their
with the help of models relative value. The greater a company's
estimated worth compared to the current
market price of its stock, the more
undervalued the company. The valuation
rankings are produced with the help of a
variety of models that quantify the
research team's findings.
[GRAPHIC] Stock selection The fund buys and sells
stocks according to its own policies,
Using research and valuations, using the research and valuation
the fund's management team rankings as a basis. In general, the
chooses stocks for its fund management team buys stocks that are
identified as undervalued and considers
selling them when they appear
overvalued. Along with attractive
valuation, the fund's managers often
consider a number of other criteria:
o catalysts that could trigger a rise
in a stock's price
o high potential reward compared to
potential risk
o temporary mispricings caused by
market overreactions
|
2 | U.S. EQUITY MANAGEMENT APPROACH
|
<PAGE>
================================================================================
TAX AWARE INVESTING AT J.P. MORGAN
The fund is designed to reduce, but not eliminate, capital gains distributions
to shareholders. In doing so, the fund sells securities when the anticipated
performance benefit justifies the resulting tax liability. This strategy often
includes holding securities long enough to avoid higher, short-term capital
gains taxes, selling shares with a higher cost basis first, and offsetting gains
realized in one security by selling another security at a capital loss. The fund
is aided in this process by a tax-sensitive optimization model developed by J.P.
Morgan.
The fund generally intends to pay redemption proceeds in cash; however, it
reserves the right at its sole discretion to pay redemptions over $500,000
in-kind as a portfolio of representative stocks rather than cash. An in-kind
redemption payment can shield the fund -- and other shareholders -- from tax
liabilities that might otherwise be incurred. It is not subject to a redemption
fee by the fund. However, the stocks received will continue to fluctuate in
value after redemption and will be subject to brokerage or other transaction
costs when liquidated.
|
U.S. EQUITY MANAGEMENT APPROACH | 3
|
<PAGE>
J.P. MORGAN INSTITUTIONAL TAX AWARE
DISCIPLINED EQUITY FUND
================================================================================
REGISTRANT: J.P. MORGAN SERIES TRUST
(J.P. MORGAN TAX AWARE DISCIPLINED EQUITY FUND:
INSTITUTIONAL SHARES)
[GRAPHIC] GOAL
The fund's goal is to provide a consistently high after tax total return
from a broadly diversified portfolio of equity securities with risk
characteristics similar to the Standard & Poor's 500 Stock Index (S&P 500). This
goal can be changed without shareholder approval.
[GRAPHIC] INVESTMENT APPROACH
The fund invests primarily in large- and medium-capitalization U.S.
companies. Industry by industry, the fund's weightings are similar to those of
the S&P 500. The fund does not look to overweight or underweight industries.
Within each industry, the fund modestly overweights stocks that are ranked as
undervalued or fairly valued while modestly underweighting or not holding stocks
that appear overvalued. (The process used to rank stocks according to their
relative valuations is described on page 2.)
To this investment approach the fund adds the element of tax aware investing.
The fund's tax aware investment strategies are described on page 3.
[GRAPHIC] POTENTIAL RISKS AND REWARDS
The value of your investment in the fund will fluctuate in response to
movements in the stock market. Fund performance will also depend on the
effectiveness of J.P. Morgan's research and the management team's stock picking
decisions.
By owning a large number of stocks within the S&P 500, with an emphasis on those
that appear undervalued or fairly valued, and by tracking the industry
weightings of that index, the fund seeks returns that modestly exceed those of
the S&P 500 over the long term with virtually the same level of volatility. The
fund's tax aware strategies may reduce your capital gains but will not eliminate
them. Maximizing after-tax returns may require trade-offs that reduce pre-tax
returns.
The fund's securities are described in more detail on page 10, along with their
main risks, which may cause the fund's share price to decline, and the fund's
strategies to reduce these risks.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $275
billion, including more than $13 billion using the same strategy as the fund.
The portfolio management team is led by Robin B. Chance, vice president, and
Frederic A. Nelson, managing director, who have been on the team since the
fund's inception in January of 1997. Ms. Chance has been at J.P. Morgan since
1987, Mr. Nelson since May of 1994. Prior to managing this fund, both were
responsible for structured equity strategies. Prior to joining Morgan, Mr.
Nelson was a portfolio manager at Bankers Trust.
================================================================================
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 fund's
redemption fee is paid out of the proceeds you receive when you sell applicable
shares; this fee does not apply to in-kind redemptions. The annual fund expenses
shown are deducted from fund assets prior to performance calculations.
Footnotes for this section are shown on next page.
<TABLE>
<CAPTION>
================================================================================
Shareholder transaction expenses
================================================================================
Redemption fees (% of your cash proceeds)
- --------------------------------------------------------------------------------
<S> <C>
Shares held for less than five years 1.00
Shares held five years or longer None
Annual expenses(1) (% of fund assets)
- --------------------------------------------------------------------------------
Management fees (actual) 0.35
Marketing (12b-1) fees none
Other expenses(2) (after reimbursement) 0.20
================================================================================
Total operating expenses(2)
(after reimbursement) 0.55
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
================================================================================
EXPENSE EXAMPLE
================================================================================
The example below uses the same assumptions as other fund prospectuses: $1,000
initial investment, 5% annual total return, expenses unchanged. The first number
assumes that you continued to hold your shares, the second that you sold all
shares for cash at the end of each time period. The example is for comparison
only; the fund's actual return and expenses will be different.
- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
<S> <C> <C> <C> <C>
Your cost($) 6/16 18/28 31/31 69/69
- --------------------------------------------------------------------------------
</TABLE>
|
4 | J.P. MORGAN INSTITUTIONAL TAX AWARE DISCIPLINED EQUITY FUND
|
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
PERFORMANCE (unaudited)
=================================
Average annual total return (%) Shows performance over time, for periods ended December 31, 1997
==================================--------------------------------------------------------------------------------------------------
Since inception(3)
<S> <C>
J.P. Morgan Institutional Tax Aware Disciplined Equity Fund (after expenses) 27.78
- ------------------------------------------------------------------------------------------------------------------------------------
S&P 500(4) (no expenses) 25.52
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
=================================
Year-by-year total return (%) Shows changes in returns for the period ended December 31, 1997
==================================--------------------------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<S> <C>
J.P. Morgan Institutional Tax Aware Disciplined Equity Fund 27.78
- ------------------------------------------------------------------------------------------------------------------------------------
S&P 500(4) 25.52
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================================
FINANCIAL HIGHLIGHTS
=================================
Per-share data For fiscal periods ended
=================================---------------------------------------------------------------------------------------------------
10/31/97(3) 4/30/98
(unaudited)
<S> <C> <C>
Net asset value, beginning of period ($) 10.00 12.08
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.06 0.06
Net realized and unrealized gain
on investments ($) 2.02 2.72
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations ($) 2.08 2.78
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions to shareholders from:
Net investment income ($) -- (0.10)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period ($) 12.08 14.76
- ------------------------------------------------------------------------------------------------------------------------------------
=================================
Ratios and supplemental data
=================================---------------------------------------------------------------------------------------------------
Total return (%) 20.80(5) 23.18(5)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 12,026 67,198
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
Expenses (%) 0.55(6) 0.55(6)
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (%) 1.19(6) 1.02(6)
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses without reimbursement (%) 4.59(6) 1.22(6)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 35(5) 12(5)
- ------------------------------------------------------------------------------------------------------------------------------------
Average broker commissions per share ($) 0.0261 0.0235
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The financial highlights for the fiscal period ended 10/31/97 have been audited
by PricewaterhouseCoopers LLP, the fund's independent accountants.
(1) This table shows expenses for the fiscal period ended 10/31/97, expressed
as a percentage of average net assets and reflecting reimbursement for
ordinary expenses over 0.55%.
(2) Without reimbursement, other expenses and total operating expenses would
have been 4.24% and 4.59%, respectively, on an annualized basis. This
reimbursement arrangement can be changed or terminated at any time after
2/28/99 at the option of J.P. Morgan.
(3) The fund commenced operations on 1/30/97 and performance is calculated as
of 1/31/97.
(4) The S&P500 is an unmanaged index of U.S. stocks widely used as a measure of
overall stock market performance.
(5) Not annualized.
(6) Annualized.
|
J.P. MORGAN INSTITUTIONAL TAX AWARE DISCIPLINED EQUITY FUND | 5
|
<PAGE>
YOUR INVESTMENT
================================================================================
For your convenience, the J.P. Morgan Institutional Funds offer several ways to
start and add to 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 DIRECTLY
Investors may establish accounts without the help of an intermediary by using
the instructions below and at right:
o Determine the amount you are investing. The minimum amount for initial
investments in the fund is $3,000,000 and for additional investments
$25,000, although these minimums may be less for some investors. For more
information on minimum investments, call 1-800-766-7722.
o 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.
o 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 1-800-766-7722.
OPENING YOUR ACCOUNT
By wire
o Mail your completed application to the Shareholder Services Agent.
o 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.
o After placing your purchase order, instruct your bank to wire the amount of
your investment to:
Morgan Guaranty Trust Company of New York
Routing number: 021-000-238
Credit: J.P. Morgan Institutional Funds
Account number: 001-57-689
FFC: your account number, name of registered owner(s) and fund name
By check
o Make out a check for the investment amount payable to J.P. Morgan
Institutional Funds.
o Mail the check with your completed application to the Shareholder Services
Agent.
By exchange
o Call the Shareholder Services Agent to effect an exchange.
ADDING TO YOUR ACCOUNT
By wire
o Call the Shareholder Services Agent to place a purchase order. Funds that
are wired without a purchase order will be returned uninvested.
o Once you have placed your purchase order, instruct your bank to wire the
amount of your investment as described above.
By check
o Make out a check for the investment amount payable to J.P. Morgan
Institutional Funds.
o Mail the check with a completed investment slip to the Shareholder Services
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
o Call the Shareholder Services Agent to effect an exchange.
|
6 | YOUR INVESTMENT
|
<PAGE>
================================================================================
SELLING SHARES
By phone - wire payment
o 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.
o 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 - check payment
o 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
o 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.
o Indicate whether you want any cash proceeds sent by check or by wire.
o Make sure the letter is signed by an authorized party. The Shareholder
Services Agent may require additional information, such as a signature
guarantee.
o 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 (NYSE). The fund calculates
its net asset value per share (NAV) every business day as of the close of
trading on the NYSE (normally 4:00 p.m. eastern time). The fund's securities are
typically priced using market quotes or pricing services. When these methods
are not available or do not represent a security's value at the time of pricing,
the security is valued in accordance with the fund's fair valuation procedures.
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 NYSE 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.
================================================================================
Shareholder Services Agent
J.P. Morgan Funds Services
522 Fifth Avenue
New York, NY 10036
1-800-766-7722
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, cash proceeds are generally available the day following
execution and will be forwarded according to your instructions. In-kind
redemptions (described on page 3) will be available as promptly as feasible.
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 reserves the right to 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 reserves the right to close out your account and
send the proceeds to the address of record.
DIVIDENDS AND DISTRIBUTIONS
The fund typically pays income dividends four times a year 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 reinvested 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 Institutional 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 for taxable
accounts:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Transaction Tax status
- --------------------------------------------------------------------------------
<S> <C>
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
- --------------------------------------------------------------------------------
</TABLE>
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
1-800-766-7722. 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 all 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, along with J.P. Morgan,
provides 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:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Advisory services 0.35% of the fund's
average net assets
- --------------------------------------------------------------------------------
<S> <C>
Administrative services Fund's pro-rata portion of
(fee shared with Funds 0.09% of the first $7 billion
Distributor, Inc.) in J.P. Morgan-advised portfolios,
plus 0.04% of average
net assets over $7 billion
- --------------------------------------------------------------------------------
Shareholder services 0.10% of the fund's average
net assets
- --------------------------------------------------------------------------------
</TABLE>
J.P. Morgan may pay fees to certain firms and professionals for providing
recordkeeping or other services in connection with investments in the fund.
