<PAGE>
MARCH 1, 1999 | PROSPECTUS
J.P. MORGAN INSTITUTIONAL
U.S. EQUITY FUNDS
Disciplined Equity Fund
U.S. Equity Fund
U.S. Small Company Fund
Tax Aware Disciplined Equity Fund
----------------------------------------
Seeking to outperform U.S. stock markets
over the long term through a disciplined
management approach
This prospectus contains essential information for anyone investing in these
funds. Please read it carefully and keep it for reference.
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 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.
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CONTENTS
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2 | Each fund's goal, investment approach, risks, expenses and performance
J.P. MORGAN INSTITUTIONAL U.S. EQUITY FUNDS
J.P. Morgan Institutional Disciplined Equity Fund ................... 2
J.P. Morgan Institutional U.S. Equity Fund .......................... 4
J.P. Morgan Institutional U.S. Small Company Fund ................... 6
J.P. Morgan Institutional Tax Aware Disciplined Equity Fund ......... 8
10 | Principles and techniques common
to the funds in this prospectus
U.S. EQUITY MANAGEMENT APPROACH
J.P. Morgan ........................................................ 10
J.P. Morgan U.S. equity funds ...................................... 10
The spectrum of U.S. equity funds .................................. 10
Who may want to invest ............................................. 10
U.S. equity investment process ..................................... 11
Tax aware investing at J.P. Morgan ................................. 11
12 | Investing in the J.P. Morgan
Institutional U.S. Equity Funds
YOUR INVESTMENT
Investing through a financial professional ......................... 12
Investing through an employer-sponsored retirement plan ............ 12
Investing through an IRA or rollover IRA ........................... 12
Investing directly ................................................. 12
Opening your account ............................................... 12
Adding to your account ............................................. 12
Selling shares ..................................................... 13
Account and transaction policies ................................... 13
Dividends and distributions ........................................ 14
Tax considerations ................................................. 14
15 | More about risk and the funds'
business operations
FUND DETAILS
Business structure ................................................. 15
Management and administration ...................................... 15
Risk and reward elements ........................................... 16
Financial Highlights ............................................... 18
FOR MORE INFORMATION ........................................ back cover
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J.P. MORGAN INSTITUTIONAL
DISCIPLINED EQUITY FUND | TICKER SYMBOL: JPIEX
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REGISTRANT: J.P. MORGAN INSTITUTIONAL FUNDS
(J.P. MORGAN INSTITUTIONAL DISCIPLINED EQUITY FUND)
RISK/RETURN SUMMARY
[GRAPHIC OMITTED]
For a more detailed discussion of the fund's investments and their main risks,
as well as fund strategies, please see pages 16-17.
GOAL
[GRAPHIC OMITTED]
The fund's goal is to provide a consistently high 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.
INVESTMENT APPROACH
[GRAPHIC OMITTED]
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 11.) Therefore, the fund tends to own a
larger number of stocks within the S&P 500 than the U.S. Equity Fund.
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.
An investment in the fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. You could lose money if you sell when the fund's share price is lower
than when you invested.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $316
billion, including more than $16.4 billion using similar strategies as the fund.
The portfolio management team is led by James C. Wiess and Timothy J. Devlin,
both vice presidents, who have been on the team since the fund's inception. Mr.
Wiess has been at J.P. Morgan since 1992, and prior to managing this fund
managed other structured equity portfolios for J.P. Morgan. Mr. Devlin has been
at J.P. Morgan since July 1996, and prior to that time was an equity portfolio
manager at Mitchell Hutchins Asset Management Inc.
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Before you invest
Investors considering the fund should understand that:
o There is no assurance that the fund will meet its investment goal.
o The fund does not represent a complete investment program.
2 | J.P. MORGAN INSTITUTIONAL DISCIPLINED EQUITY FUND
<PAGE>
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PERFORMANCE (unaudited)
The bar chart and table shown below provide some indication of the risks of
investing in J.P. Morgan Institutional Disciplined Equity Fund.
The bar chart indicates the risks by showing the performance of the fund's
shares during its first complete calendar year of operations.
The table indicates the risks by showing how the fund's average annual returns
for the past year and for the life of the fund compare to those of the S&P 500
Index. This is a widely recognized, unmanaged index of U.S. stocks used as a
measure of overall U.S. stock market performance.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
Total return (%) Shows changes in returns by calendar year(1)
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1998
30% 32.35
20%
10%
0%
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[] J.P. Morgan Institutional Disciplined Equity Fund
For the period covered by this total return chart, the fund's highest quarterly
return was 22.85% (for the quarter ended 12/31/98); and the lowest quarterly
return was -9.91% (for the quarter ended 9/30/98).
Average annual total return (%) Shows performance over time, for periods
ended
December 31, 1998(2)
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Past 1 yr. Life of fund
J.P. Morgan Institutional Disciplined Equity
Fund (after expenses) 32.35 30.49
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S&P 500 Index (no expenses) 28.58 28.37
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INVESTOR EXPENSES
The expenses of the fund are shown at right. The fund has no sales, redemption,
exchange, or account fees, although some institutions may charge you a fee for
shares you buy through them. The annual fund expenses are deducted from fund
assets prior to performance calculations.
Annual fund operating expenses(3) (%)
(expenses that are deducted from fund assets)
Management fees 0.35
Marketing (12b-1) fees none
Other expenses(4) 0.37
- --------------------------------------------
Total annual fund
operating expenses(4) 0.72
- --------------------------------------------
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Expense example
- --------------------------------------------------------------------------------
The example below is intended to help you compare the cost of investing in the
fund with the cost of investing in other mutual funds. The example assumes:
$10,000 initial investment, 5% return each year, total operating expenses
unchanged, and all shares sold at the end of each time period. The example is
for comparison only; the fund's actual return and your actual costs may be
higher or lower.
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1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 74 230 401 895
- --------------------------------------------------------------------------------
(1) The fund's fiscal year end is 5/31.
(2) The fund commenced operations on 1/3/97 and performance is calculated as of
1/31/97.
(3) The fund has a master/feeder structure as described on page 15. This table
shows the fund's expenses and its share of master portfolio expenses for
the past fiscal year before reimbursement, expressed as a percentage of the
fund's average net assets.
(4) After reimbursement other expenses and total operating expenses are 0.10%
and 0.45%, respectively. This reimbursement can be changed or terminated at
any time at the option of J.P. Morgan.
J.P. MORGAN INSTITUTIONAL DISCIPLINED EQUITY FUND | 3
<PAGE>
J.P. MORGAN INSTITUTIONAL
U.S. EQUITY FUND | TICKER SYMBOL: JMUEX
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REGISTRANT: J.P. MORGAN INSTITUTIONAL FUNDS
(J.P. MORGAN INSTITUTIONAL U.S. EQUITY FUND)
RISK/RETURN SUMMARY
[GRAPHIC OMITTED]
For a more detailed discussion of the fund's investments and their main risks,
as well as fund strategies, please see pages 16-17.
GOAL
[GRAPHIC OMITTED]
The fund's goal is to provide high total return from a portfolio of selected
equity securities. This goal can be changed without shareholder approval.
INVESTMENT APPROACH
[GRAPHIC OMITTED]
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 11. The fund
generally considers selling stocks that appear overvalued.
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 seeks 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.
An investment in the fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. You could lose money if you sell when the fund's share price is lower
than when you invested.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $316
billion, including more than $13.3 billion using similar strategies as the fund.
The portfolio management team is led by William M. Riegel, Jr., managing
director, who has been on the team since 1993 and has been at J.P. Morgan since
1979, and Henry D. Cavanna, managing director, who joined the team in February
1998, and has been at J.P. Morgan since 1971. Both served as managers of U.S.
equity portfolios prior to managing the fund.
- --------------------------------------------------------------------------------
Before you invest
Investors considering the fund should understand that:
o There is no assurance that the fund will meet its investment goal.
o The fund does not represent a complete investment program.
4 | J.P. MORGAN INSTITUTIONAL U.S. EQUITY FUND
<PAGE>
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PERFORMANCE (unaudited)
The bar chart and table shown below provide some indication of the risks of
investing in J.P. Morgan Institutional U.S. Equity Fund.
The bar chart indicates the risks by showing changes in the performance of the
fund's shares from year to year for each of the fund's last 10 calendar years.
The table indicates the risks by showing how the fund's average annual returns
for the past one, five and ten years compare to those of the S&P 500 Index. This
is a widely recognized, unmanaged index of U.S. stocks used as a measure of
overall U.S. stock market performance.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
Year-by-year total return (%) Shows changes in returns by calendar year(1,2)
- --------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
40%
34.12 32.83
30% 31.43
28.58 24.79
20% 21.22
11.06
10%
8.73
0% 1.38
(0.32)
(10%)
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[] J.P. Morgan Institutional U.S. Equity Fund
For the period covered by this year-by-year total return chart, the fund's
highest quarterly return was 21.33% (for the quarter ended 12/31/98); and the
lowest quarterly return was -11.83% (for the quarter ended 9/30/90).
Average annual total return (%) Shows performance over time, for periods ended
December 31, 1998(1)
- --------------------------------------------------------------------------------
Past 1 yr. Past 5 yrs. Past 10 yrs.
J.P. Morgan Institutional U.S.
Equity Fund (after expenses) 24.79 20.83 18.71
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S&P 500 Index (no expenses) 28.58 24.06 19.21
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<PAGE>
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INVESTOR EXPENSES
The expenses of the fund are shown at right. The fund has no sales, redemption,
exchange, or account fees, although some institutions may charge you a fee for
shares you buy through them. The annual fund expenses are deducted from fund
assets prior to performance calculations.
Annual fund operating expenses(3) (%)
(expenses that are deducted from fund assets)
Management fees 0.40
Marketing (12b-1) fees none
Other expenses(4) 0.23
- --------------------------------------------
Total annual fund
operating expenses(4) 0.63
- --------------------------------------------
Expense example
The example below is intended to help you compare the cost of investing in the
fund with the cost of investing in other mutual funds. The example assumes:
$10,000 initial investment, 5% return each year, total operating expenses
unchanged, and all shares sold at the end of each time period. The example is
for comparison only; the fund's actual return and your actual costs may be
higher or lower.
- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 64 202 351 786
- --------------------------------------------------------------------------------
(1) The fund commenced operations on 9/17/93. For the period 1/1/89 through
9/30/93, returns reflect performance of The Pierpont Equity Fund, the
predecessor of the fund.
(2) The fund's fiscal year end is 5/31.
(3) The fund has a master/feeder structure as described on page 15. This table
shows the fund's expenses and its share of master portfolio expenses for
the past fiscal year before reimbursement, expressed as a percentage of the
fund's average net assets.
(4) After reimbursement, other expenses and total operating expenses are 0.20%
and 0.60%, respectively. This reimbursement arrangement can be changed or
terminated at any time at the option of J.P. Morgan.
J.P. MORGAN INSTITUTIONAL U.S. EQUITY FUND | 5
<PAGE>
J.P. MORGAN INSTITUTIONAL
U.S. SMALL COMPANY FUND | TICKER SYMBOL: JUSSX
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REGISTRANT: J.P. MORGAN INSTITUTIONAL FUNDS
(J.P. MORGAN INSTITUTIONAL U.S. SMALL COMPANY FUND)
RISK/RETURN SUMMARY
[GRAPHIC OMITTED]
For a more detailed discussion of the fund's investments and their main risks,
as well as fund strategies, please see pages 16-17.
GOAL
[GRAPHIC OMITTED]
The fund's goal is to provide high total return from a portfolio of small
company stocks. This goal can be changed without shareholder approval.
INVESTMENT APPROACH
[GRAPHIC OMITTED]
The fund invests primarily in small and medium sized U.S. companies whose market
capitalizations are greater than $110 million and less than $1.5 billion.
Industry by industry, the fund's weightings are similar to those of the Russell
2000 Index. 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 process described on page 11. The fund generally
considers selling stocks that appear overvalued or have grown into large-cap
stocks.
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.
Small-cap stocks have historically offered higher long-term growth than
large-cap stocks, and have also involved higher risks. The fund's small-cap
emphasis means it is likely to be more sensitive to economic news and is likely
to fall further in value during broad market downturns. The fund pursues returns
that exceed those of the Russell 2000 Index while seeking to limit its
volatility relative to this index.
An investment in the fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. You could lose money if you sell when the fund's share price is lower
than when you invested.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $316
billion, including more than $2.7 billion using similar strategies as the fund.
The portfolio management team is led by Denise Higgins, vice president, Marian
Pardo, managing director, and Stephen J. Rich, vice president. Ms. Higgins
joined the team in January 1998 and has been with J.P. Morgan since 1994. Prior
to managing the fund, Ms. Higgins served as a balanced and equity portfolio
manager and member of the U.S. asset allocation committee, and prior to 1994,
was a mid-to-small cap portfolio manager at Lord Abbett & Company. Ms. Pardo has
been at J.P. Morgan since 1968, except for five months in 1998 when she was
president of a small investment management firm. Prior to managing the fund, Ms.
Pardo managed small and large cap equity portfolios, equity and convertible
funds, and several institutional portfolios. Mr. Rich joined the team in January
1997 and has been at J.P. Morgan since 1991, and prior to managing the fund held
positions in J.P. Morgan's structured equity and balanced/equity groups.
- --------------------------------------------------------------------------------
Before you invest
Investors considering the fund should understand that:
o There is no assurance that the fund will meet its investment goal.
o The fund does not represent a complete investment program.
6 | J.P. MORGAN INSTITUTIONAL U.S. SMALL COMPANY EQUITY FUND
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE (unaudited)
The bar chart and table shown below provide some indication of the risks of
investing in J.P. Morgan U.S. Institutional Small Company Fund.
The bar chart indicates the risks by showing changes in the performance of the
fund's shares from year to year for each of the fund's last 10 calendar years.
The table indicates the risks by showing how the fund's average annual returns
for the past one, five and ten years compare to those of the Russell 2000 Index.
This is a widely recognized, unmanaged index of small cap U.S. stocks used as a
measure of overall U.S. small company stock performance.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
Year-by-year total return (%) Shows changes in returns by calendar year(1,2)
- --------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
60%
59.59
31.88
30%
29.01 20.84 22.70
18.98
0% 8.59
(30%)
(24.34)
(5.81) (5.28)
- --------------------------------------------------------------------------------
[] J.P. Morgan U.S. Small Company Fund
For the period covered by this year-by-year total return chart, the fund's
highest quarterly return was 33.79% (for the quarter ended 3/31/91); and the
lowest quarterly return was -30.03% (for the quarter ended 9/30/90).
Average annual total return (%) Shows performance over time, for periods ended
December 31, 1998(1)
- --------------------------------------------------------------------------------
Past 1 yr. Past 5 yrs. Past 10 yrs.
J.P. Morgan Institutional U.S. Small Company
Fund (after expenses) (5.28) 11.77 13.38
- --------------------------------------------------------------------------------
Russell 2000 Index (no expenses) (2.55) 11.86 12.92
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
The expenses of the fund are shown at right. The fund has no sales, redemption,
exchange, or account fees, although some institutions may charge you a fee for
shares you buy through them. The annual fund expenses are deducted from fund
assets prior to performance calculations.
Annual fund operating expenses(3) (%)
(expenses that are deducted from fund assets)
Management fees 0.60
Marketing (12b-1) fees none
Other expenses(4) 0.25
- --------------------------------------------
Total annual fund
operating expenses(4) 0.85
- --------------------------------------------
Expense example
The example below is intended to help you compare the cost of investing in the
fund with the cost of investing in other mutual funds. The example assumes:
$10,000 initial investment, 5% return each year, total operating expenses
unchanged, and all shares sold at the end of each time period. The example is
for comparison only; the fund's actual return and your actual costs may be
higher or lower.
- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 87 271 471 1049
- --------------------------------------------------------------------------------
(1) The fund commenced operations on 11/4/93. For the period 1/1/89 through
11/30/93 returns reflect performance of The Pierpont Capital Appreciation
Fund, the predecessor of the fund.
(2) The fund's fiscal year end is 5/31.
(3) The fund has a master/feeder structure as described on page 15. This table
shows the fund's expenses and its share of master portfolio expenses for
the past fiscal year before reimbursement expressed as a percentage of the
fund's average net assets.
(4) After reimbursement other expenses and total operating expenses are 0.20%
and 0.80%, respectively. This reimbursement arrangement can be changed or
terminated at any time at the option of J.P. Morgan.
J.P. MORGAN INSTITUTIONAL U.S. SMALL COMPANY FUND | 7
<PAGE>
J.P. MORGAN INSTITUTIONAL TAX AWARE
DISCIPLINED EQUITY FUND | TICKER SYMBOL: JPDEX
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REGISTRANT: J.P. MORGAN SERIES TRUST
(J.P. MORGAN TAX AWARE DISCIPLINED EQUITY FUND:INSTITUTIONAL SHARES)
RISK/RETURN SUMMARY
[GRAPHIC OMITTED]
For a more detailed discussion of the fund's investments and their main risks,
as well as fund strategies, please see pages 16-17.
GOAL
[GRAPHIC OMITTED]
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.
INVESTMENT APPROACH
[GRAPHIC OMITTED]
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 does not look to underweight or
overweight 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 11.) Therefore, the fund tends to own a
larger number of stocks within the S&P 500 than the U.S. Equity Fund.
To this investment approach the fund adds the element of tax aware investing.
The fund's tax aware investment strategies are described on page 11.
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.
An investment in the fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. You could lose money if you sell when the fund's share price is lower
than when you invested.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $316
billion, including more than $16.4 billion using similar strategies 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 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.
- --------------------------------------------------------------------------------
Before you invest
Investors considering the fund should understand that:
o There is no assurance that the fund will meet its investment goal.
o The fund does not represent a complete investment program.
8 | J.P. MORGAN INSTITUTIONAL TAX AWARE DISCIPLINED EQUITY FUND
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE (unaudited)
The bar chart and table shown below provide some indication of the risks of
investing in J.P. Morgan Institutional Tax Aware Disciplined Equity Fund.
The bar chart indicates the risks by showing changes in the performance of the
fund's shares during its first complete calendar year of operations.
The table indicates the risks by showing how the fund's average annual returns
for the past year and the life of the fund compare to those of the S&P 500
Index. This is a widely recognized, unmanaged index of U.S. stocks used as a
measure of overall U.S. stock performance.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
- --------------------------------------------------------------------------------
Total return (%) Shows changes in returns by calendar year(1)
- --------------------------------------------------------------------------------
1998
40%
31.82
20%
0%
- --------------------------------------------------------------------------------
[] J.P. Morgan Institutional Tax Aware Disciplined Equity Fund
For the period covered by this total return chart, the fund's highest quarterly
return was 22.98% (for the quarter ended 12/31/98) and the lowest quarterly
return was -10.05% (for the quarter ended 9/30/98).
- --------------------------------------------------------------------------------
Average annual total return (%) Shows performance over time, for periods ended
December 31, 1998(2)
- --------------------------------------------------------------------------------
Past 1 yr. Life of fund
J.P. Morgan Institutional Tax Aware
Disciplined Equity Fund (after expenses) 31.82 31.29
- --------------------------------------------------------------------------------
S&P 500 Index (no expenses) 28.58 28.37
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
The expenses of the fund before reimbursement are shown at right. The fund has
no sales, exchange, or account fees, although some institutions may charge you a
fee for shares you buy through them. The annual fund expenses after
reimbursement are deducted from fund assets prior to performance calculations.
- -------------------------------------------------
Shareholder transaction expenses(3)
- -------------------------------------------------
Redemption fees (% of your cash proceeds)
- -------------------------------------------------
Shares held for less than one year 1.00
Shares held one year or longer none
Annual expenses (% of fund assets)
- -------------------------------------------------
Management fees 0.35
Marketing (12b-1) fees none
Other expenses 0.67
- -------------------------------------------------
Total annual fund operating expenses 1.02
- -------------------------------------------------
- --------------------------------------------------------------------------------
Expense example
- --------------------------------------------------------------------------------
The example below is intended to help you compare the cost of investing in the
fund with the cost of investing in other mutual funds. The example assumes:
$10,000 initial investment, 5% return each year, total operating expenses
unchanged, and all shares sold at the end of each time period. In the one year
example, the first number assumes that you continued to hold your shares, the
second that you sold all shares for cash at the end of the period. The example
is for comparison only; the fund's actual return and your actual costs may be
higher or lower.
- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 104/204 325 563 1,248
- --------------------------------------------------------------------------------
(1) The fund's fiscal year end is 10/31.
(2) The fund commenced operations on 1/30/97, and returns reflect performance
of the fund from 1/31/97.
(3) This table shows the fund's expenses for the past fiscal year before
reimbursement, expressed as a percentage of the fund's average net assets.
After reimbursement, other expenses and total operating expenses are 0.20%
and 0.55%, respectively. This reimbursement arrangement can be changed or
terminated at any time at the option of J.P. Morgan.
J.P. MORGAN INSTITUTIONAL TAX AWARE DISCIPLINED EQUITY FUND | 9
<PAGE>
U.S. EQUITY MANAGEMENT APPROACH
- --------------------------------------------------------------------------------
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 $316 billion in assets under management,
including assets managed by the funds' advisor, J.P. Morgan Investment
Management Inc.
J.P. MORGAN U.S. EQUITY FUNDS
These funds invest primarily in U.S. stocks either directly or through another
fund. As a shareholder, you should anticipate risks and rewards beyond those of
a typical bond fund or a typical balanced fund.
THE SPECTRUM OF U.S. EQUITY FUNDS
The funds described in this prospectus pursue a range of goals and offer varying
degrees of risk and potential reward. Differences between these funds include:
o how much emphasis they give to the most undervalued stocks
o how closely they follow the industry weightings of their benchmarks
o how many securities they typically maintain in their portfolios
o the size or market capitalization of the companies in which they invest
o whether they focus on before-tax or after-tax returns
The table below shows degrees of the relative risk and return that these funds
potentially offer. These and other distinguishing features of each U.S. equity
fund were described on the preceding pages.
- --------------------------------------------------------------------------------
Who May Want To Invest
The funds are 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 funds that seek to outperform the markets in which they each invest
over the long term
o with regard to the Tax Aware Fund, are individuals that could benefit from
a strategy that pursues returns from an after-tax perspective
The funds are not designed for investors who:
o want funds that pursue market trends or focus 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 with regard to the Tax Aware Fund, are investing through a tax-deferred
account such as an IRA.
- --------------------------------------------------------------------------------
Potential risk and return
- --------------------------------------------------------------------------------
^
|
|---------------U.S. Small Company Fund o The positions of the funds in
R| | this graph reflect long-term
| | performance goals only and are
e| | relative, not absolute.
| |
t|--------------------o U.S. Equity Fund |
| | |
u| | |
| | |
r| | |
|----------o Tax Aware Disciplined Equity Fund
n| | Disciplined Equity Fund |
| | | |
| | | |
| | | |
| | | |
-------------------------------------------->
R i s k
10 | FUND DETAILS
<PAGE>
[GRAPHIC OMITTED]
J.P. Morgan analysts develop proprietary
fundamental research
[GRAPHIC OMITTED]
Stocks in each industry are ranked
with the help of models
[GRAPHIC OMITTED]
Using research and valuations,
each fund's management team
chooses stocks for its fund
U.S. EQUITY INVESTMENT PROCESS
The J.P. Morgan U.S. equity funds invest primarily in U.S. stocks. The Tax Aware
Fund does so while seeking to enhance after-tax returns.
While each fund follows its own strategy, the funds as a group share a single
investment philosophy. This philosophy, developed by the funds' advisor, focuses
on stock picking while largely avoiding sector or market-timing strategies.
In managing the funds, J.P. Morgan employs a three-step process:
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.
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.
Stock selection Each fund buys and sells stocks according to its own policies,
using the research and valuation rankings as a basis. In general, each
management team buys stocks that are identified as undervalued and considers
selling them when they appear overvalued. Along with attractive valuation, the
funds' 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
<PAGE>
- --------------------------------------------------------------------------------
TAX AWARE INVESTING AT J.P. MORGAN
The Tax Aware 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 Tax Aware 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.
FUND DETAILS | 11
<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 THROUGH AN EMPLOYER-SPONSORED RETIREMENT PLAN
Your fund investments are handled through your plan. Refer to your plan
materials or contact your benefits office for information on buying, selling, or
exchanging fund shares.
INVESTING THROUGH AN IRA OR ROLLOVER IRA
Please contact a J.P. Morgan Retirement Services Specialist at 1-888-576-4472
for information on J.P. Morgan's comprehensive IRA services, including lower
minimum investments.
INVESTING DIRECTLY
Investors may establish accounts without the help of an intermediary by using
the instructions below and at right:
o Choose a fund (or funds) and determine the amount you are investing. The
minimum amount for initial investments is $1,000,000 for the Disciplined
Equity and U.S. Small Company funds and $3,000,000 for the U.S. Equity and
Tax Aware funds 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 on the
right.
For answers to any questions, please speak with a J.P. Morgan Funds Services
Representative at 1-800-766-7722.
<PAGE>
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-Delaware
Routing number: 031-100-238
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.
12 | 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 the 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.
By exchange
o Call the Shareholder Services Agent to effect an exchange.
Redemption in kind
o Each fund reserves the right to make redemptions of over $250,000 in
securities rather than in cash.
<PAGE>
ACCOUNT AND TRANSACTION POLICIES
Telephone orders The funds accept telephone orders from all shareholders. To
guard against fraud, the funds require shareholders to use a PIN, and may record
telephone orders or take other reasonable precautions. However, if a fund does
take such steps to ensure the authenticity of an order, you may bear any loss if
the order later proves fraudulent.
Exchanges You may exchange shares in these funds for shares in any other J.P.
Morgan or J.P. Morgan Institutional mutual fund at no charge (subject to the
securities laws of your state). When making exchanges, it is important to
observe any applicable minimums. Keep in mind that for tax purposes an exchange
is considered a sale.
A fund may alter, limit, or suspend its exchange policy at any time.
Business days and NAV calculations The funds' regular business days and hours
are the same as those of the New York Stock Exchange (NYSE). Each 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). Each 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, (e.g., when an event occurs after the close of trading that
would materially impact a security's value) 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. A 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 | 13
<PAGE>
- --------------------------------------------------------------------------------
Timing of settlements When you buy shares, you will become the owner of record
when a 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 11) will be available as promptly as is 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 funds send monthly account statements as well as
confirmations after each purchase or sale of shares (except reinvestments).
Every six months each fund sends out an annual or semi-annual report containing
information on its 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), each 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, each fund reserves the right to close out your account
and send the proceeds to the address of record.
DIVIDENDS AND DISTRIBUTIONS
Income dividends are typically paid four times a year for the Disciplined
Equity, U.S. Equity and Tax Aware funds; and twice a year for the U.S. Small
Company fund. Each fund typically makes capital gains distributions, if any,
once per year. However, a fund may make more or fewer payments in a given year,
depending on its investment results and its tax compliance situation. Each
fund's dividends and distributions consist of most or all of its 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
<PAGE>
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:
- --------------------------------------------------------------------------------
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 a fund is about to declare a long-term capital
gains distribution.
Every January, each fund issues tax information on its distributions for the
previous year.
Any investor for whom a 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.
14 | YOUR INVESTMENT
<PAGE>
FUND DETAILS
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
As noted earlier, each fund (except the Tax Aware Fund) is a series of J.P
Morgan Institutional Funds, a Massachusetts business trust, and is a "feeder"
fund that invests in a master portfolio. (Except where indicated, this
prospectus uses the term "the fund" to mean the feeder fund and its master
portfolio taken together.)
Each master portfolio accepts investments from other feeder funds, and all the
feeders of a given master portfolio bear the portfolio's expenses in proportion
to their assets. However, each feeder can set its own transaction minimums,
fund-specific expenses and other conditions. This means that one feeder could
offer access to the same master portfolio on more attractive terms, or could
experience better performance, than another feeder. Information about other
feeders is available by calling 1-800-766-7722. Generally, when a master
portfolio seeks a vote, its feeder fund will hold a shareholder meeting and cast
its vote proportionately, as instructed by its shareholders. Fund shareholders
are entitled to one full or fractional vote for each dollar or fraction of a
dollar invested.
Each feeder fund and its master portfolio expect to maintain consistent goals,
but if they do not, the feeder fund will withdraw from the master portfolio,
receiving its assets either in cash or securities. Each feeder fund's trustees
would then consider whether a fund should hire its own investment adviser,
invest in a different master portfolio, or take other action.
The Tax Aware 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.
MANAGEMENT AND ADMINISTRATION
The feeder funds described in this prospectus, their corresponding master
portfolios, and J.P. Morgan Series Trust are all 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 each 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:
<PAGE>
- --------------------------------------------------------------------------------
Advisory services Percentage of the master
portfolio's average net assets
- --------------------------------------------------------------------------------
Disciplined Equity 0.35%
- --------------------------------------------------------------------------------
U.S. Equity 0.40%
- --------------------------------------------------------------------------------
U.S. Small Company 0.60%
- --------------------------------------------------------------------------------
Administrative services Master portfolio's and fund's pro-
(fee shared with Funds rata portions of 0.09% of the
Distributor, Inc.) first $7 billion 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
- --------------------------------------------------------------------------------
The Tax Aware Fund, subject to the expense reimbursements described earlier in
this prospectus, pays J.P. Morgan the following fees for investment advisory and
other services:
- --------------------------------------------------------------------------------
Advisory services 0.35% of the fund's average
net assets
- --------------------------------------------------------------------------------
Administrative services Fund's pro-rata portion of 0.09%
(fee shared with Funds of the first $7 billion of
Distributor, Inc.) average net assets 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
- --------------------------------------------------------------------------------
J.P. Morgan may pay fees to certain firms and professionals for providing
recordkeeping or other services in connection with investments in a fund.
Year 2000 Fund operations and shareholders could be adversely affected if the
computer systems used by J.P. Morgan, the funds' other service providers and
other entities with computer systems linked to the funds 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 funds 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 funds or generally, the
net asset value of the funds will decline.
FUND DETAILS | 15
<PAGE>
- --------------------------------------------------------------------------------
RISK AND REWARD ELEMENTS
This table discusses the main elements that make up each fund's overall risk and
reward characteristics. It also outlines each fund's policies toward various
investments, including those that are designed to help certain funds manage
risk.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Potential risks Potential rewards Policies to balance risk and reward
- -----------------------------------------------------------------------------------------------------------------------------------
Market conditions
o Each fund's share price and o Stocks have generally outperformed o Under normal circumstances the funds
performance will fluctuate more stable investments (such as plan to remain fully invested, with
in response to stock bonds and cash equivalents) over the at least 65% in stocks; stock
market movements long term investments may include U.S. and
foreign common stocks, convertible
o Adverse market conditions may from securities, preferred stocks, trust
time to time cause a fund to take or partnership interests, warrants,
temporary defensive positions that rights, and investment company
are inconsistent with its principal securities
investment strategies and may hinder
a fund from achieving its investment o The funds seek to limit risk through
objective diversification
o During severe market downturns, the
funds have the option of investing up
to 100% of assets in investment-grade
short-term securities
- ------------------------------------------------------------------------------------------------------------------------------------
Management choices
o A fund could underperform its o A fund could outperform its benchmark o J.P. Morgan focuses its active
benchmark due to its securities and 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 Each Fund anticipates that its total
could reduce gains or create losses could generate gains or reduce losses foreign investments will not exceed
20% of assets
o A fund could lose money because of o Foreign investments, which represent
foreign government actions, political a major portion of the world's o Each fund actively manages the
instability, or lack of adequate and securities, offer attractive currency exposure of its foreign
accurate information potential performance and investments relative to its
opportunities for diversification benchmark, and may hedge back into
the U.S. dollar from time to time
(see also "Derivatives")
- -----------------------------------------------------------------------------------------------------------------------------------
When-issued and delayed delivery securities
o When a fund buys securities before o A fund can take advantage of o Each fund uses segregated accounts to
issue or for delayed delivery, it attractive transaction opportunities offset leverage risk
could be exposed to leverage
risk if it does not use segregated
accounts
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term trading
o Increased trading would raise a o A fund could realize gains in a short o Each Fund anticipates a portfolio
fund's brokerage and related costs period of time turnover rate of approximately 100%
o Increased short-term capital gains o A fund could protect against losses o The funds generally avoid short-term
distributions would raise if a stock is overvalued and its trading, except to take advantage of
shareholders' income tax liability value later falls attractive or unexpected
opportunities or to meet demands
generated by shareholder activity
</TABLE>
16 | FUND DETAILS
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Potential risks Potential rewards Policies to balance risk and reward
- ------------------------------------------------------------------------------------------------------------------------------------
Derivatives
<S> <C> <C>
o Derivatives such as futures, options, o Hedges that correlate well with o The funds use derivatives for hedging
swaps, and forward foreign currency underlying positions can reduce or and for risk management (i.e., to
contracts that are used for hedging eliminate losses at low cost establish or adjust exposure to
the portfolio or specific securities particular securities, markets or
may not fully offset the underlying o A fund could make money and protect currencies); risk management may
positions(1) and this could result in against losses if management's include management of a fund's
losses to the fund that would not analysis proves correct exposure relative to its benchmark
have otherwise occurred
o Derivatives that involve leverage o The funds only establish hedges that
o Derivatives used for risk management could generate substantial gains at they expect will be highly correlated
may not have the intended effects and low cost with underlying positions
may result in losses or missed
opportunities o While the funds may use derivatives
that incidentally involve leverage,
o The counterparty to a derivatives they do not use them for the specific
contract could default purpose of leveraging their
portfolios
o Derivatives that involve leverage
could magnify losses
o Certain types of derivatives involve
costs to the funds which can reduce
returns
- ------------------------------------------------------------------------------------------------------------------------------------
Securities Lending
o When a fund lends a security, o The fund may enhance o J.P. Morgan maintains a list of approved borrowers
the loaned securities may not income through the
be returned if the borrower investment of the o The lending agents idemnify the fund against borrower
defaults collateral received default
from the borrower
o J.P. Morgan's collateral investment guidelines limit the
quality and duration of collateral investments
to minimize losses
o The collateral will be subject
to the risks of the securities o The fund receives collateral equal to at least 100%
in which it is invested of the current value of the securities loaned
o Upon recall, the borrower must return the securities loaned
within the normal settlement period
- ------------------------------------------------------------------------------------------------------------------------------------
Illiquid holdings
o A fund could have difficulty valuing o These holdings may offer more o No fund may invest more than 15% of
these holdings precisely attractive yields or potential growth net assets in illiquid holdings
than comparable widely traded
o A fund could be unable to sell these securities o To maintain adequate liquidity to
holdings at the time or price it meet redemptions, each fund may hold
desires investment-grade short-term
securities (including repurchase
agreements and reverse repurchase
agreements) and, for temporary or
extraordinary purposes, may borrow
from banks up to 33 1/3% of the value
of its total assets
- ----------------------------------------------------------------------------------------------------------------------------
</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. A swap is a privately negotiated agreement to exchange
one stream of payments for another. A forward foreign currency contract is
an obligation to buy or sell a given currency on a future date and at a set
price.
FUND DETAILS | 17
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial tables are intended to help you understand each fund's financial
performance for the past one through five fiscal years or periods, as
applicable. Certain information reflects financial results for a single fund
share. The total returns in the tables represent the rate that an investor would
have earned (or lost) on an investment in a fund (assuming reinvestment of all
dividends and distributions). Except where noted, this information has been
audited by PricewaterhouseCoopers LLP, whose reports, along with each fund's
financial statements, are included in the respective fund's annual report, which
are available upon request.
- --------------------------------------------------------------------------------
J.P. MORGAN INSTITUTIONAL DISCIPLINED EQUITY FUND
- --------------------------------------------------------------------------------
Per-share data For fiscal periods ended
- --------------------------------------------------------------------------------
5/31/97(1) 5/31/98 11/30/98
(unaudited)
Net asset value, beginning of period ($) 10.00 11.47 14.96
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.04 0.12 0.07
Net realized and unrealized gain
on investment ($) 1.43 3.62 1.15
- --------------------------------------------------------------------------------
Total from investment operations ($) 1.47 3.74 1.22
- --------------------------------------------------------------------------------
Less distributions to shareholders from:
Net investment income ($) -- (0.12) (0.05)
Net realized gains ($) -- (0.13) --
- --------------------------------------------------------------------------------
Total distributions ($) -- (0.25) (0.05)
- --------------------------------------------------------------------------------
Net asset value, end of period ($) 11.47 14.96 16.13
- --------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------
Total return (%) 14.70(2) 32.98 8.18(2)
- --------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 49,726 296,19(1) 458,399
- --------------------------------------------------------------------------------
Ratio to average net assets:
- --------------------------------------------------------------------------------
Expenses (%) 0.45(3) 0.45 0.45(3)
------------------------------------------------------------------------------
Net investment income (%) 1.58(3) 1.27 1.14(3)
------------------------------------------------------------------------------
Expenses without reimbursement (%) 1.34(3) 0.72 0.61(3)
------------------------------------------------------------------------------
(1) The fund commenced operations on 1/3/97.
(2) Not annualized.
(3) Annualized.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
J.P. MORGAN INSTITUTIONAL U.S. EQUITY FUND
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share data For fiscal periods ended
- ------------------------------------------------------------------------------------------------------------------------------------
5/31/94(1) 5/31/95 5/31/96 5/31/97 5/31/98 11/30/98
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ($) 10.00 10.92 12.10 14.00 15.66 16.73
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.08 0.18 0.27 0.17 0.15 0.09
Net realized and unrealized gain
on investments ($) 0.88 1.42 2.66 3.02 3.81 0.63
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations ($) 0.96 1.60 2.93 3.19 3.96 0.72
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions to shareholders from:
Net investment income ($) (0.04) (0.14) (0.20) (0.25) (0.18) (0.05)
Net realized gains ($) -- (0.28) (0.83) (1.28) (2.71) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions ($) (0.04) (0.42) (1.03) (1.53) (2.89) (0.05)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period ($) 10.92 12.10 14.00 15.66 16.73 17.40
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return (%) 9.61 15.40 25.43 25.21 28.53 4.32(3)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 47,473 172,497 221,368 329,776 378,988 311,212
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses (%) 0.60(2) 0.60 0.60 0.60 0.60 0.60(2)
----------------------------------------------------------------------------------------------------------------------------------
Net investment income (%) 1.74(2) 2.07 2.08 1.33 0.89 0.97(2)
----------------------------------------------------------------------------------------------------------------------------------
Expenses without reimbursement (%) 1.03(2) 0.71 0.62 0.65 0.63 0.63(2)
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The fund commenced public investment operations on 9/17/93 and returns
reflect performance of The Pierpont Equity Fund, the fund's predecessor,
prior to that date.
(2) Annualized.
(3) Not annualized
18 | FUND DETAILS
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
J.P. MORGAN INSTITUTIONAL U.S. SMALL COMPANY FUND
- ------------------------------------------------------------------------------------------------------------------------------------
Per-share data For fiscal periods ended
- ------------------------------------------------------------------------------------------------------------------------------------
5/31/94(1) 5/31/95 5/31/96 5/31/97 5/31/98 11/30/98
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ($) 10.00 10.03 11.16 13.97 14.09 15.30
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.04 0.10 0.13 0.10 0.09 0.05
Net realized and unrealized gain (loss)
on investment ($) -- 1.12 3.66 1.07 3.04 (2.47)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations ($) 0.04 1.22 3.79 1.17 3.13 (2.42)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from
Net investment income ($) (0.01) (0.09) (0.12) (0.13) (0.08) (0.04)
Net realized gain ($) -- -- (0.86) (0.92) (1.84) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions ($) (0.01) (0.09) (0.98) (1.05) (1.92) (0.04)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period ($) 10.03 11.16 13.97 14.09 15.30 12.84
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return (%) 0.42 12.26 35.60 9.44 23.55 (15.83)(4)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 74,141 149,279 291,931 401,797 420,413 337,856
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses (%) 0.80(2) 0.80 0.80 0.80 0.80 0.80(2)
----------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (%) 0.93(2) 1.14 1.20 0.81 0.55 0.71(2)
----------------------------------------------------------------------------------------------------------------------------------
Expenses without reimbursement and including
interest expense (%) 1.07(2) 0.91 0.83 0.85 0.85 0.85(2)
----------------------------------------------------------------------------------------------------------------------------------
Interest expense (%) -- -- -- -- 0.00(3) --
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The fund commenced public investment operations on 11/4/93 and returns
reflect performance of The Capital Appreciation Fund, the fund's
predecessor, prior to that date.
(2) Annualized.
(3) Less than 0.01%.
(4) Not annualized.
<PAGE>
- --------------------------------------------------------------------------------
J.P. MORGAN INSTITUTIONAL TAX AWARE DISCIPLINED EQUITY FUND
- --------------------------------------------------------------------------------
Per-share data For fiscal periods ended
- --------------------------------------------------------------------------------
10/31/97(1) 10/31/98
Net asset value, beginning of period ($) 10.00 12.08
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.06 0.11
Net realized and unrealized gain
on investments ($) 2.02 2.68
- --------------------------------------------------------------------------------
Total from investment operations ($) 2.08 2.79
- --------------------------------------------------------------------------------
Less distributions to shareholders from:
Net investment income ($) -- (0.16)
- --------------------------------------------------------------------------------
Net asset value, end of period ($) 12.08 14.71
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------
Total return (%) 20.80(2) 23.26
- --------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 12,026 90,079
- --------------------------------------------------------------------------------
Ratio to average net assets:
- --------------------------------------------------------------------------------
Expenses (%) 0.55(3) 0.55
------------------------------------------------------------------------------
Net investment income (%) 1.19(3) 0.97
------------------------------------------------------------------------------
Expenses without reimbursement (%) 4.59(3) 1.02
------------------------------------------------------------------------------
Portfolio turnover rate (%) 35 57
------------------------------------------------------------------------------
(1) The fund commenced operations on 1/30/97.
(2) Not annualized.
(3) Annualized.
FUND DETAILS | 19
<PAGE>
- --------------------------------------------------------------------------------
FOR MORE INFORMATION
- --------------------------------------------------------------------------------
For investors who want more information on these funds, 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 a fund's most recently completed fiscal year or
half-year.
Statement of Additional Information (SAI) Provides a fuller technical and legal
description of a fund's policies, investment restrictions, and business
structure. This prospectus incorporates each fund's SAI by reference.
Copies of the current versions of these documents, along with other information
about the funds, may be obtained by contacting:
J.P. Morgan Institutional Funds
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. Each
fund's investment company and 1933 Act registration numbers are:
J.P. Morgan Institutional Disciplined Equity Fund 811-07342 and 033-54642
J.P. Morgan Institutional U.S. Equity Fund 811-07342 and 033-54642
J.P. Morgan Institutional U.S. Small Company Fund 811-07342 and 033-54642
J.P. Morgan Institutional Tax Aware Disciplined
Equity Fund 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.
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
<PAGE>
March 1, 1999 | Prospectus
J.P. MORGAN U.S. EQUITY FUNDS
Disciplined Equity Fund
U.S. Equity Fund
U.S. Small Company Fund
U.S. Small Company Opportunities Fund
Tax Aware U.S. Equity Fund
- -----------------
Seeking to outperform U.S. stock markets over the long term through a
disciplined management approach
This prospectus contains essential information for anyone investing in these
funds. Please read it carefully and keep it for reference.
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 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.
J.P. MORGAN
<PAGE>
Contents
- --------------------------------------------------------------------------------
2 |
Each fund's goal, investment approach, risks, expenses and performance
J.P. MORGAN U.S. EQUITY FUNDS
J.P. Morgan Disciplined Equity Fund .............................. 2
J.P. Morgan U.S. Equity Fund ..................................... 4
J.P. Morgan U.S. Small Company Fund .............................. 6
J.P. Morgan U.S. Small Company Opportunities Fund ................ 8
J.P. Morgan Tax Aware U.S. Equity Fund ........................... 10
12 |
Principles and techniques common
to the funds in this prospectus
U.S. EQUITY MANAGEMENT APPROACH
J.P. Morgan ...................................................... 12
J.P. Morgan U.S. equity funds .................................... 12
The spectrum of U.S. equity funds ................................ 12
Who may want to invest ........................................... 12
U.S. equity investment process ................................... 13
Tax aware investing at J.P. Morgan ............................... 13
14 |
Investing in the J.P. Morgan
U.S. Equity Funds
YOUR INVESTMENT
Investing through a financial professional ....................... 14
Investing through an employer-sponsored retirement plan .......... 14
Investing through an IRA or rollover IRA ......................... 14
Investing directly ............................................... 14
Opening your account ............................................. 14
Adding to your account ........................................... 14
Selling shares ................................................... 15
Account and transaction policies ................................. 15
Dividends and distributions ...................................... 16
Tax considerations ............................................... 16
17 |
More about risk and the funds'
business operations
FUND DETAILS
Business structure ............................................... 17
Management and administration .................................... 17
Risk and reward elements ......................................... 18
Financial Highlights ............................................. 20
FOR MORE INFORMATION ............................................. back cover
<PAGE>
J.P. MORGAN DISCIPLINED EQUITY FUND | TICKER SYMBOL: JPEQX
REGISTRANT: J.P. MORGAN FUNDS
(J.P. MORGAN DISCIPLINED EQUITY FUND)
[GRAPHIC OMITTED]
RISK/RETURN SUMMARY
For a more detailed discussion of the fund's investments and their main risks,
as well as fund strategies, please see pages 18-19.
[GRAPHIC OMITTED]
GOAL
The fund's goal is to provide a consistently high 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 OMITTED]
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 13.) Therefore, the fund tends to own a
larger number of stocks within the S&P 500 than the U.S. Equity Fund or the Tax
Aware U.S. Equity Fund.
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.
An investment in the fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. You could lose money if you sell when the fund's share price is lower
than when you invested.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $316
billion, including more than $16.4 billion using similar strategies as the fund.
The portfolio management team is led by James C. Wiess and Timothy J. Devlin,
both vice presidents, who have been on the team since the fund's inception. Mr.
Wiess has been at J.P. Morgan since 1992, and prior to managing this fund
managed other structured equity portfolios for J.P. Morgan. Mr. Devlin has been
at J.P. Morgan since July of 1996, and prior to that time was an equity
portfolio manager at Mitchell Hutchins Asset Management Inc.
- -------------------
Before you invest
Investors considering the fund should understand that:
o There is no assurance that the fund will meet its investment goal.
o The fund does not represent a complete investment program.
2 | J.P. MORGAN DISCIPLINED EQUITY FUND
<PAGE>
PERFORMANCE (unaudited)
The bar chart and table shown below provide some indication of the risks of
investing in J.P. Morgan Disciplined Equity Fund.
The bar chart indicates the risks by showing the performance of the fund's
shares during its first complete calendar year of operations.
The table indicates the risks by showing how the fund's average annual returns
for the past year and for the life of the fund compare to those of the S&P 500
Index. This is a widely recognized, unmanaged index of U.S. stocks used as a
measure of overall U.S. stock market performance.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
Total return (%) Shows changes in returns by calendar year(1),(2)
- --------------------------------------------------------------------------------
1998
40%
- ----
31.98
30%
- ----
20%
- ----
10%
- ----
0%
- --------------------------------------------------------------------------------
[] J.P. Morgan Disciplined Equity Fund
For the period covered by this year-by-year total return chart, the fund's
highest quarterly return was 22.83% (for the quarter ended 12/31/98); and the
lowest quarterly return was -9.96% (for the quarter ended 9/30/98).
Shows performance over time,
Average annual total return (%) for periods ended December 31, 1998(1)
- --------------------------------------------------------------------------------
Past 1 yr. Life of fund
J.P. Morgan Disciplined Equity
Fund (after expenses) 31.98 30.30
- --------------------------------------------------------------------------------
S&P 500 Index (no expenses) 28.58 28.37
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
The expenses of the fund are shown at right. The fund has no sales, redemption,
exchange, or account fees, although some institutions may charge you a fee for
shares you buy through them. The annual fund expenses are deducted from fund
assets prior to performance calculations.
Annual fund operating expenses(3) (%)
(expenses that are deducted from fund assets)
Management fees 0.35
Marketing (12b-1) fees none
Other expenses(4) 2.93
- --------------------------------------------------------------------------------
Total annual fund
operating expenses(4) 3.28
- --------------------------------------------------------------------------------
Expense example
The example below is intended to help you compare the cost of investing in the
fund with the cost of investing in other mutual funds. The example assumes:
$10,000 initial investment, 5% return each year, total operating expenses
unchanged, and all shares sold at the end of each time period. The example is
for comparison only; the fund's actual return and your actual costs may be
higher or lower.
- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 331 1010 1712 3576
- --------------------------------------------------------------------------------
(1) The fund commenced operations on 12/31/97. For the period 1/31/97 through
12/31/97, returns reflect performance of J.P. Morgan Institutional
Disciplined Equity Fund (a separate feeder fund investing in the same master
portfolio). These returns reflect lower operating expenses than those of the
fund. Therefore, these returns may be higher than the fund's would have been
had it existed during the same period.
(2) The fund's fiscal year end is 5/31.
(3) The fund has a master/feeder structure as described on page 17. This table
shows the fund's expenses and its share of master portfolio expenses for the
past fiscal year before reimbursement, expressed as a percentage of the
fund's average net assets.
(4) After reimbursement other expenses and total operating expenses are 0.40%
and 0.75%, respectively. This reimbursement can be changed at any time after
9/30/99 at the option of J.P. Morgan.
J.P. MORGAN DISCIPLINED EQUITY FUND | 3
<PAGE>
J.P. MORGAN U.S. EQUITY FUND | TICKER SYMBOL: PPEQX
- --------------------------------------------------------------------------------
REGISTRANT: J.P. MORGAN FUNDS
(J.P. MORGAN U.S. EQUITY FUND)
[GRAPHIC OMITTED]
RISK/RETURN SUMMARY
For a more detailed discussion of the fund's investments and their main risks,
as well as fund strategies, please see pages 18-19.
[GRAPHIC OMITTED]
GOAL
The fund's goal is to provide high total return from a portfolio of selected
equity securities. This goal can be changed without shareholder approval.
[GRAPHIC OMITTED]
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 13. The fund
generally considers selling stocks that appear overvalued.
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 seeks 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.
An investment in the fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. You could lose money if you sell when the fund's share price is lower
than when you invested.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $316
billion, including more than $13.3 billion using similar strategies as the fund.
The portfolio management team is led by William M. Riegel, Jr., managing
director, who has been on the team since 1993 and has been at J.P. Morgan since
1979, and Henry D. Cavanna, managing director, who joined the team in February
of 1998, and has been at J.P. Morgan since 1971. Both served as managers of U.S.
equity portfolios prior to managing the fund.
- ---------------------
Before you invest
Investors considering the fund should understand that:
o There is no assurance that the fund will meet its investment goal.
o The fund does not represent a complete investment program.
4 | J.P. MORGAN U.S. EQUITY FUND
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE (unaudited)
The bar chart and table shown below provide some indication of the risks of
investing in J.P. Morgan U.S. Equity Fund.
The bar chart indicates the risks by showing changes in the performance of the
fund's shares from year to year for each of the fund's last 10 calendar years.
The table indicates the risks by showing how the fund's average annual returns
for the past one, five and ten years compare to those of the S&P 500 Index. This
is a widely recognized, unmanaged index of U.S. stocks used as a measure of
overall U.S. stock market performance.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
<TABLE>
<CAPTION>
Year-by-year total return (%) Shows changes in returns by calendar year(1),(2)
- ---------------------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
40%
- ----
34.12
32.48
30% 31.43
- ----
28.41
24.45
20% 21.06
- ----
11.02
10%
- ----
8.73
0% 1.38
- ----
(0.61)
(10%)
- ----
</TABLE>
[] J.P. Morgan U.S. Equity Fund
For the period covered by this year-by-year total return chart, the fund's
highest quarterly return was 21.33% (for the quarter ended 12/31/98); and the
lowest quarterly return was -11.83% (for the quarter ended 9/30/90).
<TABLE>
<CAPTION>
Average annual total return (%)Shows performance over time, for periods ended December 31, 1998(1)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Past 1 yr. Past 5 yrs. Past 10 yrs.
J.P. Morgan U.S. Equity Fund (after expenses) 24.45 20.57 18.57
- --------------------------------------------------------------------------------------------------
S&P 500 Index (no expenses) 28.58 24.06 19.21
- --------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
The expenses of the fund are shown at right. The fund has no sales, redemption,
exchange, or account fees, although some institutions may charge you a fee for
shares you buy through them. The annual fund expenses are deducted from fund
assets prior to performance calculations.
Annual fund operating expenses(3) (%)
(expenses that are deducted from fund assets)
Management fees 0.40
Marketing (12b-1) fees none
Other expenses 0.38
- --------------------------------------------------------------------
Total annual fund
operating expenses 0.78
- --------------------------------------------------------------------
Expense example
The example below is intended to help you compare the cost of investing in the
fund with the cost of investing in other mutual funds. The example assumes:
$10,000 initial investment, 5% return each year, total operating expenses
unchanged, and all shares sold at the end of each time period. The example is
for comparison only; the fund's actual return and your actual costs may be
higher or lower.
- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 80 249 433 966
- --------------------------------------------------------------------------------
(1) The fund commenced operations on 7/18/93. For the period 1/1/89 through
7/31/93 returns reflect performance of The Pierpont Equity Fund, the
predecessor of the fund.
(2) The fund's fiscal year end is 5/31.
(3) The fund has a master/feeder structure as described on page 17. This table
shows the fund's expenses and its share of master portfolio expenses for the
past fiscal year, expressed as a percentage of the fund's average net
assets.
J.P. MORGAN U.S. EQUITY FUND | 5
<PAGE>
J.P. MORGAN U.S. SMALL COMPANY FUND | TICKER SYMBOL: PPCAX
- --------------------------------------------------------------------------------
REGISTRANT: J.P. MORGAN FUNDS
(J.P. MORGAN U.S. SMALL COMPANY FUND)
[GRAPHIC OMITTED]
RISK/RETURN SUMMARY
For a more detailed discussion of the fund's investments and their main risks,
as well as fund strategies, please see pages 18-19.
[GRAPHIC OMITTED]
GOAL
The fund's goal is to provide high total return from a portfolio of small
company stocks. This goal can be changed without shareholder approval.
INVESTMENT APPROACH
The fund invests primarily in small and medium sized U.S. companies whose market
capitalizations are greater than $110 million and less than $1.5 billion.
Industry by industry, the fund's weightings are similar to those of the Russell
2000 Index. 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 process described on page 13. The fund generally
considers selling stocks that appear overvalued or have grown into large-cap
stocks.
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.
Small-cap stocks have historically offered higher long-term growth than
large-cap stocks, and have also involved higher risks. The fund's small-cap
emphasis means it is likely to be more sensitive to economic news and is likely
to fall further in value during broad market downturns. The fund pursues returns
that exceed those of the Russell 2000 Index while seeking to limit its
volatility relative to this index.
An investment in the fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. You could lose money if you sell when the fund's share price is lower
than when you invested.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $316
billion, including more than $2.7 billion using similar strategies as the fund.
The portfolio management team is led by Denise Higgins, vice president, Marian
Pardo, managing director, and Stephen J. Rich, vice president. Ms. Higgins
joined the team in January of 1998 and has been with J.P. Morgan since 1994.
Prior to managing the fund, Ms. Higgins served as a balanced and equity
portfolio manager and member of the U.S. asset allocation committee, and prior
to 1994, was a mid-to-small cap portfolio manager at Lord Abbett & Company. Ms.
Pardo has been at J.P. Morgan since 1968, except for five months in 1998 when
she was president of a small investment management firm. Prior to managing the
fund, Ms. Pardo managed small and large cap equity portfolios, equity and
convertible funds, and several institutional portfolios. Mr. Rich joined the
team in January of 1997 and has been at J.P. Morgan since 1991, and prior to
managing the fund held positions in J.P. Morgan's structured equity and
balanced/equity groups.
- ----------------------
Before you invest
Investors considering the fund should understand that:
o There is no assurance that the fund will meet its investment goal.
o The fund does not represent a complete investment program.
6 | J.P. MORGAN U.S. SMALL COMPANY FUND
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE (unaudited)
The bar chart and table shown below provide some indication of the risks of
investing in J.P. Morgan U.S. Small Company Fund.
The bar chart indicates the risks by showing changes in the performance of the
fund's shares from year to year for each of the fund's last 10 calendar years.
The table indicates the risks by showing how the fund's average annual returns
for the past one, five and ten years compare to those of the Russell 2000 Index.
This is a widely recognized, unmanaged index of small cap U.S. stocks used as a
measure of overall U.S. small company stock performance.(1)
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
<TABLE>
<CAPTION>
Year-by-year total return (%)Shows changes in returns by calendar year(1),(2)
- --------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
60%
- -----
59.59
31.86
30%
- -----
29.01
22.75
20.75
18.98
8.58
0%
- -----
(5.49)
(5.89)
(24.34)
(30%)
- -----
</TABLE>
[] J.P. Morgan U.S. Small Company Fund
For the period covered by this year-by-year total return chart, the fund's
highest quarterly return was 33.79% (for the quarter ended 3/31/91); and the
lowest quarterly return was -30.03% (for the quarter ended 9/30/90).
<TABLE>
<CAPTION>
Average annual total return (%)Shows performance over time, for periods ended December 31, 1998(1)
- --------------------------------------------------------------------------------------------------
Past 1 yr. Past 5 yrs. Past 10 yrs.
<S> <C> <C> <C>
J.P. Morgan U.S. Small Company Fund (after expenses) (5.49) 11.69 13.34
- --------------------------------------------------------------------------------------------------
Russell 2000 Index (no expenses) (2.55) 11.86 12.92
- --------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
The expenses of the fund are shown at right. The fund has no sales, redemption,
exchange, or account fees, although some institutions may charge you a fee for
shares you buy through them. The annual fund expenses are deducted from fund
assets prior to performance calculations.
Annual fund operating expenses(3) (%)
(expenses that are deducted from fund assets)
Management fees 0.60
Marketing (12b-1) fees none
Other expenses 0.43
- -----------------------------------------------------
Total annual fund
operating expenses 1.03
- -----------------------------------------------------
Expense example
The example below is intended to help you compare the cost of investing in the
fund with the cost of investing in other mutual funds. The example assumes:
$10,000 initial investment, 5% return each year, total operating expenses
unchanged, and all shares sold at the end of each time period. The example is
for comparison only; the fund's actual return and your actual costs may be
higher or lower.
- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 105 328 569 1,259
- --------------------------------------------------------------------------------
(1) The fund commenced operations on 7/19/93. For the period 1/1/89 through
7/31/93 returns reflect performance of The Pierpont Capital Appreciation
Fund, the predecessor of the fund.
(2) The fund's fiscal year end is 5/31.
(3) The fund has a master/feeder structure as described on page 17. This table
shows the fund's expenses and its share of master portfolio expenses for the
past fiscal year, expressed as a percentage of the fund's average net
assets.
J.P. MORGAN U.S. SMALL COMPANY FUND | 7
<PAGE>
J.P. MORGAN U.S. SMALL COMPANY
OPPORTUNITIES FUND | TICKER SYMBOL: JPSOX
- --------------------------------------------------------------------------------
REGISTRANT: J.P. MORGAN FUNDS
(J.P. MORGAN U.S. SMALL COMPANY
OPPORTUNITIES FUND)
[GRAPHIC OMITTED]
RISK/RETURN SUMMARY
For a more detailed discussion of the fund's investments and their main risks,
as well as fund strategies, please see pages 18-19.
[GRAPHIC OMITTED]
GOAL
The fund's goal is to provide long-term growth from a portfolio of small
company growth stocks. This goal can be changed without shareholder approval.
[GRAPHIC OMITTED]
INVESTMENT APPROACH
The fund invests primarily in stocks of small U.S. companies whose market
capitalization is greater than $150 million and less than $1.25 billion when
purchased. While the fund holds stocks in many industries to reduce the impact
of poor performance in any one sector, it tends to emphasize industries with
higher growth potential and does not track the sector weightings of the overall
small company stock market.
In searching for companies, the fund combines the approach described on page 13
with a growth-oriented approach that focuses on each company's business
strategies and its competitive environment. The fund seeks to buy stocks when
they are undervalued or fairly valued and are poised for long-term growth.
Stocks become candidates for sale when they appear overvalued or when the
company is no longer a small-cap company, but the fund may also continue to hold
them if it believes further substantial growth is possible.
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.
Small-cap stocks have historically offered higher long-term growth than mediumor
large-cap stocks, and have also involved higher risks. The fund's small-cap
emphasis means it is likely to be more sensitive to economic news and is likely
to fall further in value during broad market downturns. Because the fund seeks
to outperform the Russell 2000 Growth Index while not tracking its industry
weightings, investors should expect higher volatility compared to this index or
to more conservatively managed small-cap funds.
An investment in the fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. You could lose money if you sell when the fund's share price is lower
than when you invested.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $316
billion, including more than $2.7 billion using similar strategies as the fund.
The portfolio management team is led by Candice Eggerss, vice president, Saira
Malik, vice president and CFA, and Sara Weingarten, associate. Ms. Eggerss has
been with J.P. Morgan since May 1996 as a member of the U.S. small company
portfolio management team, and from June 1993 to May 1996 held a similar
position with Weiss, Peck & Greer. Ms. Malik has been with J.P. Morgan since
July 1995 as a small company equity analyst and portfolio manager after
graduating from the University of Wisconsin with an M.S. in finance. Ms.
Weingarten has been with J.P. Morgan as a small company portfolio manager and
marketing associate since graduating from Tufts University in 1994.
- --------------------
Before you invest
Investors considering the fund should understand that:
o There is no assurance that the fund will meet its investment goal.
o The fund does not represent a complete investment program.
8 | J.P. MORGAN U.S. SMALL COMPANY OPPORTUNITIES FUND
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE (unaudited)
The bar chart and table shown below provide some indication of the risks of
investing in J.P. Morgan U.S. Small Company Opportunities Fund.
The bar chart indicates the risks by showing the performance of the fund's
shares during its first complete calendar year of operations.
The table indicates the risks by showing how the fund's average annual returns
for the past year and for the life of the fund compare to those of the Russell
2000 Growth Index. This is a widely recognized, unmanaged index of small cap
U.S. growth stocks used as a measure of overall U.S. small cap growth stock
performance.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
Total return (%) Shows changes in returns by calendar year(1)
- --------------------------------------------------------------------------------
1998
20%
- ---
10%
- ---
0% 5.21
- ---
- --------------------------------------------------------------------------------
[] J.P. Morgan U.S. Small Company Opportunities Fund
For the period covered by this total return chart, the fund's highest quarterly
return was 23.09% (for the quarter ended 12/31/98); and the lowest quarterly
return was -20.19% (for the quarter ended 9/30/98).
<TABLE>
<CAPTION>
Average annual total return (%)Shows performance over time, for periods ended December 31, 1998(2)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Past 1 yr. Life of fund
J.P. Morgan U.S. Small Company Opportunities Fund (after expenses) 5.21 13.62
- --------------------------------------------------------------------------------------------------
Russell 2000 Growth Index (no expenses) 1.23 5.69
- --------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
The expenses of the fund are shown at right. The fund has no sales, redemption,
exchange, or account fees, although some institutions may charge you a fee for
shares you buy through them. The annual fund expenses are deducted from fund
assets prior to performance calculations.
Annual fund operating expenses(3) (%)
(expenses that are deducted from fund assets)
Management fees 0.60
Marketing (12b-1) fees none
Other expenses 0.65
- --------------------------------------------------------------------
Total annual fund
operating expenses 1.25
- --------------------------------------------------------------------
Expense example
The example below is intended to help you compare the cost of investing in the
fund with the cost of investing in other mutual funds. The example assumes:
$10,000 initial investment, 5% return each year, total operating expenses
unchanged, and all shares sold at the end of each time period. The example is
for comparison only; the fund's actual return and your actual costs may be
higher or lower.
- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 127 397 686 1,511
- --------------------------------------------------------------------------------
(1) The fund's fiscal year end is 5/31.
(2) The fund commenced operations on 6/16/97 and returns reflect performance of
the fund from 6/30/97.
(3) The fund has a master/feeder structure as described on page 17. This table
shows the fund's expenses and its share of master portfolio expenses for
the past fiscal year, expressed as a percentage of the fund's average
net assets.
J.P. MORGAN U.S. SMALL COMPANY OPPORTUNITIES FUND | 9
<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 OMITTED]
RISK/RETURN SUMMARY
For a more detailed discussion of the fund's investments and their main risks,
as well as fund strategies, please see pages 18-19.
[GRAPHIC OMITTED]
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 OMITTED]
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 13. 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 13.
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 seeks to produce returns that exceed
those of the S&P 500. At the same time, by controlling the industry weightings
of the fund so that they 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.
An investment in the fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. You could lose money if you sell when the fund's share price is lower
than when you invested.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $316
billion, including more than $13.3 billion using similar strategies as the fund.
The portfolio management team is led by Terry E. Banet, vice president and
Louise Sclafani, vice president. Ms. Banet has been on the team since the fund's
inception in December 1996, and has been at J.P. Morgan since 1985. Prior to
managing this fund, Ms. Banet managed tax aware accounts and helped develop
Morgan's tax aware equity process. Ms. Sclafani has been at J.P. Morgan since
1994. Prior to managing this fund, Ms. Sclafani was an equity analyst and
portfolio manager at Brundage, Story and Rose.
- ----------------------
Before you invest
Investors considering the fund should understand that:
o There is no assurance that the fund will meet its investment goal.
o The fund does not represent a complete investment program.
10 | J.P. MORGAN TAX AWARE U.S. EQUITY FUND
<PAGE>
PERFORMANCE (unaudited)
The bar chart and table shown below provide some indication of the risks of
investing in J.P. Morgan Tax Aware U.S. Equity Fund.
The bar chart indicates the risks by showing changes in the performance of the
fund's shares from year to year for each of the fund's last 2 calendar years.
The table indicates the risks by showing how the fund's average annual returns
for the past year and the life of the fund compare to those of the S&P 500
Index. This is a widely recognized, unmanaged index of U.S. stocks used as a
measure of overall U.S. stock performance.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
Year-by-year total return (%)Shows changes in returns by calendar year(1)
- --------------------------------------------------------------------------------
1997 1998
40%
- ---
31.18
30.52
20%
- ---
0%
- ---
- --------------------------------------------------------------------------------
[] J.P. Morgan Tax Aware U.S. Equity Fund
For the period covered by this year-by-year total return chart, the fund's
highest quarterly return was 21.64% (for the quarter ended 12/31/98) and the
lowest quarterly return was -8.86% (for the quarter ended 9/30/98).
<TABLE>
<CAPTION>
Average annual total return (%)Shows performance over time, for periods ended December 31, 1998(2)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Past 1 yr. Life of fund
J.P. Morgan Tax Aware U.S. Equity Fund (after expenses) 31.18 30.75
- --------------------------------------------------------------------------------------------------
S&P 500 Index (no expenses) 28.58 30.95
- --------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
The expenses of the fund before reimbursement are shown at right. The fund has
no sales, redemption, exchange, or account fees, although some institutions may
charge you a fee for shares you buy through them. The annual fund expenses after
reimbursement are deducted from fund assets prior to performance calculations.
Shareholder transaction expenses(3)
Redemption fees (% of your cash proceeds)
- --------------------------------------------------------------------
Shares held for less than one year 1.00
Shares held one year or longer none
Annual expenses (% of fund assets)
- --------------------------------------------------------------------
Management fees 0.45
Marketing (12b-1) fees none
Other expenses 0.64
- --------------------------------------------------------------------
Total operating expenses 1.09
- --------------------------------------------------------------------
Expense example
The example below is intended to help you compare the cost of investing in the
fund with the cost of investing in other mutual funds. The example assumes:
$10,000 initial investment, 5% return each year, total operating expenses
unchanged, and all shares sold at the end of each time period. In the one year
example, the first number assumes that you continued to hold your shares, the
second that you sold all shares for cash at the end of the period. The example
is for comparison only; the fund's actual return and your actual costs may be
higher or lower.
- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 111/211 347 601 1,329
- --------------------------------------------------------------------------------
(1) The fund's fiscal year end is 10/31.
(2) The fund commenced operations on 12/18/96, and returns reflect performance
of the fund from 12/31/96.
(3) This table shows the fund's expenses for the past fiscal year expressed as a
percentage of the fund's average net assets. After reimbursement, other
expenses and total operating expenses are 0.40% and 0.85%, respectively.
This reimbursement arrangement can be changed or terminated at any time at
the option of J.P. Morgan.
J.P. MORGAN TAX AWARE U.S. EQUITY FUND | 11
<PAGE>
U.S. EQUITY MANAGEMENT APPROACH
- --------------------------------------------------------------------------------
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 $316 billion in assets under management,
including assets managed by the funds' advisor, J.P. Morgan Investment
Management Inc.
J.P. MORGAN U.S. EQUITY FUNDS
These funds invest primarily in U.S. stocks either directly or through another
fund. As a shareholder, you should anticipate risks and rewards beyond those of
a typical bond fund or a typical balanced fund.
THE SPECTRUM OF U.S. EQUITY FUNDS
The funds described in this prospectus pursue a range of goals and offer varying
degrees of risk and potential reward. Differences between these funds include:
o how much emphasis they give to the most undervalued stocks
o how closely they follow the industry weightings of their benchmarks
o how many securities they typically maintain in their portfolios
o the size or market capitalization of the companies in which they invest
o whether they focus on before-tax or after-tax returns
The table below shows degrees of the relative risk and return that these funds
potentially offer. These and other distinguishing features of each U.S. equity
fund are described on the following pages.
- --------------------------
Who May Want To Invest
The funds are 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 funds that seek to outperform the markets in which they each invest over
the long term
o with regard to the Tax Aware Fund, are individuals that could benefit from a
strategy that pursues returns from an after-tax perspective
The funds are not designed for investors who:
o want funds that pursue market trends or focus 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 with regard to the Tax Aware Fund, are investing through a tax-deferred
account such as an IRA.
Potential risk and return
The positions of the funds in this graph reflect long-term performance goals
only and are relative, not absolute.
U.S. Small Company Opportunities Fund o
U.S. Small Company Fund o
oTax Aware U.S. Equity Fund
U.S. Equity Fund
oDisciplined Equity Fund
Return
Risk
12 |
<PAGE>
- --------------------------------------------------------------------------------
U.S. EQUITY INVESTMENT PROCESS
The J.P. Morgan U.S. equity funds invest primarily in U.S. stocks. The Tax Aware
Fund does so while seeking to enhance after-tax returns.
While each fund follows its own strategy, the funds as a group share a single
investment philosophy. This philosophy, developed by the funds' advisor, focuses
on stock picking while largely avoiding sector or market-timing strategies.
In managing the funds, J.P. Morgan employs a three-step process:
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 OMITTED]
J.P. Morgan analysts develop proprietary fundamental research
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 OMITTED]
Stocks in each industry are ranked
with the help of models
[GRAPHIC OMITTED]
Using research and valuations,
each fund's management team
chooses stocks for its fund
Stock selection Each fund buys and sells stocks according to its own policies,
using the research and valuation rankings as a basis. In general, each
management team buys stocks that are identified as undervalued and considers
selling them when they appear overvalued. Along with attractive valuation, the
funds' 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.
- --------------------------------------------------------------------------------
TAX AWARE INVESTING AT J.P. MORGAN
The Tax Aware 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 Tax Aware 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.
| 13
<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 THROUGH AN EMPLOYER-SPONSORED RETIREMENT PLAN
Your fund investments are handled through your plan. Refer to your plan
materials or contact your benefits office for information on buying, selling, or
exchanging fund shares.
INVESTING THROUGH AN IRA OR ROLLOVER IRA
Please contact a J.P. Morgan Retirement Services Specialist at 1-888-576-4472
for information on J.P. Morgan's comprehensive IRA services, including lower
minimum investments.
INVESTING DIRECTLY
Investors may establish accounts without the help of an intermediary by using
the instructions below and at right:
o Choose a fund (or funds) and determine the amount you are investing. The
minimum amount for initial investments in a 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.
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 on the
right.
For answers to any questions, please speak with a J.P. Morgan Funds Services
Representative at 1-800-521-5411.
<PAGE>
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:
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
o Make out a check for the investment amount payable to J.P. Morgan Funds
o Mail the check with your completed application to the Transfer 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 Funds.
o 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
o Call the Shareholder Services Agent to effect an exchange.
14 | 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 the 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.
By exchange
o Call the Shareholder Services Agent to effect an exchange.
Redemption in kind
o Each fund reserves the right to make redemptions of over 250,000 in
securities rather than in cash.
ACCOUNT AND TRANSACTION POLICIES
Telephone orders The funds accept telephone orders from all shareholders. To
guard against fraud, the funds require shareholders to use a PIN, and may record
telephone orders or take other reasonable precautions. However, if a fund does
take such steps to ensure the authenticity of an order, you may bear any loss if
the order later proves fraudulent.
Exchanges You may exchange shares in these funds for shares in any other J.P.
Morgan or J.P. Morgan Institutional mutual fund at no charge (subject to the
securities laws of your state). When making exchanges, it is important to
observe any applicable minimums. Keep in mind that for tax purposes an exchange
is considered a sale.
A fund may alter, limit, or suspend its exchange policy at any time.
Business days and NAV calculations The funds' regular business days and hours
are the same as those of the New York Stock Exchange (NYSE). Each 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). Each 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, (e.g., when an event occurs after the close of trading that
would materially impact a security's value)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. A 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.
15 | YOUR INVESTMENT
<PAGE>
- --------------------------------------------------------------------------------
Timing of settlements When you buy shares, you will become the owner of record
when a 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 13) will be available as promptly as is 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 funds send monthly account statements as well as
confirmations after each purchase or sale of shares (except reinvestments).
Every six months each fund sends out an annual or semi-annual report containing
information on its 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), each 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, each fund reserves the right to close out your account
and send the proceeds to the address of record.
DIVIDENDS AND DISTRIBUTIONS
Income dividends are typically paid four times a year for the Disciplined
Equity, U.S. Equity and Tax Aware funds; and twice a year for the U.S. Small
Company and U.S. Small Company Opportunities funds. Each fund typically makes
capital gains distributions, if any, once per year. However, a fund may make
more or fewer payments in a given year, depending on its investment results and
its tax compliance situation. Each fund's dividends and distributions consist of
most or all of its 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 a fund is about to declare a long-term capital
gains distribution.
Every January, each fund issues tax information on its distributions for the
previous year.
Any investor for whom a 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.
16 | YOUR INVESTMENT
<PAGE>
FUND DETAILS
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
As noted earlier, each fund (except the Tax Aware Fund) is a series of J.P.
Morgan Funds, a Massachusetts business trust, and is a "feeder" fund that
invests in a master portfolio. (Except where indicated, this prospectus uses the
term "the fund" to mean the feeder fund and its master portfolio taken
together.)
Each master portfolio accepts investments from other feeder funds, and all the
feeders of a given master portfolio bear the portfolio's expenses in proportion
to their assets. However, each feeder can set its own transaction minimums,
fund-specific expenses and other conditions. This means that one feeder could
offer access to the same master portfolio on more attractive terms, or could
experience better performance, than another feeder. Information about other
feeders is available by calling 1-800-521-5411. Generally, when a master
portfolio seeks a vote, its feeder fund will hold a shareholder meeting and cast
its vote proportionately, as instructed by its shareholders. Fund shareholders
are entitled to one full or fractional vote for each dollar or fraction of a
dollar invested.
Each feeder fund and its master portfolio expect to maintain consistent goals,
but if they do not, the feeder fund will withdraw from the master portfolio,
receiving its assets either in cash or securities. Each feeder fund's trustees
would then consider whether a fund should hire its own investment adviser,
invest in a different master portfolio, or take other action.
The Tax Aware 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.
MANAGEMENT AND ADMINISTRATION
The feeder funds described in this prospectus, their corresponding master
portfolios, and J.P. Morgan Series Trust are all 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 each fund's other service
providers.
J.P. Morgan, subject to the expense reimbursements described earlier in this
prospectus, receives the following fees for investment advisory and other
services:
Advisory services Percentage of the master
portfolio's average net assets
Disciplined Equity 0.35%
U.S. Equity 0.40%
U.S. Small Company 0.60%
U.S. Small Company 0.60%
Opportunities
- --------------------------------------------------------------------------------
Administrative services Master portfolio's and fund's
(fee shared with Funds pro-rata portions of 0.09% of the
Distributor, Inc.) first $7 billion in 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
<PAGE>
The Tax Aware Fund, subject to the expense reimbursements described earlier in
this prospectus, pays J.P. Morgan the following fees for investment advisory and
other services:
Advisory services 0.45% of the fund's average
net assets
- --------------------------------------------------------------------------------
Administrative services Fund's pro-rata portion of 0.09%
(fee shared with Funds of the first $7 billion of average
Distributor, Inc.) net assets in 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
J.P. Morgan may pay fees to certain firms and professionals for providing
recordkeeping or other services in connection with investments in a fund.
Year 2000 Fund operations and shareholders could be adversely affected if the
computer systems used by J.P. Morgan, the funds' other service providers and
other entities with computer systems linked to the funds 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 funds 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 funds or generally, the
net asset value of the funds will decline.
FUND DETAILS | 17
<PAGE>
- --------------------------------------------------------------------------------
RISK AND REWARD ELEMENTS
This table discusses the main elements that make up each fund's overall risk and
reward characteristics. It also outlines each fund's policies toward various
investments, including those that are designed to help certain funds manage
risk.