Year 2000 Fund operations and shareholders could be adversely affected if the
computer systems used by J.P. Morgan, the fund's other service providers and
other entities with computer systems linked to the fund do not properly process
and calculate January 1, 2000 and after date-related information. J.P. Morgan is
working to avoid these problems and to obtain assurances from other service
providers that they are taking similar steps. However, it is not certain that
these actions will be sufficient to prevent these problems from adversely
impacting fund operations and shareholders. In addition, to the extent that
operations of issuers of securities held by the fund are impaired by
date-related problems or prices of securities decline as a result of real or
perceived date-related problems of issuers held by the fund or generally, the
net asset value of the fund will decline.
|
FUND DETAILS | 9
|
<PAGE>
================================================================================
RISK AND REWARD ELEMENTS
This table discusses the main elements that make up the fund's overall risk and
reward characteristics (described on page 3). It also outlines the fund's
policies toward various securities, 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>
Market conditions
o The fund's share price and o Stocks have generally outperformed o Under normal circumstances the fund
performance will fluctuate in more stable investments (such as plans to remain fully invested,
response to stock market movements bonds and cash equivalents) over with at least 65% in stocks; stock
the long term investments may include U.S. and
o Adverse market conditions may from foreign common stocks, convertible
time to time cause the fund to take securities, preferred stocks, trust
temporary defensive positions that or partnership interests, warrants,
are inconsistent with its principal rights, and investment company
investment strategies and may securities
hinder the fund from achieving its
investment objective o The fund seeks to limit risk
through diversification
o During severe market downturns, the
fund has the option of investing up
to 100% of assets in investment-grade
short-term securities
- ------------------------------------------------------------------------------------------------------------------------------------
Management choices
o The fund could underperform its o The fund could outperform its o J.P. Morgan focuses its active
benchmark due to its securities and benchmark due to these same choices management on securities selection,
asset allocation choices the area where it believes its
commitment to research can most
enhance returns
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign investments
o Currency exchange rate movements o Favorable exchange rate movements o The fund anticipates that its total
could reduce gains or create losses could generate gains or reduce foreign investments will not exceed
losses 20% of assets.
o The fund could lose money because
of foreign government actions, o Foreign investments, which o The fund actively manages the
political instability, or lack of represent a major portion of the currency exposure of its foreign
adequate and accurate information world's securities, offer investments relative to its
attractive potential performance benchmark, and may hedge back into
and opportunities for the U.S. dollar from time to time
diversification (see also "Derivatives")
- ------------------------------------------------------------------------------------------------------------------------------------
Derivatives
o Derivatives such as futures, o Hedges that correlate well with o The fund uses derivatives for
options, and forward foreign underlying positions can reduce or hedging and for risk management
currency contracts that are used eliminate losses at low cost (i.e., to establish or adjust
for hedging the portfolio or exposure to particular securities,
specific securities may not fully o The fund could make money and markets or currencies); risk
offset the underlying positions(1) protect against losses if management may include management
management's analysis proves of the fund's exposure relative to
o Derivatives used for risk correct its benchmark
management may not have the
intended effects and may result in o Derivatives that involve leverage o The fund only establishes hedges
losses or missed opportunities could generate substantial gains at that it expects will be highly
low cost correlated with underlying
o The counterparty to a derivatives positions
contract could default
o While the fund may use derivatives
o Derivatives that involve leverage that incidentally involve leverage,
could magnify losses it does not use them for the
specific purpose of leveraging the
portfolio
- ------------------------------------------------------------------------------------------------------------------------------------
</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
pre-determined price. A forward foreign currency contract is an obligation
to buy or sell a given currency on a future date and at a set price.
|
10 | FUND DETAILS
|
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Potential risks Potential rewards Policies to balance risk and reward
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Illiquid holdings
o The fund could have difficulty o These holdings may offer more o The fund may not invest more than
valuing these holdings precisely attractive yields or potential 15% of net assets in illiquid
growth than comparable widely holdings
o The fund could be unable to sell traded securities
these holdings at the time or price o To maintain adequate liquidity to
it desires meet redemptions, the fund may hold
investment-grade short-term
securities (including repurchase
agreements) and, for temporary or
extraordinary purposes, may borrow
from banks up to 33 1/3% of its
assets
- ------------------------------------------------------------------------------------------------------------------------------------
When-issued and delayed
delivery securities
o When the fund buys securities o The fund can take advantage of o The fund uses segregated accounts
before issue or for delayed attractive transaction to offset leverage risk
delivery, it could be exposed to opportunities
leverage risk if it does not use
segregated accounts
- ------------------------------------------------------------------------------------------------------------------------------------
Short-term trading
o Increased trading would raise the o The fund could realize gains in a o The fund anticipates a portfolio
fund's brokerage and related costs short period of time turnover rate of approximately 100%
o Increased short-term capital gains o The fund could protect against o The fund generally avoids
distributions would raise losses if a stock is overvalued and short-term trading, except to take
shareholders' income tax liability its value later falls advantage of attractive or
unexpected opportunities or to meet
demands generated by shareholder
activity
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
|
FUND DETAILS | 11
|
<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, along with other information
about the fund, may be obtained by contacting:
J.P. Morgan Institutional Tax Aware Disciplined Equity Fund
J.P. Morgan Funds Services
522 Fifth Avenue
New York, NY 10036
Telephone: 1-800-766-7722
Hearing impaired: 1-888-468-4015
Email: [email protected]
Text-only versions of these documents and this prospectus are available, upon
payment of a duplicating fee, 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 INSTITUTIONAL FUNDS AND THE MORGAN TRADITION
The J.P. Morgan Institutional 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 Institutional Funds offer a broad array of
distinctive opportunities for mutual fund investors.
[LOGO] JPMorgan
================================================================================
J.P. Morgan Institutional Funds
Advisor Distributor
J.P. Morgan Investment Management Inc. Funds Distributor, Inc.
522 Fifth Avenue 60 State Street
New York, NY 10036 Boston, MA 02109
1-800-766-7722 1-800-221-7930
PROS236-9810
<PAGE>
OCTOBER 1, 1998 PROSPECTUS
J.P. MORGAN TAX AWARE
U.S. EQUITY FUND
------------------------------------------
Seeking to outperform the market in which
it invests over the long term through a
disciplined management approach
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>
<TABLE>
CONTENTS
- --------------------------------------------------------------------------------
<S> <C>
2
- ---
U.S. EQUITY MANAGEMENT APPROACH
U.S. equity investment process . . . . . . . . . . . . . . . . . . . . . 2
Tax aware investing at J.P. Morgan . . . . . . . . . . . . . . . . . . . 3
4
- ----
The fund's goal, investment approach, risks, expenses,
performance, and financial highlights
J.P. MORGAN TAX AWARE U.S. EQUITY FUND
Fund description . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Investor expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Financial highlights . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6
- ----
Investing in the J.P. Morgan Tax
Aware U.S. Equity Fund
YOUR INVESTMENT
Investing through a financial professional . . . . . . . . . . . . . . . 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
</TABLE>
<PAGE>
INTRODUCTION
- --------------------------------------------------------------------------------
J.P. MORGAN TAX AWARE U.S.EQUITY FUND
This fund invests primarily in U.S. stocks. As a shareholder, you should
anticipate risks and rewards beyond those of a typical bond fund or a typical
balanced fund.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
WHO MAY WANT TO INVEST
- - The fund is designed for investors who:
- - are pursuing a long-term goal such as retirement
- - want to add an investment with growth potential to further diversify a
portfolio
- - want a fund that seeks to outperform the market in which it invests over
the long term
- - are individuals that could benefit from a strategy that pursues returns
from an after-tax perspective
The fund is NOT designed for investors who:
- - want a fund that pursues market trends or focuses only on particular
industries or sectors
- - require regular income or stability of principal
- - are pursuing a short-term goal or investing emergency reserves
- - are investing through a tax-deferred account such as an IRA
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 $275 billion in assets under management,
including assets managed by the fund's advisor, J.P. Morgan Investment
Management Inc.
1
<PAGE>
U.S. EQUITY MANAGEMENT APPROACH
- --------------------------------------------------------------------------------
The J.P. Morgan Tax Aware U.S. Equity Fund invests primarily in U.S. stocks
while seeking to enhance the after-tax returns of its shareholders.
The fund's investment philosophy, developed by its advisor, focuses on stock
picking while largely avoiding sector or market-timing strategies. Also, under
normal market conditions, the fund will remain fully invested.
U.S. EQUITY INVESTMENT PROCESS
In managing the fund, J.P. Morgan employs a three-step process:
[GRAPHIC]
J.P. Morgan analysts develop proprietary
fundamental research
- ----------------------------------------
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 real growth potential. J.P. Morgan's in-house research is developed by
an extensive worldwide network of over 120 career analysts. The team of analysts
dedicated to U.S. equities includes more than 20 members, with an average of
over ten years of experience.
[GRAPHIC]
Stocks in each industry are ranked
with the help of models
- ----------------------------------
VALUATION The research findings allow J.P. Morgan to rank the companies in each
industry group according to their relative value. The greater a company's
estimated worth compared to the current market price of its stock, the more
undervalued the company. The valuation rankings are produced with the help of a
variety of models that quantify the research team's findings.
[GRAPHIC]
Using research and valuations, the fund's
management team chooses stocks for its
fund
- -----------------------------------------
STOCK SELECTION The fund buys and sells stocks according to its own policies,
using the research and valuation rankings as a basis. In general, the management
team buys stocks that are identified as undervalued and considers selling them
when they appear overvalued. Along with attractive valuation, the fund's
managers often consider a number of other criteria:
- - catalysts that could trigger a rise in a stock's price
- - high potential reward compared to potential risk
- - temporary mispricings caused by market overreactions
2 U.S. EQUITY MANAGEMENT APPROACH
<PAGE>
- --------------------------------------------------------------------------------
TAX AWARE INVESTING AT J.P. MORGAN
The fund is designed to reduce, but not eliminate, capital gains distributions
to shareholders. In doing so, the fund sells securities when the anticipated
performance benefit justifies the resulting tax liability. This strategy often
includes holding securities long enough to avoid higher, short-term capital
gains taxes, selling shares with a higher cost basis first, and offsetting gains
realized in one security by selling another security at a capital loss. The fund
is aided in this process by a tax-sensitive optimization model developed by J.P.
Morgan.
The fund generally intends to pay redemption proceeds in cash; however, it
reserves the right at its sole discretion to pay redemptions over $250,000 in-
kind as a portfolio of representative stocks rather than cash. An in-kind
redemption payment can shield the fund -- and other shareholders -- from tax
liabilities that might otherwise be incurred. It is not subject to a redemption
fee by the fund. However, the stocks received will continue to fluctuate in
value after redemption and will be subject to brokerage or other transaction
costs when liquidated.
U.S. EQUITY MANAGEMENT APPROACH 3
<PAGE>
J.P. MORGAN TAX AWARE
U.S. EQUITY FUND TICKER SYMBOL: JPTAX
- --------------------------------------------------------------------------------
REGISTRANT: J.P. MORGAN SERIES TRUST
(J.P. MORGAN TAX AWARE U.S. EQUITY FUND: SELECT SHARES)
[GRAPHIC]
GOAL
The fund's goal is to provide high after tax total return from a portfolio of
selected equity securities. This goal can be changed without shareholder
approval.
[GRAPHIC]
INVESTMENT APPROACH
The fund invests primarily in large- and medium-capitalization U.S. companies.
Industry by industry, the fund's weightings are similar to those of the Standard
& Poor's 500 Stock Index (S&P 500). The fund can moderately underweight or
overweight industries when it believes it will benefit performance.
Within each industry, the fund focuses on those stocks that are ranked as most
undervalued according to the investment process described on page 2. The fund
generally considers selling stocks that appear overvalued.
To this investment approach the fund adds the element of tax aware investing.
The fund's tax aware investment strategies are described on page 3.
[GRAPHIC]
POTENTIAL RISKS AND REWARDS
The value of your investment in the fund will fluctuate in response
to movements in the stock market. Fund performance will also depend on
the effectiveness of J.P. Morgan's research and the management team's stock
picking decisions.
By emphasizing undervalued stocks, the fund has the potential to produce returns
that exceed those of the S&P 500. At the same time, by controlling the industry
weightings of the fund so they can differ only moderately from the industry
weightings of the S&P 500, the fund seeks to limit its volatility to that of the
overall market, as represented by this index. The fund's tax aware strategies
may reduce your capital gains but will not eliminate them. Maximizing after-tax
returns may require trade-offs that reduce pre-tax returns.
The fund's securities are described in more detail on page 10, along with their
main risks, which may cause the fund's share price to decline, and the fund's
strategies to reduce these risks.
[GRAPHIC]
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $275
billion, including more than $12.5 billion using the same strategy as the fund.
The portfolio management team is led by Terry E. Banet, vice president, and
Gordon B. Fowler, managing director, who have been on the team since the fund's
inception in December of 1996. Ms. Banet has been at J.P. Morgan since 1985, Mr.
Fowler since 1981. Prior to managing this fund, Ms. Banet managed tax aware
accounts and helped develop Morgan's tax aware equity process while Mr. Fowler
was responsible for structured equity products for both the institutional and
the private client markets.
- --------------------------------------------------------------------------------
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 fund's
redemption fee is paid out of the proceeds you receive when you sell applicable
shares; this fee does not apply to in-kind redemptions. The annual fund expenses
shown are deducted from fund assets prior to performance calculations.
Footnotes for this section are shown on next page.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
REDEMPTION FEES (% of your cash proceeds)
- --------------------------------------------------
<S> <C>
Shares held for less than five years 1.00
Shares held five years or longer None
<CAPTION>
ANNUAL EXPENSES(1) (% OF FUND ASSETS)
- --------------------------------------------------
<S> <C>
Management fees (actual) 0.45
Marketing (12b-1) fees none
Other expenses2 (after reimbursement) 0.40
- --------------------------------------------------
TOTAL OPERATING EXPENSES(2)
(AFTER REIMBURSEMENT) 0.85
- --------------------------------------------------
</TABLE>
EXPENSE EXAMPLE
The example below uses the same assumptions as other fund prospectuses: $1,000
initial investment, 5% annual total return, expenses unchanged. The first number
assumes that you continued to hold your shares, the second that you sold all
shares for cash at the end of each time period. The example is for comparison
only; the fund's actual return and expenses will be different.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs
<S> <C> <C> <C> <C>
YOUR COST($) 9/19 27/37 47/47 105/105
- --------------------------------------------------------------------------------
</TABLE>
4 J.P. MORGAN TAX AWARE U.S. EQUITY FUND
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE (UNAUDITED)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN (%) Shows performance over time, for the period ended December 31, 1997
- ----------------------------------------------------------------------------------------------------------------------------
Since inception(3)
<S> <C>
J.P. MORGAN TAX AWARE U.S. EQUITY FUND (after expenses) 30.52
- ----------------------------------------------------------------------------------------------------------------------------
S&P 500(4) (no expenses) 33.36
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR-BY-YEAR TOTAL RETURN (%) Shows changes in returns for the period ended December 31, 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
1997(3)
- ----------------------------------------------------------------------------------------------------------------------------
J.P. MORGAN TAX AWARE U.S. EQUITY FUND 30.52
- ----------------------------------------------------------------------------------------------------------------------------
S&P 500(4) 33.36
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PER-SHARE DATA For fiscal periods ended
- ----------------------------------------------------------------------------------------------------------------------------
10/31/97(3) 4/30/98
(unaudited)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ($) 10.00 12.57
- ----------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.06 0.03
Net realized and unrealized gain
on investments ($) 2.52 2.65
- ----------------------------------------------------------------------------------------------------------------------------
Total from investment operations ($) 2.58 2.68
- ----------------------------------------------------------------------------------------------------------------------------
Less distributions to shareholders from:
Net investment income ($) (0.01) (0.07)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD ($) 12.57 15.18
- ----------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN (%) 25.83(5) 21.42(5)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD ($ thousands) 25,649 58,740
- ----------------------------------------------------------------------------------------------------------------------------
RATIO TO AVERAGE NET ASSETS:
EXPENSES (%) 0.85(6) 0.85(6)
- ----------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (%) 0.70(6) 0.59(6)
- ----------------------------------------------------------------------------------------------------------------------------
EXPENSES WITHOUT REIMBURSEMENT (%) 2.16(6) 1.20(6)
- ----------------------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE (%) 23(6) 20(2)
- ----------------------------------------------------------------------------------------------------------------------------
AVERAGE BROKER COMMISSIONS PER SHARE ($) 0.0321 0.0315
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The financial highlights for the fiscal period ended 10/31/97 above have been
audited by PricewaterhouseCoopers LLP, the fund's independent accountants.
(1) This table shows expenses for the fiscal period ended 10/31/97, expressed
as a percentage of average net assets and reflecting reimbursement for
ordinary expenses over 0.85%.
(2) Without reimbursement, other expenses and total operating expenses would
have been 1.71% and 2.16%, respectively, on an annualized basis. This
reimbursement arrangement can be changed or terminated at any time after
2/28/99 at the option of J.P. Morgan.
(3) The fund commenced operations on 12/18/96 and performance is calculated as
of 12/31/96.
(4) The S&P 500 is an unmanaged index of U.S. stocks widely used as a measure
of overall stock market performance.
(5) Not annualized.
(6) Annualized.
J.P. MORGAN TAX AWARE U.S. EQUITY FUND 5
<PAGE>
YOUR INVESTMENT
- --------------------------------------------------------------------------------
For your convenience, the J.P. Morgan Funds offer several ways to start and add
to 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 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 to effect 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 to effect an exchange.
6 YOUR INVESTMENT
<PAGE>
SELLING SHARES
BY PHONE - WIRE PAYMENT
- - 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 - CHECK PAYMENT
- - 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 (NYSE). The fund
calculates its net asset value per share (NAV) every business day as of the
close of trading on the NYSE (normally 4:00 p.m. eastern time). The fund's
securities are typically priced using market quotes or pricing services. When
these methods are not available or do not represent a security's value at the
time of pricing, the security is valued in accordance with the fund's fair
valuation procedures.
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 or the NYSE 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, cash proceeds are generally available the day following
execution and will be forwarded according to your instructions. In-kind
redemptions (described on page 3) will be available as promptly as feasible.
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 reserves the right to 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 reserves the right to close out your account and
send the proceeds to the address of record.
DIVIDENDS AND DISTRIBUTIONS
The fund typically pays income dividends four times a year 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 reinvested 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 for taxable
accounts:
- --------------------------------------------------------------------------------
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, along with J.P. Morgan, provides 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:
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
ADVISORY SERVICES 0.45% of the fund's
average net assets
- --------------------------------------------------------------------------------
ADMINISTRATIVE SERVICES Fund's pro-rata portion of
(fee shared with Funds 0.09% of the first $7 billion in
Distributor, Inc.) J.P. Morgan-advised portfolios
plus 0.04% of average
net assets over $7 billion
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES 0.25% of the fund's average
net assets
- --------------------------------------------------------------------------------
</TABLE>
J.P. Morgan may pay fees to certain firms and professionals for providing
recordkeeping or other services in connection with investments in the fund.
YEAR 2000 Fund operations and shareholders could be adversely affected if the
computer systems used by J.P. Morgan, the fund's other service providers and
other entities with computer systems linked to the fund do not properly process
and calculate January 1, 2000 and after date-related information. J.P. Morgan
is working to avoid these problems and to obtain assurances from other service
providers that they are taking similar steps. However, it is not certain that
these actions will be sufficient to prevent these problems from adversely
impacting fund operations and shareholders. In addition, to the extent that
operations of issuers of securities held by the fund are impaired by date-
related problems or prices of securities decline as a result of real or
perceived date-related problems of issuers held by the fund or generally, the
net asset value of the fund will decline.
FUND DETAILS 9
<PAGE>
- --------------------------------------------------------------------------------
RISK AND REWARD ELEMENTS
This table discusses 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 securities, 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>
- -----------------------------------------------------------------------------------------------------------------------------------
MARKET CONDITIONS
- - The fund's share price and - Stocks have generally - Under normal circumstances the
performance will fluctuate outperformed more stable invest- fund plans to remain fully invested,
in response to stock market ments (such as bonds and cash with at least 65% in U.S. stocks;
movements equivalents) over the long term stock investments may include U.S.
and foreign common stocks,
- - Adverse market convertible securities, preferred
conditions may from time to stocks, trust or partnership
time cause the fund to take interests, warrants, rights, and
temporary defensive investment company securities
positions that are
inconsistent with its - The fund seeks to limit risk
principal investment through diversification
strategies and may hinder
the fund from achieving its - During severe market downturns,
investment objective the fund has the option of investing
up to 100% of assets in
investment-grade short-term securities
- -----------------------------------------------------------------------------------------------------------------------------------
MANAGEMENT CHOICES
- - The fund could - The fund could outperform its - J.P. Morgan focuses its active
underperform its benchmark benchmark due to these same choices management on securities selection,
due to its securities and the area where it believes its
asset allocation choices commitment to research can most
enhance returns
- -----------------------------------------------------------------------------------------------------------------------------------
FOREIGN INVESTMENTS
- - Currency exchange rate - Favorable exchange rate - The fund anticipates that its
movements could reduce movements could generate gains or total foreign investments will not
gains or create losses reduce losses exceed 20% of assets
- - The fund could lose - Foreign investments, which - The fund actively manages the
money because of foreign represent a major portion of the currency exposure of its foreign
government actions, world's securities, offer attractive investments relative to its
political instability, or potential performance and benchmark, and may hedge back into
lack of adequate and accurate opportunities for diversification the U.S. dollar from time to time
information (see also "Derivatives")
- -----------------------------------------------------------------------------------------------------------------------------------
DERIVATIVES
- - Derivatives such as - Hedges that correlate well with - The fund uses derivatives for
futures and options that underlying positions can reduce or hedging and for risk management
are used for hedging the eliminate losses at low cost (i.e., to establish or adjust
portfolio or specific exposure to particular securities or
securities may not fully - The fund could make money and markets); risk management may include
offset the underlying protect against losses if management of the fund's exposure
positions(1) management's analysis proves correct relative to its benchmark
- - Derivatives used for - Derivatives that involve - The fund only establishes hedges
risk management may not leverage could generate substantial that it expects will be highly
have the intended effects gains at low cost correlated with underlying positions
and may result in losses or
missed opportunities - While the fund may use
derivatives that incidentally involve
- - The counterparty to a leverage, it does not use them for
derivatives contract could the specific purpose of leveraging
default the portfolio
- - Derivatives that involve
leverage could magnify
losses
- -----------------------------------------------------------------------------------------------------------------------------------
</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
pre-determined price.
10 FUND DETAILS
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
POTENTIAL RISKS POTENTIAL REWARDS POLICIES TO BALANCE RISK AND REWARD
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
ILLIQUID HOLDINGS
- - The fund could have difficulty - These holdings may offer more - The fund may not invest more than 15% of
valuing these holdings attractive yields or potential net assets in illiquid holdings
precisely growth than comparable widely
traded securities - To maintain adequate liquidity to meet
- - The fund could be unable to redemptions, the fund may hold
sell these holdings at the investment-grade short-term securities
time or price it desires (including repurchase agreements) and,
for temporary or extraordinary purposes,
may borrow from banks up to 33 1/3% of
its assets
- -----------------------------------------------------------------------------------------------------------------------------------
WHEN-ISSUED AND DELAYED
DELIVERY SECURITIES
- - When the fund buys secur- - The fund can take advantage - The fund uses segregated accounts to
ities before issue or for of attractive transaction offset leverage risk
delayed delivery, it could be opportunities
exposed to leverage risk if it
does not use segregated
accounts
- -----------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM TRADING
- - Increased trading would raise - The fund could realize gains - The fund anticipates a portfolio turnover
the fund's brokerage and in a short period of time rate of approximately 100%
related 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
gains distributions would and its value later falls attractive or unexpected opportunities
raise shareholders' income or to meet demands generated by
tax liability shareholder activity
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
FUND DETAILS 11
<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, along with other information
about the fund, may be obtained by contacting:
J.P. MORGAN TAX AWARE U.S. EQUITY 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, upon
payment of a duplicating fee, 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.
J.P. MORGAN
- --------------------------------------------------------------------------------
J.P. MORGAN FUNDS
ADVISOR DISTRIBUTOR
J.P. Morgan Investment Management Inc. Funds Distributor, Inc.
522 Fifth Avenue 60 State Street
New York, NY 10036 Boston, MA 02109
1-800-521-5411 1-800-221-7930
PROS237-9810
<PAGE>
J.P. MORGAN SERIES TRUST
J.P. MORGAN TAX AWARE DISCIPLINED EQUITY FUND
J.P. MORGAN TAX AWARE U.S. EQUITY FUND
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 1, 1998
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS BUT CONTAINS
ADDITIONAL INFORMATION WHICH SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS
DATED OCTOBER 1, 1998 FOR EACH OF THE FUNDS LISTED ABOVE, AS SUPPLEMENTED FROM
TIME TO TIME. ADDITIONALLY, THIS STATEMENT OF ADDITIONAL INFORMATION
INCORPORATES BY REFERENCE THE FINANCIAL STATEMENTS INCLUDED IN THE SHAREHOLDER
REPORTS, IF APPLICABLE, RELATING TO EACH OF THE FUNDS LISTED ABOVE DATED OCTOBER
31, 1998 AND APRIL 30, 1998. THE PROSPECTUSES AND THESE FINANCIAL STATEMENTS,
INCLUDING THE AUDITOR'S REPORT THEREON, IF APPLICABLE, ARE AVAILABLE, WITHOUT
CHARGE, UPON REQUEST FROM FUNDS DISTRIBUTOR, INC., 60 STATE STREET, SUITE 1300,
BOSTON, MASSACHUSETTS 02109, ATTENTION: J.P. MORGAN SERIES TRUST (800) 221-7930.