- --------------------------------------------------------------------------------
Potential risks
- -----------------
Market conditions
o Each fund's share price and performance will fluctuate in response to stock
market movements
o Adverse market conditions may from time to time cause a fund to take
temporary defensive positions that are inconsistent with its principal
investment strategies and may hinder a fund from achieving its investment
objective
- --------------------------------------------------------------------------------
Management choices
o A fund could underperform its benchmark due to its securities and asset
allocation choices
- --------------------------------------------------------------------------------
Foreign investments
o Currency exchange rate movements could reduce gains or create losses
o A fund could lose money because of foreign government actions, political
instability, or lack of adequate and accurate information
- --------------------------------------------------------------------------------
When-issued and delayed delivery securities
o When a fund buys securities before issue or for delayed delivery, it could
be exposed to leverage risk if it does not use segregated accounts
- --------------------------------------------------------------------------------
Short-term trading
o Increased trading would raise a fund's brokerage and related costs
o Increased short-term capital gains distributions would raise shareholders'
income tax liability
- --------------------------------------------------------------------------------
Potential rewards
- -----------------
o Stocks have generally outperformed more stable investments (such as bonds
and cash equivalents) over the long term
- --------------------------------------------------------------------------------
o A fund could outperform its benchmark due to these same choices
- --------------------------------------------------------------------------------
o Favorable exchange rate movements could generate gains or reduce losses
o Foreign investments, which represent a major portion of the world's
securities, offer attractive potential performance and opportunities for
diversification
- --------------------------------------------------------------------------------
o A fund can take advantage of attractive transaction opportunities
- --------------------------------------------------------------------------------
o A fund could realize gains in a short period of time
o A fund could protect against losses if a stock is overvalued and its value
later falls
<PAGE>
- --------------------------------------------------------------------------------
Policies to balance risk and reward
- -----------------------------------
o Under normal circumstances the funds plan to remain fully invested, with at
least 65% in stocks; stock investments may include U.S. and foreign common
stocks, convertible securities, preferred stocks, trust or partnership
interests, warrants, rights, and investment company securities
o The funds seek to limit risk through diversification
o During severe market downturns, the funds have the option of investing up to
100% of assets in investment-grade short-term securities
- --------------------------------------------------------------------------------
o J.P. Morgan focuses its active management on securities selection, the area
where it believes its commitment to research can most enhance returns
o Each Fund anticipates that its total foreign investments will not exceed 20%
of assets
o Each fund actively manages the currency exposure of its foreign investments
relative to its benchmark, and may hedge back into the U.S. dollar from time
to time (see also "Derivatives")
- --------------------------------------------------------------------------------
o Each fund uses segregated accounts to offset leverage risk
- --------------------------------------------------------------------------------
o Each Fund anticipates a portfolio turnover rate of approximately 100%
o The funds generally avoid short-term trading, except to take advantage of
attractive or unexpected opportunities or to meet demands generated by
shareholder activity
18 | FUND DETAILS
<PAGE>
- --------------------------------------------------------------------------------
Potential risks
- ----------------
- --------------------------------------------------------------------------------
Derivatives
o Derivatives such as futures, options, swaps, and forward foreign currency
contracts that are used for hedging the portfolio or specific securities may
not fully offset the underlying positions(1) and this could result in losses
to the fund that would not have otherwise occured
o Derivatives used for risk management may not have the intended effects and
may result in losses or missed opportunities
o The counterparty to a derivatives contract could default
o Derivatives that involve leverage could magnify losses
o Certain types of derivatives involve costs to the funds which can reduce
returns
- --------------------------------------------------------------------------------
Securities Lending
o When a fund lends a security, the loaned securities may not be returned if
the borrower defaults
o The collateral will be subject to the risks of the securities in which it is
invested
- --------------------------------------------------------------------------------
Illiquid holdings
o A fund could have difficulty valuing these holdings precisely
o A fund could be unable to sell these holdings at the time or price it
desires
- --------------------------------------------------------------------------------
Potential rewards
- -----------------
o Hedges that correlate well with underlying positions can reduce or eliminate
losses at low cost
o A fund could make money and protect against losses if management's analysis
proves correct
o Derivatives that involve leverage could generate substantial gains at low
cost
- --------------------------------------------------------------------------------
o A fund may enhance income through the investment of the collateral received
from the borrower
- --------------------------------------------------------------------------------
o These holdings may offer more attractive yields or potential growth than
comparable widely traded securities
<PAGE>
- --------------------------------------------------------------------------------
Policies to balance risk and reward
- -----------------------------------
o The funds use derivatives for hedging and for risk management (i.e., to
establish or adjust exposure to particular securities, markets or currencies);
risk management may include management of a fund's exposure relative to its
benchmark (the U.S. Small Company Opportunities Fund is permitted to use
derivatives, however, it has no current intention to do so)
o The funds only establish hedges that they expect will be highly correlated
with underlying positions
o While the funds may use derivatives that incidentally involve leverage, they
do not use them for the specific purpose of leveraging their portfolios
- --------------------------------------------------------------------------------
o J.P. Morgan maintains a list of approved borrowers
o The fund receives collateral equal to at least 100% of the current value of
the securities loaned
o The lending agents indemnify a fund against borrower default
o J.P. Morgan's collateral investment guidelines limit the quality and duration
of collateral investment to minimize losses
o Upon recall, the borrower must return the securities loaned within the normal
settlement period
- --------------------------------------------------------------------------------
o No fund may invest more than 15% of net assets in illiquid holdings
o To maintain adequate liquidity to meet redemptions, each fund may hold
investment-grade short-term securities (including repurchase agreements and
reverse repurchase agreements) and, for temporary or extraordinary purposes,
may borrow from banks up to 33 1/3% of the value of its total assets
- --------------------------------------------------------------------------------
(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. A swap is a privately negotiated agreement to exchange
one stream of payments for another. A forward foreign currency contract is
an obligation to buy or sell a given currency on a future date and at a set
price.
FUND DETAILS | 19
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial tables are intended to help you understand each fund's financial
performance for the past one through five fiscal years or periods, as
applicable. Certain information reflects financial results for a single fund
share. The total returns in the tables represent the rate that an investor would
have earned (or lost) on an investment in a fund (assuming reinvestment of all
dividends are distributions). Except where noted, this information has been
audited by PricewaterhouseCoopers LLP, whose reports, along with each fund's
financial statements, are included in the respective fund's annual report which
are available upon request.
- --------------------------------------------------------------------------------
J.P. MORGAN DISCIPLINED EQUITY FUND
Per-share data For fiscal periods ended
- --------------------------------------------------------------------------------
5/31/98(1) 11/30/98
(unaudited)
Net asset value, beginning of period ($) 12.98 14.95
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.03 0.05
Net realized and unrealized gain
on investments ($) 1.96 1.15
- --------------------------------------------------------------------------------
Total from investment operations ($) 1.99 1.20
- --------------------------------------------------------------------------------
Less distributions to shareholders from:
Net investment income ($) (0.02) (0.02)
- --------------------------------------------------------------------------------
Total distributions ($) (0.02) (0.02)
- --------------------------------------------------------------------------------
Net asset value, end of period ($) 14.95 16.13
- --------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------
Total return (%) 15.33(2) 8.04(2)
- --------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 18,037 45,436
- --------------------------------------------------------------------------------
Ratio to average net assets:
Expenses (%) 0.75(3) 0.75(3)
- --------------------------------------------------------------------------------
Net investment income (%) 1.00(3) 0.88(3)
- --------------------------------------------------------------------------------
Expenses without reimbursement (%) 3.28(3) 0.97(3)
- --------------------------------------------------------------------------------
(1) The fund commenced operations on 12/31/97.
(2) Not annualized.
(3) Annualized.
20 | FUND DETAILS
<PAGE>
- --------------------------------------------------------------------------------
J.P. MORGAN U.S. EQUITY FUND
<TABLE>
<CAPTION>
Per-share data For fiscal periods ended
5/31/94 5/31/95 5/31/96 5/31/97 5/31/98 11/30/98
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ($) 19.30 19.38 19.42 22.15 24.63 25.66
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.27 0.32 0.38 0.25 0.18 0.10
Net realized and unrealized gain
on investments ($) 1.32 2.17 4.23 4.72 5.92 0.97
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations ($) 1.59 2.49 4.61 4.97 6.10 1.07
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions to shareholders from:
Net investment income ($) (0.29) (0.28) (0.29) (0.36) (0.23) (0.07)
Net realized gains ($) (1.22) (2.17) (1.59) (2.13) (4.84) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions ($) (1.51) (2.45) (1.88) (2.49) (5.07) (0.07)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period ($) 19.38 19.42 22.15 24.63 25.66 26.66
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return (%) 8.54 15.11 25.18 25.00 28.35 4.18
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 231,306 259,338 330,014 362,603 448,144 420,409
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
Expenses (%) 0.90 0.90 0.81 0.80 0.78 0.78(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (%) 1.43 1.74 1.87 1.13 0.71 0.81(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses without reimbursement (%) 0.93 0.91 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 10(1) -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Portfolio turnover reflects the period 6/1/93 to 7/18/93 and has not been
annualized. In July, 1993 the fund's predecessor contributed all of its
investable assets to The U.S. Equity Portfolio.
(2) Annualized
FUND DETAILS | 21
<PAGE>
- --------------------------------------------------------------------------------
J.P. MORGAN U.S. SMALL COMPANY FUND
<TABLE>
<CAPTION>
Per-share data For fiscal periods ended
- ------------------------------------------------------------------------------------------------------------------------------------
5/31/94 5/31/95 5/31/96 5/31/97 5/31/98 11/30/98
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ($) 25.12 21.40 22.02 26.20 26.04 27.68
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) ($) 0.20 0.22 0.26 0.18 0.11 0.06
Net realized and unrealized gain
on investment ($) 0.19 2.13 6.96 2.00 5.58 (4.46)
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment operations ($) 0.39 2.35 7.22 2.18 5.69 (4.40)
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income ($) (0.09) (0.21) (0.26) (0.21) (0.14) (0.04)
Net realized gain ($) (4.02) (1.52) (2.78) (2.13) (3.91) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions ($) (4.11) (1.73) (3.04) (2.34) (4.05) (0.04)
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period ($) 21.40 22.02 26.20 26.04 27.68 23.24
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------------------------------------------
Total return (%) 1.14 12.28 35.48 9.49 23.37 (15.90)
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 204,445 179,130 220,917 237,985 261,804 201,366
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
Expenses (%) 0.90 0.90 0.90 0.90 0.97 1.03(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (%) 0.75 1.02 1.10 0.71 0.39 0.48(2)
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses without reimbursement (%) 1.10 1.12 1.03 1.03 1.03 --
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) .14(1) .-- .-- .-- .-- --
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Portfolio turnover reflects the period 6/1/93 to 7/18/93 and has not been
annualized. In July, 1993 the Fund's predecessor contributed all of its
investable assets to The U.S. Small Company Portfolio.
(2) Annualized
- --------------------------------------------------------------------------------
J.P. MORGAN U.S. SMALL COMPANY OPPORTUNITIES FUND
Per-share data For fiscal periods ended
5/31/98(1) 11/30/98
(unaudited)
Net asset value, beginning of period ($) 10.00 12.57
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) ($) (0.02) (0.02)
Net realized and unrealized gain
on investment ($) 2.59 (1.24)
- --------------------------------------------------------------------------------
Total from investment operations ($) 2.57 (1.26)
- --------------------------------------------------------------------------------
Net asset value, end of period ($) 12.57 11.31
- --------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------
Total return (%) 25.70(2) (10.02)
- --------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 188,932 185,207
- --------------------------------------------------------------------------------
Ratio to average net assets:
Expenses (%) 1.19(3) 1.08(3)
- --------------------------------------------------------------------------------
Net investment income (loss) (%) (0.37)(3) (0.30)(3)
- --------------------------------------------------------------------------------
Expenses without reimbursement (%) 1.25(3) --
- --------------------------------------------------------------------------------
(1) The fund commenced operations on 6/16/97.
(2) Not annualized.
(3) Annualized.
22 | FUND DETAILS
<PAGE>
- --------------------------------------------------------------------------------
J.P. MORGAN TAX AWARE U.S. EQUITY FUND
Per-share data For fiscal periods ended
- --------------------------------------------------------------------------------
10/31/97(1) 10/31/98
Net asset value, beginning of period ($) 10.00 12.57
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.06 0.08
Net realized and unrealized gain
on investments ($) 2.52 2.65
- --------------------------------------------------------------------------------
Total from investment operations ($) 2.58 2.73
- --------------------------------------------------------------------------------
Less distributions to shareholders from:
Net investment income ($) (0.01) (0.11)
- --------------------------------------------------------------------------------
Net asset value, end of period ($) 12.57 15.19
- --------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------
Total return (%) 25.83(2) 21.81
- --------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 25,649 76,924
- --------------------------------------------------------------------------------
Ratio to average net assets:
Expenses (%) 0.85(3) 0.85
- --------------------------------------------------------------------------------
Net investment income (%) 0.70(3) 0.63
- --------------------------------------------------------------------------------
Expenses without reimbursement (%) 2.16(3) 1.09
- --------------------------------------------------------------------------------
Portfolio turnover rate (%) 23 44
- --------------------------------------------------------------------------------
(1) The fund commenced operations on 12/18/96.
(2) Not annualized.
(3) Annualized.
FUND DETAILS | 23
<PAGE>
(THIS PAGE IS INTENTIONALLY LEFT BLANK)
<PAGE>
FOR MORE INFORMATION
For investors who want more information on these funds, 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 a fund's most recently completed fiscal year or
half-year.
Statement of Additional Information (SAI) Provides a fuller technical and legal
description of a fund's policies, investment restrictions, and business
structure. This prospectus incorporates each fund's SAI by reference.
Copies of the current versions of these documents, along with other information
about the funds, may be obtained by contacting:
J.P. Morgan Funds
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. Each
fund's investment company and 1933 Act registration numbers are:
J.P. Morgan Disciplined Equity Fund ................. 811-07340 and 033-54632
J.P. Morgan U.S. Equity Fund ........................ 811-07340 and 033-54632
J.P. Morgan U.S. Small Company Fund ................. 811-07340 and 033-54632
J.P. Morgan U.S. Small Company Opportunities Fund ... 811-07340 and 033-54632
J.P. Morgan Tax Aware U.S. Equity Fund .............. 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 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
<PAGE>
MARCH 1, 1999
PROSPECTUS
J.P. MORGAN FIXED INCOME FUNDS
Short Term Bond Fund
Bond Fund
Global Strategic Income Fund
Emerging Markets Debt Fund
Tax Exempt Bond Fund
New York Tax Exempt Bond Fund
California Bond Fund
- ----------------------------
Seeking high total return or
current income by investing
primarily in fixed income
securities.
This prospectus contains essential information for anyone investing in these
funds. Please read it carefully and keep it for reference.
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 or guarantees that the information in this prospectus is correct or
adequate. It is a criminal offense to state or suggest otherwise.
Distributed by Funds Distributor, Inc.
JPMorgan
<PAGE>
Contents
- --------------------------------------------------------------------------------
2
Each fund's goal, investment approach,
risks, expenses, and performance
J.P. MORGAN FIXED INCOME FUNDS
J.P. Morgan Short Term Bond Fund .......................................... 2
J.P. Morgan Bond Fund ..................................................... 4
J.P. Morgan Global Strategic Income Fund .................................. 6
J.P. Morgan Emerging Markets Debt Fund .................................... 8
J.P. Morgan Tax Exempt Bond Fund .......................................... 10
J.P. Morgan New York Tax Exempt Bond Fund ................................. 12
J.P. Morgan California Bond Fund .......................................... 14
16
Principles and techniques common
to the funds in this prospectus
FIXED INCOME MANAGEMENT APPROACH
J.P. Morgan ............................................................... 16
J.P. Morgan fixed income funds ............................................ 16
The spectrum of fixed income funds ........................................ 16
Who may want to invest .................................................... 16
Fixed income investment process ........................................... 17
18
Investing in the J.P. Morgan
Fixed Income funds
YOUR INVESTMENT
Investing through a financial professional ................................ 18
Investing through an employer-sponsored retirement plan ................... 18
Investing through an IRA or rollover IRA .................................. 18
Investing directly ........................................................ 18
Opening your account ...................................................... 18
Adding to your account .................................................... 18
Selling shares ............................................................ 19
Account and transaction policies .......................................... 19
Dividends and distributions ............................................... 20
Tax considerations ........................................................ 20
21
More about risk and the funds'
business operations
FUND DETAILS
Business structure ........................................................ 21
Management and administration ............................................. 21
Risk and reward elements .................................................. 24
Investments ............................................................... 26
Financial highlights ...................................................... 28
FOR MORE INFORMATION .............................................. back cover
<PAGE>
J.P. MORGAN SHORT TERM BOND FUND
- --------------------------------------------------------------------------------
REGISTRANT: J.P. MORGAN FUNDS
(J.P. MORGAN SHORT TERM BOND FUND)
RISK/RETURN SUMMARY
For a more detailed discussion of the fund's investments and their main risks,
as well as fund strategies, please see pages 24-27.
GOAL
The fund's goal is to provide high total return, consistent with low volatility
of principal. This goal can be changed without shareholder approval.
INVESTMENT APPROACH
The fund invests primarily in fixed income securities, including U.S. government
and agency securities, domestic and foreign corporate bonds, private placements,
asset-backed and mortgage-related securities, and money market instruments, that
it believes have the potential to provide a high total return over time. These
securities may be of any maturity, but under normal market conditions the fund's
duration will range between one and three years, similar to that of the Merrill
Lynch 1-3 Year Treasury Index. For a description of duration, please see fixed
income investment process on page 17.
Up to 25% of assets may be invested in foreign securities, including 20% in debt
securities denominated in foreign currencies of developed countries. The fund
typically hedges its non-dollar investments back to the U.S. dollar. At least
90% of assets must be invested in securities that, at the time of purchase, are
rated investment-grade (BBB/Baa or better) or are the unrated equivalent,
including at least 75% A or better. No more than 10% of assets may be invested
in securities rated B or BB.
The fund's share price and total return will vary in response to changes in
interest rates. How well the fund's performance compares to that of similar
duration fixed income funds will depend on the success of the investment
process, which is described on page 17.
Although any rise in interest rates is likely to cause a fall in the price of
bonds, the fund's comparatively short duration is designed to help keep its
share price within a relatively narrow range. Because it seeks to minimize risk,
the fund will generally offer less income, and during periods of declining
interest rates, may offer lower total returns than bond funds with longer
durations. Because of the sensitivity of the fund's mortgage related securities
to changes in interest rates, the performance and duration of the fund may be
more volatile than if it did not hold these securities. The fund uses futures
contracts to help manage duration.To the extent that the fund seeks higher
returns by investing in non-investment-grade bonds, often called junk bonds, it
takes on additional risks, since these bonds are more sensitive to economic news
and their issuers have a less secure financial position. To the extent the fund
invests in foreign securities, it could lose money because of foreign government
actions, political instability, currency fluctuation or lack of adequate and
accurate information. The fund may engage in active and frequent trading,
leading to increased portfolio turnover and the possibility of increased capital
gains. See page 20 for further discussion on the tax treatment of capital gains.
An investment in the fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. You could lose money if you sell when the fund's share price is lower
than when you invested.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $316
billion, including more than $2.1 billion using similar strategies as the fund.
The portfolio management team is led by Connie J. Plaehn, managing director, who
has been on the team since the fund's inception and has been at J.P. Morgan
since 1984, William G. Tennille, vice president, who joined the team in January
of 1994 and has been at J.P. Morgan since 1992 and Augustus Cheh, vice
president, who has been a fixed income portfolio manager and analyst since
joining J.P. Morgan in 1994.
- --------------------------------------------------------------------------------
Before you invest
Investors considering the fund should understand that:
o There is no assurance that the fund will meet its investment goal.
o The fund does not represent a complete investment program.
2 J.P. MORGAN SHORT TERM BOND FUND
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE (unaudited)
The bar chart and table shown below provide some indication of the risks of
investing in J.P. Morgan Short Term Bond Fund.
The bar chart indicates the risks by showing changes in the performance of the
fund's shares from year to year for each of the last 5 calendar years.
The table indicates the risks by showing how the fund's average annual returns
for the past one year and life of the fund compare to those of the Merrill Lynch
1-3 Year Treasury Index. This is a widely recognized, unmanaged index of U.S.
Treasury notes and bonds with maturities of 1-3 years used as a measure of
overall short-term bond market performance.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
Year-by-year total return (%) Shows changes in returns by calendar year(1)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998
20%
10% 10.58 6.14 6.84
0% 0.11 4.94
</TABLE>
- --------------------------------------------------------------------------------
o J.P. Morgan Short Term Bond Fund
For the period covered by this year-by-year total return chart, the fund's
highest quarterly return was 3.41% (for the quarter ended 6/30/95); and the
lowest quarterly return was -0.54% (for the quarter ended 3/31/94).
Average annual total return Shows performance over time, for periods ended
December 31, 1998(2)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Past 1 yr. Past 5 yrs. Life of fund
J.P. Morgan Short Term Bond
Fund (after expenses) 6.84 5.67 5.48
- --------------------------------------------------------------------------------
Merrill Lynch 1-3 Year
Treasury Index (no expenses) 7.00 5.99 5.86
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
INVESTOR EXPENSES
The expenses of the fund before reimbursement are shown at right. The fund has
no sales, redemption, exchange, or account fees, although some institutions may
charge you a fee for shares you buy through them. The annual fund expenses after
reimbursement are deducted from fund assets prior to performance calculations.
Annual fund operating expenses(3) (%)
(expenses that are deducted from fund assets)
Management fees 0.25
Marketing (12b-1) fees none
Other expenses(4) 0.77
- --------------------------------------------------------------------------------
Total annual fund
operating expenses(4) 1.02
- --------------------------------------------------------------------------------
EXPENSE EXAMPLE
The example below is intended to help you compare the cost of investing in the
fund with the cost of investing in other mutual funds. The example assumes:
$10,000 initial investment, 5% return each year, total operating expenses
(before reimbursement) unchanged, and all shares sold at the end of each time
period. The example is for comparison only; the fund's actual return and your
actual costs may be higher or lower.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 104 325 563 1248
- --------------------------------------------------------------------------------
</TABLE>
(1) The fund's fiscal year end is 10/31.
(2) The fund commenced operations on 7/8/93 and returns reflect performance of
the fund from 7/31/93.
(3) The fund has a master/feeder structure as described on page 21. This
table is restated to show the current fee arrangements in effect as of
8/1/98, and shows the fund's expenses and its share of master portfolio
expenses for the past fiscal year using the current fees as if they had been
in effect during the past fiscal year, before reimbursement, expressed as a
percentage of the fund's average net assets.
(4) After reimbursement, other expenses and total operating expenses are
0.35% and 0.60%, respectively, and can be changed or terminated at any time
at the option of J.P. Morgan.
J.P. MORGAN SHORT TERM BOND FUND 3
<PAGE>
J.P. MORGAN BOND FUND TICKER SYMBOL: PPBDX
- --------------------------------------------------------------------------------
REGISTRANT: J.P. MORGAN FUNDS
(J.P. MORGAN BOND FUND)
RISK/RETURN SUMMARY
For a more detailed discussion of the fund's investments and their main risks,
as well as fund strategies, please see pages 24-27.
GOAL
The fund's goal is to provide high total return consistent with moderate risk of
capital and maintenance of liquidity. This goal can be changed without
shareholder approval.
INVESTMENT APPROACH
The fund invests primarily in fixed income securities, including U.S. government
and agency securities, corporate bonds, private placements, asset-backed and
mortgage-backed securities, that it believes have the potential to provide a
high total return over time. These securities may be of any maturity, but under
normal market conditions the management team will keep the fund's duration
within one year of that of the Salomon Brothers Broad Investment Grade Bond
Index (currently about five years). For a description of duration, please see
fixed income investment process on page 17.
Up to 25% of assets may be invested in foreign securities, including 20% in debt
securities denominated in foreign currencies of developed countries. The fund
typically hedges its non-dollar investments back to the U.S. dollar. At least
75% of assets must be invested in securities that, at the time of purchase, are
rated investment-grade (BBB/Baa or better) or are the unrated equivalent,
including at least 65% A or better. No more than 25% of assets may be invested
in securities rated B or BB.
The fund's share price and total return will vary in response to changes in
interest rates. How well the fund's performance compares to that of similar
fixed income funds will depend on the success of the investment process, which
is described on page 17. To the extent that the fund seeks higher returns by
investing in non-investment-grade bonds, often called junk bonds, it takes on
additional risks, since these bonds are more sensitive to economic news and
their issuers have a less secure financial position.
To the extent the fund invests in foreign securities, it could lose money
because of foreign government actions, political instability, currency
fluctuation or lack of adequate and accurate information. The fund may engage in
active and frequent trading, leading to increased portfolio turnover and the
possibility of increased capital gains. See page 20 for further discussion on
the tax treatment of capital gains.
An investment in the fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. You could lose money if you sell when the fund's share price is lower
than when you invested.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $316
billion, including more than $32.9 billion using similar strategies as the fund.
The portfolio management team is led by William G. Tennille, vice president, who
has been at J.P. Morgan since 1992, Connie J. Plaehn, managing director, who has
been at J.P. Morgan since 1984, and John Snyder, vice president, who has been at
J.P. Morgan since 1993. Mr. Tennille and Ms. Plaehn have been on the team since
January of 1994. Mr. Snyder has been a fixed income portfolio manager since
joining J.P. Morgan.
- --------------------------------------------------------------------------------
Before you invest
Investors considering the fund should understand that:
o There is no assurance that the fund will meet its investment goal.
o The fund does not represent a complete investment program.
4 J.P. MORGAN BOND FUND
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE (unaudited)
The bar chart and table shown below provide some indication of the risks of
investing in J.P. Morgan Bond Fund.
The bar chart indicates the risks by showing changes in the performance of the
fund's shares from year to year for each of the last 10 calendar years.
The table indicates the risks by showing how the fund's average annual returns
for the past one, five and ten years and compare to those of the Salomon
Brothers Broad Investment Grade Bond Index. This is a widely recognized,
unmanaged index of U.S. Treasury and agency securities and investment-grade
mortgage and corporate bonds used as a measure of overall bond market
performance.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
<TABLE>
<CAPTION>
Year-by-year total return (%) Shows changes in returns by calendar year(1),(2)
- ----------------------------------------------------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
20% 18.17
10% 10.23 10.09 13.45 9.87 9.13
0% 6.53 3.13 7.36
(10%) (2.97)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
o J.P. MORGAN BOND FUND
For the period covered by this year-by-year total return chart, the fund's
highest quarterly return was 6.25% (for the quarter ended 6/30/95); and the
lowest quarterly return was -2.39% (for the quarter ended 3/31/94).
Average annual total return (%) Shows performance over time, for periods ended
December 31, 1998(1)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Past 1 yr. Past 5 yrs. Past 10 yrs.
J.P. Morgan Bond Fund
(after expenses) 7.36 6.74 8.36
- --------------------------------------------------------------------------------
Salomon Brothers Broad Investment
Grade Bond Index (no expenses) 8.72 7.30 9.31
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
INVESTOR EXPENSES
The expenses of the fund are shown at right. The fund has no sales, redemption,
exchange, or account fees, although some institutions may charge you a fee for
shares you buy through them. The annual fund expenses are deducted from fund
assets prior to performance calculations.
Annual fund operating expenses(3) (%)
(expenses that are deducted from fund assets)
Management fees 0.30
Marketing (12b-1) fees none
Other expenses 0.40
- --------------------------------------------------------------------------------
Total annual fund
operating expenses 0.70
- --------------------------------------------------------------------------------
Expense example
The example below is intended to help you compare the cost of investing in the
fund with the cost of investing in other mutual funds. The example assumes:
$10,000 initial investment, 5% return each year, total operating expenses
unchanged, and all shares sold at the end of each time period. The example is
for comparison only; the fund's actual return and your actual costs may be
higher or lower.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 72 224 390 871
- --------------------------------------------------------------------------------
</TABLE>
(1) The fund commenced operations on 7/12/93. Returns for the period 3/31/88
through 7/31/93 reflect performance of The Pierpont Bond Fund, the fund's
predecessor, which commenced operations on 3/11/88.
(2) The fund's fiscal year end is 10/31.
(3) The fund has a master/feeder structure as described on page 21. This
table is restated to show the current fee arrangements in effect as of
8/1/98, and shows the fund's expenses and its share of master portfolio
expenses for the past fiscal year, using the current fees as if they had
been in effect during the past fiscal year, before reimbursement, expressed
as a percentage of the fund's average net assets.
J.P. MORGAN BOND FUND 5
<PAGE>
J.P. MORGAN GLOBAL STRATEGIC
INCOME FUND
- --------------------------------------------------------------------------------
REGISTRANT: J.P. MORGAN FUNDS
(J.P. MORGAN GLOBAL STRATEGIC INCOME FUND)
RISK/RETURN SUMMARY
For a more detailed discussion of the fund's investments and their main risks,
as well as fund strategies, please see pages 24-27.
GOAL
The fund's goal is to provide high total return from a portfolio of fixed income
securities of foreign and domestic issuers. This goal can be changed without
shareholder approval.
INVESTMENT APPROACH
The fund invests in a wide range of debt securities from the U.S. and other
markets, both developed and emerging. Issuers may include governments,
corporations, financial institutions, and supranational organizations (such as
the World Bank) that the fund believes have the potential to provide a high
total return over time. The fund may invest directly in mortgages and in
mortgage-backed securities. The fund's securities may be of any maturity, but
under normal market conditions its duration will generally be similar to that of
the Lehman Brothers Aggregate Bond Index (currently about four and a half
years). For a description of duration, please see fixed income investment
process on page 17. At least 40% of assets must be invested in securities that,
at the time of purchase, are rated investment-grade (BBB/Baa or better) or are
the unrated equivalent. The balance of assets must be invested in securities
rated B or higher at the time of purchase (or the unrated equivalent), except
that the fund's emerging market component has no minimum quality rating and may
invest without limit in securities that are in the lowest rating categories (or
are the unrated equivalent).
The management team uses the process described on page 17, and also makes
country allocations, based primarily on macro-economic factors. The team uses
the model allocation shown at right as a basis for its sector allocation,
although the actual allocations are adjusted periodically within the indicated
ranges. Within each sector, a dedicated team handles securities selection. The
fund typically hedges its non-dollar investments in developed countries back to
the U.S. dollar.
The fund's share price and total return will vary in response to changes in
global bond markets, interest rates, and currency exchange rates. How well the
fund's performance compares to that of similar fixed income funds will depend on
the success of the investment process. Because of credit and foreign and
emerging markets investment risks, the fund's performance is likely to be more
volatile than that of most fixed income funds. Foreign and emerging market
investment risks include foreign government actions, political instability,
currency fluctuations and lack of adequate and accurate information. To the
extent that the fund seeks higher returns by investing in non-investment-grade
bonds, often called junk bonds, it takes on additional risks, since these bonds
are more sensitive to economic news and their issuers have a less secure
financial position. The fund's mortgage-backed investments involve the risk of
losses due to default or to prepayments that occur earlier or later than
expected. Some investments, including directly owned mortgages, may be illiquid.
The fund has the potential for long-term total returns that exceed those of more
traditional bond funds, but investors should also be prepared for risks that
exceed those of more traditional bond funds.
An investment in the fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. You could lose money if you sell when the fund's share price is lower
than when you invested.
<PAGE>
MODEL SECTOR ALLOCATION
15% public/private
corporates
(range 5-25%)
23% high yield
corporates
(range 13-33%)
15% emerging
markets
(range 5-25%)
12% international
non-dollar
(range 0-25%)
35% public/private
mortgages
(range 20-45%)
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $316
billion, including more than $4.1 billion using similar strategies as the fund.
The portfolio management team is led by Gerard W. Lillis, managing director, who
has been at J.P. Morgan since 1978, and Mark E. Smith, managing director, who
joined J.P. Morgan in 1994 from Allied Signal, Inc. where he managed fixed
income portfolios and oversaw asset allocation activities. Both have been on the
team since the fund's inception.
- --------------------------------------------------------------------------------
Before you invest
Investors considering the fund should understand that:
o There is no assurance that the fund will meet its investment goal.
o The fund does not represent a complete investment program.
6 J.P. MORGAN GLOBAL STRATEGIC INCOME FUND
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE (unaudited)
The bar chart and table shown below provide some indication of the risks of
investing in J.P. Morgan Global Strategic Income Fund.
The bar chart indicates the risks by showing the performance of the fund's
shares during its first complete calendar year of operations.
The table indicates the risks by showing how the fund's average annual returns
for the past one year and life of the fund compare to those of the Lehman
Brothers Aggregate Bond Index. This is a widely recognized, unmanaged index used
as a measure of overall bond market performance.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
Total return (%) Shows changes in returns by calendar year(1),(2)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
1998
20%
10%
0% 2.31
- --------------------------------------------------------------------------------
</TABLE>
o J.P. MORGAN GLOBAL STRATEGIC INCOME FUND
For the period covered by this total return chart, the fund's highest quarterly
return was 3.04% (for the quarter ended 3/31/98); and the lowest quarterly
return was -1.58% (for the quarter ended 9/30/98).
Average annual total return Shows performance over time, for periods ended
December 31, 1998(1)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
Past 1 yr. Life of fund
J.P. Morgan Global Strategic
Income Fund (after expenses) 2.31 6.75
Lehman Brothers Aggregate Bond
Index (no expenses) 8.67 10.91
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
INVESTOR EXPENSES
The expenses of the fund before reimbursement are shown at right. The fund has
no sales, redemption, exchange, or account fees, although some institutions may
charge you a fee for shares you buy through them. The annual fund expenses after
reimbursement are deducted from fund assets prior to performance calculations.
Annual fund operating expenses(3) (%)
(expenses that are deducted from fund assets)
Management fees 0.45
Marketing (12b-1) fees none
Other expenses(4) 1.44
- --------------------------------------------------------------------------------
Total annual fund
operating expenses(4) 1.89
- --------------------------------------------------------------------------------
Expense example
The example below is intended to help you compare the cost of investing in the
fund with the cost of investing in other mutual funds. The example assumes:
$10,000 initial investment, 5% return each year, total operating expenses
(before reimbursement) unchanged, and all shares sold at the end of each time
period. The example is for comparison only; the fund's actual return and your
actual costs may be higher or lower.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 yr. 3 yrs. 5 yrs 10yrs
Your cost($) 192 594 1,021 2,212
- --------------------------------------------------------------------------------
</TABLE>
(1) The fund commenced operations on 11/5/97. For the period 3/31/97 through
11/30/97, returns reflect performance of the J.P. Morgan Institutional
Global Strategic Income Fund (a separate feeder fund investing in the same
master portfolio). These returns reflect lower operating expenses than those
of the fund. Therefore these returns may be higher than the fund's would
have been had it existed during the same period.
(2) The fund's fiscal year end is 10/31.
(3) The fund has a master/feeder structure as described on page 21. This table
shows the fund's expenses and its share of master portfolio expenses for the
fiscal period 11/5/97 (commencement of operations) through 10/31/98, before
reimbursement, expressed as a percentage of the fund's average net assets.
(4) After reimbursement, other expenses and total operating expenses are 0.55%
and 1.00%, respectively. This reimbursement arrangement can be changed or
terminated at any time at the option of J.P. Morgan.
J.P. MORGAN GLOBAL STRATEGIC INCOME FUND 7
<PAGE>
J.P. MORGAN EMERGING
MARKETS DEBT FUND
- --------------------------------------------------------------------------------
REGISTRANT: J.P. MORGAN FUNDS
(J.P. MORGAN EMERGING MARKETS DEBT FUND)
RISKS/RETURN SUMMARY
For a more detailed discussion of the fund's investments and their main risks,
as well as fund strategies, please see pages 24-27.
GOAL
The fund's goal is to provide high total return from a portfolio of fixed income
securities of emerging markets issuers. This goal can be changed without
shareholder approval.
INVESTMENT APPROACH
The fund invests primarily in debt securities that it believes have the
potential to provide a high total return from countries whose economies or bond
markets are less developed. This designation currently includes most countries
in the world except Australia, Canada, Hong Kong, Japan, New Zealand, the U.S.,
the United Kingdom, and most Western European countries. Issuers of portfolio
securities may include foreign governments, corporations, and financial
institutions. These securities may be of any maturity and quality, but under
normal market conditions the fund's duration will generally range between four
and six years, similar to that of the Emerging Markets Bond Index Plus. For a
description of duration, please see fixed income investment process on page 17.
The fund does not have any minimum quality rating and may invest without limit
in securities that are rated in the lowest rating categories (or are the unrated
equivalent).
In addition to the investment process described on page 17, the management team
makes country allocation decisions, based primarily on financial and economic
forecasts and other macro-economic factors.
The fund's share price and total return will vary in response to changes in
emerging bond markets, interest rates, and currency exchange rates. How well the
fund's performance compares to that of similar fixed income funds will depend on
the success of the investment process. Because the fund is non-diversified and
may invest more than 5% of its assets in a single issuer and its primary
securities combine the risks of emerging markets and low credit quality, its
performance is likely to be more volatile than that of other fixed income
investments. These risks and fund volatility are likely to be compounded when
the fund concentrates its investments in a small number of countries. Emerging
market investment risks include foreign government actions, political
instability, currency fluctuations and lack of adequate and accurate
information. The fund may engage in active and frequent trading, leading to
increased portfolio turnover and the possibility of increased capital gains. See
page 20 for further discussion on the tax treatment of capital gains. To the
extent that the fund seeks higher returns by investing in non-investment-grade
bonds, often called junk bonds, it takes on additional risks, since these bonds
are more sensitive to economic news and their issuers have a less secure
financial position. Investors should be prepared to ride out periods of negative
return.
An investment in the fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. You could lose money if you sell when the fund's share price is lower
than when you invested.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $316
billion, including more than $.5 billion using similar strategies as the fund.
The portfolio management team is led by Andrew F. Goldberg, vice president, who
has been at J.P. Morgan since 1990, and Michael Cembalest, vice president, who
has been at J.P. Morgan from 1988 to January 1998 and since June 1998. Prior to
joining the portfolio management team, Mr. Goldberg oversaw the capital research
group's research into fixed income and derivatives markets, and Mr. Cembalest
was responsible for sovereign debt analysis in the emerging markets group. From
January 1998 to June 1998, Mr. Cembalest was a portfolio manager at Morgan
Stanley.
- --------------------------------------------------------------------------------
Before you invest
Investors considering the fund should understand that:
o There is no assurance that the fund will meet its investment goal.
o The fund does not represent a complete investment program.
8 J.P. MORGAN EMERGING MARKETS DEBT FUND
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE (unaudited)
The bar chart and table shown below provide some indication of the risks of
investing in J.P. Morgan Emerging Markets Debt Fund.
The bar chart indicates the risks by showing the performance of the fund's
shares during it's first complete calendar year of operations.
The table indicates the risks by showing how the fund's average annual returns
for the past year and life of fund compare to those of the Emerging Markets Bond
Index Plus. This is an unmanaged index which tracks total return for external
currency-denominated debt (Brady bonds, loans, Eurobonds and U.S.
dollar-denominated market instruments) in emerging markets.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
Total return (%) Shows changes in returns by calendar year(1)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
1998
10%
0%
(10%)
(20%) (15.93)
- --------------------------------------------------------------------------------
</TABLE>
o J.P. Morgan Emerging Market Debt
For the period covered by this total return chart, the fund's highest quarterly
return was 9.50% (for the quarter ended 12/31/98) and the lowest quarterly
return was -21.73% (for the quarter ended 9/30/98).
Average annual total return (%) Shows performance over time, for period ended
December 31, 1998(2)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C> <C>
Past 1 yr. Life of fund
J.P. Morgan Emerging Market Debt
(after expenses) -15.93 -8.04
- --------------------------------------------------------------------------------
Emerging Markets Bond Index Plus
(no expenses) -14.35 -4.08
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
INVESTOR EXPENSES
The expenses of the fund before reimbursement are shown at right. The fund has
no sales, redemption, exchange, or account fees, although some institutions may
charge you a fee for shares you buy through them. The annual fund expenses after
reimbursement are deducted from fund assets prior to performance calculations.
Annual fund operating expenses(3) (%)
(expenses that are deducted from fund assets)
Management fees 0.70
Marketing (12b-1) fees none
Other expenses(4) 1.39
- --------------------------------------------------------------------------------
Total annual fund
operating expenses(4) 2.09
- --------------------------------------------------------------------------------
Expense example
The example below is intended to help you compare the cost of investing in the
fund with the cost of investing in other mutual funds. The example assumes:
$10,000 initial investment, 5% return each year, total operating expenses
(before reimbursement) unchanged, and all shares sold at the end of each time
period. The example is for comparison only; the fund's actual return and your
actual costs may be higher or lower.
- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs 10 yrs
Your cost($) 212 655 1,124 2,421
- --------------------------------------------------------------------------------
(1) The fund's fiscal year end is 12/31.
(2) The fund commenced operations on 4/17/97 and returns reflect performance of
the fund from 4/30/97.
(3) The fund has a master/feeder structure as described on page 21. This table
shows the fund's expenses and its share of master portfolio expenses for the
past fiscal year before reimbursement, expressed as a percentage of average
net assets.
(4) After reimbursement, other expenses and total operating expenses are 0.55%
and 1.25%, respectively. This reimbursement arrangement can be changed or
terminated at any time after 4/30/99 at the option of J.P. Morgan.
J.P. MORGAN EMERGING MARKETS DEBT FUND 9
<PAGE>
J.P. MORGAN TAX EXEMPT
BOND FUND TICKER SYMBOL: PPTBX
- --------------------------------------------------------------------------------
REGISTRANT: J.P. MORGAN FUNDS
(J.P. MORGAN TAX EXEMPT BOND FUND)
RISK/RETURN SUMMARY
For a more detailed discussion of the fund's investments and their main risks,
as well as fund strategies, please see pages 24-27.
GOAL
The fund's goal is to provide a high level of current income that is exempt from
federal income tax consistent with moderate risk of capital. This goal can be
changed without shareholder approval.
INVESTMENT APPROACH
The fund invests primarily in high quality municipal securities that it believes
have the potential to provide high current income that is free from federal
personal income tax. While the fund's goal is high tax-exempt income, the fund
may invest to a limited extent in taxable securities, including U.S. government,
government agency, corporate, or taxable municipal securities. The fund's
securities may be of any maturity, but under normal market conditions the fund's
duration (duration is a measure of average weighted maturity of the securities
held by a fund and a common measurement of sensitivity to interest rate
movements) will generally range between four and seven years, similar to that of
the Lehman Brothers 1-16 Year Municipal Bond Index (currently 5.4 years) For a
description of duration, please see fixed income investment process on page 17.
At least 90% of assets must be invested in securities that, at the time of
purchase, are rated investment-grade (BBB/Baa or better) or are the unrated
equivalent. No more than 10% of assets may be invested in securities rated B or
BB.
The fund's share price and total return will vary in response to changes in
interest rates. How well the fund's performance compares to that of similar
tax-exempt funds will depend on the success of the investment process, which is
described on page 17.
Investors should be prepared for higher share price volatility than from a tax
exempt fund of shorter duration. The fund's performance could also be affected
by market reaction to proposed tax legislation. To the extent that the fund
seeks higher returns by investing in non-investment-grade bonds, often called
junk bonds, it takes on additional risks, since these bonds are more sensitive
to economic news and their issuers have a less secure financial position.
An investment in the fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. You could lose money if you sell when the fund's share price is lower
than when you invested.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $316
billion, including more than $12 billion using similar strategies as the fund.
The portfolio management team is led by Robert W. Meiselas, vice president, who
joined the team in May of 1997 and has been at J.P. Morgan since 1987, and
Elaine B. Young, vice president, who joined the team in January of 1996 and has
been at J.P. Morgan since August of 1994. Prior to joining J.P. Morgan, Ms.
Young was a municipal bond trader and fixed income portfolio manager at Scudder,
Stevens, & Clark, Inc.
- --------------------------------------------------------------------------------
Before you invest
Investors considering the fund should understand that:
o There is no assurance that the fund will meet its investment goal.
o The fund does not represent a complete investment program.
10 J.P. MORGAN TAX EXEMPT BOND FUND
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE (unaudited)
The bar chart and table shown below provide some indication of the risks of
investing in J.P. Morgan Tax Exempt Bond Fund.
The bar chart indicates the risks by showing changes in the performance of the
fund's shares from year to year for each of the fund's last 10 calendar years.
The table indicates the risks by showing how the fund's average annual returns
for the past one, five and ten years compare to those of the Lehman Brothers
1-16 Year Municipal Bond Index. This is a widely recognized, unmanaged index of
general obligation and revenue bonds with maturities of 1-16 years used as a
measure of overall tax-exempt bond market performance.(1)
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
<TABLE>
<CAPTION>
Year-by-year total return (%) Shows changes in returns by calendar
year(1),(2)
- ----------------------------------------------------------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
20% 13.40
10% 8.25 6.87 10.92 7.47 9.58 7.42
0% 3.54 5.47
(10%) (2.70)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
o J.P. MORGAN TAX EXEMPT BOND FUND
For the period covered by this year-by-year total return chart, the fund's
highest quarterly return was 5.09% (for the quarter ended 3/30/95); and the
lowest quarterly return was -3.08% (for the quarter ended 3/31/94).
Average annual total return (%) Shows performance over time, for periods ended
December 31, 1998(1)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Past 1 yr. Past 5 yrs. Past 10 yrs.
J.P. Morgan Tax Exempt Bond Fund
(after expenses) 5.47 5.30 6.94
- --------------------------------------------------------------------------------
Lehman Brothers 1-16 Year Municipal
Bond Index (no expenses) 6.25 5.86 N/A
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
INVESTOR EXPENSES
The expenses of the fund are shown at right. The fund has no sales, redemption,
exchange, or account fees, although some institutions may charge you a fee for
shares you buy through them. The annual fund expenses are deducted from fund
assets prior to performance calculations.
Annual fund operating expenses(3) (%)
(expenses that are deducted from fund assets)
Management fees 0.30
Marketing (12b-1) fees none
Other expenses 0.39
- --------------------------------------------------------------------------------
Total annual fund
operating expenses 0.69
- --------------------------------------------------------------------------------
Expense example
The example below is intended to help you compare the cost of investing in the
fund with the cost of investing in other mutual funds. The example assumes:
$10,000 initial investment, 5% return each year, total operating expenses
unchanged, and all shares sold at the end of each time period. The example is
for comparison only; the fund's actual return and your actual costs may be
higher or lower.
- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 71 221 384 859
- --------------------------------------------------------------------------------
(1) The fund commenced operations on 7/12/93. For the period 1/1/88 through
7/31/93 returns reflect performance of The Pierpont Tax Exempt Bond Fund,
the predecessor of the fund, which commenced operations on 10/3/84.
(2) The fund's fiscal year end is 8/31.
(3) The fund has a master/feeder structure as described on page 21. This table
is restated to show the current fee arrangements in effect as of 8/1/98, and
shows the fund's expenses and its share of master portfolio expenses for the
past fiscal year using the current fees as if they had been in effect during
the past fiscal year, expressed as a percentage of the fund's average net
assets.
J.P. MORGAN TAX EXEMPT BOND FUND 11
<PAGE>
J.P. MORGAN NEW YORK
TAX EXEMPT BOND FUND TICKER SYMBOL: PPNYX
- --------------------------------------------------------------------------------
REGISTRANT: J.P. MORGAN FUNDS
(J.P. MORGAN NEW YORK TAX EXEMPT BOND FUND)
RISK/RETURN SUMMARY
For a more detailed discussion of the fund's investments and their main risks,
as well as fund strategies, please see pages 24-27.
GOAL
The fund's goal is to provide a high level of tax exempt income for New York
residents consistent with moderate risk of capital. This goal can be changed
without shareholder approval.
INVESTMENT APPROACH
The fund invests primarily in New York municipal securities that it believes
have the potential to provide high current income which is free from federal,
state, and New York City personal income taxes for New York residents. The fund
may also invest to a limited extent in securities of other states or
territories. To the extent that the fund invests in municipal securities of
other states, the income from such securities would be free from federal
personal income taxes for New York residents but would be subject to New York
state and New York City personal income taxes. For non-New York residents, the
income from New York municipal securities is free from federal personal income
taxes only. The fund may also invest in taxable securities. The fund's
securities may be of any maturity, but under normal market conditions the fund's
duration (duration is a measure of average weighted maturity of the securities
held by a fund and a common measurement of sensitivity to interest rate
movements) will generally range between three and seven years, similar to that
of the Lehman Brothers 1-16 Year Municipal Bond Index (currently 5.4 years). For
a description of duration, please see fixed income investment process on page
17. At least 90% of assets must be invested in securities that, at the time of
purchase, are rated investment-grade (BBB/Baa or better) or are the unrated
equivalent. No more than 10% of assets may be invested in securities rated B or
BB.
The fund's share price and total return will vary in response to changes in
interest rates. How well the fund's performance compares to that of similar
fixed income funds will depend on the success of the investment process, which
is described on page 17. Because most of the fund's investments will typically
be from issuers in the State of New York, its performance will be affected by
the fiscal and economic health of that state and its municipalities. The fund is
non-diversified and may invest more than 5% of assets in a single issuer, which
could further concentrate its risks. To the extent that the fund seeks higher
returns by investing in non-investment-grade bonds, often called junk bonds, it
takes on additional risks, since these bonds are more sensitive to economic news
and their issuers have a less secure financial condition.
An investment in the fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. You could lose money if you sell when the fund's share price is lower
than when you invested.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $316
billion, including more than $12 billion using similar strategies as the fund.
The portfolio management team is led by Robert W. Meiselas, vice president, who
has been at J.P. Morgan since 1987, and Elaine B. Young, vice president, who
joined J.P. Morgan from Scudder, Stevens & Clark, Inc. in 1994 where she was a
municipal bond trader and fixed income portfolio manager. Both have been on the
team since June of 1997.
- --------------------------------------------------------------------------------
Before you invest
Investors considering the fund should understand that:
o There is no assurance that the fund will meet its investment goal.
o The fund does not represent a complete investment program.
12 J.P. MORGAN NEW YORK TAX EXEMPT BOND FUND
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE (unaudited)
The bar chart and table shown below provide some indication of the risks of
investing in J.P. Morgan New York Tax Exempt Bond Fund.
The table indicates the risks by showing how the fund's average annual returns
for the past year and the life of the fund compare to those of the Lehman
Brothers 1-16 Year Municipal Bond Index. This is a widely recognized, unmanaged
index of general obligation and revenue bonds with maturities of 1-16 years used
as a measure of overall tax-exempt bond market performance.
The bar chart indicates the risks by showing changes in the performance of the
fund's shares from year to year for each of the last 4 calendar years.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
Year-by-year total return (%) Shows changes in returns by calendar year(1)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995 1996 1997 1998
20%
10% 13.03 7.41
0% 3.96 5.39
- --------------------------------------------------------------------------------
</TABLE>
o J.P. Morgan New York Tax Exempt Bond Fund
For the period covered by this year-by-year total return chart, the fund's
highest quarterly return was 4.80% (for the quarter ended 3/31/95) and the
lowest quarterly return was -0.65% (for the quarter ended 3/31/96).
Average annual total return (%) Shows performance over time, for periods ended
December 31, 1998(2)
<TABLE>
<CAPTION>
<S> <C>
Past 1 yr. Life of fund
J.P. Morgan New York Tax Exempt
Bond Fund (after expenses) 5.39 6.36
- --------------------------------------------------------------------------------
Lehman Brothers 1-16 Year
Municipal Bond Index (no expenses) 6.25 7.07
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
INVESTOR EXPENSES
The expenses of the fund before reimbursement are shown at right. The fund has
no sales, redemption, exchange, or account fees, although some institutions may
charge you a fee for shares you buy through them. The annual fund expenses after
reimbursement are deducted from fund assets prior to performance calculations.
Annual fund operating expenses(3) (%)
(expenses that are deducted from fund assets)
Management fees 0.30
Marketing (12b-1) fees none
Other expenses(4) 0.52
- --------------------------------------------------------------------------------
Total annual fund
operating expenses(4) 0.82
- --------------------------------------------------------------------------------
Expense example
The example below is intended to help you compare the cost of investing in the
fund with the cost of investing in other mutual funds. The example assumes:
$10,000 initial investment, 5% return each year, total operating expenses
(before reimbursement) unchanged, and all shares sold at the end of each time
period. The example is for comparison only; the fund's actual return and your
actual costs may be higher or lower.
- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 84 262 455 1,014
- --------------------------------------------------------------------------------
(1) The fund's fiscal year end is 12/31.
(2) The fund commenced operations on 4/17/97 and returns reflect performance of
the fund from 4/30/97.
(3) The fund has a master/feeder structure as described on page 21. This table
is restated to show the current fee arrangements in effect as of 8/1/98, and
shows the fund's expenses and its share of master portfolio expenses for the
past fiscal year using the current fees as if they had been in effect during
the past fiscal year, before reimbursement, expressed as a percentage of the
fund's average net assets.
(4) After reimbursement, other expenses and total operating expenses are 0.40%
and 0.70%, respectively. This reimbursement arrangement can be changed or
terminated at any time at the option of J.P. Morgan.
J.P. MORGAN NEW YORK TAX EXEMPT BOND FUND 13
<PAGE>
J.P. MORGAN CALIFORNIA
BOND FUND
- --------------------------------------------------------------------------------
REGISTRANT: J.P. MORGAN SERIES TRUST
(J.P. MORGAN CALIFORNIA BOND FUND: SELECT SHARES)
RISK/RETURN SUMMARY
For a more detailed discussion of the fund's investments and their main risks,
as well as fund strategies, please see pages 24-27.
GOAL
The fund's goal is to provide high after-tax total return for California
residents consistent with moderate risk of capital. This goal can be changed
without shareholder approval.
INVESTMENT APPROACH
The fund invests primarily in California municipal securities that it believes
have the potential to provide high current income which is free from federal and
state personal income taxes for California residents. Because the fund's goal is
high after-tax total return rather than high tax-exempt income, the fund may
invest to a limited extent in securities of other states or territories. To the
extent that the fund invests in municipal securities of other states, the income
from such securities would be free from federal personal income taxes for
California residents but would be subject to California state personal income
taxes. For non-California residents, the income from California municipal
securities is free from federal personal income taxes only. The fund may also
invest in taxable securities. The fund's securities may be of any maturity, but
under normal market conditions the fund's duration (duration is a measure of
average weighted maturity of the securities held by a fund and a common
measurement of sensitivity to interest rate movements) will generally range
between three and ten years, similar to that of the Lehman Brothers 1-16 Year
Municipal Bond Index (currently 5.4 years). For a description of duration,
please see fixed income investment process on page 17. At least 90% of assets
must be invested in securities that, at the time of purchase, are rated
investment-grade (BBB/Baa or better) or are the unrated equivalent. No more than
10% of assets may be invested in securities rated B or BB.
The fund's share price and total return will vary in response to changes in
interest rates. How well the fund's performance compares to that of similar
fixed income funds will depend on the success of the investment process, which
is described on page 17. Because most of the fund's investments will typically
be from issuers in the State of California, its performance will be affected by
the fiscal and economic health of that state and its municipalities. The fund is
non-diversified and may invest more than 5% of assets in a single issuer, which
could further concentrate its risks. To the extent that the fund seeks higher
returns by investing in non-investment-grade bonds, often called junk bonds, it
takes on additional risks, because these bonds are more sensitive to economic
news and their issuers have a less secure financial condition.
An investment in the fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. You could lose money if you sell when the fund's share price is lower
than when you invested.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $316
billion, including more than $12 billion using similar strategies as the fund.
The portfolio management team is led by Robert W. Meiselas, vice president, who
has been at J.P. Morgan since 1987, and Elaine B. Young, vice president, who
joined J.P. Morgan from Scudder, Stevens & Clark, Inc. in 1994 where she was a
municipal bond trader and fixed income portfolio manager. Both have been on the
team since June 1997.
- --------------------------------------------------------------------------------
Before you invest
Investors considering the fund should understand that:
o There is no assurance that the fund will meet its investment goal.
o The fund does not represent a complete investment program.
14 J.P. MORGAN CALIFORNIA BOND FUND
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE (unaudited)
The bar chart and table shown below provide some indication of the risks of
investing in J.P. Morgan California Bond Fund.
The bar chart indicates the risks by showing changes in the performance of the
fund's shares from year to year for each of the last 2 calendar years.
The table indicates the risks by showing changes in how the fund's average
annual returns for the past year compare to those of the Lehman Brothers 1-16
Year Municipal Bond Index. This is a widely recognized, unmanaged index of
general obligation and revenue bonds with maturities of 1-16 years used as a
measure of overall tax-exempt bond market performance. The fund's past
performance does not necessarily indicate how the fund will perform in the
future.
Total return (%) Shows changes in returns by calendar year(1),(2)
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1998
10% 7.72
5% 5.48
0%
- --------------------------------------------------------------------------------
</TABLE>
o J.P. MORGAN CALIFORNIA BOND FUND: SELECT SHARES(1)
(a separate class of shares)
For the period covered by this total return chart, the fund's highest quarterly
return was 3.46% (for the quarter ended 9/30/98) and the lowest quarterly return
was -0.34% (for the quarter ended 3/31/97).
Average annual total return (%)Shows performance over time, for period ended
December 31, 1998(1)
<TABLE>
<CAPTION>
<S> <C> <C>
Past 1 yr. Life of fund
J.P. Morgan California Bond
Fund: Select Shares (a separate
class of shares) (after expenses) 5.48 6.54
- --------------------------------------------------------------------------------
Lehman Brothers 1-16 Year
Municipal Bond Index (no expenses) 6.25 7.11
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
INVESTOR EXPENSES
The expenses of the fund before reimbursement are shown at right. The fund has
no sales, redemption, exchange, or account fees, although some institutions may
charge you a fee for shares you buy through them. The annual fund expenses after
reimbursement are deducted from fund assets prior to performance calculations.
Annual fund operating expenses(3) (%)
(expenses that are deducted from fund assets)
Management fees 0.30
Marketing (12b-1) fees none
Other expenses(4) 0.70
- --------------------------------------------------------------------------------
Total annual fund
operating expenses(4) 1.00
- --------------------------------------------------------------------------------
Expense example
The example below is intended to help you compare the cost of investing in the
fund with the cost of investing in other mutual funds. The example assumes:
$10,000 initial investment, 5% return each year, total operating expenses
(before reimbursement) unchanged, and all shares sold at the end of each time
period. The example is for comparison only; the fund's actual return and your
actual costs may be higher or lower.
- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 102 318 553 1225
- --------------------------------------------------------------------------------
(1) The fund commenced operations on 4/21/97 and returns reflect performance of
J.P. Morgan California Bond Fund: Institutional Shares (a separate class of
shares) from 12/31/96 through 12/31/97. Performance during this period
reflects operating expenses which are 0.20% of net assets lower than those
of the fund. Accordingly, performance returns for the fund would have been
lower if an investment had been made in the fund during the same time
period.
(2) The fund's fiscal year end is 4/30.
(3) This table shows expenses for the past fiscal year before reimbursement,
expressed as a percentage of average net assets.
(4) After reimbursement, other expenses and total operating expenses are 0.35%
and 0.65%, respectively. This reimbursement arrangement can be changed or
terminated at any time at the option of J.P. Morgan.
J.P. MORGAN CALIFORNIA BOND FUND 15
<PAGE>
FIXED INCOME MANAGEMENT APPROACH
- --------------------------------------------------------------------------------
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 $316 billion in assets under management,
including assets managed by the funds' advisor, J.P. Morgan Investment
Management Inc.
J.P. MORGAN FIXED INCOME FUNDS
These funds invest primarily in bonds and other fixed income securities, either
directly or through a master portfolio (another fund with the same goal). The
funds seek high total return or high current income. While each fund follows its
own strategy, the funds as a group share a single investment philosophy. This
philosophy, developed by the funds' advisor, emphasizes the potential for
consistently enhancing performance while managing risk.
THE SPECTRUM OF FIXED INCOME FUNDS
The funds described in this prospectus pursue different goals and offer varying
degrees of risk and potential reward. The table below shows degrees of the
relative risk and return that these funds potentially offer. These and other
distinguishing features of each fixed income fund were described on the
preceding pages. Differences among these funds include:
o the types of securities they hold
o the tax status of the income they offer
o the relative emphasis on current income versus total return
Potential risk and return
o Emerging Markets Debt Fund
o Global Strategic Income Fund
o New York Tax Exempt Bond Fund*
o California Bond Fund*
o Tax Exempt Bond Fund*
o Bond Fund
o Short Term Bond Fund
Return (after taxes)
Risk
The positions of the funds in this graph reflect long-term performance goals
only, and are relative, not absolute.
* Based on tax-equivalent returns for an investor in the highest income tax
bracket.
- --------------------------------------------------------------------------------
Who May Want to Invest
The funds are designed for investors who:
o want to add an income investment to further diversify a portfolio
o want an investment whose risk/return potential is higher than that of money
market funds but generally less than that of stock funds
o want an investment that pays monthly dividends
o with regard to the Tax Exempt Bond Fund, are seeking income that is exempt
from federal personal income tax
o with regard to the state-specific funds, are seeking income that is exempt
from federal, state, and local (if applicable) personal income taxes in New
York or California
The funds are not designed for investors who:
o are investing for aggressive long-term growth
o require stability of principal
o with regard to the Global Strategic Income or Emerging Markets Debt funds, are
not prepared to accept a higher degree of risk than most traditional bond
funds
o with regard to the federal or state tax-exempt funds, are investing through a
tax-deferred account such as an IRA
16 FIXED INCOME MANAGEMENT APPROACH
<PAGE>
- --------------------------------------------------------------------------------
FIXED INCOME INVESTMENT PROCESS
J.P. Morgan seeks to generate an information advantage through the depth of its
global fixed-income research and the sophistication of its analytical systems.
Using a team-oriented approach, J.P. Morgan seeks to gain insights in a broad
range of distinct areas, and when consistent with a fund's investment approach,
takes positions in many different areas, helping the funds to limit exposure to
concentrated sources of risk.
In managing the funds described in this prospectus, J.P. Morgan employs a
three-step process that combines sector allocation, fundamental research for
identifying portfolio securities, and duration management.
The funds invest across a range of
different types of securities
Sector allocation The sector allocation team meets monthly, analyzing the
fundamentals of a broad range of sectors in which a fund may invest. The team
seeks to enhance performance and manage risk by underweighting or overweighting
sectors.
Each fund makes its portfolio decisions
as described earlier in this prospectus
Security selection Relying on the insights of different specialists, including
credit analysts, quantitative researchers, and dedicated fixed income traders,
the portfolio managers make buy and sell decisions according to each fund's goal
and strategy.
J.P. Morgan uses a disciplined process
to control each fund's sensitivity
to interest rates
Duration management Forecasting teams use fundamental economic factors to
develop strategic forecasts of the direction of interest rates. Based on these
forecasts, strategists establish each fund's target duration, a common
measurement of a security's sensitivity to interest rate movements. For
securities owned by a fund, duration measures the average time needed to receive
the present value of all principal and interest payments by analyzing cash flows
and interest rate movements. A fund's duration is generally shorter than a
fund's average maturity because the maturity of a security only measures the
time until final payment is due. Each fund's target duration typically remains
relatively close to the duration of the market as a whole, as represented by the
fund's benchmark. The strategists closely monitor the funds and make tactical
adjustments as necessary.
FIXED INCOME MANAGEMENT APPROACH 17
<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 THROUGH AN EMPLOYER-SPONSORED RETIREMENT PLAN
Your fund investments are handled through your plan. Refer to your plan
materials or contact your benefits office for information on buying, selling, or
exchanging fund shares.
INVESTING THROUGH AN IRA OR ROLLOVER IRA
Please contact a J.P. Morgan Retirement Services Specialist at 1-888-576-4472
for information on J.P. Morgan's comprehensive IRA services, including lower
minimum investments.
INVESTING DIRECTLY
Investors may establish accounts without the help of an intermediary by using
the instructions below and at right:
o Choose a fund (or funds) and determine the amount you are investing. The
minimum amount for initial investments in a 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.
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 1-800-521-5411.
<PAGE>
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:
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
o Make out a check for the investment amount payable to J.P. Morgan Funds.
o Mail the check with your completed application to the Transfer 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 Funds.
o 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
o Call the Shareholder Services Agent to effect an exchange.
18 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 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 the 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.
By exchange
o Call the Shareholder Services Agent to effect an exchange.
Redemption In Kind
o Each fund reserves the right to make redemptions of over $250,000 in
securities rather than in cash.
<PAGE>
- --------------------------------------------------------------------------------
ACCOUNT AND TRANSACTION POLICIES
Telephone orders The funds accept telephone orders from all shareholders. To
guard against fraud, the funds require shareholders to use a PIN, and may record
telephone orders or take other reasonable precautions. However, if a fund does
take such steps to ensure the authenticity of an order, you may bear any loss if
the order later proves fraudulent.
Exchanges You may exchange shares in these funds for shares in any other J.P.
Morgan or J.P. Morgan Institutional mutual fund at no charge (subject to the
securities laws of your state). When making exchanges, it is important to
observe any applicable minimums. Keep in mind that for tax purposes an exchange
is considered a sale. A fund may alter, limit, or suspend its exchange policy at
any time.
Business hours and NAV calculations The funds' regular business days and hours
are the same as those of the New York Stock Exchange (NYSE). Each 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). Each fund's
securities are typically priced using pricing services or market quotes. When
these methods are not available or do not represent a security's value at the
time of pricing (e.g. when an event occurs after the close of trading that would
materially impact a security's value), 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. A 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 19
<PAGE>
- --------------------------------------------------------------------------------
Timing of settlements When you buy shares, you will become the owner of record
when a fund receives your payment, generally the day following execution. When
you sell shares, proceeds are generally available the day following execution
and will be forwarded according to your instructions.
When you sell shares that you recently purchased by check, your order will be
executed at the next NAV but the proceeds will not be available until your check
clears. This may take up to 15 days.
Statements and reports The funds send monthly account statements as well as
confirmations after each purchase or sale of shares (except reinvestments).
Every six months each fund sends out an annual or semi-annual report containing
information on its 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), each 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, each fund reserves the right to close out your account
and send the proceeds to the address of record.
DIVIDENDS AND DISTRIBUTIONS
Income dividends are typically declared daily and paid monthly. If an investor's
shares are redeemed during the month, accrued but unpaid dividends are paid with
the redemption proceeds. Shares of a fund earn dividends on the business day the
purchase is effective, but not on the business day the redemption is effective.
Each fund distributes capital gains, if any, once a year. However, a fund may
make more or fewer payments in a given year, depending on its investment results
and its tax compliance situation. Each fund's dividends and distributions
consist of most or all of its 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.
<PAGE>
TAX CONSIDERATIONS
In general, selling shares, 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 from the Exempt from federal, state,
New York Tax Exempt Bond and New York City personal
Fund income taxes for New York
residents only
- --------------------------------------------------------------------------------
Income dividends from the Exempt from federal and state
California Bond Fund personal income taxes for
California residents only
- --------------------------------------------------------------------------------
Income dividends from the Exempt from federal personal
Tax Exempt Bond Fund income taxes
- --------------------------------------------------------------------------------
Income dividends from Ordinary income
all other funds
- --------------------------------------------------------------------------------
Short-term capital gains Ordinary income
distributions
- --------------------------------------------------------------------------------
Long-term capital gains Capital gains
distributions
- --------------------------------------------------------------------------------
Sales or exchanges of Capital gains or
shares owned for more losses
than one year
- --------------------------------------------------------------------------------
Sales or exchanges of Gains are treated as ordinary
shares owned for one year income; losses are subject
or less 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 a fund is about to declare a long-term capital
gains distribution. A portion of the Tax Exempt Bond, New York Tax Exempt Bond
and California Bond funds' returns may be subject to federal, state, or local
tax, or the alternative minimum tax. Every January, each fund issues tax
information on its distributions for the previous year. Any investor for whom a
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.
20 YOUR INVESTMENT
<PAGE>
FUND DETAILS
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
As noted earlier, each fund (except the California Bond Fund) is a series of
J.P. Morgan Funds, a Massachussetts business trust, and a "feeder" fund that
invests in a master portfolio. (Except where indicated, this prospectus uses the
term "the fund" to mean the feeder fund and its master portfolio taken
together.)
Each master portfolio accepts investments from other feeder funds, and all the
feeders of a given master portfolio bear the portfolio's expenses in proportion
to their assets. However, each feeder can set its own transaction minimums,
fund-specific expenses and other conditions. This means that one feeder could
offer access to the same master portfolio on more attractive terms, or could
experience better performance, than another feeder. Information about other
feeders is available by calling 1-800-521-5411. Generally, when a master
portfolio seeks a vote, each of its feeder funds will hold a shareholder meeting
and cast its vote proportionately, as instructed by its shareholders. Fund
shareholders are entitled to one full or fractional vote for each dollar or
fraction of a dollar invested.
Each feeder fund and its master portfolio expect to maintain consistent goals,
but if they do not, the feeder fund will withdraw from the master portfolio,
receiving its assets either in cash or securities. Each feeder fund's trustees
would then consider whether it should hire its own investment adviser, invest in
a different master portfolio, or take other action.
The California Bond 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.
MANAGEMENT AND ADMINISTRATION
The feeder funds described in this prospectus, their corresponding master
portfolios, and J.P. Morgan Series Trust are all 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 each fund's other service
providers.
J.P. Morgan, subject to the expense reimbursements described earlier in this
prospectus, receives the following fees for investment advisory and other
services:
- --------------------------------------------------------------------------------
Advisory services Percentage of the master
portfolio's average net assets
- --------------------------------------------------------------------------------
Short Term Bond 0.25%
- --------------------------------------------------------------------------------
Bond 0.30%
- --------------------------------------------------------------------------------
Global Strategic Income 0.45%
- --------------------------------------------------------------------------------
Emerging Markets Debt 0.70%
- --------------------------------------------------------------------------------
Tax Exempt Bond 0.30%
- --------------------------------------------------------------------------------
New York Tax Exempt Bond 0.30%
- --------------------------------------------------------------------------------
Administrative services Master portfolio's and fund's
(fee shared with Funds pro-rata portions of 0.09% of
Distributor, Inc.) the first $7 billion of average
net assets in J.P. Morgan-
advised portfolios, plus 0.04%
of average net assets over
$7 billion
- --------------------------------------------------------------------------------
Shareholder services 0.25% of each fund's average
net assets
- --------------------------------------------------------------------------------
The California Bond Fund, subject to the expense reimbursements described
earlier in this prospectus, pays J.P. Morgan the following fees for investment
advisory and other services:
- --------------------------------------------------------------------------------
Advisory services 0.30% of each fund's average
net assets
- --------------------------------------------------------------------------------
Administrative services Fund's pro-rata portion of
(fee shared with Funds 0.09% of the first $7 billion
Distributor, Inc.) of average net assets in 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
- --------------------------------------------------------------------------------
J.P. Morgan may pay fees to certain firms and professionals for providing
recordkeeping or other services in connection with investments in a fund.
Year 2000 Fund operations and shareholders could be adversely affected if the
computer systems used by J.P. Morgan, the funds' other service providers and
other entities with computer systems linked to the funds 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 date-related problems from
adversely impacting fund operations and shareholders. In addition, to the extent
that operations of issuers of securities held by the funds 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 funds will decline.
FUND DETAILS 21
<PAGE>
- --------------------------------------------------------------------------------
(THIS PAGE IS INTENTIONALLY LEFT BLANK)
<PAGE>
- --------------------------------------------------------------------------------
RISK AND REWARD ELEMENTS
This table discusses the main elements that make up each fund's overall risk and
reward characteristics. It also outlines each fund's policies toward various
investments, including those that are designed to help certain funds manage
risk.
================================================================================
Potential risks
- --------------------------------------------------------------------------------
Market conditions
o Each fund's share price, yield, and total return will fluctuate in response to
bond market movements
o The value of most bonds will fall when interest rates rise; the longer a
bond's maturity and the lower its credit quality, the more its value typically
falls
o Adverse market conditions may from time to time cause a fund to take temporary
defensive positions that are inconsistent with its principal investment
strategies and may hinder a fund from achieving its investment objective
o Mortgage-backed and asset-backed securities (securities representing an
interest in, or secured by, a pool of mortgages or other assets such as
receivables) could generate capital losses or periods of low yields if they
are paid off substantially earlier or later than anticipated
- --------------------------------------------------------------------------------
Credit quality
o The default of an issuer would leave a fund with unpaid interest or principal
o Junk bonds (those rated BB/Ba or lower) have a higher risk of default, tend to
be less liquid, and may be more difficult to value
- --------------------------------------------------------------------------------
Foreign investments
o A fund could lose money because of foreign government actions, political
instability, or lack of adequate and accurate information
o Currency exchange rate movements could reduce gains or create losses
o Currency and investment risks tend to be higher in emerging markets
- --------------------------------------------------------------------------------
Management choices
o A fund could underperform its benchmark due to its sector, securities or
duration choices
================================================================================
Potential rewards
- --------------------------------------------------------------------------------
o Bonds have generally outperformed money market investments over the long term,
with less risk than stocks
o Most bonds will rise in value when interest rates fall
o Mortgage-backed and asset-backed securities can offer attractive returns
- --------------------------------------------------------------------------------
o Investment-grade bonds have a lower risk of default
o Junk bonds offer higher yields and higher potential gains
- --------------------------------------------------------------------------------
o Foreign bonds, which represent a major portion of the world's fixed income
securities, offer attractive potential performance and opportunities for
diversification
o Favorable exchange rate movements could generate gains or reduce losses
o Emerging markets can offer higher returns
- --------------------------------------------------------------------------------
o A fund could outperform its benchmark due to these same choices
<PAGE>
================================================================================
Policies to balance risk and reward
- --------------------------------------------------------------------------------
o Under normal circumstances the funds plan to remain fully invested in bonds
and other fixed income securities as noted in the table on pages 26-27
o The funds seek to limit risk and enhance total return or yields through
careful management, sector allocation, individual securities selection, and
duration management
o During severe market downturns, the funds have the option of investing up to
100% of assets in investment-grade short-term securities
o J.P. Morgan monitors interest rate trends, as well as geographic and
demographic information related to mortgage-backed securities and mortgage
prepayments
- --------------------------------------------------------------------------------
o Each fund maintains its own policies for balancing credit quality against
potential yields and gains in light of its investment goals
o J.P. Morgan develops its own ratings of unrated securities and makes a credit
quality determination for unrated securities
- --------------------------------------------------------------------------------
o Foreign bonds are a primary investment only for the Global Strategic Income
and Emerging Markets Debt funds and may be a significant investment for the
Short Term Bond and Bond funds; the Tax Exempt Bond, New York Tax Exempt Bond
and California Bond funds are not permitted to invest any assets in foreign
bonds
o To the extent that a fund invests in foreign bonds, it may manage the currency
exposure of its foreign investments relative to its benchmark, and may hedge a
portion of its foreign currency exposure into the U.S. dollar from time to
time (see also "Derivatives"); these currency management techniques may not be
available for certain emerging markets investments
- --------------------------------------------------------------------------------
o J.P. Morgan focuses its active management on those areas where it believes its
commitment to research can most enhance returns and manage risks in a
consistent way
24 FUND DETAILS
<PAGE>
================================================================================
Potential risks
- --------------------------------------------------------------------------------
Derivatives
o Derivatives such as futures, options, swaps and forward foreign currency
contracts that are used for hedging the portfolio or specific securities may
not fully offset the underlying positions(1) and this could result in losses
to the fund that would not have otherwise occurred
o Derivatives used for risk management may not have the intended effects and may
result in losses or missed opportunities
o The counterparty to a derivatives contract could default
o Certain types of derivatives involve costs to the funds which can reduce
returns
o Derivatives that involve leverage could magnify losses
- --------------------------------------------------------------------------------
Securities Lending
o When a fund lends a security, the loaned securities may not be returned if
the borrower defaults
o The collateral will be subject to the risks of the securities in which it is
invested
- --------------------------------------------------------------------------------
Illiquid holdings
o A fund could have difficulty valuing these holdings precisely
o A fund could be unable to sell these holdings at the time or price desired
- --------------------------------------------------------------------------------
When-issued and delayed delivery securities
o When a fund buys securities before issue or for delayed delivery, it could be
exposed to leverage risk if it does not use segregated accounts
Short-term trading
o Increased trading would raise a fund's transaction costs
o Increased short-term capital gains distributions would raise shareholders'
income tax liability
================================================================================
Potential rewards
- --------------------------------------------------------------------------------
o Hedges that correlate well with underlying positions can reduce or eliminate
losses at low cost
o A fund could make money and protect against losses if management's analysis
proves correct
o Derivatives that involve leverage could generate substantial gains at low cost
- --------------------------------------------------------------------------------
o A fund may enhance income through the investment of the collateral received
from the borrower
- --------------------------------------------------------------------------------
o These holdings may offer more attractive yields or potential growth than
comparable widely traded securities
- --------------------------------------------------------------------------------
o A fund can take advantage of attractive transaction opportunities
- --------------------------------------------------------------------------------
o A fund could realize gains in a short period of time
o A fund could protect against losses if a bond is overvalued and its value
later falls
<PAGE>
================================================================================
Policies to balance risk and reward
- --------------------------------------------------------------------------------
o The funds use derivatives, such as futures, options, swaps and forward foreign
currency contracts, for hedging and for risk management (i.e., to adjust
duration or to establish or adjust exposure to particular securities, markets,
or currencies); risk management may include management of a fund's exposure
relative to its benchmark; the Tax Exempt Bond, New York Tax Exempt Bond and
California Bond funds are permitted to enter into futures and options
transactions, however, these transactions result in taxable gains or losses so
it is expected that these funds will utilize them infrequently; forward
foreign currency contracts are not permitted to be used by the Tax Exempt
Bond, New York Tax Exempt Bond and California Bond funds
o The funds only establish hedges that they expect will be highly correlated
with underlying positions
o While the funds may use derivatives that incidentally involve leverage, they
do not use them for the specific purpose of leveraging their portfolios
- --------------------------------------------------------------------------------
o J.P. Morgan maintains a list of approved borrowers
o The fund receives collateral equal to at least 100% of the current value of
the securities loaned
o The lending agents indemnify a fund against borrower default
o J.P. Morgan's collateral investment guidelines limit the quality and duration
of collateral investment to minimize losses
o Upon recall, the borrower must return the securities loaned within the normal
settlement period
- --------------------------------------------------------------------------------
o No fund may invest more than 15% of net assets in illiquid holdings
o To maintain adequate liquidity to meet redemptions, each fund may hold
investment-grade short-term securities (including repurchase agreements and
reverse purchase agreements) and, for temporary or extraordinary purposes, may
borrow from banks up to 331/3% of the value of its total assets
- --------------------------------------------------------------------------------
o Each fund uses segregated accounts to offset leverage risk
- --------------------------------------------------------------------------------
o The expected turnover rate for each fund is as follows:
o Tax Exempt Bond 50%
o New York Tax Exempt Bond, California Bond 75%
o Short Term Bond, Bond, Global Strategic Income 300%
o Emerging Markets Debt 350%
o The funds generally avoid short-term trading, except to take advantage of
attractive or unexpected opportunities or to meet demands generated by
shareholder activity
- --------------------------------------------------------------------------------
(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. A swap is a privately negotiated agreement to exchange
one stream of payments for another. A forward foreign currency contract is
an obligation to buy or sell a given currency on a future date and at a set
price.
FUND DETAILS 25
<PAGE>
- --------------------------------------------------------------------------------
Investments
This table discusses the customary types of investments which can be held by
each fund. In each case the principal types of risk are listed on the following
page (see below for definitions).This table reads across two pages.
- --------------------------------------------------------------------------------
Asset-backed securities Interests in a stream of payments from specific assets,
such as auto or credit card receivables.
- --------------------------------------------------------------------------------
Bank obligations Negotiable certificates of deposit, time deposits and bankers'
acceptances of domestic and foreign issuers.
- --------------------------------------------------------------------------------
Commercial paper Unsecured short term debt issued by domestic and foreign banks
or corporations. These securities are usually discounted and are rated by S&P or
Moody's.
- --------------------------------------------------------------------------------
Convertible securities Domestic and foreign debt securities that can be
converted into equity securities at a future time and price.
- --------------------------------------------------------------------------------
Corporate bonds Debt securities of domestic and foreign industrial, utility,
banking, and other financial institutions.
- --------------------------------------------------------------------------------
Mortgages (directly held) Domestic debt instrument which gives the lender a lien
on property as security for the loan payment.
- --------------------------------------------------------------------------------
Mortgage-backed securities Domestic and foreign securities (such as Ginnie Maes,
Freddie Macs, Fannie Maes) which represent interests in pools of mortgages,
whereby the principal and interest paid every month is passed through to the
holder of the securities.
- --------------------------------------------------------------------------------
Mortgage dollar rolls The purchase of mortgage-backed securities with the
promise to purchase similar securities upon the maturity of the original
security. Segregated accounts are used to offset leverage risk.
- --------------------------------------------------------------------------------
Participation interests Interests that represent a share of bank debt or similar
securities or obligations.
- --------------------------------------------------------------------------------
Private placements Bonds or other investments that are sold directly to an
institutional investor.
- --------------------------------------------------------------------------------
REITs and other real-estate related instruments Securities of issuers that
invest in real estate or are secured by real estate.
- --------------------------------------------------------------------------------
Repurchase agreements Contracts whereby the fund agrees to purchase a security
and resell it to the seller on a particular date and at a specific price.
- --------------------------------------------------------------------------------
Reverse repurchase agreements Reverse repurchase agreements contracts whereby
the fund sells a security and agrees to repurchase it from the buyer on a
particular date and at a specific price. Considered a form of borrowing.
- --------------------------------------------------------------------------------
Sovereign debt, Brady bonds, and debt of supranational organizations Dollar- or
non-dollar-denominated securities issued by foreign governments or supranational
organizations. Brady bonds are issued in connection with debt restructurings.
- --------------------------------------------------------------------------------
Swaps Contractual agreement whereby a party agrees to exchange periodic payments
with a counterparty. Segregated accounts are used to offset leverage risk.
- --------------------------------------------------------------------------------
Synthetic variable rate instruments Debt instruments whereby the issuer agrees
to exchange one security for another in order to change the maturity or quality
of a security in the fund.