<PAGE>
Table of Contents
Page
General................................. 1
Investment Objectives and Policies...... 1
Investment Restrictions................. 15
Trustees and Officers................... 17
Investment Advisor...................... 21
Distributor............................. 24
Co-Administrator........................ 24
Services Agent.......................... 25
Custodian and Transfer Agent............ 26
Shareholder Servicing................... 26
Financial Professionals................. 27
Independent Accountants................. 28
Expenses................................ 28
Purchase of Shares...................... 28
Redemption of Shares.................... 29
Exchange of Shares.................... 29
Dividends and Distributions............. 30
Net Asset Value......................... 30
Performance Data........................ 31
Portfolio Transactions.................. 32
Massachusetts Trust..................... 34
Description of Shares................... 35
Taxes................................... 36
Additional Information.................. 40
Financial Statements.................... 40
Appendix A - Description of Securities.. A-1
<PAGE>
GENERAL
Each of J.P. Morgan Tax Aware Disciplined Equity Fund (the "Disciplined
Equity Fund") and J.P. Morgan Tax Aware U.S. Equity Fund (the " U.S. Equity
Fund", and together with the Disciplined Equity Fund, the "Funds") 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 one class of the Disciplined
Equity Fund (Institutional Shares) and one class of the U.S. Equity Fund (Select
Shares).
This Statement of Additional Information provides additional
information with respect to the Funds and should be read in conjunction with the
applicable current prospectus (the "Prospectus"). Capitalized terms not
otherwise defined herein have the meanings assigned to them in the Prospectus.
The Trust's executive offices are located at 60 State Street, Suite 1300,
Boston, Massachusetts 02109.
The Funds are advised by J.P. Morgan Investment Management Inc. ("JPMIM" or
the "Advisor").
Shares of the Funds are not deposits or obligations of, or guaranteed
or endorsed by any bank. Shares of the Funds are not federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other
governmental agency. An investment in the Funds is subject to risk that may
cause the value of the investment to fluctuate, and at the time it is redeemed,
be higher or lower than the amount originally invested.
INVESTMENT OBJECTIVES AND POLICIES
The following discussion supplements the information in the Prospectus
regarding the investment objective and policies of each Fund.
Tax Aware Disciplined Equity Fund is designed for investors seeking
enhanced total return relative to that of large and medium sized companies,
typically represented by the S&P 500 Index. The Disciplined Equity Fund's
investment objective is to provide a consistently high after tax total return
from a broadly diversified portfolio of equity securities with risk
characteristics similar to the S&P 500 Index. This investment objective can be
changed without shareholder approval.
The Disciplined Equity Fund invests primarily in large- and
medium-capitalization U.S. companies. Under normal circumstances, the
Disciplined Equity Fund expects to be fully invested.
Investment Process for the Tax Aware Disciplined Equity Fund
Research: The Advisor's more than 20 domestic equity analysts, each an
industry specialist with an average of over 10 years of experience, follow
approximately 600 medium and large capitalization U.S. companies. Their research
goal is to forecast intermediate-term earnings and prospective dividend growth
rates for the companies that they cover.
Valuation: The analysts' forecasts are converted into comparable
expected returns using a proprietary dividend discount model, which calculates
the intermediate-term earnings by comparing a company's current stock price with
its forecasted dividends and earnings. Within each sector, companies are ranked
according to their relative value and grouped into quintiles: those with the
highest expected returns (Quintile 1) are deemed the most undervalued
<PAGE>
relative to their long-term earnings power, while those with the lowest
expected returns (Quintile 5) are deemed the most overvalued.
Stock Selection: A broadly diversified portfolio is constructed using
disciplined buy and sell rules. Purchases are allocated among stocks in the
first three quintiles. Once a stock falls into the fourth and fifth quintiles
either because its price has risen or its fundamentals have deteriorated -- it
generally becomes a candidate for sale. The Disciplined Equity Fund's sector
weightings are matched to those of the S&P 500 Index, the Fund's benchmark. The
Advisor also controls the Disciplined Equity Fund's exposure to style and theme
bets and maintains near-market security weightings in individual security
holdings. This process results in an investment portfolio containing
approximately 300 stocks.
Tax Aware U.S. Equity Fund is designed for investors who want an
actively managed portfolio of selected equity securities that seeks to
outperform the S&P 500 Index. The U.S. Equity Fund's investment objective is to
provide high after tax total return from a portfolio of selected equity
securities. This investment objective can be changed without shareholder
approval.
Under normal circumstances, the U.S. Equity Fund expects to be fully
invested in equity securities consisting of U.S. and foreign common stocks and
other securities with equity characteristics which are comprised of preferred
stock, warrants, rights, convertible securities, trust certifications, limited
partnership interests and investment company securities (collectively, "Equity
Securities"). The U.S. Equity Fund's primary equity investments are the common
stock of large- and medium-capitalization U.S. corporations and, to a limited
extent, similar securities of foreign corporations.
Investment Process for the Tax Aware U.S. Equity Fund
Research: The Advisor's more than 20 domestic equity analysts, each an
industry specialist with an average of over 10 years of experience, follow
approximately 700 predominantly large- and medium-sized U.S. companies --
approximately 500 of which form the universe for the U.S. Equity Fund's
investments. Their research goal is to forecast normalized, longer term earnings
and dividends for the companies that they cover. In doing this, they may work in
concert with the Advisor's international equity analysts in order to gain a
broader perspective for evaluating industries and companies in today's global
economy.
Valuation: The analysts' forecasts are converted into comparable
expected returns using a proprietary dividend discount model, which calculates
the long-term earnings by comparing a company's current stock price with its
forecasted dividends and earnings. Within each sector, companies are ranked
according to their relative value and grouped into quintiles: those with the
highest expected returns (Quintile 1) are deemed the most undervalued relative
to their long-term earnings power, while those with the lowest expected returns
(Quintile 5)
are deemed the most overvalued.
Stock Selection: A diversified portfolio is constructed using
disciplined buy and sell rules. Purchases are concentrated among first-quintile
stocks; the specific names selected reflect the portfolio manager's judgment
concerning the soundness of the underlying forecasts, the likelihood that the
perceived misvaluation will be corrected within a reasonable time frame, and the
magnitude of the risks versus the rewards. Once a stock falls into the third
quintile -- because its price has risen or its fundamentals have deteriorated --
it generally becomes a candidate for sale. The portfolio
<PAGE>
manager seeks to hold sector weightings close to those of the S&P 500
Index, the U.S. Equity Fund's benchmark.
Tax Management Techniques
The Funds use the Advisor's proprietary tax sensitive optimization
model which is designed to reduce, but not eliminate, the impact of capital
gains taxes on shareholders' after tax total returns. Each Fund will try to
minimize the realization of net short-term and long-term capital gains by
matching securities sold at a gain with those sold at a loss to the extent
practicable. In addition, when selling a portfolio security, each Fund will
generally select the highest cost basis shares of the security to reduce the
amount of realized capital gains. Because the gain on securities that have been
held for more than one year is subject to a lower federal income tax rate, these
securities will generally be sold before securities held less than one year. The
use of these tax management techniques will not necessarily reduce a Fund's
portfolio turnover rate or prevent the Funds from selling securities to the
extent warranted by shareholder transactions, actual or anticipated economic,
market or issuer-specific developments or other investment considerations.
However, the annual portfolio turnover rate of each Fund is generally not
expected to exceed 100%.
The various types of securities in which the Funds may invest are
described below.
Equity Investments
The Funds invest primarily in Equity Securities consisting of
exchange-traded, OTC and unlisted common and preferred stocks. A discussion of
the various types of equity investments which may be purchased by the Funds
appears below. See also "Quality and Diversification Requirements."
Equity Securities. The Equity Securities in which the Funds 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 Funds 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 Funds may invest in common stock warrants that entitle the holder
to buy common stock from the issuer 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.
<PAGE>
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 prior to the expiration date.
Foreign Investments
Each of the Funds may invest up to 20% of their respective total
assets, at the time of purchase, in securities of foreign issuers. This 20%
limit is designed to accommodate the increased globalization of companies as
well as the re-domiciling of companies for tax treatment purposes. It is not
currently expected to be used to increase direct non-U.S. exposure.
Investors should realize that the value of the Funds' 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 Funds' 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 Funds must be made in compliance
with U.S. and foreign currency restrictions and tax laws restricting the amounts
and types of foreign investments.
Foreign investments may be made directly in securities of foreign
issuers or in the form of American Depository Receipts ("ADRs"), European
Depository Receipts ("EDRs") and Global Depository Receipts ("GDRs") or other
similar securities of foreign issuers. ADRs are securities, typically issued by
a U.S. financial institution (a "depository"), that evidence ownership interests
in a security or a pool of securities issued by a foreign issuer and deposited
with the depository. ADRs include American Depository Shares and New York
Shares. EDRs are receipts issued by a European financial institution. GDRs,
which are sometimes referred to as Continental Depository 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 depository, whereas an unsponsored facility may be established by a depository
without participation by the issuer of the receipt's underlying security.
Holders of an unsponsored depository receipt generally bear all costs
of the unsponsored facility. The depository 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 a 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.
<PAGE>
Additional Investments
When-Issued and Delayed Delivery Securities. Each of the Funds 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 no interest accrues to a Fund until
settlement takes place. At the time a Fund makes the commitment to purchase
securities on a when-issued or delayed delivery basis, it will record the
transaction and reflect the value each day of such securities in determining its
net asset value. At the time of settlement a when-issued security may be valued
at less than the purchase price. To facilitate such acquisitions, each Fund will
maintain with the custodian a segregated account with liquid assets, consisting
of cash or other liquid assets, in an amount at least equal to such commitments.
If a 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 fund
obligation, incur a gain or loss due to market fluctuation. Also, a Fund may be
disadvantaged if the other party to the transaction defaults.
Reverse Repurchase Agreements. Each of the Funds may enter into reverse
repurchase agreements. In a reverse repurchase agreement, a Fund sells a
security and agrees to repurchase the same security at a mutually agreed upon
date and price, reflecting the interest rate effective for the term of the
agreement. For purposes of the 1940 Act, a reverse repurchase agreement may be
deemed to be a borrowing of money by the Fund and, therefore, a form of
leverage. Leverage may cause any gains or losses for a Fund to be magnified. The
Funds will invest the proceeds of borrowings under reverse repurchase
agreements. In addition, a Fund will enter into a reverse repurchase agreement
only when the expected return to be earned from the investment of the proceeds
is greater than the interest expense of the transaction. A Fund may not enter
into reverse repurchase agreements exceeding in the aggregate one-third of the
market value of its total assets less liabilities (other than reverse repurchase
agreements and other borrowings). See "Investment Restrictions."
Loans of Portfolio Securities. Each Fund is permitted to lend its
securities in an amount up to 331/3% of the value of such Fund's net assets.
Each of the Funds 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 Funds 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 a Fund and its respective shareholders. The Funds may pay reasonable finders'
and custodial fees in connection with a loan. In addition, a Fund will consider
all facts and circumstances before entering into such an agreement including the
creditworthiness of the borrowing financial institution, and no Fund will make
any loans in excess of one year. The Funds will not lend their securities to any
officer, Trustee, Director, employee or other affiliate of the Funds, Morgan or
the Funds' distributor, unless otherwise permitted by applicable law.
<PAGE>
Illiquid Investments; Privately Placed and Other Unregistered
Securities. No Fund may acquire any illiquid securities if, as a result thereof,
more than 15% of its net assets would be in illiquid investments. Subject to
this non-fundamental policy limitation, each Fund may acquire investments that
are illiquid or have limited liquidity, such as private placements or
investments that are not registered under the Securities Act of 1933, as amended
(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 a Fund. The price
a Fund pays for illiquid securities or receives upon resale may be lower than
the price paid or received for similar securities with a more liquid market.
Accordingly the valuation of these securities will reflect any limitations on
their liquidity.
As to illiquid investments, these restricted holdings are subject to
the risk that the Fund will not be able to sell them at a price the Fund deems
representative of their value. If a restricted holding must be registered under
the Securities Act of 1933, as amended (the "1933 Act"), before it may be sold,
a Fund may be obligated to pay all or part of the registration expenses. Also, a
considerable period may elapse between the time of the decision to sell and the
time the Fund is permitted to sell a holding under an effective registration
statement. If, during such a period, adverse market conditions were to develop,
a Fund might obtain a less favorable price than prevailed when it decided to
sell.
Money Market Instruments
Although the Funds intend, under normal circumstances and to the extent
practicable, to be fully invested in equity securities, each Fund may invest in
money market instruments to the extent consistent with its investment objective
and policies. The Funds may invest in money market instruments to invest
temporary cash balances, to maintain liquidity to meet redemptions or as a
defensive measure during, or in anticipation of, adverse market conditions. A
description of the various types of money market instruments that may be
purchased by the Funds appears below. See "Quality and Diversification
Requirements."
U.S. Treasury Securities. Each of the Funds 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. Each of the Funds 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, each 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 each 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
Banks and the U.S. Postal Service, each of which has the right to borrow from
the U.S. Treasury to meet its obligations; (ii)
<PAGE>
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.