- --------------------------------------------------------------------------------
Tax exempt municipal securities Securities, generally issued as general
obligation and revenue bonds, whose interest is exempt from federal taxation and
state and/or local taxes in the state where the securities were issued.
- --------------------------------------------------------------------------------
U.S. government securities Debt instruments (Treasury bills, notes, and bonds)
guaranteed by the U.S. government for the timely payment of principal and
interest.
- --------------------------------------------------------------------------------
Zero coupon, pay-in-kind, and deferred payment securities Domestic and foreign
securities offering non-cash or delayed-cash payment. Their prices are typically
more volatile than those of some other debt instruments and involve certain
special tax considerations.
- --------------------------------------------------------------------------------
<PAGE>
Risk related to certain investments held by J.P. Morgan fixed income funds:
Credit risk The risk a financial obligation will not be met by the issuer of a
security or the counterparty to a contract, resulting in a loss to the
purchaser.
Currency risk The risk currency exchange rate fluctuations may reduce gains or
increase losses on foreign investments.
Environmental risk The risk that an owner or operator of real estate may be
liable for the costs associated with hazardous or toxic substances located on
the property.
Extension risk The risk a rise in interest rates will extend the life of a
mortgage-backed security to a date later than the anticipated prepayment date,
causing the value of the investment to fall.
Interest rate risk The risk a change in interest rates will adversely affect the
value of an investment. The value of fixed income securities generally moves in
the opposite direction of interest rates (decreases when interest rates rise and
increases when interest rates fall).
Leverage risk The risk of gains or losses disproportionately higher than the
amount invested.
Liquidity risk The risk the holder may not be able to sell the security at the
time or price it desires.
26 FUND DETAILS
<PAGE>
- --------------------------------------------------------------------------------
o Permitted (and if applicable, percentage limitation)
percentage of total assets - bold
percentage of net assets - italic
o Permitted, but not typically used
+ Permitted, but no current intention of use
- -- Not permitted
<TABLE>
<CAPTION>
Global Emerging Tax New York
Short Term Strategic Markets Exempt Tax Exempt California
Principal Types of Risk Bond Bond Income Debt Bond Bond Bond
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
credit, interest rate, market, prepayment o o o o o o o
- ------------------------------------------------------------------------------------------------------------------------------------
credit, currency, liquidity, political o(1) o(1) o o oDomestic oDomestic o
Only Only
- ------------------------------------------------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity,
market, political o o o o o o o
- ------------------------------------------------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity,
market, political, valuation o25% o25% o o -- -- --
Foreign Foreign
- ------------------------------------------------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity,
market, political, valuation o25% o25% o o -- -- --
Foreign Foreign
- ------------------------------------------------------------------------------------------------------------------------------------
credit, environmental, extension, interest
rate, liquidity, market, natural event,
political, prepayment, valuation o o o + + + +
- ------------------------------------------------------------------------------------------------------------------------------------
credit, currency, extension, interest rate,
leverage, market, political, prepayment o o o o -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
currency, extension, interest rate, leverage,
liquidity, market, political, prepayment o331/3% o331/3% o331/3% -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
credit, currency, extension, interest rate,
liquidity, political, prepayment o o o o -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
credit, interest rate, liquidity, market,
valuation o o o o o o o
- ------------------------------------------------------------------------------------------------------------------------------------
credit, interest rate, liquidity, market,
natural event, prepayment, valuation o o o -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
credit o o o o o o
- ------------------------------------------------------------------------------------------------------------------------------------
credit o(3) o(3) o(3) o(3) o(3) o(3) o(3)
- ------------------------------------------------------------------------------------------------------------------------------------
credit, currency, interest rate, market,
political o o o o -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
credit, currency, interest rate, leverage,
market, political o o o o o -- --
- ------------------------------------------------------------------------------------------------------------------------------------
credit, interest rate, leverage, liquidity,
market -- -- -- -- o o o
- ------------------------------------------------------------------------------------------------------------------------------------
credit, interest rate, market, natural event,
political o o -- -- o(2) o(2) o(2)
- ------------------------------------------------------------------------------------------------------------------------------------
interest rate o o o o o o o
- ------------------------------------------------------------------------------------------------------------------------------------
credit, currency, interest rate, liquidity,
market, political, valuation o o o o o o o
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Market risk The risk that when the market as a whole declines, the value of a
specific investment will decline proportionately. This systematic risk is common
to all investments and the mutual funds that purchase them.
Natural event risk The risk a natural disaster, such as a hurricane or similar
event, will cause severe economic losses and default in payments by the issuer
of the security.
Political risk The risk governmental policies or other political actions will
negatively impact the value of the investment.
Prepayment risk The risk declining interest rates will result in unexpected
prepayments, causing the value of the investment to fall.
Valuation risk The risk the estimated value of a security does not match the
actual amount that can be realized if the security is sold.
(1) For each of the Short Term Bond and Bond funds, all foreign securities in
the aggregate may not exceed 25% of such fund's assets.
(2) At least 65% of assets must be in tax exempt securities (for New York Tax
Exempt Bond and California Bond funds, the 65% must be in New York or
California municipal securities, respectively).
(3) All forms of borrowing (including securities lending and reverse repurchase
agreements) in the aggragate may not exceed 33 1/3 of the fund's total
assets.
FUND DETAILS 27
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand each fund's
financial performance for the past one through five fiscal years or periods, as
applicable. Certain information reflects financial results for a single fund
share. The total returns in the tables represent the rate that an investor would
have earned (or lost) on an investment in a fund (assuming reinvestment of all
dividends and distributions). Except where noted, this information has been
audited by PricewaterhouseCoopers LLP, whose reports, along with each fund's
financial statements, are included in the respective fund's annual report, which
are available upon request.
- --------------------------------------------------------------------------------
J.P. MORGAN SHORT TERM BOND FUND
<TABLE>
<CAPTION>
Per-share data For fiscal periods ended October 31
- ----------------------------------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ($) 9.99 9.60 9.84 9.86 9.85
- ----------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.45 0.57 0.53 0.58 0.56
Net realized and unrealized gain (loss)
on investment and foreign currency
contracts and transactions ($) (0.39) 0.24 0.02 (0.01) .0.13
- ----------------------------------------------------------------------------------------------------------------------
Total from investment operations ($) 0.06 0.81 0.55 0.57 0.69
- ----------------------------------------------------------------------------------------------------------------------
Less distributions to shareholders from:
Net investment income ($) (0.45) (0.57) (0.53) (0.58) (0.56)
Net asset value, end of period ($) 9.60 9.84 9.86 9.85 9.98
- ----------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------------------------------
Total return (%) 0.61 8.70 5.77 5.98 7.24
- ----------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 6,008 10,330 8,207 14,519 30,984
- ----------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
Expenses (%) 0.69 0.67 0.62 0.50 0.50
- ----------------------------------------------------------------------------------------------------------------------
Net investment income (%) 4.49 5.88 5.42 5.94 5.66
- ----------------------------------------------------------------------------------------------------------------------
Expenses without reimbursement (%) 2.05 1.48 1.61 1.38 0.98
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
28 FUND DETAILS
<PAGE>
- --------------------------------------------------------------------------------
J.P. MORGAN BOND FUND
<TABLE>
<CAPTION>
Per-share data For fiscal periods ended October 31
- ---------------------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ($) 11.00 9.64 10.41 10.30 10.42
- ---------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.55 0.64 0.62 0.66 0.65
Net realized and unrealized gain (loss)
on investment and foreign currency
contracts and transactions ($) (0.91) 0.77 (0.11) 0.18 0.17
- ---------------------------------------------------------------------------------------------------------
Total from investment operations ($) (0.36) 1.41 0.51 0.84 0.82
- ---------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income ($) (0.55) (0.64) (0.62) (0.65) (0.65)
Net realized gain ($) (0.45) .-- .-- (0.07) .--
- ---------------------------------------------------------------------------------------------------------
Total distributions ($) (1.00) (0.64) (0.62) (0.72) (0.65)
- ---------------------------------------------------------------------------------------------------------
Net asset value, end of period ($) 9.64 10.41 10.30 10.42 10.59
- ---------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ---------------------------------------------------------------------------------------------------------
Total return (%) (3.50) 15.10 5.13 8.58 8.06
- ---------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 112,049 143,004 149,207 169,233 216,285
- ---------------------------------------------------------------------------------------------------------
Ratio to average net assets:
Expenses (%) 0.78 0.69 0.66 0.68 0.66
- ---------------------------------------------------------------------------------------------------------
Net investment income (%) 5.43 6.40 6.08 6.41 6.14
- ---------------------------------------------------------------------------------------------------------
Expenses without reimbursement (%) 0.79 0.69 0.66 0.68 0.66
- ---------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
J.P. MORGAN GLOBAL STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
Per-share data For fiscal period ended October 31
- --------------------------------------------------------------------------------
1998(1)
<S> <C> <C>
Net asset value, beginning of period ($) 10.21
- --------------------------------------------------------------------------------
Income from investment operations:
- --------------------------------------------------------------------------------
Net investment income ($) 0.70
Net realized and unrealized loss
on investment and foreign currency
transactions and translations ($) (0.49)
- --------------------------------------------------------------------------------
Total from investment operations ($) 0.21
- --------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income ($) (0.63)
- --------------------------------------------------------------------------------
Return of capital (0.02)
- --------------------------------------------------------------------------------
Total distributions ($) (0.65)
- --------------------------------------------------------------------------------
Net asset value, end of period ($) 9.77
- --------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------
Total return (%) 1.97(2)
- --------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 10,166
- --------------------------------------------------------------------------------
Ratio to average net assets:
Expenses (%) 1.00(3)
- --------------------------------------------------------------------------------
Net investment income (%) 6.24(3)
- --------------------------------------------------------------------------------
Expenses without reimbursement (%) 1.89(3)
- --------------------------------------------------------------------------------
</TABLE>
(1) The fund commenced operations on 11/5/97.
(2) Not annualized.
(3) Annualized.
FUND DETAILS 29
<PAGE>
- --------------------------------------------------------------------------------
J.P. MORGAN EMERGING MARKETS DEBT Fund
Per-share data For fiscal periods ended
- --------------------------------------------------------------------------------
12/31/97(1) 12/31/98
Net asset value, beginning of period ($) 10.00 9.76
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.58 1.15
Net realized and unrealized loss
on investment and foreign currency ($) (0.05) (2.64)
- --------------------------------------------------------------------------------
Total from investment operations ($) 0.53 (1.49)
- --------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income ($) (0.58) (0.81)
Excess of net investment income ($) (0.02) (0.16)
Net realized gain ($) (0.17) .--
- --------------------------------------------------------------------------------
Total distributions ($) (0.77) (0.97)
- --------------------------------------------------------------------------------
Net asset value, end of period ($) 9.76 7.30
- --------------------------------------------------------------------------------
Total return (%) 5.47(2) (15.93)
- --------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 11,978 19,313
- --------------------------------------------------------------------------------
Ratio to average net assets:
Expenses (%) 1.25(3) 1.25
- --------------------------------------------------------------------------------
Net investment income (%) 9.71(3) 10.05
- --------------------------------------------------------------------------------
Expenses without reimbursement (%) 2.40(3) 2.09
- --------------------------------------------------------------------------------
(1) The fund commenced operations on 4/17/97.
(2) Not Annualized.
(3) Annualized.
- --------------------------------------------------------------------------------
J.P. MORGAN TAX EXEMPT BOND FUND
<TABLE>
<CAPTION>
Per-share data For fiscal periods ended August 31
- --------------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ($) 12.04 11.45 11.73 11.63 11.85
- --------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.51 0.55 0.55 0.55 0.54
Net realized and unrealized gain (loss)
on investment ($) (0.35) 0.29 (0.08) 0.24 0.30
- --------------------------------------------------------------------------------------------------
Total from investment operations ($) 0.16 0.84 0.47 0.79 0.84
- --------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income ($) (0.51) (0.55) (0.55) (0.55) (0.54)
Net realized gain ($) (0.24) (0.01) (0.02) (0.02) (0.00)(1)
- --------------------------------------------------------------------------------------------------
Total distributions ($) (0.75) (0.56) (0.57) (0.57) (0.54)
- --------------------------------------------------------------------------------------------------
Net asset value, end of period ($) 11.45 11.73 11.63 11.85 12.15
- --------------------------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------------------------
Total return (%) 1.35 7.63 4.01 6.95 7.21
- --------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 392,460 352,005 369,987 401,007 439,225
- --------------------------------------------------------------------------------------------------
Ratio to average net assets:
Expenses (%) 0.71 0.71 0.64 0.64 0.64
- --------------------------------------------------------------------------------------------------
Net investment income (%) 4.39 4.87 4.67 4.67 4.44
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) Less than $0.01 per share.
30 FUND DETAILS
<PAGE>
- --------------------------------------------------------------------------------
J.P. MORGAN NEW YORK TAX EXEMPT BOND FUND
<TABLE>
<CAPTION>
Per-share data For fiscal periods ended
- --------------------------------------------------------------------------------------------------------------
3/31/95 3/31/96 3/31/97 3/31/98 9/30/98
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period ($) 10.00 10.11 10.34 10.28 10.62
Income from investment operations:
Net investment income ($) 0.40 0.46 0.46 0.46 0.22
Net realized and unrealized gain (loss)
on investment ($) 0.11 0.26 (0.03) 0.40 0.23
- --------------------------------------------------------------------------------------------------------------
Total from investment operations ($) 0.51 0.72 0.43 0.86 0.45
- --------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income ($) (0.40) (0.46) (0.46) (0.46) (0.22)
Net realized gain ($) .-- (0.03) (0.03) (0.06) --
- --------------------------------------------------------------------------------------------------------------
Total distributions ($) (0.40) (0.49) (0.49) (0.52) (0.22)
- --------------------------------------------------------------------------------------------------------------
Net asset value, end of period ($) 10.11 10.34 10.28 10.62 10.85
- --------------------------------------------------------------------------------------------------------------
Total return (%) 5.26(2) 7.16 4.19 8.49 4.27(2)
- --------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 38,137 50,523 56,198 85,161 100,330
- --------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
Expenses (%) 0.75(3) 0.75 0.75 0.71 0.70(3)
- --------------------------------------------------------------------------------------------------------------
Net investment income (%) 4.31(3) 4.43 4.44 4.33 4.10(3)
- --------------------------------------------------------------------------------------------------------------
Expenses without reimbursement (%) 0.97(3) 0.79 0.81 0.77 0.73(3)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The fund commenced operations on 4/11/94.
(2) Not Annualized.
(3) Annualized.
FUND DETAILS 31
<PAGE>
- --------------------------------------------------------------------------------
J.P. MORGAN CALIFORNIA BOND FUND
Per-share data For fiscal periods ended
- --------------------------------------------------------------------------------
4/30/97 4/30/98 10/31/98
(unaudited)
Net asset value, beginning of period ($) 10.00 10.04 10.35
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.01 0.41 0.20
Net realized and unrealized gain (loss)
on investment ($) 0.04 0.31 0.34
- --------------------------------------------------------------------------------
Total from investment operations ($) 0.05 0.72 0.54
- --------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income ($) (0.01) (0.41) (0.20)
Net asset value, end of period ($) 10.04 10.35 10.69
- --------------------------------------------------------------------------------
Total return (%) 0.51(2) 7.20 5.26(2)
- --------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 302 5,811 15,556
- --------------------------------------------------------------------------------
Ratio to average net assets:
Expenses (%) 0.62(3) 0.65 0.65(3)
- --------------------------------------------------------------------------------
Net investment income (%) 4.52(3) 3.94 3.79(3)
- --------------------------------------------------------------------------------
Expenses without reimbursement (%) 1.17(3) 1.00 0.90
- --------------------------------------------------------------------------------
Portfolio turnover (%) 40(2) 44 27
- --------------------------------------------------------------------------------
(1) The fund commenced operations on 4/21/97.
(2) Not Annualized.
(3) Annualized.
32 FUND DETAILS
<PAGE>
(THIS PAGE IS INTENTIONALLY LEFT BLANK)
FUND DETAILS 33
<PAGE>
FOR MORE INFORMATION
For investors who want more information on these funds, 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 a fund's most recently completed fiscal year or
half-year.
Statement of Additional Information (SAI) Provides a fuller technical and legal
description of a fund's policies, investment restrictions, and business
structure. This prospectus incorporates each fund's 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 Funds
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
funds' investment company and 1933 Act registration numbers are:
J.P. Morgan Short Term Bond Fund .................. 811-07340 and 033-54632
J.P. Morgan Bond Fund ............................. 811-07340 and 033-54632
J.P. Morgan Global Strategic Income Fund .......... 811-07340 and 033-54632
J.P. Morgan Emerging Markets Debt Fund ............ 811-07340 and 033-54632
J.P. Morgan Tax Exempt Bond Fund .................. 811-07340 and 033-54632
J.P. Morgan New York Tax Exempt Bond Fund ......... 811-07340 and 033-54632
J.P. Morgan California Bond Fund .................. 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.
JP 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
MARCH 1, 1999
PROSPECTUS
J.P. MORGAN GLOBAL 50 FUND
- ------------------------------
A global equity fund seeking high
total return from a concentrated
portfolio of stocks
This prospectus contains essential information for anyone investing in the fund.
Please read it carefully and keep it for reference.
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 or guarantees that the information in this prospectus is correct or
adequate. It is a criminal offense for anyone to state or suggest otherwise.
Distributed by Funds Distributor, Inc.
JPMorgan
<PAGE>
Contents
- --------------------------------------------------------------------------------
2
The fund's goal, investment
approach, risks and expenses
J.P. MORGAN GLOBAL 50 FUND
Fund description ............................................................ 2
Investor expenses ........................................................... 3
4
GLOBAL EQUITY MANAGEMENT APPROACH
J.P. Morgan ................................................................. 4
J.P. Morgan global equity funds ............................................. 4
Who may want to invest ...................................................... 4
Global equity investment process ............................................ 5
6
Investing in the J.P. Morgan
Global 50 Fund
YOUR INVESTMENT
Investing through a financial professional .................................. 6
Investing through an employer-sponsored retirement plan ..................... 6
Investing through an IRA or rollover IRA .................................... 6
Investing directly .......................................................... 6
Opening your account ........................................................ 6
Adding to your account ...................................................... 6
Selling shares .............................................................. 7
Account and transaction policies ............................................ 7
Dividends and distributions ................................................. 8
Tax considerations .......................................................... 8
9
More about risk and the fund's
business operations
FUND DETAILS
Business structure .......................................................... 9
Management and administration ............................................... 9
Risk and reward elements .................................................... 10
Financial highlights ........................................................ 12
FOR MORE INFORMATION ............................................... back cover
1
<PAGE>
J.P. MORGAN GLOBAL 50 FUND
- --------------------------------------------------------------------------------
RISK/RETURN SUMMARY
For a more detailed discussion of the fund's investments and their main risks,
as well as fund strategies, please see pages 10-11.
GOAL
The fund seeks to provide high total return from a concentrated portfolio of
global equity securities. This goal can be changed without shareholder approval.
INVESTMENT
Approach The fund invests in approximately fifty stocks of primarily large and
mid-cap companies located throughout the world. Using its global perspective,
J.P. Morgan uses the investment process described on page 5 to identify those
stocks which in its view have an exceptional return potential.
Under normal conditions, the fund invests in stocks of at least 3 countries,
including the United States, and in a variety of industries; the fund is not
constrained by geographic limits and will not concentrate in any one industry.
The fund may invest in both developed and emerging markets. The fund may invest
substantially in securities denominated in foreign currencies and actively seeks
to enhance returns through managing currency exposure.
The value of your investment in the fund will fluctuate in response to movements
in global stock markets. Fund performance will also depend on the effectiveness
of J.P. Morgan's research and the management team's stock picking decisions.
The fund may invest in fewer stocks than other global equity funds. This
concentration increases the risk and potential of the fund. With a concentrated
portfolio of securities, it is possible that the fund could have returns that
are significantly more volatile than relevant market indices and other, more
diversified mutual funds. Because the fund holds a relatively small number of
securities, a large movement in the price of a stock in the portfolio could have
a larger impact on the fund's share price then would occur if the fund held more
securities.
In general, international investing involves higher risks than investing in U.S.
markets but offers attractive opportunities for diversification. Foreign markets
tend to be more volatile than those of the U.S., and changes in currency
exchange rates could impact market performance. These risks are higher in
emerging markets. To the extent that the fund hedges its currency exposure into
the U.S. dollar, it may reduce the effects of currency fluctuations. The fund
may also hedge from one foreign currency to another, although emerging markets
investments are typically unhedged.
An investment in the fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. You could lose money if you sell when the Fund's share price is lower
than when you invested.
PORTFOLIO MANAGEMENT
The fund's assets are managed by
J.P. Morgan, which currently manages over $316 billion.
The portfolio management team is led by Andrew Cormie, vice president, who has
been an international equity portfolio manager since 1977 and employed by J.P.
Morgan since 1984, Thomas Madsen, managing director, who has been an
international equity portfolio manager since 1984 and employed by J.P. Morgan
since 1979 and Shawn Lytle, vice president, who has been an international equity
portfolio manager since 1998 and employed by J.P. Morgan since 1992.
- --------------------------------------------------------------------------------
Before you invest
Investors considering the fund should understand that:
o There is no assurance that the fund will meet its investment goal.
o The fund does not represent a complete investment program.
2 J.P. MORGAN GLOBAL 50 FUND
<PAGE>
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
The expenses of the fund before reimbursement are shown at right. The fund has
no sales, redemption, exchange, or account fees, although some institutions may
charge you a fee for shares you buy through them. The annual fund expenses after
reimbursement are deducted from fund assets prior to performance calculations.
Annual fund operating expenses(1) (%)
(expenses that are deducted from fund assets)
Management fees 1.25
Marketing (12b-1) fees none
Other expenses(2) 0.82
- --------------------------------------------------------------------
Total annual fund
operating expenses(2) 2.07
- --------------------------------------------------------------------
Expense example
The example below is intended to help you compare the cost of investing in the
fund with the cost of investing in other mutual funds. The example assumes:
$10,000 initial investment, 5% return each year, total operating expenses
(before reimbursement) unchanged, and all shares sold at the end of each time
period. The example is for comparison only; the fund's actual return and your
actual costs may be higher or lower.
- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 210 649 1114 2400
- --------------------------------------------------------------------------------
(1) This table shows the fund's expenses for the past fiscal year ended
10/31/98 before reimbursement, expressed as a percentage of the fund's
average net assets.
(2) After reimbursement, other expenses and total operating expenses are 0.25%
and 1.50%, respectively. This reimbursement arrangement can be changed or
terminated at any time at the option of J.P. Morgan.
J.P. MORGAN GLOBAL 50 FUND 3
<PAGE>
GLOBAL EQUITY MANAGEMENT APPROACH
- --------------------------------------------------------------------------------
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 $316 billion in assets under management,
including assets managed by the fund's advisor, J.P. Morgan Investment
Management, Inc.
J.P. MORGAN GLOBAL 50 FUND
This fund invests in approximately fifty U.S. and foreign stocks. As a
shareholder, you should anticipate risks and rewards beyond those of a typical
equity fund investing solely in U.S. stocks.
- --------------------------------------------------------------------------------
WHO MAY WANT TO INVEST
The fund is designed for investors who:
o are pursuing a long-term goal
o want to add a global investment with growth potential to further diversify
a portfolio
o are looking for the added rewards and are willing to accept the added risks of
a fund that invests in a relatively small number of stocks
The fund is not designed for investors who:
o require regular income or stability of principal
o are pursuing a short-term goal or investing emergency reserves
o are uncomfortable with the risks of international investing
o are looking for a less aggressive stock investment
o want a fund that consistently focuses on particular industries or sectors
4 GLOBAL EQUITY MANAGEMENT APPROACH
<PAGE>
J.P. Morgan, as advisor, selects the fifty stocks for the fund's investments
using the investment process described below to determine which companies are
most likely to provide high total return to shareholders. In order to maximize
return potential, the fund is not constrained by geographic limits and will not
concentrate in any one industry; the fund may invest in both developed and
emerging markets.
GLOBAL EQUITY INVESTMENT PROCESS
J.P. Morgan analysts develop proprietary
fundamental research
Research and valuation Research findings allow J.P. Morgan to rank companies
according to their relative value; combined with J.P. Morgan's qualitative view,
the most attractive investment opportunities in a universe of 2,500 stocks are
identified.
J.P. Morgan takes an in-depth look at company prospects over a relatively long
period -- often as much as five years --rather than focusing on near-term
expectations. This approach is designed to provide insight into a company's
growth potential. J.P. Morgan's in-house research is developed by an extensive
worldwide network of over 85 career analysts following 2,500 stocks in 22
countries. J.P. Morgan produces valuation rankings of issuers with a market
capitalization generally greater than $1.5 billion with the help of a variety of
models that quantify its research team's findings.
Using research and valuations,
the fund's management team
chooses stocks for its fund
Stock selection Using research as the basis for investment decisions, J.P.
Morgan portfolio managers construct a concentrated stock portfolio representing
companies which in their view have an exceptional return potential relative to
other companies. J.P. Morgan's stock selection focuses on highly rated
undervalued companies which also meet certain other criteria, such as
responsiveness to industry themes (e.g. consolidation/restructuring), conviction
in management, the company's product positioning, and catalysts that may
positively affect a stock's performance over the next twelve months.
Morgan may adjust currency exposure
to seek to manage risks and
enhance returns
Currency management J.P. Morgan actively manages the fund's currency exposure in
an effort to manage risk and enhance total return. The fund has access to J.P.
Morgan's currency specialists to determine the extent and nature of its exposure
to various foreign currencies.
GLOBAL EQUITY MANAGEMENT APPROACH 5
<PAGE>
YOUR INVESTMENT
- --------------------------------------------------------------------------------
For your convenience, the J.P. Morgan Funds offer several ways to start and
maintain fund investments.
INVESTING THROUGH A FINANCIAL PROFESSIONAL
If you work with a financial professional, either at J.P. Morgan or elsewhere,
he or she is prepared to handle your planning and transaction needs. Your
financial professional will be able to assist you in establishing your fund
account, executing transactions, and monitoring your investment. If your fund
investment is not held in the name of your financial professional and you prefer
to place a transaction order yourself, please use the instructions for investing
directly.
INVESTING THROUGH AN EMPLOYER-SPONSORED RETIREMENT PLAN
Your fund investments are handled through your plan. Refer to your plan
materials or contact your benefits office for information on buying, selling, or
exchanging fund shares.
INVESTING THROUGH AN IRA OR ROLLOVER IRA
Please contact a J.P. Morgan Retirement Services Specialist at 1-888-576-4472
for information on J.P. Morgan's comprehensive IRA services, including lower
minimum investments.
INVESTING DIRECTLY
Investors may establish accounts without the help of an intermediary by using
the instructions below and at right:
o 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.
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 1-800-521-5411.
<PAGE>
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:
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
o Make out a check for the investment amount payable to J.P. Morgan Funds.
o Mail the check with your completed application to the Transfer Agent.
By exchange
o Call the Shareholder Services Agent for 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 Funds.
o 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
o Call the Shareholder Services Agent for an exchange.
6 YOUR INVESTMENT
<PAGE>
- --------------------------------------------------------------------------------
SELLING SHARES
By wire
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
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.
By exchange
o Call the Shareholder Services Agent to effect an exchange.
Redemption in kind
o The fund reserves the right to make redemptions of over $250,000 in securities
rather than in cash.
<PAGE>
- --------------------------------------------------------------------------------
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.
Exchanges You may exchange shares in this fund for shares in any other J.P.
Morgan or J.P. Morgan Institutional mutual fund at no charge (subject to the
securities laws of your state). When making exchanges, it is important to
observe any applicable minimums. Keep in mind that for tax purposes an exchange
is considered a sale.
The fund may alter, limit, or suspend its exchange policy at any time.
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 (generally 4:00 p.m. eastern time).
The fund's securities are typically priced using pricing services or
market quotes. When these methods are not available or do not represent a
security's value at the time of pricing (e.g., when an event occurs after the
close of trading that would materially impact a security's value), 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 (generally 4:00 p.m.) every business day and are
executed the same day, at that day's NAV. The fund has the right to suspend
redemption of shares and to postpone payment of proceeds for up to seven days or
as permitted by law.
- --------------------------------------------------------------------------------
Transfer Agent Shareholder Services Agent
State Street Bank and Trust Company J.P. Morgan Funds Services
P.O. Box 8411 522 Fifth Avenue
Boston, MA 02266-8411 New York, NY 10036
Attention: J.P. Morgan Funds Services 1-800-521-5411
Representatives are available 8:00 a.m. to 5:00 p.m. eastern
time on fund business days.
YOUR INVESTMENT 7
<PAGE>
- --------------------------------------------------------------------------------
Timing of settlements When you buy shares, you will become the owner of record
when the fund receives your payment, generally the day following execution. When
you sell shares, the proceeds are generally available the day following
execution and will be forwarded according to your instructions.
When you sell shares that you recently purchased by check, your order will be
executed at the next NAV but the proceeds will not be available until your check
clears. This may take up to 15 days.
Statements and reports The fund sends monthly account statements as well as
confirmations after each purchase or sale of shares (except reinvestments).
Every six months the fund sends out an annual or semi-annual report, containing
information on the fund's holdings and a discussion of recent and anticipated
market conditions and fund performance.
Accounts with below-minimum balances If your account balance falls below the
minimum for 30 days as a result of selling shares (and not because of
performance), the fund may request that you buy more shares or close your
account. If your account balance is still below the minimum 60 days after
notification, the fund 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 and makes capital gains distributions,
if any, once per year (usually in December). The fund may declare an additional
income dividend in a given year, depending on its tax situation. However, the
fund may also make fewer payments in a given year, depending on its investment
results. 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.
<PAGE>
TAX CONSIDERATIONS
In general, selling shares, 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 certain
fund officers. J.P. Morgan, as co-administrator, oversees the fund's other
service providers.
J.P. Morgan, subject to the expense reimbursements described earlier in this
prospectus, receives the following fees for investment advisory and other
services:
- --------------------------------------------------------------------------------
Advisory services 1.25% of the fund's
average net assets
- --------------------------------------------------------------------------------
Administrative services Fund's pro-rata portion of
(fee shared with Funds 0.09% of the first $7 billion
Distributor, Inc.) of average net assets in
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
- --------------------------------------------------------------------------------
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 date-related 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 identifies the main elements that make up the fund's overall risk and
reward characteristics. It also out-lines the fund's policies toward various
investments, including those that are designed to help the fund manage risk.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Potential risks Potential rewards Policies to balance risk and reward
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Foreign and other market
conditions
o The fund's share price o Stocks have generally o Under normal circumstances the fund plans to remain fully
and performance will outperformed more invested, with at least 65% in stocks of at least three
fluctuate in response stable investments countries, including the United States; stock investments
to stock market (such as bonds and may include convertible securities, preferred stocks,
movements cash equivalents) over depository receipts (such as ADRs and EDRs), trust or
the long term partnership interests, warrants, rights, and investment
o The fund could lose company securities
money because of o Foreign investments,
foreign government which represent a o During severe market downturns, the fund has the option of
actions, political major portion of the investing up to 100% of assets in investment-grade
instability, or lack world's securities, short-term securities
of adequate and/or offer attractive
accurate information potential performance
and opportunities for
o Investment risks tend diversification
to be higher in
emerging markets. o Emerging markets can
These markets also offer higher returns
present higher
liquidity and o These same stocks
valuation risks could outperform the
general market and
o The fund invests in a provide greater
relatively small returns than more
number of stocks. If diversified funds
these stocks
underperform the
general market, the
fund could
underperform more
diversified funds
o Adverse market
conditions may from
time to time cause the
fund to take temporary
defensive positions
that are inconsistent
with its principal
investment strategies
and may hinder the
fund from achieving
its investment
objective
- -----------------------------------------------------------------------------------------------------------------------------
Foreign currencies
o Currency exchange rate o Favorable exchange o The fund actively manages the currency exposure of its
movements could reduce rate movements could foreign investments and may hedge a portion of its foreign
gains or create losses generate gains or currency exposure into the U.S. dollar or other currencies
reduce losses which the Advisor deems more attractive (see also
o Currency risks tend to "Derivatives")
be higher in emerging
markets
- -----------------------------------------------------------------------------------------------------------------------------
Securities Lending
o When a fund lends a security, o The fund may enhance o J.P. Morgan maintains a list of approved borrowers
the loaned securities may not income through the
be returned if the borrower investment of the o The lending agents idemnify the fund against borrower
defaults collateral received default
from the borrower
o J.P. Morgan's collateral investment guidelines limit the
quality and duration of collateral investments
to minimize losses
o The collateral will be subject
to the risks of the securities o The fund receives collateral equal to at least 100%
in which it is invested of the current value of the securities loaned
o Upon recall, the borrower must return the securities loaned
within the normal settlement period
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
10 FUND DETAILS
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Potential risks Potential rewards Policies to balance risk and reward
Derivatives
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
o Derivatives such as o Hedges that correlate o The fund uses derivatives, such as futures, options,
futures, options, well with underlying swaps, and forward foreign currency contracts, for hedging
swaps, and forward positions can reduce and for risk management (i.e., to establish or adjust
foreign currency or eliminate losses at exposure to particular securities, markets or currencies)
contracts(1) that are low cost
used for hedging the o The fund only establishes hedges that it expects will be
portfolio or specific o The fund could make highly correlated with underlying positions
securities may not money and protect
fully offset the against losses if the o While the fund may use derivatives that incidentally
underlying positions investment analysis involve leverage, it does not use them for the specific
and this could result proves correct purpose of leveraging its portfolio
in losses to the fund
that would not have o Derivatives that
otherwise occurred involve leverage could
generate substantial
o Derivatives used for gains at low cost
risk management may
not have the intended
effects and may result
in losses or missed
opportunities
o The counterparty to a
derivatives contract
could default
o Derivatives that
involve leverage could
magnify losses
o Certain types of
derivatives involve
costs to the fund
which can reduce
returns
- ----------------------------------------------------------------------------------------------------------------------------------
Illiquid holdings
o The fund could have o These holdings may o The fund may not invest more than 15% of net assets in
difficulty valuing offer more attractive illiquid holdings
these holdings yields or potential
precisely growth than comparable o To maintain adequate liquidity, the fund may hold
widely traded investment-grade short-term securities (including
o The fund could be securities repurchase agreements and reverse repurchase agreements)
unable to sell these and may borrow from banks up to 33 1/3% of the value of its
holdings at the time total assets
or price it desired
- ----------------------------------------------------------------------------------------------------------------------------------
When-issued and delayed
delivery securities
o When the fund buys o The fund can take o The fund uses segregated accounts to offset leverage risk
securities before advantage of
issue or for delayed attractive transaction
delivery, it could be opportunities
exposed to leverage
risk if it does not
use segregated
accounts
- ----------------------------------------------------------------------------------------------------------------------------------
Short-term trading
o Increased trading o The fund could realize o The fund anticipates a portfolio turnover rate of
could raise the fund's gains in a short approximately 100%
brokerage and related period of time
costs o The fund generally avoids short-term trading, except to
o The fund could protect take advantage of attractive or unexpected opportunities
o Increased short-term against losses if a or to meet demands generated by shareholder activity
capital gains stock is overvalued
distributions could and its value later
raise shareholders' falls
income tax liability
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) A futures contract is an agreement to buy or sell a set quantity of an
underlying instrument at a future date, or to make or receive a cash
payment based on changes in the value of a securities index. An option is
the right to buy or sell a set quantity of an underlying instrument at a
predetermined price. A swap is a privately negotiated agreement to exchange
one stream of payments for another. A forward foreign currency contract is
an obligation to buy or sell a given currency on a future date and at a set
price.
FUND DETAILS 11
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund's
financial performance for the past fiscal period. Certain information reflects
financial results for a single fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the fund (assuming reinvestment of all dividends and distributions). This
information has been audited by PricewaterhouseCoopers LLP, whose reports, along
with the fund's financial statements, are included in the fund's annual report,
which is available upon request.
J.P. MORGAN GLOBAL 50 FUND
Per-share data For fiscal period ended October 31
- --------------------------------------------------------------------------------
1998(1)
Net asset value, beginning of period ($) 15.00
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.22
Net realized and unrealized loss on investment, futures
and foreign currency contracts and transactions ($) (1.86)
- --------------------------------------------------------------------------------
Total from investment operations ($) (1.64)
- --------------------------------------------------------------------------------
Net asset value, end of period ($) 13.36
- --------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------
Total return (%) (10.93)(2)
- --------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 76,486
- --------------------------------------------------------------------------------
Ratios to average net assets:
Expenses (%) 1.50(3)
- --------------------------------------------------------------------------------
Net investment income (%) 0.43(3)
- --------------------------------------------------------------------------------
Expenses without reimbursement (%) 2.07(3)
- --------------------------------------------------------------------------------
Portfolio turnover (%) 54
- --------------------------------------------------------------------------------
(1) The fund commenced operations on 5/29/98.
(2) Not annualized.
(3) Annualized.
12 J.P. MORGAN GLOBAL 50 FUND
<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 Global 50 Fund
J.P. Morgan Funds Services
522 Fifth Avenue
New York, NY 10036
Telephone: 1-800-521-5411
Hearing impaired: 1-888-468-4015
Email: [email protected]
Text-only versions of these documents and this prospectus are available, 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 811-07340 and
333-54632.
J.P. MORGAN FUNDS AND
THE MORGAN TRADITION
The J.P. Morgan Funds combine a heritage of integrity and financial leadership
with comprehensive, sophisticated analysis and management techniques. Drawing on
J.P. Morgan's extensive experience and depth as an investment manager, the J.P.
Morgan Funds offer a broad array of distinctive opportunities for mutual fund
investors.
JPMorgan
- --------------------------------------------------------------------------------
J.P. Morgan Funds
Advisor Distriubtor
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
<PAGE>
MARCH 1, 1999
PROSPECTUS
J.P. MORGAN INSTITUTIONAL
FIXED INCOME FUNDS
Short Term Bond Fund
Bond Fund
Global Strategic Income Fund
Tax Exempt Bond Fund
New York Tax Exempt Bond Fund
California Bond Fund
- ------------------------------------
Seeking high total return or current
income by investing primarily in
fixed income securities.
This prospectus contains essential information for anyone investing in these
funds. Please read it carefully and keep it for reference.
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 or guarantees that the information in this prospectus is correct or
adequate. It is a criminal offense to state or suggest otherwise.
Distributed by Funds Distributor, Inc.
JP Morgan
<PAGE>
CONTENTS
- --------------------------------------------------------------------------------
2
Each fund's goal, investment approach,
risks, expenses, and performance
J.P. MORGAN INSTITUTIONAL FIXED INCOME FUNDS
J.P. Morgan Institutional Short Term Bond Fund ........................... 2
J.P. Morgan Institutional Bond Fund ...................................... 4
J.P. Morgan Institutional Global Strategic Income Fund ................... 6
J.P. Morgan Institutional Tax Exempt Bond Fund ........................... 8
J.P. Morgan Institutional New York Tax Exempt Bond Fund .................. 10
J.P. Morgan Institutional California Bond Fund ........................... 12
14
Principles and techniques common
to the funds in this prospectus
FIXED INCOME MANAGEMENT APPROACH
J.P. Morgan .............................................................. 14
J.P. Morgan Institutional fixed income funds ............................. 14
The spectrum of fixed income funds ....................................... 14
Who may want to invest ................................................... 14
Fixed income investment process .......................................... 15
16
Investing in the J.P. Morgan
Institutional Fixed Income funds
YOUR INVESTMENT
Investing through a financial professional ............................... 16
Investing through an employer-sponsored retirement plan .................. 16
Investing through an IRA or rollover IRA ................................. 16
Investing directly ....................................................... 16
Opening your account ..................................................... 16
Adding to your account ................................................... 16
Selling shares ........................................................... 17
Account and transaction policies ......................................... 17
Dividends and distributions .............................................. 18
Tax considerations ....................................................... 18
19
More about risk and the funds'
business operations
FUND DETAILS
Business structure ....................................................... 19
Management and administration ............................................ 19
Risk and reward elements ................................................. 20
Investments .............................................................. 22
Financial highlights ..................................................... 24
FOR MORE INFORMATION ............................................. back cover
<PAGE>
J.P. MORGAN INSTITUTIONAL
SHORT TERM BOND FUND TICKER SYMBOL: JMSBX
- --------------------------------------------------------------------------------
REGISTRANT: J.P. MORGAN INSTITUTIONAL FUNDS
(J.P. MORGAN INSTITUTIONAL SHORT TERM BOND FUND)
RISK/RETURN SUMMARY
For a more detailed discussion of the fund's investments and their main risks,
as well as fund strategies, please see pages 22-25.