Bank Obligations. Unless otherwise noted below, each of the Funds 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 Funds will not invest in obligations for
which the Advisor, or any of its affiliated persons, is the ultimate obligor or
accepting bank. Each of the Funds may also invest in obligations of
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. Each of the Funds 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 Morgan Guaranty Trust Company of New York
("Morgan"), an affiliate acting as agent, for no additional fee. The monies
loaned to the borrower come from accounts managed by Morgan or its affiliates,
pursuant to arrangements with such accounts. Interest and principal payments are
credited to such accounts. Morgan, an affiliate of the Advisor, 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 Morgan. Since master demand obligations typically are
not rated by credit rating agencies, the Funds may invest in such unrated
obligations only if, at the time of 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 Funds to be liquid because they are payable upon demand. The
Funds do 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 to whom Morgan, an affiliate of the Advisor, in its
capacity as a commercial bank, has made a loan.
Repurchase Agreements. Each of the Funds may enter into repurchase
agreements with brokers, dealers or banks that meet the credit guidelines
approved by the Trust's Trustees. In a repurchase agreement, a 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 agreement is in effect 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 a Fund to the
<PAGE>
seller. The period of these repurchase agreements will usually be
short, from overnight to one week, and at no time will the Funds 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 Funds
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 Funds in each agreement plus accrued interest, and the
Funds 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, a 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.
Quality and Diversification Requirements
Each of the Funds intends to meet the diversification requirements of
the 1940 Act. To meet these requirements, 75% of the assets of each Fund is
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. As for the other 25% of the Fund's assets not subject to the
limitation described above, there is no limitation on investment of these assets
under the 1940 Act, so that all of such assets may be invested in securities of
any one issuer. Investments not subject to the limitations described above could
involve an increased risk to a Fund should an issuer, or a state or its related
entities, be unable to make interest or principal payments or should the market
value of such securities decline.
The Funds will also 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 Funds may invest in convertible debt securities, for which there
are no specific quality requirements. In addition, at the time a 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 a 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.
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
Each of the Funds may (a) purchase and sell exchange traded and
over-the-counter (OTC) put and call options on equity securities or indexes of
equity securities, (b) purchase and sell futures contracts on indexes of
<PAGE>
equity securities and (c) purchase and sell put and call options on
futures contracts on indexes of equity securities. Each of these instruments is
a derivative instrument as its value derives from the underlying asset or index.
Each Fund may use futures contracts and options for hedging and risk
management purposes. See "Risk Management" below. The Funds may not use futures
contracts and options for speculation.
Each Fund may utilize options and futures contracts to manage its
exposure to changing interest rates and/or security prices. Some options and
futures strategies, including selling futures contracts and buying puts, tend to
hedge a Fund's investments against price fluctuations. Other strategies,
including buying futures contracts, writing puts and calls, and buying calls,
tend to increase market exposure. Options and futures contracts may be combined
with each other or with forward contracts in order to adjust the risk and return
characteristics of a Fund's overall strategy in a manner deemed appropriate to
the Advisor and consistent with the Fund's objective and policies. Because
combined options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.
The use of options and futures is a highly specialized activity which
involves investment strategies and risks different from those associated with
ordinary portfolio securities transactions, and there can be no guarantee that
their use will increase a Fund's return. While the use of these instruments by a
Fund may reduce certain risks associated with owning its portfolio securities,
these techniques themselves entail certain other risks. If the Advisor applies a
strategy at an inappropriate time or judges market conditions or trends
incorrectly, options and futures strategies may lower a Fund's return. Certain
strategies limit a Fund's possibilities to realize gains as well as limiting its
exposure to losses. A Fund could also experience losses if the prices of its
options and futures positions were poorly correlated with its other investments,
or if it could not close out its positions because of an illiquid secondary
market. In addition, a Fund will incur transaction costs, including trading
commissions and option premiums, in connection with its futures and options
transactions and these transactions could significantly increase the Fund's
turnover rate.
Each Fund may purchase put and call options on securities, indexes of
securities and futures contracts, or purchase and sell futures contracts, only
if such options are written by other persons and if the aggregate premiums paid
on all such options and the aggregate margin deposits required on all such
futures or options thereon held at any time do not exceed 5% of the Fund's total
assets.
Purchasing Put and Call Options. By purchasing a put option, a Fund
obtains the right (but not the obligation) to sell the instrument underlying the
option at a fixed strike price. In return for this right, the Fund pays the
current market price for the option (known as the option premium). Options have
various types of underlying instruments, including specific securities, indexes
of securities, indexes of securities prices, and futures contracts. A Fund may
terminate its position in a put option it has purchased by allowing it to expire
or by exercising the option. A Fund may also close out a put option position by
entering into an offsetting transaction, if a liquid market exists. If the
option is allowed to expire, a Fund will lose the entire premium it paid. If a
Fund exercises a put option on a security, it will sell the instrument
underlying the option at the strike price. If a Fund exercises an option on an
index, settlement is in cash and does not involve the actual sale of securities.
If an option is American style, it may
<PAGE>
be exercised on any day up to its expiration date. A European style option
may be exercised only on its expiration date.
The buyer of a typical put option can expect to realize a gain if the
price of the underlying instrument falls substantially. However, if the price of
the instrument underlying the option does not fall enough to offset the cost of
purchasing the option, a put buyer can expect to suffer a loss (limited to the
amount of the premium paid, plus related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the instrument underlying the option at the option's
strike price. A call buyer typically attempts to participate in potential price
increases of the instrument underlying the option with risk limited to the cost
of the option if security prices fall. At the same time, the buyer can expect to
suffer a loss if security prices do not rise sufficiently to offset the cost of
the option.
Selling (Writing) Put and Call Options. When a Fund writes a put
option, it takes the opposite side of the transaction from the option's
purchaser. In return for receipt of the premium, the Fund assumes the obligation
to pay the strike price for the instrument underlying the option if the other
party to the option chooses to exercise it. A Fund may seek to terminate its
position in a put option it writes before exercise by purchasing an offsetting
option in the market at its current price. If the market is not liquid for a put
option the Fund has written, however, the Fund must continue to be prepared to
pay the strike price while the option is outstanding, regardless of price
changes, and must continue to post margin as discussed below.
If the price of the underlying instrument rises, a put writer would
generally expect to profit, although its gain would be limited to the amount of
the premium it received. If security prices remain the same over time, it is
likely that the writer will also profit, because it should be able to close out
the option at a lower price. If security prices fall, the put writer would
expect to suffer a loss. This loss should be less than the loss from purchasing
and holding the underlying instrument directly, however, because the premium
received for writing the option should offset a portion of the decline.
Writing a call option obligates a Fund to sell or deliver the option's
underlying instrument in return for the strike price upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium a call writer offsets part of the effect of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
The writer of an exchange traded put or call option on a security, an
index of securities or a futures contract is required to deposit cash or
securities or a letter of credit as margin and to make mark to market payments
of variation margin as the position becomes unprofitable.
Options on Indexes. Options on securities indexes are similar to options on
securities, except that the exercise of securities index options is settled by
cash payment and does not involve the actual purchase or sale of
<PAGE>
securities. In addition, these options are designed to reflect price
fluctuations in a group of securities or segment of the securities market rather
than price fluctuations in a single security. A Fund, in purchasing or selling
index options, is subject to the risk that the value of its portfolio securities
may not change as much as an index because the Fund's investments generally will
not match the composition of an index.
For a number of reasons, a liquid market may not exist and thus a Fund
may not be able to close out an option position that it has previously entered
into. When a Fund purchases an OTC option, it will be relying on its
counterparty to perform its obligations, and the Fund may incur additional
losses if the counterparty is unable to perform.
Exchange Traded and OTC Options. All options purchased or sold by the
Funds 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 Funds' Board of Trustees. While exchange-traded options are obligations
of the Options Clearing Corporation, in the case of OTC options, a Fund relies
on the dealer from which it purchased the option to perform if the option is
exercised. Thus, when a 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 a Fund as well as loss of the expected benefit of the
transaction.
Provided that a 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, a 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 Funds may
purchase or sell (write) futures contracts and purchase or sell put and call
options, including put and call options on futures contracts. In addition, the
funds may sell (write) put and call options, including options on futures.
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.
<PAGE>
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 a Fund are paid by the Fund into a segregated account, in the
name of the Futures Commission Merchant, as required by the 1940 Act and the
SEC's interpretations thereunder.
Combined Positions. The Funds are 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, a 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 a Fund's
current or anticipated investments exactly. A 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 a
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. A 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 a 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 a 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 a Fund to continue to hold a position until delivery or expiration
regardless of changes in its
<PAGE>
value. As a result, a 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, a 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 Funds
intend to comply with Section 4.5 of the regulations under the Commodity
Exchange Act, which limits the extent to which a Fund can commit assets to
initial margin deposits and option premiums. In addition, the Funds 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 a Fund's assets could impede portfolio management or the Fund's
ability to meet redemption requests or other current obligations.
Risk Management
The Funds may employ non-hedging risk management techniques. Risk
management strategies are used to keep the Funds fully invested and to reduce
the transaction costs associated with cash flows into and out of a Fund. The
objective where equity futures are used to "equitize" cash is to match the
notional value of all futures contracts to a 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, a 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 Funds' portfolio turnover rates are set forth below. A rate of 100%
indicates that the equivalent of all of a Fund's assets have been sold and
reinvested in a year. High portfolio turnover may result in the realization of
substantial net capital gains or losses. To the extent that net short term
capital gains are realized, any distributions resulting from such gains are
considered ordinary income for federal income tax purposes. See "Taxes" below.
<PAGE>
Tax Aware Disciplined Equity Fund -- For the period January 30, 1997
(commencement of operations) through October 31, 1997: 35%. For the six months
ended April 30, 1998: 12% (unaudited).
Tax Aware U.S. Equity Fund -- For the period December 18, 1996
(commencement of operations) through October 31, 1997: 23%. For the six months
ended April 30, 1998: 20% (unaudited).
INVESTMENT RESTRICTIONS
The investment restrictions set forth below have been adopted by the
Trust with respect to each Fund. Except as 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 Funds. 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
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 purchasing securities to the market value of a Fund's assets.
Unless Sections 8(b)(1) and 13(a) of the 1940 Act or any SEC or SEC
staff interpretations thereof are amended or modified, the Funds:
1. May not make any investments inconsistent with a Fund's classification
as a diversified investment company under the Investment Company Act of 1940;
2. May not purchase any security which would cause a Fund to concentrate its
investments in the securities of issuers primarily engaged in any particular
industry except as permitted by the SEC;
3. May not issue senior securities, except as permitted under the Investment
Company Act of 1940 or any rule, order or interpretation thereunder;
4. May not borrow money, except to the extent permitted by applicable law;
5. May not underwrite securities of other issuers, except to the extent that a
Fund, in disposing of portfolio securities, may be deemed an underwriter within
the meaning of the 1933 Act;
6. May not purchase or sell real estate, except that, to the extent permitted by
applicable law, a Fund may (a) invest in securities or other instruments
directly or indirectly secured by real estate, and (b) invest in securities or
other instruments issued by issuers that invest in real estate;
7. 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 commodities contracts; but this shall not
prevent a 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; and
<PAGE>
8. May make loans to other persons, in accordance with their respective
investment objectives and policies and to the extent permitted by applicable
law.
Non-Fundamental Investment Restrictions. The investment restrictions
described below are not fundamental policies of each Fund and may be changed by
their Trustees. These non-fundamental investment policies require that the Funds
may not:
(i) May 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 a Fund's net assets would be in investments which are illiquid;
(ii) May not purchase securities on margin, make short sales of securities, or
maintain a short position, provided that this restriction shall not be deemed to
be applicable to the purchase or sale of when-issued or delayed delivery
securities, or to short sales that are covered in accordance with SEC rules; and
(iii) May not acquire securities of other investment companies, except as
permitted by the 1940 Act or any order pursuant thereto.
If any percentage restriction described above is adhered to at the time
of investment, a subsequent increase or decrease in the percentage resulting
from a change in the value of a Fund's assets will not constitute a violation of
the restriction.
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
Trustees
The Trustees of the Trust, their principal occupations during the past
five years, business addresses 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, Texas 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, Florida
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, New Jersey 08540, and his date of birth is May 23, 1934.
MATTHEW HEALEY(1)--Trustee, Chairman and Chief Executive Officer; Chairman,
Pierpont Group, Inc., since prior to 1992. His address is Pine Tree Country
- --------
(1) Mr. Healey is an "interested person" of the Trust and the Advisor
as that term is defined in the 1940 Act.
<PAGE>
Club Estates, 10286 Saint Andrews Road, Boynton Beach, Florida 33436, and
his date of birth is August 23, 1937.
MICHAEL P. MALLARDIAATrustee; Retired; Prior to April 1996, Senior Vice
President, Capital Cities/ABC, Inc. and President, Broadcast Group. His address
is 10 Charnwood Drive, Suffern, New York 10910, and his date of birth is March
17, 1934.