GOAL
The fund's goal is to provide high total return, consistent with low volatility
of principal. This goal can be changed without shareholder approval.
INVESTMENT APPROACH
The fund invests primarily in fixed income securities, including U.S. government
and agency securities, domestic and foreign corporate bonds, private placements,
asset-backed and mortgage-related securities, and money market instruments, that
it believes have the potential to provide a high total return over time. These
securities may be of any maturity, but under normal market conditions the fund's
duration will range between one and three years, similar to that of the Merrill
Lynch 1-3 Year Treasury Index. For a description of duration, please see fixed
income investment process on page 15.
Up to 25% of assets may be invested in foreign securities, including 20% in debt
securities denominated in foreign currencies of developed countries. The fund
typically hedges its non-dollar investments back to the U.S. dollar. At least
90% of assets must be invested in securities that, at the time of purchase, are
rated investment-grade (BBB/Baa or better) or are the unrated equivalent,
including at least 75% A or better. No more than 10% of assets may be invested
in securities rated B or BB.
The fund's share price and total return will vary in response to changes in
interest rates. How well the fund's performance compares to that of similar
duration fixed income funds will depend on the success of the investment
process, which is described on page 15.
Although any rise in interest rates is likely to cause a fall in the price of
bonds, the fund's comparatively short duration is designed to help keep its
share price within a relatively narrow range. Because it seeks to minimize risk,
the fund will generally offer less income, and during periods of declining
interest rates, may offer lower total returns than bond funds with longer
durations. Because of the sensitivity of the fund's mortgage related securities
to changes in interest rates, the performance and duration of the fund may be
more volatile than if it did not hold these securities. The fund uses futures
contracts to help manage duration. To the extent that the fund seeks higher
returns by investing in non-investment-grade bonds, often called junk bonds, it
takes on additional risks. To the extent the fund invests in foreign securities,
it could lose money because of foreign government actions, political
instability, currency fluctuation or lack of adequate and accurate information.
The fund may engage in active and frequent trading, leading to increased
portfolio turnover and the possibility of increased capital gains. See page 18
for further discussion on the tax treatment of capital gains.
An investment in the fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. You could lose money if you sell when the fund's share price is lower
than when you invested.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $316
billion, including more than $2.1 billion using similar strategies as the fund.
The portfolio management team is led by Connie J. Plaehn, managing director, who
has been on the team since the fund's inception and has been at J.P. Morgan
since 1984, William G. Tennille, vice president, who joined the team in January
1994 and has been at J.P. Morgan since 1992 and Augustus Cheh, vice president,
who has been a fixed income portfolio manager and analyst since joining J.P.
Morgan in 1994.
- --------------------------------------------------------------------------------
Before you invest
Investors considering the fund should understand that:
o There is no assurance that the fund will meet its investment goal.
o The fund does not represent a complete investment program.
2 J.P. MORGAN INSTITUTIONAL SHORT TERM BOND FUND
<PAGE>
PERFORMANCE (unaudited)
The bar chart and table shown below provide some indication of the risks of
investing in J.P. Morgan Institutional Short Term Bond Fund.
The bar chart indicates the risks by showing changes in the performance of the
fund's shares from year to year for each of the last 5 calendar years.
The table indicates the risks by showing how the fund's average annual returns
for the past one year, five years and life of the fund compare to those of the
Merrill Lynch 1-3 Year Treasury Index. This is a widely recognized, unmanaged
index of U.S. Treasury notes and bonds with maturities of 1-3 years used as a
measure of overall short-term bond market performance.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
Year-by-year total return (%) Shows changes in returns by calendar year(1)
- --------------------------------------------------------------------------------
1994 1995 1996 1997 1998
20%
10%
0% 0.36 10.80 5.10 6.40 7.04
- --------------------------------------------------------------------------------
o J.P. Morgan Institutional Short Term Bond Fund
For the period covered by this year-by-year total return chart, the fund's
highest quarterly return was 3.36% (for the quarter ended 6/30/95); and the
lowest quarterly return was -0.47% (for the quarter ended 3/31/94).
Average annual total return Shows performance over time, for periods ended
December 31, 1998(2)
- --------------------------------------------------------------------------------
Past 1 yr. Past 5 yrs. Life of fund
J.P. Morgan Institutional Short Term
Bond Fund (after expenses) 7.04 5.89 5.68
- --------------------------------------------------------------------------------
Merrill Lynch 1-3 Year Treasury
Index (no expenses) 7.00 5.99 5.86
- --------------------------------------------------------------------------------
<PAGE>
INVESTOR EXPENSES
The expenses of the fund before reimbursement are shown at right. The fund has
no sales, redemption, exchange, or account fees, although some institutions may
charge you a fee for shares you buy through them. The annual fund expenses after
reimbursement are deducted from fund assets prior to performance calculations.
Annual fund operating expenses(3) (%)
(expenses that are deducted from fund assets)
Management fees 0.25
Marketing (12b-1) fees none
Other expenses(4) 0.39
- --------------------------------------------------------------------------------
Total annual fund
operating expenses(4) 0.64
- --------------------------------------------------------------------------------
Expense Example
The example below is intended to help you compare the cost of investing in the
fund with the cost of investing in other mutual funds. The example assumes:
$10,000 initial investment, 5% return each year, total operating expenses
(before reimbursement) unchanged, and all shares sold at the end of each time
period. The example is for comparison only; the fund's actual return and your
actual costs may be higher or lower.
- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 65 205 357 798
- --------------------------------------------------------------------------------
(1) The fund's fiscal year end is 10/31.
(2) The fund commenced operations on 9/13/93. For the period 7/31/93 through
9/30/93, returns reflect performance of the Pierpont Short Term Bond Fund.
(3) The fund has a master/feeder structure as described on page 19. This table
is restated to show the current fee arrangements in effect as of 8/1/98, and
shows the fund's expenses and its share of master portfolio expenses for the
past fiscal year using the current fees as if they had been in effect during
the past fiscal year, before reimbursement, expressed as a percentage of the
fund's average net assets.
(4) After reimbursement, other expenses and total operating expenses are 0.05%
and 0.30%, respectively. This reimbursement arrangement can be changed or
terminated at any time at the option of J.P. Morgan.
J.P. MORGAN INSTITUTIONAL SHORT TERM BOND FUND 3
<PAGE>
J.P. MORGAN INSTITUTIONAL BOND FUND TICKER SYMBOL: JMIBX
- --------------------------------------------------------------------------------
REGISTRANT: J.P. MORGAN INSTITUTIONAL FUNDS
(J.P. MORGAN INSTITUTIONAL BOND FUND)
RISK/RETURN SUMMARY
For a more detailed discussion of the fund's investments and their main risks,
as well as fund strategies, please see pages 22-25.
GOAL
The fund's goal is to provide high total return consistent with moderate risk of
capital and maintenance of liquidity. This goal can be changed without
shareholder approval.
INVESTMENT APPROACH
The fund invests primarily in fixed income securities, including U.S. government
and agency securities, corporate bonds, private placements, asset-backed and
mortgage-backed securities, that it believes have the potential to provide a
high total return over time. These securities may be of any maturity, but under
normal market conditions the management team will keep the fund's duration
within one year of that of the Salomon Brothers Broad Investment Grade Bond
Index (currently about five years). For a description of duration, please see
fixed income investment process on page 15.
Up to 25% of assets may be invested in foreign securities, including 20% in debt
securities denominated in foreign currencies of developed countries. The fund
typically hedges its non-dollar investments back to the U.S. dollar. At least
75% of assets must be invested in securities that, at the time of purchase, are
rated investment-grade (BBB/Baa or better) or are the unrated equivalent,
including at least 65% A or better. No more than 25% of assets may be invested
in securities rated B or BB.
The fund's share price and total return will vary in response to changes in
interest rates. How well the fund's performance compares to that of similar
fixed income funds will depend on the success of the investment process, which
is described on page 15.
To the extent that the fund seeks higher returns by investing in
non-investment-grade bonds, often called junk bonds, it takes on additional
risks, since these bonds are more sensitive to economic news and their issuers
have a less secure financial position. To the extent the fund invests in foreign
securities, it could lose money because of foreign government actions, political
instability, currency fluctuation or lack of adequate and accurate information.
The fund may engage in active and frequent trading, leading to increased
portfolio turnover and the possibility of increased capital gains. See page 18
for further discussion on the tax treatment of capital gains.
An investment in the fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. You could lose money if you sell when the fund's share price is lower
than when you invested.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $316
billion, including more than $32.9 billion using similar strategies as the fund.
The portfolio management team is led by William G. Tennille, vice president, who
has been at J.P. Morgan since 1992, Connie J. Plaehn, managing director, who has
been at J.P. Morgan since 1984, and John Snyder, vice president, who has been at
J.P. Morgan since 1993. Mr. Tennille and Ms. Plaehn have been on the team since
January 1994. Mr. Snyder has been a fixed income portfolio manager since joining
J.P. Morgan.
- --------------------------------------------------------------------------------
Before you invest
Investors considering the fund should understand that:
o There is no assurance that the fund will meet its investment goal.
o The fund does not represent a complete investment program.
4 J.P. MORGAN INSTITUTIONAL BOND FUND
<PAGE>
PERFORMANCE (unaudited)
The bar chart and table shown below provide some indication of the risks of
investing in J.P. Morgan Institutional Bond Fund.
The bar chart indicates the risks by showing changes in the performance of the
fund's shares from year to year for each of the last 10 calendar years.
The table indicates the risks by showing how the fund's average annual returns
for the past one, five and ten years compare to those of the Salomon Brothers
Broad Investment Grade Bond Index. This is a widely recognized, unmanaged index
of U.S. Treasury and agency securities and investment-grade mortgage and
corporate bonds used as a measure of overall bond market performance.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
Year-by-year total return (%) Shows changes in returns by calendar year(1,2)
- --------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
20% 18.42
10% 10.23 10.09 13.45 6.53 9.88 (2.68) 9.29 7.54
0% 3.30
(10%)
- --------------------------------------------------------------------------------
o J.P. Morgan Institutional Bond Fund
For the period covered by this year-by-year total return chart, the fund's
highest quarterly return was 6.30% (for the quarter ended 6/30/95); and the
lowest quarterly return was -2.38% (for the quarter ended 3/31/94).
Average annual total return (%) Shows performance over time, for periods ended
December 31, 1998(1)
- --------------------------------------------------------------------------------
Past 1 yr. Past 5 yrs. Past 10 yrs.
J.P. Morgan Institutional Bond
Fund (after expenses) 7.54 6.95 8.48
- --------------------------------------------------------------------------------
Salomon Brothers Broad Investment
Grade Bond Index (no expenses) 8.72 7.30 9.31
- --------------------------------------------------------------------------------
<PAGE>
INVESTOR EXPENSES
The expenses of the fund before reimbursement are shown at right. The fund has
no sales, redemption, exchange, or account fees, although some institutions may
charge you a fee for shares you buy through them. The annual fund expenses after
reimbursement are deducted from fund assets prior to performance calculations.
Annual fund operating expenses(3) (%)
(expenses that are deducted from fund assets)
Management fees 0.30
Marketing (12b-1) fees none
Other expenses(4) 0.22
- --------------------------------------------------------------------------------
Total annual fund
operating expenses(4) 0.52
- --------------------------------------------------------------------------------
Expense example
The example below is intended to help you compare the cost of investing in the
fund with the cost of investing in other mutual funds. The example assumes:
$10,000 initial investment, 5% return each year, total operating expenses
(before reimbursement) unchanged, and all shares sold at the end of each time
period. The example is for comparison only; the fund's actual return and your
actual costs may be higher or lower.
- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 53 167 291 653
- --------------------------------------------------------------------------------
(1) The fund commenced operations on 7/12/93. Returns for the period 3/31/88
through 7/31/93 reflect performance of The Pierpont Bond Fund, the fund's
predecessor, which commenced operations on 3/11/88.
(2) The fund's fiscal year end is 10/31.
(3) The fund has a master/feeder structure as described on page 19. This table
is restated to show the current fee arrangements in effect as of 8/1/98, and
shows the fund's expenses and its share of master portfolio expenses for the
past fiscal year using the current fees as if they had been in effect during
the past fiscal year, before reimbursement, expressed as a percentage of the
fund's average net assets.
(4) After reimbursement, other expenses and total operating expenses are 0.20%
and 0.50%, respectively. This reimbursement arrangement can be changed or
terminated at any time at the option of J.P. Morgan.
J.P. MORGAN INSTITUTIONAL BOND FUND 5
<PAGE>
J.P. MORGAN INSTITUTIONAL
GLOBAL STRATEGIC INCOME FUND TICKER SYMBOL: JPGSX
- --------------------------------------------------------------------------------
REGISTRANT: J.P. MORGAN INSTITUTIONAL FUNDS
(J.P. MORGAN INSTITUTIONAL GLOBAL STRATEGIC INCOME FUND)
RISK/RETURN SUMMARY
For a more detailed discussion of the fund's investments and their main risks,
as well as fund strategies, please see pages 22-25.
GOAL
The fund's goal is to provide high total return from a portfolio of fixed income
securities of foreign and domestic issuers. This goal can be changed without
shareholder approval.
INVESTMENT APPROACH
The fund invests in a wide range of debt securities from the U.S. and other
markets, both developed and emerging. Issuers may include governments,
corporations, financial institutions, and supranational organizations (such as
the World Bank), that the fund believes have the potential to provide a high
total return over time. The fund may invest directly in mortgages and in
mortgage-backed securities. The fund's securities may be of any maturity, but
under normal market conditions its duration will generally be similar to that of
the Lehman Brothers Aggregate Bond Index (currently about four and a half
years). For a description of duration, please see fixed income investment
process on page 15. At least 40% of assets must be invested in securities that,
at the time of purchase, are rated investment-grade (BBB/Baa or better) or are
the unrated equivalent. The balance of assets must be invested in securities
rated B or higher at the time of purchase (or the unrated equivalent), except
that the fund's emerging market component has no minimum quality rating and may
invest without limit in securities that are in the lowest rating categories (or
are the unrated equivalent).
The management team uses the process described on page 15, and also makes
country allocations, based primarily on macro-economic factors. The team uses
the model allocation shown at right as a basis for its sector allocation,
although the actual allocations are adjusted periodically within the indicated
ranges. Within each sector, a dedicated team handles securities selection. The
fund typically hedges its non-dollar investments in developed countries back to
the U.S. dollar.
The fund's share price and total return vary in response to changes in global
bond markets, interest rates, and currency exchange rates. How well the fund's
performance compares to that of similar fixed income funds will depend on the
success of the investment process. Because of credit and foreign and emerging
markets investment risks, the fund's performance is likely to be more volatile
than that of most fixed income funds. Foreign and emerging market investment
risks include foreign government actions, political instability, currency
fluctuations and lack of adequate and accurate information. The fund may invest
a substantial portion of its assets in non-investment grade bonds, often called
junk bonds, since these bonds are more sensitive to economic news and their
issuers have a less secure financial position. The fund's mortgage-backed
investments involve the risk of losses due to default or to prepayments that
occur earlier or later than expected. Some investments, including directly owned
mortgages, may be illiquid. The fund has the potential for long-term total
returns that exceed those of more traditional bond funds, but investors should
also be prepared for risks that exceed those of more traditional bond funds.
An investment in the fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. You could lose money if you sell when the fund's share price is lower
than when you invested.
MODEL SECTOR ALLOCATION
15% public/private
corporates
(range 5-25%)
23% high yield
corporates
(range 13-33%)
15% emerging
markets
(range 5-25%)
12% international
non-dollar
(range 0-25%)
35% public/private
mortgages
(range 20-45%)
<PAGE>
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $316
billion, including more than $4.1 billion using similar strategies as the fund.
The portfolio management team is led by Gerard W. Lillis, managing director, who
has been at J.P. Morgan since 1978, and Mark E. Smith, managing director, who
joined J.P. Morgan in 1994 from Allied Signal, Inc. where he managed fixed
income portfolios and oversaw asset allocation activities. Both have been on the
team since the fund's inception.
- --------------------------------------------------------------------------------
Before you invest
Investors considering the fund should understand that:
o There is no assurance that the fund will meet its investment goal.
o The fund does not represent a complete investment program.
6 J.P. MORGAN INSTITUTIONAL GLOBAL STRATEGIC INCOME FUND
<PAGE>
PERFORMANCE (unaudited)
The bar chart and table shown below provide some indication of the risks of
investing in J.P. Morgan Global Strategic Income Fund.
The bar chart indicates the risks by showing the performance of the fund's
shares during its first complete calendar year of operations.
The table indicates the risks by showing how the fund's average annual returns
for the past one year and life of the fund compare to those of the Lehman
Brothers Aggregate Bond Index. This is a widely recognized, unmanaged index
which measures bond market performance.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
Total return (%) Shows changes in returns by calendar year(1)
- --------------------------------------------------------------------------------
1998
20%
10%
0% 2.59
- --------------------------------------------------------------------------------
o J.P. Morgan Institutional Global Strategic Income Fund
For the period covered by this total return chart, the fund's highest quarterly
return was 3.13% (for the quarter ended 3/31/98); and the lowest quarterly
return was -1.45% (for the quarter ended 9/30/98).
Average annual total return Shows performance over time, for periods ended
December 31, 1998(2)
- --------------------------------------------------------------------------------
Past 1 yr. Life of fund
J.P. Morgan Institutional Global
Strategic Income Fund (after expenses) 2.59 7.00
- --------------------------------------------------------------------------------
Lehman Brothers Aggregate Bond Index (no expenses) 8.67 10.91
- --------------------------------------------------------------------------------
<PAGE>
INVESTOR EXPENSES
The expenses of the fund before reimbursement are shown at right. The fund has
no sales, redemption, exchange, or account fees, although some institutions may
charge you a fee for shares you buy through them. The annual fund expenses after
reimbursement are deducted from fund assets prior to performance calculations.
Annual fund operating expenses(3) (%)
(expenses that are deducted from fund assets)
Management fees 0.45
Marketing (12b-1) fees none
Other expenses(4) 0.38
- --------------------------------------------------------------------------------
Total annual fund
operating expenses(4) 0.83
- --------------------------------------------------------------------------------
Expense example
The example below is intended to help you compare the cost of investing in the
fund with the cost of investing in other mutual funds. The example assumes:
$10,000 initial investment, 5% return each year, total operating expenses
(before reimbursement) unchanged, and all shares sold at the end of each time
period. The example is for comparison only; the fund's actual return and your
actual costs may be higher or lower.
- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 85 265 460 1025
- --------------------------------------------------------------------------------
(1) The fund's fiscal year is 10/31.
(2) The fund commenced operations on 3/14/97 and performance is calculated as of
3/31/97.
(3) The fund has a master/feeder structure as described on page 19. This table
shows the fund's expenses and its share of master portfolio expenses for the
past fiscal year before reimbursement, expressed as a percentage of the
fund's average net assets.
(4) After reimbursement, other expenses and total operating expenses are 0.20%
and 0.65%, respectively. This reimbursement arrangement can be changed or
terminated at any time at the option of J.P. Morgan.
J.P. MORGAN INSTITUTIONAL GLOBAL STRATEGIC INCOME FUND 7
<PAGE>
J.P. MORGAN INSTITUTIONAL
TAX EXEMPT BOND FUND TICKER SYMBOL: JITBX
- --------------------------------------------------------------------------------
REGISTRANT: J.P. MORGAN INSTITUTIONAL FUNDS
(J.P. MORGAN INSTITUTIONAL TAX EXEMPT BOND FUND)
RISK/RETURN SUMMARY
For a more detailed discussion of the fund's investments and their main risks,
as well as fund strategies, please see pages 22-25.
GOAL
The fund's goal is to provide a high level of current income that is exempt from
federal income tax consistent with moderate risk of capital. This goal can be
changed without shareholder approval.
INVESTMENT APPROACH
The fund invests primarily in high quality municipal securities that it believes
have the potential to provide current income that is free from federal personal
income tax. While the fund's goal is high tax-exempt income, the fund may invest
to a limited extent in taxable securities, including U.S. government, government
agency, corporate, or taxable municipal securities. The fund's securities may be
of any maturity, but under normal market conditions the fund's duration will
generally range between four and seven years, similar to that of the Lehman
Brothers 1-16 Year Municipal Bond Index (currently 5.4 years). For a description
of duration, please see fixed income investment process on page 15. At least 90%
of assets must be invested in securities that, at the time of purchase, are
rated investment-grade (BBB/Baa or better) or are the unrated equivalent. No
more than 10% of assets may be invested in securities rated B or BB.
The fund's share price and total return will vary in response to changes in
interest rates. How well the fund's performance compares to that of similar
tax-exempt funds will depend on the success of the investment process, which is
described on page 15.
Investors should be prepared for higher share price volatility than from a tax
exempt fund of shorter duration. The fund's performance could also be affected
by market reaction to proposed tax legislation. To the extent that the fund
seeks higher returns by investing in non-investment-grade bonds, often called
junk bonds, it takes on additional risks, since these bonds are more sensitive
to economic news and their issuers have a less secure financial position.
An investment in the fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. You could lose money if you sell when the fund's share price is lower
than when you invested.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $316
billion, including more than $12 billion using similar strategies as the fund.
The portfolio management team is led by Robert W. Meiselas, vice president, who
joined the team in May 1997 and has been at J.P. Morgan since 1987, and Elaine
B. Young, vice president, who joined the team in January 1996 and has been at
J.P. Morgan since August 1994. Prior to joining J.P. Morgan, Ms. Young was a
municipal bond trader and fixed income portfolio manager at Scudder, Stevens, &
Clark, Inc.
- --------------------------------------------------------------------------------
Before you invest
Investors considering the fund should understand that:
o There is no assurance that the fund will meet its investment goal.
o The fund does not represent a complete investment program.
8 J.P. MORGAN INSTITUTIONAL TAX EXEMPT BOND FUND
<PAGE>
PERFORMANCE (unaudited)
The bar chart and table shown below provide some indication of the risks of
investing in J.P. Morgan Institutional Tax Exempt Bond Fund.
The bar chart indicates the risks by showing changes in the performance of the
fund's shares from year to year for each of the fund's last 10 calendar years.
The table indicates the risks by showing how the fund's average annual returns
for the past one, five and ten years compare to those of the Lehman Brothers
1-16 Year Municipal Bond Index. This is a widely recognized, unmanaged index of
general obligation and revenue bonds with maturities of 1-16 years used as a
measure of overall tax-exempt bond market performance.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
Year-by-year total return (%) Shows changes in returns by calendar year(1,2)
- --------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
20% 13.50
10% 8.25 6.87 10.92 7.47 9.58 7.58
0% 3.71 5.65
(10%) (2.53)
- --------------------------------------------------------------------------------
o J.P. Morgan Institutional Tax Exempt Bond Fund
For the period covered by this year-by-year total return chart, the fund's
highest quarterly return was 5.16% (for the quarter ended 3/30/95); and the
lowest quarterly return was -3.08% (for the quarter ended 3/31/94).
Average annual total return (%) Shows performance over time, for periods ended
December 31, 1998(1)
- --------------------------------------------------------------------------------
Past 1 yr. Past 5 yrs. Past 10 yrs.
J.P. Morgan Institutional Tax Exempt
Bond Fund (after expenses) 5.65 5.45 7.02
- --------------------------------------------------------------------------------
Lehman Brothers 1-16 Year Municipal
Bond Index (no expenses) 6.25 5.86 N/A
- --------------------------------------------------------------------------------
<PAGE>
INVESTOR EXPENSES
The expenses of the fund before reimbursement are shown at right. The fund has
no sales, redemption, exchange, or account fees, although some institutions may
charge you a fee for shares you buy through them. The annual fund expenses after
reimbursement are deducted from fund assets prior to performance calculations.
Annual fund operating expenses(3) (%)
(expenses that are deducted from fund assets)
Management fees 0.30
Marketing (12b-1) fees none
Other expenses(4) 0.28
- --------------------------------------------------------------------------------
Total annual fund
operating expenses(4) 0.58
- --------------------------------------------------------------------------------
Expense example
The example below is intended to help you compare the cost of investing in the
fund with the cost of investing in other mutual funds. The example assumes:
$10,000 initial investment, 5% return each year, total operating expenses
(before reimbursement) unchanged, and all shares sold at the end of each time
period. The example is for comparison only; the fund's actual return and your
actual costs may be higher or lower.
- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 59 186 324 726
- --------------------------------------------------------------------------------
(1) The fund commenced operations on 7/12/93. For the period 1/1/88 through
7/31/93 returns reflect performance of The Pierpont Tax Exempt Bond Fund,
the predecessor of the fund, which commenced operations on 10/3/84.
(2) The fund's fiscal year end is 8/31.
(3) The fund has a master/feeder structure as described on page 19. This table
is restated to show the current fee arrangements in effect as of 8/1/98, and
shows the fund's expenses and its share of master portfolio expenses for the
past fiscal year using the current fees as if they had been in effect during
the past fiscal year, before reimbursement, expressed as a percentage of the
fund's average net assets.
(4) After reimbursement, other expenses and total operating expenses are 0.20%
and 0.50%, respectively. This reimbursement arrangement can be changed or
terminated at any time at the option of J.P. Morgan.
J.P. MORGAN INSTITUTIONAL TAX EXEMPT BOND FUND 9
<PAGE>
J.P. MORGAN INSTITUTIONAL NEW YORK
TAX EXEMPT BOND FUND TICKER SYMBOL: JPNTX
- --------------------------------------------------------------------------------
REGISTRANT: J.P. MORGAN INSTITUTIONAL FUNDS
(J.P. MORGAN INSTITUTIONAL NEW YORK TAX EXEMPT BOND FUND)
RISK/RETURN SUMMARY
For a more detailed discussion of the fund's investments and their main risks,
as well as fund strategies, please see pages 22-25.
GOAL
The fund's goal is to provide a high level of tax exempt income for New York
residents consistent with moderate risk of capital. This goal can be changed
without shareholder approval.
INVESTMENT APPROACH
The fund invests primarily in New York municipal securities that it believes
have the potential to provide high current income which is free from federal,
state, and New York City personal income taxes for New York residents. The fund
may also invest to a limited extent in securities of other states or
territories. To the extent that the fund invests in municipal securities of
other states, the income from such securities would be free from federal
personal income taxes for New York residents but would be subject to New York
State and New York City personal income taxes. For non-New York residents, the
income from New York municipal securities is free from federal personal income
taxes only. The fund may also invest in taxable securities. The fund's
securities may be of any maturity, but under normal market conditions the fund's
duration will generally range between three and seven years, similar to that of
the Lehman Brothers 1-16 Year Municipal Bond Index (currently 5.4 years). For a
description of duration, please see fixed income investment process on page 15.
At least 90% of assets must be invested in securities that, at the time of
purchase, are rated investment-grade (BBB/Baa or better) or are the unrated
equivalent. No more than 10% of assets may be invested in securities rated B or
BB.
The fund's share price and total return will vary in response to changes in
interest rates. How well the fund's performance compares to that of similar
fixed income funds will depend on the success of the investment process, which
is described on page 15. Because most of the fund's investments will typically
be from issuers in the State of New York, its performance will be affected by
the fiscal and economic health of that state and its municipalities. The fund is
non-diversified and may invest more than 5% of assets in a single issuer, which
could further concentrate its risks. To the extent that the fund seeks higher
returns by investing in non-investment-grade bonds, often called junk bonds, it
takes on additional risks, since these bonds are more sensitive to economic news
and their issuers have a less secure financial condition.
An investment in the fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. You could lose money if you sell when the fund's share price is lower
than when you invested.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $316
billion, including more than $12 billion using similar strategies as the fund.
The portfolio management team is led by Robert W. Meiselas, vice president, who
has been at J.P. Morgan since 1987, and Elaine B. Young, vice president, who
joined J.P. Morgan from Scudder, Stevens & Clark, Inc. in 1994 where she was a
municipal bond trader and fixed income portfolio manager. Both have been on the
team since June 1997.
- --------------------------------------------------------------------------------
Before you invest
Investors considering the fund should understand that:
o There is no assurance that the fund will meet its investment goal.
o The fund does not represent a complete investment program.
10 J.P. MORGAN INSTITUTIONAL NEW YORK TAX EXEMPT BOND FUND
<PAGE>
PERFORMANCE (unaudited)
The bar chart and table shown below provide some indication of the risks of
investing in J.P. Morgan Institutional New York Tax Exempt Bond Fund.
The bar chart indicates the risks by showing changes in the performance of the
fund's shares from year to year for each of the last 4 calendar years.
The table indicates the risks by showing how the fund's average annual returns
for the past year and the life of the fund compare to those of the Lehman
Brothers 1-16 Year Municipal Bond Index. This is a widely recognized, unmanaged
index of general obligation and revenue bonds with maturities of 1-16 years used
as a measure of overall tax-exempt bond market performance.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
Year-by-year total return (%) Shows changes in returns by calendar year(1)
- --------------------------------------------------------------------------------
1995 1996 1997 1998
20% 13.28
10%
0% 4.21 7.68 5.61
- --------------------------------------------------------------------------------
o J.P. Morgan Institutional New York Tax Exempt Bond Fund
For the period covered by this year-by-year total return chart, the fund's
highest quarterly return was 4.86% (for the quarter ended 3/31/95) and the
lowest quarterly return was -0.59% (for the quarter ended 3/31/96).
Average annual total return (%) Shows performance over time, for periods ended
December 31, 1998(2)
- --------------------------------------------------------------------------------
Past 1 yr. Life of fund
J.P. Morgan Institutional New York
Tax Exempt Bond Fund (after expenses) 5.61 6.63
- --------------------------------------------------------------------------------
Lehman Brothers 1-16 Year Municipal Bond
Index (no expenses) 6.25 7.07
- --------------------------------------------------------------------------------
<PAGE>
INVESTOR EXPENSES
The expenses of the fund before reimbursement are shown at right. The fund has
no sales, redemption, exchange, or account fees, although some institutions may
charge you a fee for shares you buy through them. The annual fund expenses after
reimbursement are deducted from fund assets prior to performance calculations.
Annual fund operating expenses(3) (%)
(expenses that are deducted from fund assets)
Management fees 0.30
Marketing (12b-1) fees none
Other expenses(4) 0.32
- --------------------------------------------------------------------------------
Total annual fund
operating expenses(4) 0.62
- --------------------------------------------------------------------------------
Expense example
The example below is intended to help you compare the cost of investing in the
fund with the cost of investing in other mutual funds. The example assumes:
$10,000 initial investment, 5% return each year, total operating expenses
(before reimbursement) unchanged, and all shares sold at the end of each time
period. The example is for comparison only; the fund's actual return and your
actual costs may be higher or lower.
- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 62 195 340 762
- --------------------------------------------------------------------------------
(1) The fund's fiscal year end is 3/31.
(2) The fund commenced operations on 4/11/94, and returns reflect performance of
the fund from 4/30/94.
(3) The fund has a master/feeder structure as described on page 19. This table
is restated to show the current fee arrangements in effect as of 8/1/98, and
shows the fund's expenses and its share of master portfolio expenses for the
past fiscal year using the current fees as if they had been in effect during
the past fiscal year, before reimbursement, expressed as a percentage of the
fund's average net assets.
(4) After reimbursement, other expenses and total operating expenses are 0.20%
and 0.50%, respectively. This reimbursement arrangement can be changed or
terminated at any time at the option of J.P. Morgan.
J.P. MORGAN INSTITUTIONAL NEW YORK TAX EXEMPT BOND FUND 11
<PAGE>
J.P. MORGAN INSTITUTIONAL
CALIFORNIA BOND FUND TICKER SYMBOL: JPICX
- --------------------------------------------------------------------------------
REGISTRANT: J.P. MORGAN SERIES TRUST
(J.P. MORGAN CALIFORNIA BOND FUND: INSTITUTIONAL SHARES)
RISK/RETURN SUMMARY
For a more detailed discussion of the fund's investments and their main risks,
as well as fund strategies, please see pages 22-25.
GOAL
The fund's goal is to provide high after-tax total return for California
residents consistent with moderate risk of capital. This goal can be changed
without shareholder approval.
INVESTMENT APPROACH
The fund invests primarily in California municipal securities that it believes
have the potential to provide high current income which is free from federal and
state personal income taxes for California residents. Because the fund's goal is
high after-tax total return rather than high tax-exempt income, the fund may
invest to a limited extent in securities of other states or territories. To the
extent that the fund invests in municipal securities of other states, the income
from such securities would be free from federal personal income taxes for
California residents but would be subject to California state personal income
taxes. For non-California residents, the income from California municipal
securities is free from federal personal income taxes only. The fund may also
invest in taxable securities. The fund's securities may be of any maturity, but
under normal market conditions the fund's duration will generally range between
three and ten years, similar to that of the Lehman Brothers 1-16 Year Municipal
Bond Index (currently 5.4 years). For a description of duration, please see
fixed income investment process on page 15. At least 90% of assets must be
invested in securities that, at the time of purchase, are rated investment-grade
(BBB/Baa or better) or are the unrated equivalent. No more than 10% of assets
may be invested in securities rated B or BB.
The fund's share price and total return will vary in response to changes in
interest rates. How well the fund's performance compares to that of similar
fixed income funds will depend on the success of the investment process, which
is described on page 15. Because most of the fund's investments will typically
be from issuers in the State of California, its performance will be affected by
the fiscal and economic health of that state and its municipalities. The fund is
non-diversified and may invest more than 5% of assets in a single issuer, which
could further concentrate its risks. To the extent that the fund seeks higher
returns by investing in non-investment-grade bonds, often called junk bonds, it
takes on additional risks, because these bonds are more sensitive to economic
news and their issuers have a less secure financial condition.
An investment in the fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. You could lose money if you sell when the fund's share price is lower
than when you invested.
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $316
billion, including more than $12 billion using similar strategies as the fund.
The portfolio management team is led by Robert W. Meiselas, vice president, who
has been at J.P. Morgan since 1987, and Elaine B. Young, vice president, who
joined J.P. Morgan from Scudder, Stevens & Clark, Inc. in 1994 where she was a
municipal bond trader and fixed income portfolio manager. Both have been on the
team since June 1997.
- --------------------------------------------------------------------------------
Before you invest
Investors considering the fund should understand that:
o There is no assurance that the fund will meet its investment goal.
o The fund does not represent a complete investment program.
12 J.P. MORGAN INSTITUTIONAL CALIFORNIA BOND FUND
<PAGE>
PERFORMANCE (unaudited)
The bar chart and table shown below provide some indication of the risks of
investing in J.P. Morgan Institutional California Bond Fund.
The bar chart indicates the risks by showing changes in the performance of the
fund's shares from year to year for each of the last 2 calendar years.
The table indicates the risks by showing how the fund's average annual returns
for the past year and life of fund compare to those of the Lehman Brothers 1-16
Year Municipal Bond Index. This is a widely recognized, unmanaged index of
general obligation and revenue bonds with maturities of 1-16 years used as a
measure of overall tax-exempt bond market performance.
The fund's past performance does not necessarily indicate how the fund will
perform in the future.
Year-by-year total return (%) Shows changes in returns by calendar year(1)
- --------------------------------------------------------------------------------
1997 1998
10%
5% 7.72 5.60
0%
(5%)
- --------------------------------------------------------------------------------
o J.P. Morgan California Bond Fund: Institutional Shares
For the period covered by this year-by-year total return chart, the fund's
highest quarterly return was 3.44% (for the quarter ended 9/30/98) and the
lowest quarterly return was -0.34% (for the quarter ended 3/31/97).
Average annual total return (%) Shows performance over time, for period ended
December 31, 1998(2)
- --------------------------------------------------------------------------------
Past 1 yr. Life of fund
J.P. Morgan California Bond Fund:
Institutional Shares (after expenses) 5.60 6.60
- --------------------------------------------------------------------------------
Lehman Brothers 1-16 Year Municipal
Bond Index (no expenses) 6.25 7.11
- --------------------------------------------------------------------------------
<PAGE>
INVESTOR EXPENSES
The expenses of the fund before reimbursement are shown at right. The fund has
no sales, redemption, exchange, or account fees, although some institutions may
charge you a fee for shares you buy through them. The annual fund expenses after
reimbursement are deducted from fund assets prior to performance calculations.
Annual fund operating expenses(3) (%)
(expenses that are deducted from fund assets)
Management fees 0.30
Marketing (12b-1) fees none
Other expenses(4) 0.54
- --------------------------------------------------------------------------------
Total annual fund
operating expenses(4) 0.84
- --------------------------------------------------------------------------------
Expense example
The example below is intended to help you compare the cost of investing in the
fund with the cost of investing in other mutual funds. The example assumes:
$10,000 initial investment, 5% return each year, total operating expenses
(before reimbursement) unchanged, and all shares sold at the end of each time
period. The example is for comparison only; the fund's actual return and your
actual costs may be higher or lower.
- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 88 268 466 1037
- --------------------------------------------------------------------------------
(1) The fund commenced operations on 12/23/96, and returns reflect performance
of the fund from 12/31/96.
(2) The fund's fiscal year end is 4/30.
(3) This table is restated to show the current fee arrangements in effect as of
8/1/98, and shows expenses for the past fiscal year using the current fees
as if they had been in effect during the past fiscal year, before
reimbursement, expressed as a percentage of average net assets.
(4) After reimbursement, other expenses and total operating expenses are 0.20%
and 0.50%, respectively. This reimbursement arrangement can be changed or
terminated at any time at the option of J.P. Morgan.
J.P. MORGAN INSTITUTIONAL CALIFORNIA BOND FUND 13
<PAGE>
FIXED INCOME MANAGEMENT APPROACH
- --------------------------------------------------------------------------------
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 $316 billion in assets under management,
including assets managed by the funds' advisor, J.P. Morgan Investment
Management Inc.
J.P. MORGAN INSTITUTIONAL FIXED INCOME FUNDS
These funds invest primarily in bonds and other fixed income securities, either
directly or through a master portfolio (another fund with the same goal). The
funds seek high total return or high current income.
While each fund follows its own strategy, the funds as a group share a single
investment philosophy. This philosophy, developed by the funds' advisor,
emphasizes the potential for consistently enhancing performance while managing
risk.
THE SPECTRUM OF FIXED INCOME FUNDS
The funds described in this prospectus pursue different goals and offer varying
degrees of risk and potential reward. The table below shows degrees of the
relative risk and return that these funds potentially offer. These and other
distinguishing features of each fixed income fund were described on the
preceding pages. Differences among these funds include:
o the types of securities they hold
o the tax status of the income they offer
o the relative emphasis on current income versus total return
Potential risk and return
Return (after taxes)
Global Strategic Income Fund
New York Tax Exempt Bond Fund*
California Bond Fund*
Tax Exempt Bond Fund*
Bond Fund
Short Term Bond Fund
Risk
The positions of the funds in this graph reflect long-term performance goals
only, and are relative, not absolute.
* Based on tax-equivalent returns for an investor in the highest income tax
bracket.
<PAGE>
Who May Want to Invest
The funds are designed for investors who:
o want to add an income investment to further diversify a portfolio
o want an investment whose risk/return potential is higher than that of money
market funds but generally less than that of stock funds
o want an investment that pays monthly dividends
o with regard to the Tax Exempt Bond Fund, are seeking income that is exempt
from federal personal income tax
o with regard to the state-specific funds, are seeking income that is exempt
from federal, state, and local (if applicable) personal income taxes in New
York or California
The funds are not designed for investors who:
o are investing for aggressive long-term growth
o require stability of principal
o with regard to the Global Strategic Income Fund, are not prepared to accept a
higher degree of risk than most traditional bond funds
o with regard to the federal or state tax-exempt funds, are investing through a
tax-deferred account such as an IRA
14 FIXED INCOME MANAGEMENT APPROACH
<PAGE>
FIXED INCOME INVESTMENT PROCESS
J.P. Morgan seeks to generate an information advantage through the depth of its
global fixed-income research and the sophistication of its analytical systems.