Each Trustee is currently paid an annual fee of $75,000 (adjusted as of
April 1, 1997) for serving as Trustee of the Trust, each of the Master
Portfolios (as defined below), the J.P. Morgan Institutional Funds and J.P.
Morgan 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.
Trustee compensation expenses paid by the Trust for the calendar year ended
December 31, 1997 is set forth below.
-------------------------------- --------------------- ------------------------
TOTAL TRUSTEE
COMPENSATION ACCRUED
BY THE MASTER
PORTFOLIOS (*), J.P.
AGGREGATE TRUSTEE MORGAN INSTITUTIONAL
COMPENSATION FUNDS, J.P. MORGAN
PAID BY THE TRUST FUNDS AND THE TRUST
NAME OF TRUSTEE DURING 1997 DURING 1997(**)
--------------------------------- --------------------- -----------------------
--------------------------------- --------------------- -----------------------
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
--------------------------------- --------------------- -----------------------
(*) The J.P. Morgan Funds and J.P. Morgan Institutional Funds are each
multi-series registered investment companies that are part of a two-tier
(master-feeder) investment fund structure. Each series of the J.P. Morgan Funds
and J.P. Morgan Institutional Funds is a feeder fund that invests all of its
investable assets in one of 22 separate master portfolios (collectively the
"Master Portfolios"), 15 of which are registered investment companies.
(**) No investment company within the fund complex has a pension or
retirement plan.
(***) 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 $21,100 to a defined contribution plan on his behalf and paid
$20,500 in insurance premiums for his benefit.
The Trustees decide upon general policies and are responsible for
overseeing the Trust's business affairs. 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 Pierpont Family of Funds (now the J.P. Morgan Family of Funds), and
<PAGE>
the Trustees are the equal and sole shareholders of Pierpont Group, Inc.
The Trust has agreed to pay Pierpont Group, Inc. a fee in an amount representing
its reasonable costs in performing these services to the Trust and certain other
registered investment companies subject to similar agreements with Pierpont
Group, Inc. These costs are periodically reviewed by the Trustees. The principal
offices of Pierpont Group, Inc. are located at 461 Fifth Avenue, New York, New
York 10017.
The aggregate fees paid to Pierpont Group, Inc. by each Fund during the
indicated fiscal periods are set forth below:
Tax Aware Disciplined Equity Fund -- For the period January 30, 1997
(commencement of operations) through October 31, 1997: $157. For the six months
ended April 30, 1998: $528, (unaudited).
Tax Aware U.S. Equity Fund -- For the period December 18, 1996
(commencement of operations) through October 31, 1997: $451. For the six months
ended April 30, 1998: $616, (unaudited).
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 Chief Executive
Officer receives no compensation in his capacity as an officer of the Trust. 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 Country Club Estates, 10286 Saint
Andrews Road, Boynton Beach, Florida 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.
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.
<PAGE>
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.
KATHLEEN K. MORRISEY; Vice President and Assistant Secretary. Vice
President and Assistant Secretary of FDI. Manager of Treasury Services
Administration and an officer of certain investment companies advised or
administered by Montgomery Asset Management, L.P. and Dresdner RCM Global
Investors, Inc., and their respective affiliates. From July 1994 to November
1995, Ms. Morrisey was a Fund Accountant II for Investors Bank & Trust Company.
Prior to July 1994 she was a finance student at Stonehill College. Her date of
birth is July 5, 1972.
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, Morgan Guaranty Trust
Company of New York. 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.
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.
STEPHANIE D. PIERCE; Vice President and Assistant Secretary. Vice President
and 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. Address: 200 Park Avenue, New York, New York 10166. Her
date of birth is August 18, 1968.
GEORGE A. RIO; President and Treasurer. Executive Vice President and Client
Service Director of FDI since April 1998. From June 1995 to March 1998, Mr. Rio
was Senior Vice President and Senior Key Account Manager for Putnam Mutual
Funds. From May 1994 to June 1995, Mr. Rio was Director of
<PAGE>
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.
CHRISTINE ROTUNDO; Assistant Treasurer. Vice President, Morgan Guaranty
Trust Company of New York. 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 Trust has retained JPMIM as Investment Advisor to provide
investment advice and portfolio management services to the Funds. Subject to the
supervision of the Fund's Trustees, the Advisor makes each Fund's day-to-day
investment decisions, arranges for the execution of portfolio transactions and
generally manages each Fund's investments. Effective October 1, 1998 each Fund's
Investment Advisor is JPMIM. Prior to that date, Morgan was the Investment
Advisor.
JPMIM, a wholly owned subsidiary of J.P. Morgan & Co. Incorporated
("J.P. Morgan"), is a registered investment adviser under the Investment
Advisers Act of 1940, as amended, and 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.
J.P. Morgan, through the Advisor and other subsidiaries, acts as
investment advisor to individuals, governments, corporations, employee benefit
plans, mutual funds and other institutional investors with combined assets under
management of more than $275 billion.
J.P. Morgan has a long history of service as an advisor, underwriter
and lender to an extensive roster of major companies and as a financial advisor
to national governments. The firm, through its predecessor firms, has been in
business for over a century and has been managing investments since 1913.
The basis of the Advisor's investment process is fundamental investment
research because the firm believes that fundamentals should determine an asset's
value over the long term. The Advisor 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 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 conclusions of
the equity analysts' fundamental research is quantified into a set of projected
returns for individual companies through
<PAGE>
the use of a dividend discount model. These returns are projected for 2
to 5 years to enable analysts to take a longer term view. These returns, or
normalized earnings, are used to establish relative values among stocks in each
industrial sector. These values may not be the same as the markets' current
valuations of these companies. This provides the basis for ranking the
attractiveness of the companies in an industry according to five distinct
quintiles or rankings. This ranking is one of the factors considered in
determining the stocks purchased and sold in each sector.
The investment advisory services the Advisor provides to the Funds 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. The
Advisor serves as investment advisor to personal investors and other investment
companies and acts as fiduciary for trusts, estates and employee benefit plans.
Certain of the assets of trusts and estates under management are invested in
common trust funds for which the Advisor serves as trustee. 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 Funds. Such accounts are supervised by officers and employees of the
Advisor who may also be acting in similar capacities for the Funds. See
"Portfolio Transactions."
Sector weightings are generally similar to a benchmark with the
emphasis on security selection as the method to achieve investment performance
superior to the benchmark. The benchmark for the Funds is currently the S&P 500
Index.
Morgan, also a wholly owned subsidiary of J.P. Morgan, is a bank
holding company organized under the laws of the State of Delaware. Morgan, whose
principal offices are at 60 Wall Street, New York, New York 10260, is a New York
trust company which conducts a general banking and trust business. Morgan is
subject to regulation by the New York State Banking Department and is a member
bank of the Federal Reserve System. Through offices in New York City and abroad,
Morgan 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 Funds are managed by officers of the Advisor who, in acting for
their clients, including the Funds, do not discuss their investment decisions
with any personnel of J.P. Morgan or any personnel of other divisions of J.P.
Morgan or with any of its affiliated persons, with the exception of certain
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 Advisory
Agreements, the Funds have agreed to pay the Advisor a fee, which is computed
daily and may be paid monthly, equal to the annual rates of each Fund's average
daily net assets shown below.
Tax Aware Disciplined Equity Fund: 0.35%
Tax Aware U.S. Equity Fund: 0.45%
The table below sets forth for each Fund listed the advisory fees paid
by Morgan to the Advisor for the fiscal periods indicated.
Tax Aware Disciplined Equity Fund --For the period January 30, 1997
(commencement of operations) through October 31, 1997: $16,524. For the six
months ended April 30, 1998: $57,845, (unaudited).
<PAGE>
Tax Aware U.S. Equity Fund -- For the period December 18, 1996
(commencement of operations) through October 31, 1997: $62,523. For the six
months ended April 30, 1998: $88,571, (unaudited).
The Investment Advisory Agreement between the Advisor and the Trust, on
behalf of each Fund, 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 with respect to a Fund without penalty by a vote of a
majority of the Trust's 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 Fund. See
"Additional Information."
The Glass-Steagall Act and other applicable laws generally prohibit
banks and their subsidiaries, such as the Advisor, from engaging in the business
of underwriting or distributing securities. 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 that continuously issues
shares, such as the Trust. The interpretation does not prohibit a holding
company or a subsidiary thereof from acting as investment advisor,
administrator, shareholder servicing agent or custodian to such an investment
company. The Advisor believes that it may perform the services for the Funds
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
banks 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 banks 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
Funds.
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
shareholders that they approve the Fund's entering into a new investment
advisory agreement with another qualified investment advisor selected by the
Trustees.
Under separate agreements, Morgan provides certain financial, fund
accounting, administrative and shareholder services to the Trust. See "Services
Agent" and "Shareholder Servicing" below.
DISTRIBUTOR
FDI serves as the Trust's exclusive distributor and holds itself
available to receive purchase orders for each 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 each 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 Funds' distributor.
The Distribution Agreement will continue in effect with respect to each
Fund for a period of two years after execution only if it is approved at least
<PAGE>
annually thereafter (i) by a vote of the holders of a majority of the
Fund's outstanding voting securities 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. The Distribution Agreement is also
terminable with respect to a Fund 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 (i) 67% or more of
the Fund's outstanding voting securities present at a meeting if the holders of
more than 50% of the Fund's outstanding voting securities are present or
represented by proxy, or (ii) more than 50% of the Fund's outstanding voting
securities, whichever is less. FDI is a wholly owned indirect subsidiary of
Boston Institutional Group, Inc. The principal offices of FDI are located at 60
State Street, Suite 1300, Boston, Massachusetts 02109.
CO-ADMINISTRATOR
Under a Co-Administration Agreement with the Trust, 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 of the Trust 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 Funds; (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 regulatory documents and mails
communications to Trustees and investors; and (vi) maintains related books and
records.
For its services under the Co-Administration Agreement, each 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
each Fund is based on the ratio of the Fund's net assets to the aggregate net
assets of the Trust and certain other registered investment companies subject to
similar arrangements with FDI.
The table below sets forth for each Fund listed the administrative fees
paid to FDI for the fiscal periods indicated.
Tax Aware Disciplined Equity Fund: -- For the period January 30, 1997
(commencement of operations) through October 31, 1997: $84. For the six months
ended April 30, 1998: $244, (unaudited).
Tax Aware U.S. Equity Fund: -- For the period December 18, 1996
(commencement of operations) through October 31, 1997: $252. For the six months
ended April 30, 1998: $295, (unaudited).
<PAGE>
SERVICES AGENT
The Trust, on behalf of each Fund, has entered into an Administrative
Services Agreement (the "Services Agreement") with Morgan pursuant to which
Morgan is responsible for certain administrative and related services provided
to each 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 Agreement, Morgan provides certain administrative
and related services to each 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 Services Agreement, each 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 Funds and the Master
Portfolios in accordance with the following annual schedule: 0.09% of the first
$7 billion of their aggregate average daily net assets, and 0.04% of their
aggregate average daily net assets in excess of $7 billion, less the
complex-wide fees payable to FDI. The portion of this charge payable by each
Fund is determined by the proportionate share that its net assets bear to the
total net assets of the Trust and the other investment companies provided
administrative services by Morgan.
The table below sets forth for each Fund listed the fees paid to
Morgan, net of fee waivers and reimbursements, as Services Agent.
Tax Aware Disciplined Equity Fund: -- For the period January 30, 1997
(commencement of operations) through October 31, 1997: $2,693. For the six
months ended April 30, 1998: $9,832, (unaudited).
Tax Aware U.S. Equity Fund: -- For the period December 18, 1996
(commencement of operations) through October 31, 1997: $7,649. For the six
months ended April 30, 1998: $11,722, (unaudited).
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, transfer and dividend disbursing agent. Pursuant to the Custodian
Contract with the Trust, State Street is responsible for maintaining the books
and records of each Fund's portfolio transactions and holding portfolio
securities and cash. 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 on behalf of each of the Funds has entered into a Shareholder
Servicing Agreement with Morgan pursuant to which Morgan acts as shareholder
servicing agent for Fund shareholders. Under this agreement, Morgan is
responsible for performing, directly or through an agent, 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
<PAGE>
matters pertaining to a 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 Funds' 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 FDI of the gross amount of purchase orders for Fund shares; and
providing other related services.
Under the Shareholder Servicing Agreement, the Tax Aware U.S. Equity
Fund has agreed to pay Morgan for these services a fee of 0.25% (expressed as a
percentage of the average daily net asset values of Fund shares owned by or for
shareholders for whom Morgan is acting as shareholder servicing agent); and
effective October 1, 1998, the Tax Aware Disciplined Equity Fund has agreed to
pay Morgan for these services a fee of 0.10% (expressed as a percentage of the
average daily net asset values of Fund shares owned by or for shareholders for
whom Morgan is acting as Shareholder Servicing Agent). Morgan acts as
Shareholder Servicing Agent for all shareholders.
The table below sets forth for each Fund listed the shareholder
servicing fees paid by each Fund to Morgan, net of fee waivers and
reimbursements, for the fiscal periods indicated.
Tax Aware Disciplined Equity Fund: -- For the period January 30, 1997
(commencement of operations) through October 31, 1997: $11,803. For the six
months ended April 30, 1998: $41,318, (unaudited).
Tax Aware U.S. Equity Fund: -- For the period December 18, 1996
(commencement of operations) through October 31, 1997: $34,735. For the six
months ended April 30, 1998: $49,207, (unaudited).
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 for providing administrative services to the Funds under the Services
Agreement, and JPMIM in acting as Advisor to the Funds under the Investment
Advisory Agreement may raise issues under these laws. However, Morgan and JPMIM
believe that they may properly perform these services and the other activities
described in the Prospectuses without violating 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 and the Services Agreements, the Trustees would seek an
alternative provider of such services. In such event, changes in the operation
of the Funds 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 Funds may be sold to or through financial intermediaries who are
customers of J.P. Morgan ("financial professionals"), including financial
institutions and broker-dealers, that may be paid fees by J.P. Morgan or its
affiliates for services provided to their clients that invest in the Funds. See
"Financial Professionals" below. Organizations that provide recordkeeping
<PAGE>
or other services to certain employee benefit or retirement plans that
includes the Funds as an investment alternative may also be paid a fee.
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 J.P. 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 Funds,
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 be remitted
to the Fund or J.P. Morgan.
Each 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 a Fund's behalf. A
Fund will be deemed to have received a purchase or redemption order when an
authorized broker or, it 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 are PricewaterhouseCoopers
LLP, 1177 Avenue of the Americas, New York, New York 10036.
PricewaterhouseCoopers LLP conducts an annual audit of the financial statements
of each of the Funds, assists in the preparation and/or review of each of the
Fund's federal and state income tax returns and consults with the Funds 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", "Distributor", "Services Agent" and
"Shareholder Servicing" above, the Funds are responsible for usual and customary
expenses associated with the Trust's 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, transfer, registrar and
dividend disbursing costs, the expenses of printing and mailing reports, notices
and proxy statements to Fund shareholders, fees under state securities laws,
custodian fees and brokerage expenses.
<PAGE>
PURCHASE OF SHARES
Additional Minimum Balance Information. For investors who purchased shares
of the Disciplined Equity Fund prior to January 2, 1998, the minimum account
balance will remain $100,000 and the minimum subsequent investment remains
$5,000.
If your account balance falls below the minimum for 30 days as a result of
selling shares (and not because of performance), the Fund reserves the right to
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 reserves the
right to close out your account and send the proceeds to the address of record.
Method of Purchase. Investors may open accounts with a Fund only
through the Distributor. All purchase transactions in Fund accounts are
processed by Morgan as shareholder servicing agent and each 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 Funds reserve the right to determine the purchase orders that
they will accept.
References in the Prospectuses and this Statement of Additional
Information to customers of J.P. Morgan or a financial professional include
customers of their affiliates and references to transactions by customers with
J.P. 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 a Fund may make transactions in shares of a Fund.
Each Fund may, at its own option, accept securities in payment for
shares. The securities so delivered are valued by the method described under
"Net Asset Value" as of the day a 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 the Advisor, appropriate
investments for a 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 applicable Fund for investment and not for resale; (iii) be
liquid securities which are not restricted as to transfer; 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. Each 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 charge the investor a
fee for this service and other services it provides to its customers. J.P.
Morgan may pay fees to financial professionals for services in connection with
fund investments. See "Financial Professionals" above.
REDEMPTION OF SHARES
Investors may redeem shares of the Funds as described in the Prospectus.
The Funds generally intend to pay redemption proceeds in cash; however, they
<PAGE>
reserve the right at their sole discretion to pay redemption over
$500,000 (in the case of the Tax Aware Disciplined Equity Fund) or $250,000 (in
the case of the Tax Aware U.S. Equity Fund) in-kind as a portfolio of
representative stocks rather than cash. See below and "Exchange of Shares".
The Trust, on behalf of each Fund, reserves 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 thereon
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 a 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.
If the Trust determines that it would be detrimental to the best
interest of the remaining shareholders of the Funds 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. If
shares are redeemed in-kind, the redeeming shareholder might incur costs in
converting the assets into cash. The Trust is in the process of seeking
exemptive relief from the SEC with respect to redemptions in-kind by the Funds.
If the requested relief is granted, each Fund would then be permitted to pay
redemptions to greater than 5% shareholders in securities, rather than in cash,
to the extent permitted by the SEC and applicable law. 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.
In general, a Fund will attempt to select securities for in-kind
redemptions that approximate the overall characteristics of the Fund's
portfolio. A Fund will not distribute illiquid securities to satisfy in-kind
redemptions. For purposes of effecting in-kind redemptions, securities will be
valued in the manner regularly used to value a Fund's portfolio securities. A
Fund will not redeem its shares in-kind in a manner that after giving effect to
the redemption would cause it to violate its investment restrictions or
policies. See the Prospectuses for information on redemptions in-kind.
Redemption Fee. A redemption of 1% will be imposed on shares held for
less than 5 years and paid to each Fund on the gross dollar amount of shares
redeemed for cash.
The redemption fees help cover transaction costs and the tax costs
long-term investors may bear when a Fund realizes capital gains as a result of
selling securities to meet redemptions. By being paid directly to the Funds, the
fees tend to be more advantageous to long-term investors and less advantageous
to short-term investors.
There will be no redemption fee charged on the cash redemption of (i)
shares acquired through reinvested dividends and distributions, (ii) shares
redeemed in connection with the settlement of an estate, or (iii) shares subject
to a mandatory redemption.
For federal income tax purposes, the redemption fee will reduce the
proceeds paid to the shareholder upon the redemption of shares.
Other Redemption Processing Information. Redemption requests may not be
processed if the redemption request is not submitted in proper form. A
redemption request is not in proper form unless a Fund has received the
shareholder's certified taxpayer identification number and address. In
<PAGE>
addition, if shares were paid for by check and the check has not yet
cleared, redemption proceeds will not be transmitted until the check has
cleared, which may take up to 15 days. Each Fund reserves the right to suspend
the right of redemption or postpone the payment of redemption proceeds to the
extent permitted by the SEC. Shareholders may realize taxable gains upon
redeeming shares.
For information regarding redemption orders placed through a financial
professional, please see "Financial Professionals" above.
EXCHANGE OF SHARES
Subject to the limitations below, an investor may exchange shares from
a Fund into any other J.P. Morgan Fund or J.P. Morgan Institutional 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. The Funds generally intend to pay
redemption proceeds in cash; however, since they reserve the right at their sole
discretion to pay redemptions over $500,000 (in the case of the Tax Aware
Disciplined Equity Fund) or $250,000 (in the case of the Tax Aware U.S. Equity
Fund) in-kind as a portfolio of representative stocks rather than cash, each
Fund reserves the right to deny an exchange request in excess of those amounts.
See "Redemption of Shares". 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 a fund to be acquired
are purchased for settlement when the proceeds from redemption become available.
In the case of investors in certain states, state securities laws may restrict
the availability of the exchange privilege. The Trust reserves the right to
discontinue, alter or limit the exchange privilege at any time.
DIVIDENDS AND DISTRIBUTIONS
Each Fund declares and pays dividends and distributions as described in
the Prospectus.
A Fund's dividends and distributions are paid in additional shares
unless the shareholder elects to have them paid in cash. The tax effects of
dividends and distributions are the same whether they are paid in shares or
cash. Cash dividends and distributions either (1) are credited to the
shareholder's account at J.P. Morgan or at his financial professional or (2) in
the case of certain J.P. Morgan clients, are paid by a check mailed in
accordance with the client's instructions.
NET ASSET VALUE
Each of the Funds computes its net asset value separately for each
class of shares outstanding at the time described in the Prospectus. 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. On days when U.S. trading markets close early in observance of
these holidays, the Fund will close for purchases and redemptions at the same
<PAGE>
time. The Funds may also 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,
other than options on stock indices, is based on the last sale 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 rate
currency average on the valuation date.
Options on stock indexes traded on national securities exchanges are
valued at the close of options trading on such exchanges which is currently 4:10
p.m., New York time. Stock index futures and related options, which are traded
on commodities exchanges, are valued at their last sales price as of the close
of such commodities exchanges which is currently 4:15 p.m., New York time.
Securities or other assets for which market quotations are not readily available
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.
PERFORMANCE DATA
From time to time, the Funds may quote performance in terms of actual
distributions, total return or capital appreciation for the various Fund classes
in reports, sales literature and advertisements published by the Trust. Current
performance information may be obtained by calling Morgan at (800) 766-7722 for
J.P. Morgan Tax Aware Disciplined Equity Fund: Institutional Shares and (800)
521-5411 for J.P. Morgan Tax Aware U.S. Equity Fund: Select Shares.
The classes of shares of each 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 a 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.
Total Return Quotations. As required by regulations of the SEC, average
annual total return of each Fund's class of shares 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 average annual 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.
<PAGE>
Aggregate total returns, reflecting the cumulative percentage change
over a measuring period, may also be calculated.
Below is set forth historical return information for the Funds for the
periods indicated:
Tax Aware Disciplined Equity Fund (4/30/98): Average annual total return, 1
year: 45.17%; average annual total return, 5 years: N/A; average annual total
return, commencement of operations (January 30, 1997) to period end: 37.55%;
aggregate total return, 1 year: 45.17%; aggregate total return, 5 years: N/A;
aggregate total return, commencement of operations (January 30, 1997) to period
end: 48.80%.
Tax Aware U.S. Equity Fund (4/30/98): Average annual total return, 1 year:
40.15%; average annual total return, 5 years: N/A; average annual total return,
commencement of operations (December 18, 1996) to period end: 36.43%; aggregate
total return, 1 year: 40.15%; aggregate total return, 5 years: N/A; aggregate
total return, commencement of operations (December 18, 1996) to period end:
52.78%.
General. Performance will vary from time to time depending upon market
conditions, the composition of the portfolio, and operating expenses.
Consequently, any given performance quotation should not be considered
representative of a 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 a Fund with certain bank deposits or other
investments that pay a fixed yield or return for a stated period of time.
Comparative performance information may be used from time to time in
advertising the Funds' shares, including appropriate market indices including
the benchmarks indicated under "Investment Advisor" above or data from Lipper
Analytical Services, Inc., Micropal, Inc., Ibbotson Associates, Morningstar
Inc., the Dow Jones Industrial Average and other industry publications.
From time to time, the Funds 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 Funds; (7)
comparisons of investment products (including the Funds) 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 a Fund's volatility relative to its
benchmark or to past performance, including risk adjusted measures. The Funds
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 any of the Funds.
PORTFOLIO TRANSACTIONS
The Advisor places orders for all Funds for all purchases and sales of
portfolio securities, enters into repurchase agreements and may enter into
<PAGE>
reverse repurchase agreements and execute loans of portfolio securities on
behalf of all the Funds. See "Investment Objectives and Policies."
Fixed income and debt securities are generally traded at a net price
with dealers acting as principal for their own accounts without a stated
commission. The price of the security usually includes profit to the dealers. In
underwritten offerings, securities are purchased at a fixed price which includes
an amount of compensation to the underwriter, generally referred to as the
underwriter's concession or discount. On occasion, certain securities may be
purchased directly from an issuer, in which case no commissions or discounts are
paid. The Advisor intends to seek best execution on a competitive basis for both
purchases and sales of securities.
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 broker's
financial condition; and 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 Trust's Trustees review regularly the
reasonableness of commissions and other transaction costs incurred by the Funds
in light of facts and circumstances deemed relevant from time to time and, in
that connection, will receive reports from Morgan 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 and
political analysts. Research services furnished by brokers are used for the
benefit of all of the Advisor's clients and not solely or necessarily for the
benefit of an individual Fund. the Advisor believes that the value of research
services received is not determinable and does not significantly reduce its
expenses. The Funds do not reduce their fee to the Advisor by any amount that
might be attributable to the value of such services.
The Funds paid the following approximate brokerage commissions for the
indicated fiscal periods:
Tax Aware Disciplined Equity Fund: For the period January 30, 1997
(commencement of operations) through October 31, 1997: $2,800. For the six
months ended April 30, 1998: $24,924 (unaudited).
Tax Aware U.S. Equity Fund: For the period December 18, 1996 (commencement
of operations) through October 31, 1997: $4,971. For the six months ended April
30, 1998: $21,752 (unaudited).