Using a team-oriented approach, J.P. Morgan seeks to gain insights in a broad
range of distinct areas and takes positions in many different areas, helping the
funds to limit exposure to concentrated sources of risk. In managing the funds
described in this prospectus, J.P. Morgan employs a three-step process that
combines sector allocation, fundamental research for identifying portfolio
securities, and duration management.
The funds invest across a range of
different types of securities
Sector allocation The sector allocation team meets monthly, analyzing the
fundamentals of a broad range of sectors in which a fund may invest. The team
seeks to enhance performance and manage risk by underweighting or overweighting
sectors.
Each fund makes its portfolio decisions
as described earlier in this prospectus
Security selection Relying on the insights of different specialists, including
credit analysts, quantitative researchers, and dedicated fixed income traders,
the portfolio managers make buy and sell decisions according to each fund's goal
and strategy.
J.P. Morgan uses a disciplined process
to control each fund's sensitivity
to interest rates
Duration management Forecasting teams use fundamental economic factors to
develop strategic forecasts of the direction of interest rates. Based on these
forecasts, strategists establish each fund's target duration, a common
measurement of a security's sensitivity to interest rate movements. For
securities owned by a fund, duration measures the average time needed to receive
the present value of all principal and interest payments by analyzing cash flows
and interest rate movements. A fund's duration is generally shorter than a
fund's average maturity because the maturity of a security only measures the
time until final payment is due. Each fund's target duration typically remains
relatively close to the duration of the market as a whole, as represented by the
fund's benchmark. The strategists closely monitor the funds and make tactical
adjustments as necessary.
FIXED INCOME MANAGEMENT APPROACH 15
<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 THROUGH AN EMPLOYER-SPONSORED RETIREMENT PLAN
Your fund investments are handled through your plan. Refer to your plan
materials or contact your benefits office for information on buying, selling, or
exchanging fund shares.
INVESTING THROUGH AN IRA OR ROLLOVER IRA
Please contact a J.P. Morgan Retirement Services Specialist at 1-888-576-4472
for information on J.P. Morgan's comprehensive IRA services, including lower
minimum investments.
INVESTING DIRECTLY
Investors may establish accounts without the help of an intermediary by using
the instructions below and at right:
o Choose a fund (or funds) and determine the amount you are investing. The
minimum amount for initial investments is $5,000,000 for the Short Term Bond,
Bond, Tax Exempt Bond, New York Tax Exempt Bond and California Bond funds and
$1,000,000 for the Global Strategic Income Fund 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.
<PAGE>
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-Delaware
Routing number: 031-100-238
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.
16 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 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 the 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.
By exchange
o Call the Shareholder Services Agent to effect an exchange.
Redemption In Kind
o Each fund reserves the right to make redemptions of over $250,000 in
securities rather than in cash.
ACCOUNT AND TRANSACTION POLICIES
Telephone orders The funds accept telephone orders from all shareholders. To
guard against fraud, the funds require shareholders to use a PIN, and may record
telephone orders or take other reasonable precautions. However, if a fund does
take such steps to ensure the authenticity of an order, you may bear any loss if
the order later proves fraudulent.
Exchanges You may exchange shares in these funds for shares in any other J.P.
Morgan Institutional or J.P. Morgan mutual fund at no charge (subject to the
securities laws of your state). When making exchanges, it is important to
observe any applicable minimums. Keep in mind that for tax purposes an exchange
is considered a sale.
A fund may alter, limit, or suspend its exchange policy at any time.
Business hours and NAV calculations The funds' regular business days and hours
are the same as those of the New York Stock Exchange (NYSE). Each 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). Each fund's
securities are typically priced using pricing services or market quotes. When
these methods are not available or do not represent a security's value at the
time of pricing (e.g. when an event occurs after the close of trading that would
materially impact a security's value), 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. A 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 17
<PAGE>
Timing of settlements When you buy shares, you will become the owner of record
when a fund receives your payment, generally the day following execution. When
you sell shares, proceeds are generally available the day following execution
and will be forwarded according to your instructions.
When you sell shares that you recently purchased by check, your order will be
executed at the next NAV but the proceeds will not be available until your check
clears. This may take up to 15 days.
Statements and reports The funds send monthly account statements as well as
confirmations after each purchase or sale of shares (except reinvestments).
Every six months each fund sends out an annual or semi-annual report containing
information on its 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), each 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, each fund reserves the right to close out your account
and send the proceeds to the address of record.
DIVIDENDS AND DISTRIBUTIONS
Income dividends are typically declared daily and paid monthly. If an investor's
shares are redeemed during the month, accrued but unpaid dividends are paid with
the redemption proceeds. Shares of a fund earn dividends on the business day the
purchase is effective, but not on the business day the redemption is effective.
Each fund distributes capital gains, if any, once a year. However, a fund may
make more or fewer payments in a given year, depending on its investment results
and its tax compliance situation. Each fund's dividends and distributions
consist of most or all of its 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, 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 from the Exempt from federal, state,
New York Tax Exempt Bond and New York City personal
Fund income taxes for New York
residents only
- --------------------------------------------------------------------------------
Income dividends from the Exempt from federal and state
California Bond Fund personal income taxes for
California residents only
- --------------------------------------------------------------------------------
Income dividends from the Exempt from federal personal
Tax Exempt Bond Fund income taxes
- --------------------------------------------------------------------------------
Income dividends from Ordinary income
all other funds
- --------------------------------------------------------------------------------
Short-term capital gains Ordinary income
distributions
- --------------------------------------------------------------------------------
Long-term capital gains Capital gains
distributions
- --------------------------------------------------------------------------------
Sales or exchanges of Capital gains or
shares owned for more losses
than one year
- --------------------------------------------------------------------------------
Sales or exchanges of Gains are treated as ordinary
shares owned for one year income; losses are subject
or less to special rules
- --------------------------------------------------------------------------------
<PAGE>
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 a fund is about to declare a long-term capital
gains distribution. A portion of the Tax Exempt Bond, New York Tax Exempt Bond
and California Bond funds' returns may be subject to federal, state, or local
tax, or the alternative minimum tax. Every January, each fund issues tax
information on its distributions for the previous year. Any investor for whom a
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.
18 YOUR INVESTMENT
<PAGE>
FUND DETAILS
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
As noted earlier, each fund (except the California Bond Fund) is a series of
J.P. Morgan Institutional Funds, a Massachusetts business trust, and is a
"feeder" fund that invests in a master portfolio. (Except where indicated, this
prospectus uses the term "the fund" to mean the feeder fund and its master
portfolio taken together.)
Each master portfolio accepts investments from other feeder funds, and all the
feeders of a given master portfolio bear the portfolio's expenses in proportion
to their assets. However, each feeder can set its own transaction minimums,
fund-specific expenses and other conditions. This means that one feeder could
offer access to the same master portfolio on more attractive terms, or could
experience better performance, than another feeder. Information about other
feeders is available by calling 1-800-766-7722. Generally, when a master
portfolio seeks a vote, each of its feeder funds will hold a shareholder meeting
and cast its vote proportionately, as instructed by its shareholders. Fund
shareholders are entitled to one full or fractional vote for each dollar or
fraction of a dollar invested.
Each feeder fund and its master portfolio expect to maintain consistent goals,
but if they do not, the feeder fund will withdraw from the master portfolio,
receiving its assets either in cash or securities. Each feeder fund's trustees
would then consider whether it should hire its own investment adviser, invest in
a different master portfolio, or take other action.
The California Bond 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.
MANAGEMENT AND ADMINISTRATION
The feeder funds described in this prospectus, their corresponding master
portfolios, and J.P. Morgan Series Trust are all 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 each fund's other service
providers.
J.P. Morgan, subject to the expense reimbursements described earlier in this
prospectus, receives the following fees for investment advisory and other
services:
- --------------------------------------------------------------------------------
Advisory services Percentage of the master
portfolio's average net assets
- --------------------------------------------------------------------------------
Short Term Bond 0.25%
- --------------------------------------------------------------------------------
Bond 0.30%
- --------------------------------------------------------------------------------
Global Strategic Income 0.45%
- --------------------------------------------------------------------------------
Tax Exempt Bond 0.30%
- --------------------------------------------------------------------------------
New York Tax Exempt Bond 0.30%
- --------------------------------------------------------------------------------
Administrative services Master portfolio's and fund's pro-
(fee shared with Funds rata portions of 0.09% of the
Distributor, Inc.) first $7 billion 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
- --------------------------------------------------------------------------------
The California Bond Fund, subject to the expense reimbursements described
earlier in this prospectus, pays J.P. Morgan the following fees for investment
advisory and other services:
- --------------------------------------------------------------------------------
Advisory services 0.30% of each fund's average
net assets
- --------------------------------------------------------------------------------
Administrative services Fund's pro-rata portion of 0.09%
(fee shared with of the first $7 billion of average
Funds Distributor, Inc.) net assets in J.P. Morgan-advised
portfolios, plus 0.04% of average
assets over $7 billion
- --------------------------------------------------------------------------------
Shareholder services 0.10% of the fund's average
net assets
- --------------------------------------------------------------------------------
<PAGE>
J.P. Morgan may pay fees to certain firms and professionals for providing
recordkeeping or other services in connection with investments in a fund.
Year 2000 Fund operations and shareholders could be adversely affected if the
computer systems used by J.P. Morgan, the funds' other service providers and
other entities with computer systems linked to the funds 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 date-related problems from
adversely impacting fund operations and shareholders. In addition, to the extent
that operations of issuers of securities held by the funds 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 funds will decline.
FUND DETAILS 19
<PAGE>
RISK AND REWARD ELEMENTS
This table discusses the main elements that make up each fund's overall risk and
reward characteristics. It also outlines each fund's policies toward various
investments, including those that are designed to help certain funds manage
risk.
================================================================================
Potential risks
- --------------------------------------------------------------------------------
Market conditions
o Each fund's share price, yield, and total return will fluctuate in response to
bond market movements
o The value of most bonds will fall when interest rates rise; the longer a
bond's maturity and the lower its credit quality, the more its value typically
falls
o Adverse market conditions may from time to time cause a fund to take temporary
defensive positions that are inconsistent with its principal investment
strategies and may hinder a fund from achieving its investment objective
o Mortgage-backed and asset-backed securities (securities representing an
interest in, or secured by, a pool of mortgages or other assets such as
receivables) could generate capital losses or periods of low yields if they
are paid off substantially earlier or later than anticipated
- --------------------------------------------------------------------------------
Credit quality
o The default of an issuer would leave a fund with unpaid interest or principal
o Junk bonds (those rated BB/Ba or lower) have a higher risk of default, tend to
be less liquid, and may be more difficult to value
- --------------------------------------------------------------------------------
Foreign investments
o A fund could lose money because of foreign government actions, political
instability, or lack of adequate and accurate information
o Currency exchange rate movements could reduce gains or create losses
o Currency and investment risks tend to be higher in emerging markets
- --------------------------------------------------------------------------------
When-issued and delayed delivery securities
o When a fund buys securities before issue or for delayed delivery, it could be
exposed to leverage risk if it does not use segregated accounts
- --------------------------------------------------------------------------------
================================================================================
Potential rewards
- --------------------------------------------------------------------------------
o Bonds have generally outperformed money market investments over the long term,
with less risk than stocks
o Most bonds will rise in value when interest rates fall
o Mortgage-backed and asset-backed securities can offer attractive returns
- --------------------------------------------------------------------------------
o Investment-grade bonds have a lower risk of default
o Junk bonds offer higher yields and higher potential gains
- --------------------------------------------------------------------------------
o Foreign bonds, which represent a major portion of the world's fixed income
securities, offer attractive potential performance and opportunities for
diversification
o Favorable exchange rate movements could generate gains or reduce losses
o Emerging markets can offer higher returns
- --------------------------------------------------------------------------------
o A fund can take advantage of attractive transaction opportunities
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
Policies to balance risk and reward
- --------------------------------------------------------------------------------
o Under normal circumstances the funds plan to remain fully invested in bonds
and other fixed income securities as noted in the table on pages 24-25
o The funds seek to limit risk and enhance total return or yields through
careful management, sector allocation, individual securities selection, and
duration management
o During severe market downturns, the funds have the option of investing up to
100% of assets in investment-grade short-term securities
o J.P. Morgan monitors interest rate trends, as well as geographic and
demographic information related to mortgage-backed securities and mortgage
prepayments
- --------------------------------------------------------------------------------
o Each fund maintains its own policies for balancing credit quality against
potential yields and gains in light of its investment goals
o J.P. Morgan develops its own ratings of unrated securities and makes a credit
quality determination for unrated securities
- --------------------------------------------------------------------------------
o Foreign bonds are a primary investment only for the Global Strategic Income
fund and may be a significant investment for the Short Term Bond and Bond
funds; the Tax Exempt Bond, New York Tax Exempt Bond and California Bond funds
are not permitted to invest any assets in foreign bonds
o To the extent that a fund invests in foreign bonds, it may manage the currency
exposure of its foreign investments relative to its benchmark, and may hedge a
portion of its foreign currency exposure into the U.S. dollar from time to
time (see also "Derivatives"); these currency management techniques may not be
available for certain emerging markets investments
- --------------------------------------------------------------------------------
o Each fund uses segregated accounts to offset leverage risk
- --------------------------------------------------------------------------------
20 FUND DETAILS
<PAGE>
================================================================================
Potential risks
- --------------------------------------------------------------------------------
Management choices
o A fund could underperform its benchmark due to its sector, securities or
duration choices
- --------------------------------------------------------------------------------
Derivatives
o Derivatives such as futures, options, swaps and forward foreign currency
contracts that are used for hedging the portfolio or specific securities may
not fully offset the underlying positions(1) and this could result in losses
to the fund that would not have otherwise occurred
o Derivatives used for risk management may not have the intended effects and may
result in losses or missed opportunities
o The counterparty to a derivatives contract could default
o Certain types of derivatives involve costs to the funds which can reduce
returns
o Derivatives that involve leverage could magnify losses
- --------------------------------------------------------------------------------
Securities Lending
o When a fund lends a security, the loaned securities may not be returned if
the borrower defaults
o The collateral will be subject to the risks of the securities in which it is
invested
- --------------------------------------------------------------------------------
Illiquid holdings
o A fund could have difficulty valuing these holdings precisely
o A fund could be unable to sell these holdings at the time or price desired
- --------------------------------------------------------------------------------
Short-term trading
o Increased trading would raise a fund's transaction costs
o Increased short-term capital gains distributions would raise shareholders'
income tax liability
- --------------------------------------------------------------------------------
================================================================================
Potential rewards
- --------------------------------------------------------------------------------
o A fund could outperform its benchmark due to these same choices
- --------------------------------------------------------------------------------
o Hedges that correlate well with underlying positions can reduce or eliminate
losses at low cost
o A fund could make money and protect against losses if management's analysis
proves correct
o Derivatives that involve leverage could generate substantial gains at low cost
- --------------------------------------------------------------------------------
o A fund may enhance income through the investment of the collateral received
from the borrower
- --------------------------------------------------------------------------------
o These holdings may offer more attractive yields or potential growth than
comparable widely traded securities
- --------------------------------------------------------------------------------
o A fund could realize gains in a short period of time
o A fund could protect against losses if a bond is overvalued and its value
later falls
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
Policies to balance risk and reward
- --------------------------------------------------------------------------------
o J.P. Morgan focuses its active management on those areas where it believes its
commitment to research can most enhance returns and manage risks in a
consistent way
- --------------------------------------------------------------------------------
o The funds use derivatives, such as futures, options, swaps and forward foreign
currency contracts for hedging and for risk management (i.e., to adjust
duration or to establish or adjust exposure to particular securities, markets,
or currencies); risk management may include management of a fund's exposure
relative to its benchmark; the Tax Exempt Bond, New York Tax Exempt Bond and
California Bond funds are permitted to enter into futures and options
transactions, however, these transactions result in taxable gains or losses so
it is expected that these funds will utilize them infrequently; forward
foreign currency contracts are not permitted to be used by the Tax Exempt
Bond, New York Tax Exempt Bond and California Bond funds
o The funds only establish hedges that they expect will be highly correlated
with underlying positions
o While the funds may use derivatives that incidentally involve leverage, they
do not use them for the specific purpose of leveraging their portfolios
- --------------------------------------------------------------------------------
o J.P. Morgan maintains a list of approved borrowers
o The fund receives collateral equal to at least 100% of the current value of
the securities loaned
o The lending agents indemnify a fund against borrower default
o J.P. Morgan's collateral investment guidelines limit the quality and duration
of collateral investment to minimize losses
o Upon recall, the borrower must return the securities loaned within the normal
settlement period
- --------------------------------------------------------------------------------
o No fund may inSvest more than 15% of net assets in illiquid holdings
o To maintain adequate liquidity to meet redemptions, each fund may hold
investment-grade short-term securities (including repurchase agreements and
reverse repurchase agreements) and, for temporary or extraordinary purposes,
may borrow from banks up to 33 1/3% of the value of its total assets
- --------------------------------------------------------------------------------
o The expected turnover rate for each fund is as follows:
o Tax Exempt Bond 50%
o New York Tax Exempt Bond, California Bond 75%
o Short Term Bond, Bond, Global Strategic Income 300%
o The funds generally avoid short-term trading, except to take advantage of
attractive or unexpected opportunities or to meet demands generated by
shareholder activity
- --------------------------------------------------------------------------------
(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. A swap is a privately negotiated agreement to exchange
one stream of payments for another. A forward foreign currency contract is
an obligation to buy or sell a given currency on a future date and at a set
price.
FUND DETAILS 21
<PAGE>
Investments
This table discusses the customary types of investments which can be held by
each fund. In each case the principal types of risk are listed on the following
page (see below for definitions).This table reads across two pages.
- --------------------------------------------------------------------------------
Asset-backed securities Interests in a stream of payments from specific assets,
such as auto or credit card receivables.
- --------------------------------------------------------------------------------
Bank obligations Negotiable certificates of deposit, time deposits and bankers'
acceptances of domestic and foreign issuers.
- --------------------------------------------------------------------------------
Commercial paper Unsecured short term debt issued by domestic and foreign banks
or corporations. These securities are usually discounted and are rated by S&P or
Moody's.
- --------------------------------------------------------------------------------
Convertible securities Domestic and foreign debt securities that can be
converted into equity securities at a future time and price.
- --------------------------------------------------------------------------------
Corporate bonds Debt securities of domestic and foreign industrial, utility,
banking, and other financial institutions.
- --------------------------------------------------------------------------------
Mortgages (directly held) Domestic debt instrument which gives the lender a lien
on property as security for the loan payment.
- --------------------------------------------------------------------------------
Mortgage-backed securities Domestic and foreign securities (such as Ginnie Maes,
Freddie Macs, Fannie Maes) which represent interests in pools of mortgages,
whereby the principal and interest paid every month is passed through to the
holder of the securities.
- --------------------------------------------------------------------------------
Mortgage dollar rolls The purchase of mortgage-backed securities with the
promise to purchase similar securities upon the maturity of the original
security. Segregated accounts are used to offset leverage risk.
- --------------------------------------------------------------------------------
Participation interests Interests that represent a share of bank debt or similar
securities or obligations.
- --------------------------------------------------------------------------------
Private placements Bonds or other investments that are sold directly to an
institutional investor.
- --------------------------------------------------------------------------------
REITs and other real-estate related instruments Securities of issuers that
invest in real estate or are secured by real estate.
- --------------------------------------------------------------------------------
Repurchase agreements Contracts whereby the fund agrees to purchase a security
and resell it to the seller on a particular date and at a specific price.
- --------------------------------------------------------------------------------
Reverse repurchase agreements Contracts whereby the fund sells a security and
agrees to repurchase it from the buyer on a particular date and at a specific
price. Considered a form of borrowing.
- --------------------------------------------------------------------------------
Sovereign debt, Brady bonds, and debt of supranational organizations Dollar- or
non-dollar-denominated securities issued by foreign governments or supranational
organizations. Brady bonds are issued in connection with debt restructurings.
- --------------------------------------------------------------------------------
Swaps Contractual agreement whereby a party agrees to exchange periodic payments
with a counterparty. Segregated accounts are used to offset leverage risk.
- --------------------------------------------------------------------------------
Synthetic variable rate instruments Debt instruments whereby the issuer agrees
to exchange one security for another in order to change the maturity or quality
of a security in the fund.
- --------------------------------------------------------------------------------
Tax exempt municipal securities Securities, generally issued as general
obligation and revenue bonds, whose interest is exempt from federal taxation and
state and/or local taxes in the state where the securities were issued.
- --------------------------------------------------------------------------------
U.S. government securities Debt instruments (Treasury bills, notes, and bonds)
guaranteed by the U.S. government for the timely payment of principal and
interest.
- --------------------------------------------------------------------------------
Zero coupon, pay-in-kind, and deferred payment securities Domestic and foreign
securities offering non-cash or delayed-cash payment. Their prices are typically
more volatile than those of some other debt instruments and involve certain
special tax considerations.
- --------------------------------------------------------------------------------
<PAGE>
Risk related to certain investments held by J.P. Morgan Institutional fixed
income funds:
Credit risk The risk a financial obligation will not be met by the issuer of a
security or the counterparty to a contract, resulting in a loss to the
purchaser.
Currency risk The risk currency exchange rate fluctuations may reduce gains or
increase losses on foreign investments.
Environmental risk The risk that an owner or operator of real estate may be
liable for the costs associated with hazardous or toxic substances located on
the property.
Extension risk The risk a rise in interest rates will extend the life of a
mortgage-backed security to a date later than the anticipated prepayment date,
causing the value of the investment to fall.
Interest rate risk The risk a change in interest rates will adversely affect the
value of an investment. The value of fixed income securities generally moves in
the opposite direction of interest rates (decreases when interest rates rise and
increases when interest rates fall).
Leverage risk The risk of gains or losses disproportionately higher than the
amount invested.
22 FUND DETAILS
<PAGE>
o Permitted (and if applicable, percentage limitation)
percentage of total assets - bold
percentage of net assets - italic
o Permitted, but not typically used
+ Permitted, but no current intention of use
- -- Not permitted
Principal Types of Risk
<TABLE>
<CAPTION>
Short Term Global Strategic Tax Exempt New York Tax California
Bond Bond Income Bond Exempt Bond Bond
<S> <C> <C> <C> <C> <C> <C>
credit, interest rate, market, prepayment o o o o o o
credit, currency, liquidity, political o(1) o(1) o o Domestic o Domestic o Domestic
Only Only Only
credit, currency, interest rate, liquidity, market,
political o o o o o o
credit, currency, interest rate, liquidity, market,
political, valuation o 25% o 25% o -- -- --
Foreign Foreign
credit, currency, interest rate, liquidity, market,
political, valuation o 25% o 25% o -- -- --
Foreign Foreign
credit, environmental, extension, interest rate,
liquidity, market, natural event, political,
prepayment, valuation o o o + + +
credit, currency, extension, interest rate,
leverage, market, political, prepayment o o o -- -- --
currency, extension, interest rate, leverage,
liquidity, market, political, prepayment o 33 1/3% o 33 1/3% o 33 1/3% -- -- --
credit, currency, extension, interest rate,
liquidity, political, prepayment o o o -- -- --
credit, interest rate, liquidity, market,
valuation o o o o o o
credit, interest rate, liquidity, market, natural
event prepayment, valuation o o o -- -- --
credit o o o o o o
credit o(3) o(3) o(3) o(3) o(3) o(3)
credit, currency, interest rate, market, political o o o -- -- --
credit, currency, interest rate, leverage, market,
political o o o o -- --
credit, interest rate, leverage, liquidity, market -- -- -- o o o
credit, interest rate, market, natural event,
political o o -- o(2) o(2) o(2)
interest rate o o o o o o
credit, currency, interest rate, liquidity, market,
political, valuation o o o o o o
</TABLE>
<PAGE>
Liquidity risk The risk the holder may not be able to sell the security at the
time or price it desires.
Market risk The risk that when the market as a whole declines, the value of a
specific investment will decline proportionately. This systematic risk is common
to all investments and the mutual funds that purchase them.
Natural event risk The risk a natural disaster, such as a hurricane or similar
event, will cause severe economic losses and default in payments by the issuer
of the security.
Political risk The risk governmental policies or other political actions will
negatively impact the value of the investment.
Prepayment risk The risk declining interest rates will result in unexpected
prepayments, causing the value of the investment to fall.
Valuation risk The risk the estimated value of a security does not match the
actual amount that can be realized if the security is sold.
(1) For each of the Short Term Bond and Bond funds, all foreign securities in
the aggregate may not exceed 25% of such fund's assets.
(2) At least 65% of assets must be in tax exempt securities (for New York Tax
Exempt Bond and California Bond funds, the 65% must be in New York or
California municipal securities, respectively).
(3) All forms of borrowing (including securities lending and reverse repurchase
agreements) in the aggregate may not exceed 33 1/3% of the fund's total
assets.
FUND DETAILS 23
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand each fund's
financial performance for the past one through five fiscal years or periods, as
applicable. Certain information reflects financial results for a single fund
share. The total returns in the tables represent the rate that an investor would
have earned (or lost) on an investment in a fund (assuming reinvestment of all
dividends and distributions). Except where noted, this information has been
audited by PricewaterhouseCoopers LLP, whose reports, along with each fund's
financial statements, are included in the respective fund's annual report, which
are available upon request.
<TABLE>
<CAPTION>
J.P. MORGAN INSTITUTIONAL SHORT TERM BOND FUND
Per-share data For fiscal periods ended October 31
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998
Net asset value, beginning of period ($) 9.99 9.60 9.83 9.85 9.84
- -----------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.47 0.58 0.55 0.61 0.59
Net realized and unrealized gain (loss)
on investment and foreign currency contracts
and transactions($) (0.39) 0.24 0.02 (0.01) 0.12
- -----------------------------------------------------------------------------------------------------------------------
Total from investment operations ($) 0.08 0.82 0.57 0.60 0.71
- -----------------------------------------------------------------------------------------------------------------------
Less distributions to shareholders from:
Net investment income ($) (0.47) (0.59) (0.55) (0.61) (0.59)
Net asset value, end of period ($) 9.60 9.83 9.85 9.84 9.96
- -----------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------------------------
Total return (%) 0.87 8.81 6.01 6.27 7.40
- -----------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 47,679 18,916 17,810 27,375 232,986
- -----------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
- -----------------------------------------------------------------------------------------------------------------------
Expenses (%) 0.45 0.45 0.37 0.25 0.25
- -----------------------------------------------------------------------------------------------------------------------
Net investment income (%) 4.96 6.09 5.69 6.19 5.84
- -----------------------------------------------------------------------------------------------------------------------
Expenses without
reimbursement (%) 0.78 0.67 1.37 0.96 0.62
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
24 FUND DETAILS
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
J.P. MORGAN INSTITUTIONAL BOND FUND
Per-share data For fiscal periods ended October 31
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998
Net asset value, beginning of period ($) 10.14 9.23 9.98 9.84 10.01
- -----------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.55 0.63 0.61 0.65 0.64
Net realized and unrealized gain (loss)
on investment and foreign currency contracts
and transactions ($) (0.88) 0.75 (0.11) 0.18 0.15
- -----------------------------------------------------------------------------------------------------------------------
Total from investment operations ($) (0.33) 1.38 0.50 0.83 0.79
- -----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income ($) (0.55) (0.63) (0.61) (0.64) (0.63)
Net realized gain ($) (0.03) -- (0.03) (0.02) (0.07)
- -----------------------------------------------------------------------------------------------------------------------
Total distributions ($) (0.58) (0.63) (0.64) (0.66) (0.70)
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period ($) 9.23 9.98 9.84 10.01 10.10
- -----------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------------------------
Total return (%) (3.33) 15.50 5.21 8.78 8.18
- -----------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 253,174 438,610 836,066 912,054 1,001,411
- -----------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
Expenses (%) 0.50 0.47 0.50 0.50 0.49
- -----------------------------------------------------------------------------------------------------------------------
Net investment income (%) 6.00 6.62 6.28 6.59 6.32
- -----------------------------------------------------------------------------------------------------------------------
Expenses without
reimbursement (%) 0.69 0.52 0.53 0.50 0.50
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
J.P. MORGAN INSTITUTIONAL GLOBAL STRATEGIC INCOME FUND
Per-share data For fiscal periods ended October 31
- --------------------------------------------------------------------------------
1997(1) 1998
Net asset value, beginning of period ($) 10.00 10.16
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.46 0.75
Net realized and unrealized gain (loss)
on investment and foreign currency transactions ($) 0.15 (0.45)
- --------------------------------------------------------------------------------
Total from investment operations ($) 0.61 0.30
- --------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income ($) (0.45) (0.70)
Net realized gain ($) -- (0.02)
Return of capital -- (0.02)
- --------------------------------------------------------------------------------
Total distributions ($) (0.45) (0.74)
- --------------------------------------------------------------------------------
Net asset value, end of period ($) 10.16 9.72
- --------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------
Total return (%) 6.15(2) 2.91
- --------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 105,051 223,700
- --------------------------------------------------------------------------------
Ratio to average net assets:
Expenses (%) 0.65(3) 0.65
- --------------------------------------------------------------------------------
Net investment income (%) 7.12(3) 6.59
- --------------------------------------------------------------------------------
Expenses without
reimbursement (%) 1.18(3) 0.83
- --------------------------------------------------------------------------------
(1) The fund commenced operations on 3/17/97.
(2) Not annualized.
(3) Annualized.
FUND DETAILS 25
<PAGE>
- --------------------------------------------------------------------------------
J.P. MORGAN INSTITUTIONAL CALIFORNIA BOND FUND
Per-share data For fiscal periods ended
- --------------------------------------------------------------------------------
4/30/97(1) 4/30/98 10/31/98
(unaudited)
Net asset value, beginning of period ($) 10.00 9.90 10.20
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.16 0.42 0.21
Net realized and unrealized gain (loss)
on investment ($) (0.10) 0.30 0.33
- --------------------------------------------------------------------------------
Total from investment operations ($) 0.06 0.72 0.54
- --------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income ($) (0.16) (0.42) (0.21)
- --------------------------------------------------------------------------------
Net asset value, end of period ($) 9.90 10.20 10.53
- --------------------------------------------------------------------------------
Total return (%) 0.56(2) 7.35 5.30(2)
- --------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 14,793 46,280 53,971
- --------------------------------------------------------------------------------
Ratio to average net assets:
Expenses (%) 0.45(3) 0.45 0.48(3)
- --------------------------------------------------------------------------------
Net investment income (%) 4.43(3) 4.11 3.96(3)
- --------------------------------------------------------------------------------
Expenses without
reimbursement (%) 3.46(3) 0.79 0.73(3)
- --------------------------------------------------------------------------------
Portfolio turnover (%) 40 44 27
- --------------------------------------------------------------------------------
(1) The fund commenced operations on 12/23/96.
(2) Not annualized.
(3) Annualized.
26 FUND DETAILS
<PAGE>
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<PAGE>
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<PAGE>
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<PAGE>
FOR MORE INFORMATION
- --------------------------------------------------------------------------------
For investors who want more information on these funds, 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 a fund's most recently completed fiscal year or
half-year.
Statement of Additional Information (SAI) Provides a fuller technical and legal
description of a fund's policies, investment restrictions, and business
structure. This prospectus incorporates each fund's 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 Funds
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
funds' investment company and 1933 Act registration numbers are:
J.P. Morgan Institutional Short Term Bond Fund.....................811-07342 and
033-54642
J.P. Morgan Institutional Bond Fund ...............................811-07342 and
033-54642
J.P. Morgan Institutional Global Strategic Income Fund ............811-07342 and
033-54642
J.P. Morgan Institutional Tax Exempt Bond Fund.....................811-07342 and
033-54642
J.P. Morgan Institutional New York Tax Exempt Bond Fund ...........811-07342 and
033-54642
J.P. Morgan Institutional California Bond Fund.....................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.
JPMorgan
- --------------------------------------------------------------------------------
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
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
MARCH 1, 1999
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS BUT CONTAINS
ADDITIONAL INFORMATION WHICH SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS
DATED MARCH 1, 1999 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 RELATING TO EACH OF THE FUNDS LISTED ABOVE DATED OCTOBER 31, 1998. THE
PROSPECTUSES AND THESE FINANCIAL STATEMENTS, INCLUDING THE INDEPENDENT
ACCOUNTANTS' REPORT IN THE ANNUAL FINANCIAL STATEMENTS, 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................. 14
Trustees and Officers................... 15
Investment Advisor...................... 19
Distributor............................. 21
Co-Administrator........................ 22
Services Agent.......................... 22
Custodian and Transfer Agent............ 23
Shareholder Servicing................... 23
Financial Professionals................. 24
Independent Accountants................. 25
Expenses................................ 25
Purchase of Shares...................... 26
Redemption of Shares.................... 26
Exchange of Shares.................... 28
Dividends and Distributions............. 28
Net Asset Value......................... 28
Performance Data........................ 29
Portfolio Transactions.................. 30
Massachusetts Trust..................... 32
Description of Shares................... 33
Taxes................................... 34
Additional Information.................. 37
Financial Statements.................... 38
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 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 is also
considered as the 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, except for liquidity purposes, a Fund will enter into a
reverse repurchase agreement only when the expected return from the investment
of the proceeds is greater than the expense of the transaction. A Fund will not
invest the proceeds of a reverse repurchase agreement for a period which exceeds
the duration of the reverse repurchase agreement. Each Fund will establish and
maintain with the custodian a separate account with a segregated portfolio of
securities in an amount at least equal to its purchase obligations under its
reverse repurchase agreements. See "Investment Restrictions" for each Fund's
limitations on reverse repurchase agreements and bank borrowings.
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, the
Advisor 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) 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 be exercised on
<PAGE>
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
securities. In addition, these options are designed to reflect price
<PAGE>
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.
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
<PAGE>
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 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.)
<PAGE>
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.
Tax Aware Disciplined Equity Fund -- For the period January 30, 1997
(commencement of operations) through October 31, 1997, and the for the fiscal
year ended October 31, 1998: 35% and 57%, respectively.
<PAGE>
Tax Aware U.S. Equity Fund -- For the period December 18, 1996 (commencement of
operations) through October 31, 1997, and for the fiscal year ended October 31,
1998: 23% and 44%, respectively.
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.
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 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
<PAGE>
by their Trustees. These non-fundamental investment policies require that
the Funds:
(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.
<PAGE>
MATTHEW HEALEY1--Trustee, Chairman and Chief Executive Officer;
Chairman, Pierpont Group, Inc., since prior to 1993. His address is Pine Tree
Country Club Estates, 10286 Saint Andrews Road, Boynton Beach, Florida 33436,
and his date of birth is August 23, 1937.
MICHAEL P. MALLARDI--Trustee; Retired; Prior to April 1996, Senior Vice
President, Capital Cities/ABC, Inc. and President, Broadcast Group. His address
is 10 Charnwood Drive, Suffern, 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, 1998 is set forth below.
<TABLE>
<CAPTION>
<S> <C> <C>
- ------------------------------- ------------------- ----------------------------
TOTAL TRUSTEE COMPENSATION
ACCRUED BY THE MASTER
PORTFOLIOS (*), J.P. MORGAN
INSTITUTIONAL FUNDS, J.P.
AGGREGATE TRUSTEE MORGAN FUNDS AND THE TRUST
COMPENSATION DURING 1998(**)
PAID BY THE TRUST
NAME OF TRUSTEE DURING 1998
- ------------------------------- ------------------- -----------------------------
- ------------------------------- ------------------- -----------------------------
Frederick S. Addy, Trustee $494 $75,000
- ------------------------------- ------------------- -----------------------------
- ------------------------------- ------------------- -----------------------------
William G. Burns, Trustee $494 $75,000
- ------------------------------- ------------------- -----------------------------
- ------------------------------- ------------------- -----------------------------
Arthur C. Eschenlauer, Trustee $494 $75,000
- ------------------------------- ------------------- -----------------------------
- ------------------------------- ------------------- -----------------------------
Matthew Healey, Trustee (***) $494 $75,000
Chairman and Chief Executive
Officer
- ------------------------------- ------------------- -----------------------------
- ------------------------------- ------------------- -----------------------------
Michael P. Mallardi, Trustee $494 $75,000
- ------------------------------- ------------------- -----------------------------
</TABLE>
(*) Includes each portfolio in which a series of J.P. Morgan Funds or J.P.
Morgan Institutional Funds invests.
(**) No investment company within the fund complex has a pension or
retirement plan. Currently there are 17 investment companies (14 investment
companies comprising the Master Portfolios, J.P. Morgan Funds, J.P. Morgan
Institutional Funds and the Trust) in the fund complex.
(***) During 1998, Pierpont Group, Inc. paid Mr. Healey, in his role as
Chairman of Pierpont Group, Inc., compensation in the amount of $157,400,
contributed $23,610 to a defined contribution plan on his behalf and paid
$17,700 in insurance premiums for his benefit.
<PAGE>
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 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 and for the fiscal year
ended October 31, 1998: $157 and $1,578, respectively.
Tax Aware U.S. Equity Fund -- For the period December 18, 1996 (commencement of
operations) through October 31, 1997 and for the fiscal year ended October 31,
1998: $451 and $1,552, respectively.
Officers
The Trust's executive officers (listed below), other than the Chief
Executive Officer and the officers who are employees of the Advisor, are
provided and compensated by Funds Distributor, Inc. ("FDI"), a wholly owned
indirect subsidiary of Boston Institutional Group, Inc. The officers conduct and
supervise the business operations of the Trust. The Trust has no employees.
The officers of the Trust, their principal occupations during the past
five years and dates of birth are set forth below. The business address of each
of the officers unless otherwise noted is Funds Distributor, Inc., 60 State
Street, Suite 1300, Boston, Massachusetts 02109.
MATTHEW HEALEY; Chief Executive Officer; Chairman, Pierpont Group,
since prior to 1993. His address is Pine Tree 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.
<PAGE>
DOUGLAS C. CONROY; Vice President and Assistant Treasurer. Assistant Vice
President and Assistant Department Manager of Treasury Services and
Administration of FDI and an officer of certain investment companies distributed
or administered by FDI. Prior to April 1997, Mr. Conroy was Supervisor of
Treasury Services and Administration of FDI. From April 1993 to January 1995,
Mr. Conroy was a Senior Fund Accountant for Investors Bank & Trust Company. His
date of birth is March 31, 1969.
KAREN JACOPPO-WOOD; Vice President and Assistant Secretary. Vice President
and Senior Counsel of FDI and an officer of certain investment companies
distributed or administered by FDI. From June 1994 to January 1996, Ms.
Jacoppo-Wood was a Manager of SEC Registration at Scudder, Stevens & Clark, Inc.
Prior to May 1994, Ms. Jacoppo-Wood was a senior paralegal at The Boston Company
Advisors, Inc. ("TBCA"). Her date of birth is December 29, 1966.
CHRISTOPHER J. KELLEY; Vice President and Assistant Secretary. Vice
President and Senior Associate General Counsel of FDI and Premier Mutual and an
officer of certain investment companies distributed or administered by FDI. From
April 1994 to July 1996, Mr. Kelley was Assistant Counsel at Forum Financial
Group. Prior to April 1994, Mr. Kelley was employed by Putnam Investments in
legal and compliance capacities. His date of birth is December 24, 1964.
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
<PAGE>
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 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.
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 $316 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 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
<PAGE>
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 the advisory fees paid by each Fund 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 and for the fiscal year
ended October 31, 1998: $16,524 and $195,083, respectively.
<PAGE>
Tax Aware U.S. Equity Fund -- For the period December 18, 1996 (commencement of
operations) through October 31, 1997 and for the fiscal year ended October 31,
1998: $62,523 and $243,124, respectively.
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
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
<PAGE>
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 and for the fiscal year
ended October 31, 1998: $84 and $744, respectively.