Subject to the overriding objective of obtaining the best execution of
orders, the Advisor may allocate a portion of a Fund's brokerage transactions to
affiliates of the Advisor. In order for affiliates of the Advisor to effect any
portfolio transactions for a Fund, 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 Trust's Trustees, including a majority of the Trustees who
<PAGE>
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 Advisor or FDI or any "affiliated person" (as defined in the 1940
Act) thereof when such entities are acting as principals, except to the extent
permitted by law. In addition, the Funds will not purchase securities from any
underwriting group of which the Advisor or an affiliate of the Advisor is a
member, except to the extent permitted by law.
Investment decisions made by the Advisor are the product of many
factors in addition to basic suitability for the particular Fund or other client
in question. Thus, a particular security may be bought or sold for certain
clients even though it could have been bought or sold for other clients at the
same time. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling the same security. The Funds may only
sell a security to each other or to other accounts managed by the Advisor or its
affiliates in accordance with procedures adopted by the Trustees.
It also sometimes happens that two or more clients simultaneously
purchase or sell the same security. On those occasions when the Advisor deems
the purchase or sale of a security to be in the best interests of a Fund, as
well as other clients including other Funds, 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 a Fund with those to be sold or purchased
for other clients 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 the Advisor 's fiduciary obligations to a Fund. In some
instances, this procedure might adversely affect a Fund.
MASSACHUSETTS TRUST
The Trust is a "Massachusetts business trust" of which each 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.
Under Massachusetts law, shareholders of such a trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. However, the Trust's Declaration of Trust provides that the shareholders
will 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 will contain a provision to the effect that the
shareholders are not personally liable thereunder.
Effective May 12, 1997, the name of the U.S. Equity Fund was changed
from "Tax Aware Equity Fund" to "Tax Aware U.S. Equity Fund". Effective January
1, 1998, the name of the Trust was changed from "JPM Series Trust" to "J.P.
Morgan Series Trust", the name of the U.S. Equity Fund was changed from "Tax
Aware U.S. Equity Fund" to "J.P. Morgan Tax Aware U.S. Equity Fund", the name of
the Disciplined Equity Fund was changed from "Tax Aware Disciplined Equity Fund"
to "J.P. Morgan Tax Aware Disciplined Equity Fund", the "JPM Pierpont Shares"
were renamed "Select Shares", and "JPM Pierpont Shares" of "Tax Aware
Disciplined Equity Fund" were renamed "Institutional Shares" of "J.P. Morgan Tax
Aware Disciplined Equity Fund".
<PAGE>
The Trust's Declaration of Trust further provides that no Trustee,
officer, employee, or agent of the Trust is liable to a 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 a 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 ("disabling
conduct"). It also provides that all third persons must look solely to Fund
property for satisfaction of claims arising in connection with the affairs of a
Fund. 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 a Fund, except liabilities arising from disabling
conduct.
DESCRIPTION OF SHARES
Each 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 a
Fund. To date, shares of each Fund described in this Statement of Additional
Information have been authorized and are currently available for sale to the
public.
Each share represents an equal proportional interest in a Fund with
each other share of the same class. Upon liquidation of a Fund, holders are
entitled to share pro rata in the net assets of a Fund available for
distribution to such shareholders. Shares of a 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.
As of August 31, 1998, the following owned of record or, to the
knowledge of management, beneficially owned more than 5% of the outstanding
shares of:
Tax Aware U.S. Equity Fund - Charles Schwab & Co. Inc. Special Custody
Account for the benefit of Customers (7.77%); Morgan as agent for A. Kaufman
(5.42%).
<PAGE>
Tax Aware Disciplined Equity Fund - American Contractors Insurance Group
Ltd. (21.07%); Charles Schwab & Co. Inc. Special Custody Account for the benefit
of Customers (11.51%); Morgan as agent for Clarendon Capital Management Co.
(6.08%).
The address of each owner listed above is c/o JPMIM, 522 Fifth Avenue,
New York, New York 10036. As of the date of this Statement of Additional
Information the officers and Trustees as a group owned less than 1% of the
beneficial shares of each Fund.
TAXES
The following discussion of tax consequences is based on U.S. federal
tax laws in effect on the date of the Prospectuses. These laws and regulations
are subject to change by legislative or administrative action.
Each Fund intends to qualify and remain qualified as a regulated
investment company under Subchapter M of the Code. As a regulated investment
company, a 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 or securities and
other income (including but not limited to gains from options and futures
contracts) derived with respect to its business of investing in such stock or
securities; and (b) diversify its holdings so that, at the end of each fiscal
quarter, (i) at least 50% of the value of a Fund's total assets is represented
by cash, U.S. Government securities, investments in other regulated investment
companies and other securities limited, in respect of any one issuer, to an
amount not greater than 5% of a 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 the securities of other regulated investment
companies).
As a regulated investment company, a Fund (as opposed to its
shareholders) will not be subject to federal income taxes on the net investment
income and capital gains that it distributes to its shareholders, provided that
at least 90% of its net investment income and realized net short-term capital
gains in excess of net long-term capital losses for the taxable year is
distributed in accordance with the Code's requirements.
Under the Code, a 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. Each 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 a 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 generally be
taxable to a shareholder in the year declared rather than the year paid.
Distributions of net investment income and realized net short-term
capital gain in excess of net long-term capital loss generally taxable to
shareholders of the Funds as ordinary income whether such distributions are
taken in cash or reinvested in additional shares. The Funds expect that a
portion of these distributions to corporate shareholders will be eligible for
the dividends-received deduction, subject to applicable limitations under the
<PAGE>
Code. If dividend payments exceed income earned by a Fund, the overdistribution
would be considered a return of capital rather than a dividend payment. The
Funds intend 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 a 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 a Fund. In general,
long-term capital gain of an individual shareholder will be subject to a reduced
rate of tax. Investors should consult their tax advisors concerning the
treatment of capital gains and losses.
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, if applicable, 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 a
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 a Fund pursuant to the exercise of a put option written by it, a
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. 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 a 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 fluctuations in
exchange rates between the time a Fund accrues income or receivables or expenses
or other liabilities denominated in a foreign currency and the time a 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 a 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.
<PAGE>
Options and futures contracts entered into by a 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 Fund on options and
futures contracts or on the underlying securities.
Certain options and futures held by a Fund at the end of each taxable
fiscal 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 Fund has held such options or futures.
The Funds may invest in Equity Securities of foreign issuers. If a Fund
purchases shares in certain foreign investment funds (referred to as passive
foreign investment companies ("PFICs") under the Code), a Fund may be subject to
federal income tax on a portion of an "excess distribution" from such foreign
investment fund, including any gain from the disposition of such shares, even
though such income may have to be distributed as a taxable dividend by a Fund to
its shareholders. In addition, certain interest charges may be imposed on a Fund
as a result of such distributions. Alternatively, a Fund may in certain
circumstances include each year in its income and distribute to shareholders a
pro rata portion of the PFIC's income, whether or not distributed to a Fund.
The Funds will be permitted to "mark to market" any marketable stock
held by a Fund in a PFIC. If a Fund made such an election, it would 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. A 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 a Fund for prior
taxable years.
If a correct and certified taxpayer identification number is not on
file, a Fund is required, subject to certain exemptions, to withhold 31% of
certain payments made or distributions declared to non-corporate shareholders.
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.
In the case of a foreign shareholder who is a nonresident alien
individual or foreign entity, a Fund may be required to withhold U.S. federal
income tax as "backup withholding" at the rate of 31% from distributions
<PAGE>
treated as long-term capital gains 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 a 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 a 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.
State and Local Taxes. Each Fund may be subject to state or local taxes
in jurisdictions in which a Fund is deemed to be doing business. In addition,
the treatment of a 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 any Fund is liable for any
income or franchise tax in The Commonwealth of Massachusetts, provided that each
Fund continues to qualify as a regulated investment company under Subchapter M
of the Code.
ADDITIONAL INFORMATION
Telephone calls to the Funds, J.P. Morgan or State Street 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 statement filed under the 1940 Act. Pursuant to
the rules and regulations of the SEC, certain portions have been omitted. The
registration statement 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 Funds or FDI. The Prospectus and this Statement of Additional
Information do not constitute an offer by any Fund or by FDI 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 FDI to make such offer in such
jurisdictions.
The Year 2000 Initiative
With the new millennium rapidly approaching, organizations are
examining their computer systems to ensure they are year 2000 compliant. The
issue, in simple terms, is that many existing computer systems use only two
numbers to identify a year in the date field with the assumption that the first
two digits are always 19. As the century is implied in the date, on January 1,
2000, computers that are not year 2000 compliant will assume the year is 1900.
Systems that calculate, compare, or sort using the incorrect date will cause
<PAGE>
erroneous results, ranging from system malfunctions to incorrect or
incomplete transaction processing. If not remedied, potential risks include
business interruption or shutdown, financial loss, reputation loss, and/or legal
liability.
J.P. Morgan has undertaken a firmwide initiative to address the year
2000 issue and has developed a comprehensive plan to prepare, as appropriate,
its computer systems. Each business line has taken responsibility for
identifying and fixing the problem within its own area of operation and for
addressing all interdependencies. A multidisciplinary team of internal and
external experts supports the business teams by providing direction and firmwide
coordination. Working together, the business and multidisciplinary teams have
completed a thorough education and awareness initiative and a global inventory
and assessment of J.P. Morgan's technology and application portfolio to
understand the scope of the year 2000 impact at J.P. Morgan. J.P. Morgan
presently is renovating and testing these technologies and applications in
partnership with external consulting and software development organizations, as
well as with year 2000 tool providers. J.P. Morgan is on target with its plan to
substantially complete renovation, testing, and validation of its key systems by
year-end 1998 and to participate in industry-wide testing (or streetwide
testing) in 1999. J.P. Morgan is also working with key external parties,
including clients, counterparties, vendors, exchanges, depositories, utilities,
suppliers, agents and regulatory agencies, to stem the potential risks the year
2000 problem poses to J.P. Morgan and to the global financial community.
Costs associated with efforts to prepare J.P. Morgan's systems for the
year 2000 approximated $95 million in 1997. In 1998, J.P. Morgan will continue
its efforts to prepare its systems for the year 2000. The total cost to become
year-2000 compliant is estimated at $250 million, for internal systems
renovation and testing, testing equipment, and both internal and external
resources working on the project. Remaining costs will be incurred primarily in
1998. The costs associated with J.P. Morgan becoming year-2000 compliant will be
borne by J.P. Morgan and not the Funds.
<PAGE>
FINANCIAL STATEMENTS
The following financial statements of each Fund and the report thereon
of PricewaterhouseCoopers LLP are incorporated herein by reference from their
respective annual report filings made with the SEC pursuant to Section 30(b) of
the 1940 Act and Rule 30b2-1 thereunder. Additionally, the financial statements
of each Fund are incorporated herein by reference from their respective
semi-annual report filings made with the SEC pursuant to Section 30(b) of the
1940 Act and Rule 30b2-1 thereunder. Any of the following financial reports are
available without charge upon request by calling J.P. Morgan Fund Services at
(800) 766-7722 for Tax Aware Disciplined Equity Fund: Institutional Shares and
(800) 521-5411 for Tax Aware U.S. Equity Fund: Select Shares.
- ----------------------------------- ---------------------- ---------------------
Date of Semi-Annual Date of Annual
Report; Date Semi- Report; Date Annual
Annual Report Filed; Report Filed; and
Name of Fund and Accession Number Accession Number
- ----------------------------------
- ----------------------------------- ---------------------- ---------------------
Tax Aware Disciplined Equity Fund 4/30/98; 10/31/97;
9/23/98; 12/31/97;
0001047469-98-035204 0001047469-97-009209
- ----------------------------------- ---------------------
- ----------------------------------- ---------------------
Tax Aware U.S. Equity Fund 4/30/98; 10/31/97;
9/23/98; 12/31/97;
0001047469-98-035203 0001047469-97-009208
- ----------------------------------- ---------------------- ---------------------
<PAGE>
APPENDIX A
Description of Securities Ratings
STANDARD & POOR'S
Corporate and Municipal Bonds
AAA - Debt rated AAA has 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 has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in
a small degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than for debt in higher rated categories.
BB-B - Debt rated BB and B is regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation. While
such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
Commercial Paper, including Tax Exempt
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.
Short-Term Tax-Exempt Notes
SP-1 - The short-term tax-exempt note rating of SP-1 is the highest
rating assigned by Standard & Poor's and has a very strong or
strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics are
given a "plus" (+) designation.
SP-2 - The short-term tax-exempt note rating of SP-2 has a
satisfactory capacity to pay principal and interest.
<PAGE>
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 Aa
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 a
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.
<PAGE>
Commercial Paper, including Tax Exempt
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.
Short-Term Tax Exempt Notes
MIG-1 - The short-term tax-exempt note rating MIG-1 is the highest
rating assigned by Moody's for notes judged to be the best
quality. Notes with this rating enjoy strong protection from
established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing,
or both.
MIG-2 - MIG-2 rated notes are of high quality but with margins of
protection not as large as MIG-1.