Tax Aware U.S. Equity Fund: -- For the period December 18, 1996
(commencement of operations) through October 31, 1997 and for the fiscal year
ended October 31, 1998: $252 and $734, respectively.
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
<PAGE>
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
as Services Agent.
Tax Aware Disciplined Equity Fund: -- For the period January 30, 1997
(commencement of operations) through October 31, 1997 and for the fiscal year
ended October 31, 1998: $2,693 and $32,142, respectively.
Tax Aware U.S. Equity Fund: -- For the period December 18, 1996
(commencement of operations) through October 31, 1997 and for the fiscal year
ended October 31, 1998: $7,649 and $31,306, respectively.
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
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
<PAGE>
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 for the fiscal periods indicated.
Tax Aware Disciplined Equity Fund: -- For the period January 30, 1997
(commencement of operations) through October 31, 1997 and for the fiscal year
ended October 31, 1998: $11,803 and $108,894, respectively.
Tax Aware U.S. Equity Fund: -- For the period December 18, 1996
(commencement of operations) through October 31, 1997 and for the fiscal year
ended October 31, 1998: $34,735 and $135,069.
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 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
<PAGE>
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.
J.P. Morgan has agreed that it will reimburse the Funds noted below
until further notice to the extent necessary to maintain the Fund's total
operating expenses at the following annual rates of the Fund's average daily net
assets.
Tax Aware Disciplined Equity Fund 0.55%
Tax Aware U.S. Equity Fund 0.85%
These limits do not cover extraordinary expenses. These
reimbursement arrangements can be changed at any time at the option of
J.P. Morgan.
<PAGE>
The table below sets forth for each Fund listed the fees and other
expenses J.P. Morgan reimbursed under the expense reimbursement arrangements
described above or pursuant to prior expense reimbursement arrangements for the
fiscal periods indicated.
Tax Aware Disciplined Equity Fund: -- For the period January 30, 1997
(commencement of operations) through October 31, 1997 and for the fiscal year
ended October 31, 1998: $190,599 and $261,143, respectively.
Tax Aware U.S. Equity Fund: -- For the period December 18, 1996
(commencement of operations) through October 31, 1997 and for the fiscal year
ended October 31, 1998: $182,588 and $130,293.
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
<PAGE>
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 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 fee of 1% will be imposed on shares held
for less than one year 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.
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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 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
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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
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
<PAGE>
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.
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 (10/31/98): Average annual total return,
1 year: 23.26%; average annual total return, 5 years: N/A; average annual total
return, commencement of operations (January 30, 1997) to period end: 25.53%;
aggregate total return, 1 year: 23.26%; aggregate total return, 5 years: N/A;
aggregate total return, commencement of operations (January 30, 1997) to period
end: 28.17%.
Tax Aware U.S. Equity Fund (10/31/98): Average annual total return, 1 year:
21.81%; average annual total return, 5 years: N/A; average annual total return,
commencement of operations (December 18, 1996) to period end: 25.68%; aggregate
total return, 1 year: 21.81%; aggregate total return, 5 years: N/A; aggregate
total return, commencement of operations (December 18, 1996) to period end:
53.28%.
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
<PAGE>
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
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 and for the fiscal year
ended October 31, 1998: $2,800 and $59,170, respectively.
Tax Aware U.S. Equity Fund: For the period December 18, 1996 (commencement
of operations) through October 31, 1997 and for the fiscal year ended October
31, 1998: $4,971 and $48,738, respectively.
<PAGE>
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 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
<PAGE>
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".
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
<PAGE>
of the Trust. The Trustees are also required, under certain
circumstances, to assist shareholders in communicating with other shareholders.
As of January 31, 1999, 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 (12.25%).
Tax Aware Disciplined Equity Fund - Charles Schwab & Co. Inc. Special
Custody Account for the benefit of Customers (21.40%); American Contractors
Insurance Group (14.84%).
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
<PAGE>
generally be taxable to a shareholder in the year declared rather than the
year paid.
For federal income tax purposes, the Tax Aware U.S. Equity Fund had a
capital loss carryforward of $579,679 at October 31, 1998, of which $81,365 will
expire in the year 2005 and $498,314 will expire in the year 2006. In addition,
the Tax Aware Disciplined Equity had a capital loss carryforward of $964,303 at
October 31, 1998, of which $19,095 will expire in the year 2005 and $945,208
will expire in the year 2006. To the extent that this capital loss is used to
offset future capital gains, it is probable that the gains so offset will not be
distributed to shareholders.
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
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 20%
rate of tax.
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. Long-term capital gain of an
individual holder is subject to maximum tax rate of 20%. 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
<PAGE>
shareholder with respect to such shares. Investors are urged to consult their
tax advisors concerning the limitations on the deductibility of capital losses.
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.
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
<PAGE>
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 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
<PAGE>
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 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 has substantially completed
renovation, testing, and validation of its key systems and is preparing 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. For potential failure
scenarios where the risks are deemed significant and where such risk is
considered to have a higher probability of occurrence, J.P. Morgan will attempt
to develop business recovery/contingency plans. These plans, which is being
developed in the first half of 1999, will define the infrastructure that should
be put in place for managing a failure during the millennium event itself.
Costs associated with efforts to prepare J.P. Morgan's systems for the
year 2000 approximated $95 million in 1997 and $112 million for the first nine
months of 1998. In 1999, J.P. Morgan is continuing its efforts to prepare its
systems for the year 2000. The total cost to become year-2000 compliant is
estimated at $300 million (for firmwide systems upgrade, not just for systems
relating to mutual funds), for internal systems renovation and testing, testing
equipment, and both internal and external resources working on the project. 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.
<TABLE>
<CAPTION>
<S> <C>
- ---------------------------------- ---------------------------------------------
Date of Annual Report; Date Annual Report
Name of Fund Filed; and Accession Number
- ---------------------------------- ---------------------------------------------
- ----------------------------------
Tax Aware Disciplined Equity Fund 10/31/98; 01/06/99;
0001047469-99-000252
- ----------------------------------
- ---------------------------------- ---------------------------------------------
Tax Aware U.S. Equity Fund 10/31/98; 01/06/99;
0001047469-99-000253
- ---------------------------------- ---------------------------------------------
</TABLE>
<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.
- --------
1Mr. Healey is an "interested person" (as defined in the 1940 Act) of
the Trust. Mr. Healey is also an "interested person" (as defined in the 1940
Act) of the Advisor due to his son's affiliation with JPMIM.
J.P. MORGAN SERIES TRUST
J.P. MORGAN CALIFORNIA BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 1999
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT CONTAINS
ADDITIONAL INFORMATION WHICH SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS
DATED MARCH 1, 1999 FOR THE FUND LISTED ABOVE, AS SUPPLEMENTED FROM TIME TO
TIME. ADDITIONALLY, THIS STATEMENT OF ADDITIONAL INFORMATION INCORPORATES BY
REFERENCE THE FINANCIAL STATEMENTS INCLUDED IN THE SHAREHOLDER REPORT RELATING
TO THE FUND LISTED ABOVE DATED APRIL 30, 1998 AND OCTOBER 31, 1998. THE
PROSPECTUS AND THESE FINANCIAL STATEMENTS, INCLUDING THE INDEPENDENT
ACCOUNTANTS' REPORTS ON THE APRIL 30, 1998 FINANCIAL STATEMENTS, ARE AVAILABLE,
WITHOUT CHARGE UPON REQUEST FROM FUNDS DISTRIBUTOR, INC., ATTENTION: J.P. MORGAN
SERIES TRUST (800)221-7930.
<PAGE>
Table of Contents
Page
General . . . . . . . . . . . . . . . . . . . 1
Investment Objective and Policies . . . . . . 1
Investment Restrictions . . . . . . . . . . . 22
Trustees and Officers . . . . . . . . . . . . 24
Investment Advisor . . . . . . . . . . . . . . 28
Distributor . . . . . . . . . . . . . . . . . 30
Co-Administrator . . . . . . . . . . . . . . . 30
Services Agent . . . . . . . . . . . . . . . . 31
Custodian and Transfer Agent . . . . . . . . . 32
Shareholder Servicing . . . . . . . . . . . . 32
Financial Professionals . . . . . . . . . . . . 33
Independent Accountants . . . . . . . . . . . 34
Expenses . . . . . . . . . . . . . . . . . . . 34
Purchase of Shares . . . . . . . . . . . . . . 34
Redemption of Shares . . . . . . . . . . . . . 35
Exchange of Shares . . . . . . . . . . . . . . 35
Dividends and Distributions . . . . . . . . . 36
Net Asset Value . . . . . . . . . . . . . . . 36
Performance Data . . . . . . . . . . . . . . . 37
Portfolio Transactions . . . . . . . . . . . . 39
Massachusetts Trust . . . . . . . . . . . . . 41
Description of Shares . . . . . . . . . . . . 41
Taxes . . . . . . . . . . . . . . . . . . . . 42
Additional Information . . . . . . . . . . . 45
Financial Statements . . . . . . . . . . . . . 46
Appendix A - Description of Security Ratings . A-1
Appendix B - Additional Information Concerning
California Municipal Securities . B-1
<PAGE>
GENERAL
The J.P. Morgan California Bond Fund (the "Fund") is a series of J.P.
Morgan Series Trust, an open-end management investment company organized as a
Massachusetts business trust (the "Trust"). The Fund is a non-diversified,
open-end management investment company. The Trustees of the Trust have
authorized the issuance and sale of shares of two classes of the Fund (Select
Shares and Institutional Shares).
This Statement of Additional Information describes the financial
history, investment objective and policies, management and operation of the Fund
and provides additional information with respect to the Fund and should be read
in conjunction with the Fund's current Prospectus (the "Prospectus").
Capitalized terms not otherwise defined herein have the meanings accorded to
them in the Prospectus. The Fund's executive offices are located at 60 State
Street, Suite 1300, Boston, Massachusetts 02109.
The Fund is advised by J.P. Morgan Investment Management Inc. ("JPMIM" or
the "Advisor").
Investments in the Fund are not deposits or obligations of, or
guaranteed or endorsed by, Morgan Guaranty Trust Company of New York ("Morgan"),
an affiliate of the Advisor, or any other bank. Shares of the Fund are not
federally insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board, or any other governmental agency. An investment in the Fund is
subject to risk that may cause the value of the investment to fluctuate, and
when the investment is redeemed, the value may be higher or lower than the
amount originally invested by the investor.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide a high after-tax
total return for California residents consistent with moderate risk of capital.
The Fund invests primarily in California Municipal Securities (defined below),
the income from which is exempt from federal and California personal income
taxes. It may also invest in other municipal securities that generate income
exempt from federal income tax but not from California income tax. In addition,
in order to maximize after tax total return, the Fund may invest in taxable debt
obligations to the extent consistent with its objective.
The following discussion supplements the information regarding the
investment objective of the Fund and the policies to be employed to achieve this
objective.
The Fund is designed for investors subject to federal and California
personal income taxes who are seeking high after tax return but are not adverse
to receiving some taxable income and gains. The Fund is not suitable for
tax-deferred retirement or pension plans, including Individual Retirement
Accounts (IRAs), 401(k) plans and 403(b) plans. The Fund is not a complete
investment program and there is no assurance that the Fund will achieve its
investment objective.
The Advisor actively manages the Fund's duration, the allocation of
securities across market sectors and the selection of securities to maximize
after tax total return. The Advisor adjusts the Fund's duration based upon
fundamental economic and capital markets research and the Advisor's interest
rate outlook. For example, if interest rates are expected to rise, the duration
may be shortened to lessen the Fund's exposure to the expected decrease in bond
prices. If interest rates are expected to remain stable, the Advisor may
lengthen the duration in order to enhance the Fund's yield.
<PAGE>
Under normal market conditions, the Fund will have a duration of three
to seven years, although the maturities of individual portfolio securities may
vary widely. Duration measures the price sensitivity of the Fund's portfolio,
including expected cash flow under a wide range of interest rate scenarios. A
longer duration generally results in greater price volatility. As a result, when
interest rates increase, the prices of longer duration securities increase more
than the prices of comparable quality securities with a shorter duration.
The Advisor also attempts to enhance after tax total return by
allocating the Fund's assets among market sectors. Specific securities which the
Advisor believes are undervalued are selected for purchase within sectors using
advanced quantitative tools, analysis of credit risk, the expertise of a
dedicated trading desk and the judgment of fixed income portfolio managers and
analysts.
The Fund may engage in short-term trading to the extent consistent with
its objective. The annual portfolio turnover rate of the Fund is generally not
expected to exceed 75%. Portfolio transactions may generate taxable capital
gains and result in increased transaction costs.
Under normal circumstances, the Fund invests at least 65% of its total
assets in California municipal bonds. For purposes of this policy, "California
municipal bonds" has the same meaning as "California Municipal Securities,"
which are obligations of any duration (or maturity) issued by California, its
political subdivisions and their agencies, authorities and instrumentalities and
any other obligations, the interest from which is exempt from California
personal income tax. The interest from many but not all California Municipal
Securities is also exempt from federal income tax. The Fund may also invest in
debt obligations of state and municipal issuers outside of California. In
general, the interest on such securities is exempt from federal income tax but
subject to California income tax. A portion of the Fund's distributions from
interest on California Municipal Securities and other municipal securities in
which the Fund invests may under certain circumstances be subject to federal
alternative minimum tax. See "Taxes".
Tax Exempt Obligations
Since the Fund invests primarily in California Municipal Securities,
its performance and the ability of California issuers to meet their obligations
may be affected by economic, political, demographic or other conditions in
California. As a result, the value of the Fund's shares may fluctuate more
widely than the value of shares of a fund investing in securities of issuers in
multiple states. The ability of state, county or local governments to meet their
obligations will depend primarily on the availability of tax and other revenues
to those governments and on their general fiscal conditions. Constitutional or
statutory restrictions may limit a municipal issuer's power to raise revenues or
increase taxes. The availability of federal, state and local aid to issuers of
California Municipal Securities may also affect their ability to meet their
obligations. Payments of principal and interest on revenue bonds will depend on
the economic or fiscal condition of the issuer or specific revenue source from
whose revenues the payments will be made. Any reduction in the actual or
perceived ability of an issuer of California Municipal Securities to meet its
obligations (including a reduction in the rating of its outstanding securities)
would probably reduce the market value and marketability of the Fund's portfolio
securities.
<PAGE>
The Fund may invest in municipal securities of any maturity and type.
These include both general obligation bonds secured by the issuer's pledge of
its full faith, credit and taxing authority and revenue bonds payable from
specific revenue sources, but generally not backed by the issuer's taxing
authority. In addition, the Fund may invest in all types of municipal notes,
including tax, revenue and grant anticipation notes, municipal commercial paper,
and municipal demand obligations such as variable rate demand notes and master
demand obligations. There is no specific percentage limitation on these
investments.
Municipal Bonds. Municipal bonds are debt obligations issued by the
states, territories and possessions of the United States and the District of
Columbia, by their political subdivisions and by duly constituted authorities
and corporations. For example, states, territories, possessions and
municipalities may issue municipal bonds to raise funds for various public
purposes such as airports, housing, hospitals, mass transportation, schools,
water and sewer works. They may also issue municipal bonds to refund outstanding
obligations and to meet general operating expenses. Public authorities issue
municipal bonds to obtain funding for privately operated facilities, such as
housing and pollution control facilities, for industrial facilities or for water
supply, gas, electricity or waste disposal facilities.
Municipal bonds may be general obligation or revenue bonds. General
obligation bonds are secured by the issuer's pledge of its full faith, credit
and taxing power for the payment of principal and interest. Revenue bonds are
payable from revenues derived from particular facilities, from the proceeds of a
special excise tax or from other specific revenue sources. They are not
generally payable from the general taxing power of a municipality.
Municipal Notes. The Fund may also invest in municipal notes of various
types, including notes issued in anticipation of receipt of taxes, the proceeds
of the sale of bonds, other revenues or grant proceeds, as well as municipal
commercial paper and municipal demand obligations such as variable rate demand
notes and master demand obligations. The interest rate on variable rate demand
notes is adjustable at periodic intervals as specified in the notes. Master
demand obligations permit the investment of fluctuating amounts at periodically
adjusted interest rates. They are governed by agreements between the municipal
issuer and Morgan acting as agent, for no additional fee. Although master demand
obligations are not marketable to third parties, the Fund considers them to be
liquid because they are payable on demand. There is no specific percentage
limitation on these investments. Municipal notes are subdivided into three
categories of short-term obligations: municipal notes, municipal commercial
paper and municipal demand obligations.
Municipal notes are short-term obligations with a maturity at the time
of issuance ranging from six months to five years. The principal types of
municipal notes include tax anticipation notes, bond anticipation notes, revenue
anticipation notes, grant anticipation notes and project notes. Notes sold in
anticipation of collection of taxes, a bond sale, or receipt of other revenues
are usually general obligations of the issuing municipality or agency.
Municipal commercial paper typically consists of very short-term
unsecured negotiable promissory notes that are sold to meet seasonal working
capital or interim construction financing needs of a municipality or agency.
<PAGE>
While these obligations are intended to be paid from general revenues
or refinanced with long-term debt, they frequently are backed by letters of
credit, lending agreements, note repurchase agreements or other credit facility
agreements offered by banks or institutions.
Municipal demand obligations are subdivided into two types: variable rate
demand notes and master demand obligations.
Variable rate demand notes are tax exempt municipal obligations or
participation interests that provide for a periodic adjustment in the interest
rate paid on the notes. They permit the holder to demand payment of the notes,
or to demand purchase of the notes at a purchase price equal to the unpaid
principal balance, plus accrued interest either directly by the issuer or by
drawing on a bank letter of credit or guaranty issued with respect to such note.
The issuer of the municipal obligation may have a corresponding right to prepay
at its discretion the outstanding principal of the note plus accrued interest
upon notice comparable to that required for the holder to demand payment. The
variable rate demand notes in which the Fund may invest are payable, or are
subject to purchase, on demand usually on notice of seven calendar days or less.
The terms of the notes provide that interest rates are adjustable at intervals
ranging from daily to six months, and the adjustments are based upon the prime
rate of a bank or other appropriate interest rate index specified in the
respective notes. Variable rate demand notes are valued at amortized cost; no
value is assigned to the right of the Fund to receive the par value of the
obligation upon demand or notice.
Master demand obligations are tax exempt municipal obligations that
provide for a periodic adjustment in the interest rate paid and permit daily
changes in the amount borrowed. The interest on such obligations is, in the
opinion of counsel for the borrower, excluded from gross income for federal
income tax purposes. Although there is no secondary market for master demand
obligations, such obligations are considered by the Fund to be liquid because
they are payable upon demand. The Fund has no specific percentage limitations on
investments in master demand obligations.
Premium Securities. During a period of declining interest rates, many
municipal securities in which the Fund invests likely will bear coupon rates
higher than current market rates, regardless of whether the securities were
initially purchased at a premium. In general, such securities have market values
greater than the principal amounts payable on maturity, which would be reflected
in the net asset value of the Fund's shares. The values of such "premium"
securities tend to approach the principal amount as they near maturity.
Puts. The Fund may purchase without limit, municipal bonds or notes
together with the right to resell the bonds or notes to the seller at an agreed
price or yield within a specified period prior to the maturity date of the bonds
or notes. Such a right to resell is commonly known as a "put." The aggregate
price for bonds or notes with puts may be higher than the price for bonds or
notes without puts. Consistent with the Fund's investment objective and subject
to the supervision of the Trustees, the purpose of this practice is to permit
the Fund to be fully invested in tax exempt securities while preserving the
necessary liquidity to purchase securities on a when-issued basis, to meet
unusually large redemptions, and to purchase at a later date securities other
than those subject to the put. The principal risk of puts is
<PAGE>
that the writer of the put may default on its obligation to repurchase.
The Advisor will monitor each writer's ability to meet its obligations under
puts.
Puts may be exercised prior to the expiration date in order to fund
obligations to purchase other securities or to meet redemption requests. These
obligations may arise during periods in which proceeds from sales of Fund shares
and from recent sales of portfolio securities are insufficient to meet
obligations or when the funds available are otherwise allocated for investment.
In addition, puts may be exercised prior to the expiration date in order to take
advantage of alternative investment opportunities or in the event the Advisor
revises its evaluation of the creditworthiness of the issuer of the underlying
security. In determining whether to exercise puts prior to their expiration date
and in selecting which puts to exercise, the Advisor considers the amount of
cash available to the Fund, the expiration dates of the available puts, any
future commitments for securities purchases, alternative investment
opportunities, the desirability of retaining the underlying securities in the
Fund's portfolio and the yield, quality and maturity dates of the underlying
securities.
The Fund values any municipal bonds and notes subject to puts with
remaining maturities of less than 60 days by the amortized cost method. If the
Fund were to invest in municipal bonds and notes with maturities of 60 days or
more that are subject to puts separate from the underlying securities, the puts
and the underlying securities would be valued at fair value as determined in
accordance with procedures established by the Board of Trustees. The Board of
Trustees would, in connection with the determination of the value of a put,
consider, among other factors, the creditworthiness of the writer of the put,
the duration of the put, the dates on which or the periods during which the put
may be exercised and the applicable rules and regulations of the SEC. Prior to
investing in such securities, the Fund, if deemed necessary based upon the
advice of counsel, will apply to the SEC for an exemptive order, which may not
be granted, relating to the amortized valuation of such securities.
Since the value of the put is partly dependent on the ability of the
put writer to meet its obligation to repurchase, the Fund's policy is to enter
into put transactions only with municipal securities dealers who are approved by
the Advisor. Each dealer will be approved on its own merits, and it is the
Fund's general policy to enter into put transactions only with those dealers
which are determined to present minimal credit risks. In connection with such
determination, the Advisor reviews regularly the list of approved dealers,
taking into consideration, among other things, the ratings, if available, of
their equity and debt securities, their reputation in the municipal securities
markets, their net worth, their efficiency in consummating transactions and any
collateral arrangements, such as letters of credit, securing the puts written by
them. Commercial bank dealers normally will be members of the Federal Reserve
System, and other dealers will be members of the National Association of
Securities Dealers, Inc. or members of a national securities exchange. Other put
writers will have outstanding debt rated Aa or better by Moody's Investors
Service, Inc. ("Moody's") or AA or better by Standard & Poor's Ratings Group
("Standard & Poor's"), or will be of comparable quality in the Advisor's opinion
or such put writers' obligations will be collateralized and of comparable
quality in the Advisor's opinion. The Trustees have directed the Advisor not to
enter into put transactions with any dealer which in the judgment of the Advisor
become more than a minimal credit
<PAGE>
risk. In the event that a dealer should default on its obligation to
repurchase an underlying security, the Fund is unable to predict whether all or
any portion of any loss sustained could subsequently be recovered from such
dealer.
Entering into a put with respect to a tax exempt security may be
treated, depending upon the terms of the put, as a taxable sale of the tax
exempt security by the Fund with the result that, while the put is outstanding,
the Fund will no longer be treated as the owner of the security and the interest
income derived with respect to the security will be treated as taxable income to
the Fund.
Non-Municipal Securities
The Fund may invest in bonds and other debt securities of domestic
issuers to the extent consistent with its investment objective and policies. The
Fund may invest in U.S. Government, bank and corporate debt obligations, as well
as asset-backed securities and repurchase agreements. The Fund will purchase
such securities only when the Advisor believes that they would enhance the after
tax returns of a shareholder of the Fund in the highest federal and California
income tax brackets. Under normal circumstances, the Fund's holdings of
non-municipal securities and securities of municipal issuers outside California
will not exceed 35% of its total assets. A description of these investments
appears below. See "Quality and Diversification Requirements." For information
on short-term investments in these securities, see "Money Market Instruments."
Zero Coupon, Pay-in-Kind and Deferred Payment Securities. Zero coupon
securities are securities that are sold at a discount to par value and on which
interest payments are not made during the life of the security. Upon maturity,
the holder is entitled to receive the par value of the security. Pay-in-kind
securities are securities that have interest payable by delivery of additional
securities. Upon maturity, the holder is entitled to receive the aggregate par
value of the securities. The Fund accrues income with respect to zero coupon and
pay-in-kind securities prior to the receipt of cash payments. Deferred payment
securities are securities that remain zero coupon securities until a
predetermined date, at which time the stated coupon rate becomes effective and
interest becomes payable at regular intervals. While interest payments are not
made on such securities, holders of such securities are deemed to have received
"phantom income." Because the Fund will distribute "phantom income" to
shareholders, to the extent that shareholders elect to receive dividends in cash
rather than reinvesting such dividends in additional shares, the Fund will have
fewer assets with which to purchase income producing securities. Zero coupon,
pay-in-kind and deferred payment securities may be subject to greater
fluctuation in value and lesser liquidity in the event of adverse market
conditions than comparably rated securities paying cash interest at regular
interest payment periods.
Asset-Backed Securities. Asset-backed securities directly or indirectly
represent a participation interest in, or are secured by and payable from, a
stream of payments generated by particular assets such as motor vehicle or
credit card receivables or other asset-backed securities collateralized by such
assets. Payments of principal and interest may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution unaffiliated with the entities issuing the securities. The
asset-backed securities in which the Fund may invest are subject to the
<PAGE>
Fund's overall credit requirements. However, asset-backed securities,
in general, are subject to certain risks. Most of these risks are related to
limited interests in applicable collateral. For example, credit card debt
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts on credit card debt
thereby reducing the balance due. Additionally, if the letter of credit is
exhausted, holders of asset-backed securities may also experience delays in
payments or losses if the full amounts due on underlying sales contracts are not
realized. Because asset-backed securities are relatively new, the market
experience in these securities is limited and the market's ability to sustain
liquidity through all phases of the market cycle has not been tested.
Money Market Instruments
The Fund may invest in money market instruments to the extent
consistent with its investment objective and policies. Under normal
circumstances, the Fund will purchase these securities to invest temporary cash
balances or to maintain liquidity to meet withdrawals. However, the Fund may
also invest in money market instruments as a temporary defensive measure taken
during, or in anticipation of, adverse market conditions. A description of the
various types of money market instruments that may be purchased by the Fund
appears below. Also see "Quality and Diversification Requirements."
U.S. Treasury Securities. The Fund may invest in direct obligations of the
U.S. Treasury, including Treasury bills, notes and bonds, all of which are
backed as to principal and interest payments by the full faith and credit of the
United States.
Additional U.S. Government Obligations. The Fund may invest in
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities. These obligations may or may not be backed by the "full faith
and credit" of the United States. Securities which are backed by the full faith
and credit of the United States include obligations of the Government National
Mortgage Association, the Farmers Home Administration, and the Export-Import
Bank. In the case of securities not backed by the full faith and credit of the
United States, the Fund must look principally to the federal agency issuing or
guaranteeing the obligation for ultimate repayment and may not be able to assert
a claim against the United States itself in the event the agency or
instrumentality does not meet its commitments. Securities in which the Fund may
invest that are not backed by the full faith and credit of the United States
include, but are not limited to: (i) obligations of the Tennessee Valley
Authority, the Federal Home Loan Mortgage Corporation, the Federal Home Loan
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) 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. The Fund may invest in negotiable certificates of
deposit, time deposits and bankers' acceptances of (i) banks, savings and loan
associations and savings banks which have more than $2 billion in total and are
organized under the laws of the United States or any state, (ii) foreign
branches of these banks of equivalent size (Euros) and (iii) U.S. branches of
<PAGE>
foreign banks of equivalent size (Yankees). The Fund may not invest in
obligations of foreign branches of foreign banks. The Fund will not invest in
obligations for which the Advisor, or any of its affiliated persons, is the
ultimate obligor or accepting bank.
Commercial Paper. The Fund may invest in commercial paper, including
master demand obligations. Master demand obligations are obligations that
provide for a periodic adjustment in the interest rate paid and permit daily
changes in the amount borrowed. Master demand obligations are governed by
agreements between the issuer and Morgan 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 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 Fund may invest in such unrated obligations only if
at the time of an investment the obligation is determined by the Advisor to have
a credit quality which satisfies the Fund's quality restrictions. See "Quality
and Diversification Requirements." Although there is no secondary market for
master demand obligations, such obligations are considered by the Fund to be
liquid because they are payable upon demand. The Fund does not have any specific
percentage limitation on investments in master demand obligations. It is
possible that the issuer of a master demand obligation could be a client of
Morgan to whom Morgan, in its capacity as a commercial bank, has made a loan.
Repurchase Agreements. The Fund may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines approved by the
Fund's Trustees. In a repurchase agreement, the Fund buys a security from a
seller that has agreed to repurchase the same security at a mutually agreed upon
date and price. The resale price normally is in excess of the purchase price,
reflecting an agreed upon interest rate. This interest rate is effective for the
period of time the Fund is invested in the agreement and is not related to the
coupon rate on the underlying security. A repurchase agreement may also be
viewed as a fully collateralized loan of money by the Fund to the seller. The
period of these repurchase agreements will usually be short, from overnight to
one week, and at no time will the Fund invest in repurchase agreements for more
than thirteen months. The securities which are subject to repurchase agreements,
however, may have maturity dates in excess of thirteen months from the effective
date of the repurchase agreement. The Fund will always receive securities as
collateral whose market value is, and during the entire term of the agreement
remains, at least equal to 100% of the dollar amount invested by the Fund in the
agreement plus accrued interest, and the Fund will make payment for such
securities only upon physical delivery or upon evidence of book entry transfer
to the account of the custodian. If the seller defaults, the Fund might incur a
loss if the value of the collateral securing the repurchase agreement declines
and might incur disposition costs in connection with liquidating the collateral.
In addition, if bankruptcy proceedings are commenced with respect to the seller
of the security,
<PAGE>
realization upon disposal of the collateral by the Fund may be delayed or
limited.
The Fund may make investments in other debt securities, including
without limitation corporate bonds and other obligations described in this
Statement of Additional Information.
Additional Investments
When-Issued and Delayed Delivery Securities. The Fund may purchase
securities on a when-issued or delayed delivery basis. For example, delivery of
and payment for these securities can take place a month or more after the date
of the purchase commitment. The purchase price and the interest rate payable, if
any, on the securities are fixed on the purchase commitment date or at the time
the settlement date is fixed. The value of such securities is subject to market
fluctuation and for money market instruments and other fixed income securities
no interest accrues to the Fund until settlement takes place. At the time the
Fund makes the commitment to purchase securities on a when-issued or delayed
delivery basis, it will record the transaction, reflect the value each day of
such securities in determining its net asset value and, if applicable, calculate
the maturity for the purposes of average maturity from that date. At the time of
settlement a when-issued security may be valued at less than the purchase price.
To facilitate such acquisitions, the Fund will maintain with the custodian a
segregated account with liquid assets, consisting of cash, U.S. Government
securities or other appropriate securities, in an amount at least equal to such
commitments. On delivery dates for such transactions, the Fund will meet its
obligations from maturities or sales of the securities held in the segregated
account and/or from cash flow. If the Fund chooses to dispose of the right to
acquire a when-issued security prior to its acquisition, it could, as with the
disposition of any other portfolio obligation, incur a gain or loss due to
market fluctuation. Also, the Fund may be disadvantaged if the other party to
the transaction defaults. It is the current policy of the Fund not to enter into
when-issued commitments exceeding in the aggregate 15% of the market value of
the Fund's total assets, less liabilities other than the obligations created by
when-issued commitments.
Investment Company Securities. Securities of other investment companies
may be acquired by the Fund to the extent permitted under the 1940 Act or any
order pursuant thereto. These limits currently require that, as determined
immediately after a purchase is made, (i) not more than 5% of the value of the
Fund's total assets will be invested in the securities of any one investment
company, (ii) not more than 10% of the value of its total assets will be
invested in the aggregate in securities of investment companies as a group, and
(iii) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Fund. As a shareholder of another investment
company, the Fund would bear, along with other shareholders, its pro rata
portion of the other investment company's expenses, including advisory fees.
These expenses would be in addition to the advisory and other expenses that the
Fund bears directly in connection with its own operations. The Fund has applied
for exemptive relief from the SEC to permit the Fund to invest in affiliated
investment companies. If the requested relief is granted, the Fund would then be
permitted to invest in affiliated funds, subject to certain conditions specified
in the applicable order.
<PAGE>
Reverse Repurchase Agreements. The Fund 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 is also considered as
the borrowing of money by the Fund and, therefore, a form of leverage. Leverage
may cause any gains or losses for the Fund to be magnified. The Fund will invest
the proceeds of borrowings under reverse repurchase agreements. In addition,
except for liquidity purposes, the Fund will enter into a reverse repurchase
agreement only when the expected return from the investment of the proceeds is
greater than the expense of the transaction. The Fund will not invest the
proceeds of a reverse repurchase agreement for a period which exceeds the
duration of the reverse repurchase agreement. The Fund will establish and
maintain with the custodian a separate account with a segregated portfolio of
securities in an amount at least equal to its purchase obligations under its
reverse repurchase agreements. See "Investment Restrictions" for the Fund's
limitations on reverse repurchase agreements and bank borrowings.
Loans of Portfolio Securities. Subject to applicable investment
restrictions, the Fund is permitted to lend securities in an amount up to 331/3%
of the value of the Fund's total assets. The Fund may lend its securities if
such loans are secured continuously by cash or equivalent collateral or by a
letter of credit in favor of the Fund at least equal at all times to 100% of the
market value of the securities loaned, plus accrued interest. While such
securities are on loan, the borrower will pay the Fund any income accruing
thereon. Loans will be subject to termination by the Fund in the normal
settlement time, generally three business days after notice, or by the borrower
on one day's notice. Borrowed securities must be returned when the loan is
terminated. Any gain or loss in the market price of the borrowed securities
which occurs during the term of the loan inures to the Fund and its respective
investors. The Fund may pay reasonable finders' and custodial fees in connection
with a loan. In addition, the Fund will consider all facts and circumstances
including the creditworthiness of the borrowing financial institution, and the
Fund will not make any loans in excess of one year. The Fund will not lend its
securities to any officer, Trustee, Director, employee or other affiliate of the
Fund, the Advisor or the Distributor, unless otherwise permitted by applicable
law.
Illiquid Investments; Privately Placed and Other Unregistered
Securities. The Fund may not acquire any illiquid securities if, as a result
thereof, more than 15% of the Fund's net assets would be in illiquid
investments. Subject to this non-fundamental policy limitation, the Fund may
acquire investments that are illiquid or have limited liquidity, such as private
placements or investments that are not registered under the 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
the Portfolio. The price the 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.
<PAGE>
The Fund may also purchase Rule 144A securities sold to institutional
investors without registration under the 1933 Act. These securities may be
determined to be liquid in accordance with guidelines established by the Advisor
and approved by the Trustees. The Trustees will monitor the Advisor's
implementation of these guidelines on a periodic basis.
As to illiquid investments, the Fund is subject to a risk that should
the Fund decide to sell them when a ready buyer is not available at a price the
Fund deems representative of their value, the value of the Fund's net assets
could be adversely affected. Where an illiquid security must be registered under
the 1933 Act, before it may be sold, the Fund may be obligated to pay all or
part of the registration expenses, and a considerable period may elapse between
the time of the decision to sell and the time the Fund may be permitted to sell
a security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell.
Synthetic Variable Rate Instruments. The Fund may invest in certain
synthetic variable rate instruments. Such instruments generally involve the
deposit of a long-term tax exempt bond in a custody or trust arrangement and the
creation of a mechanism to adjust the long-term interest rate on the bond to a
variable short-term rate and a right (subject to certain conditions) on the part
of the purchaser to tender it periodically to a third party at par. Morgan will
review the structure of synthetic variable rate instruments to identify credit
and liquidity risks (including the conditions under which the right to tender
the instrument would no longer be available) and will monitor those risks. In
the event that the right to tender the instrument is no longer available, the
risk to the Fund will be that of holding the long-term bond. In the case of some
types of instruments credit enhancement is not provided, and if certain events,
which may include (a) default in the payment of principal or interest on the
underlying bond, (b) downgrading of the bond below investment grade or (c) a
loss of the bond's tax exempt status, occur, then (i) the put will terminate and
(ii) the risk to the Fund will be that of holding a long-term bond.
Quality and Diversification Requirements
The Fund is registered as a non-diversified investment company which
means that the Fund is not limited by the 1940 Act in the proportion of its
assets that may be invested in the obligations of a single issuer. Thus, the
Fund may invest a greater proportion of its assets in the securities of a
smaller number of issuers and, as a result, may be subject to greater risk with
respect to its portfolio securities. The Fund, however, will comply with the
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended (the "Code"), for qualification as a regulated investment company. See
"Taxes".
It is the current policy of the Fund that under normal circumstances at
least 90% of total assets will consist of securities that at the time of
purchase are rated Baa or better by Moody's or BBB or better by Standard &
Poor's. The remaining 10% of total assets may be invested in securities that are
rated B or better by Moody's or Standard & Poor's. See "Below Investment Grade
Debt" below. In each case, the Fund may invest in securities which are unrated,
if in the Advisor's opinion, such securities are of comparable
<PAGE>
quality. Securities rated Baa by Moody's or BBB by Standard & Poor's
are considered investment grade, but have some speculative characteristics.
Securities rated Ba or B by Moody's and BB or B by Standard & Poor's are below
investment grade and considered to be speculative with regard to payment of
interest and principal. These standards must be satisfied at the time an
investment is made. If the quality of the investment later declines, the Fund
may continue to hold the investment.
The Fund invests principally in a portfolio of "investment grade" tax
exempt securities. An investment grade bond is rated, on the date of investment,
within the four highest ratings of Moody's, currently Aaa, Aa, A and Baa or of
Standard & Poor's, currently AAA, AA, A and BBB, while high grade debt is rated,
on the date of the investment, within the two highest of such ratings.
Investment grade municipal notes are rated, on the date of investment, MIG-1 or
MIG-2 by Standard & Poor's or SP-1 and SP-2 by Moody's. Investment grade
municipal commercial paper is rated, on the date of investment, Prime 1 or Prime
2 by Moody's and A-1 or A-2 by Standard & Poor's. The Fund may also invest up to
10% of its total assets in securities which are "below investment grade." Such
securities must be rated, on the date of investment, B or better by Moody's or
Standard & Poor's, or of comparable quality. The Fund may invest in debt
securities which are not rated or other debt securities to which these ratings
are not applicable, if in the opinion of the Advisor, such securities are of
comparable quality to the rated securities discussed above. In addition, at the
time the Fund invests in any commercial paper, bank obligation, repurchase
agreement, or any other money market instruments, the investment must have
received a short term rating of investment grade or better (currently Prime-3 or
better by Moody's or A-3 or better by Standard & Poor's) or the investment must
have been issued by an issuer that received a short term investment grade rating
or better with respect to a class of investments or any investment within that
class that is comparable in priority and security with the investment being
purchased by the Fund. If no such ratings exists, the investment must be of
comparable investment quality in the Advisor's opinion, but will not be eligible
for purchase if the issuer or its parent has long term outstanding debt rated
below BBB.
Below Investment Grade Debt. Certain lower rated securities purchased
by the Fund, such as those rated Ba or B by Moody's or BB or B by Standard &
Poor's (commonly known as junk bonds), may be subject to certain risks with
respect to the issuing entity's ability to make scheduled payments of principal
and interest and to greater market fluctuations. While generally providing
higher coupons or interest rates than investments in higher quality securities,
lower quality fixed income securities involve greater risk of loss of principal
and income, including the possibility of default or bankruptcy of the issuers of
such securities, and have greater price volatility, especially during periods of
economic uncertainty or change. These lower quality fixed income securities tend
to be affected by economic changes and short-term corporate and industry
developments to a greater extent than higher quality securities, which react
primarily to fluctuations in the general level of interest rates. To the extent
that the Fund invests in such lower quality securities, the achievement of its
investment objective may be more dependent on the Advisor's own credit analysis.
Lower quality fixed income securities are affected by the market's
perception of their credit quality, especially during times of adverse
publicity, and the outlook for economic growth. Economic downturns or an
<PAGE>
increase in interest rates may cause a higher incidence of default by
the issuers of these securities, especially issuers that are highly leveraged.
The market for these lower quality fixed income securities is generally less
liquid than the market for investment grade fixed income securities. It may be
more difficult to sell these lower rated securities to meet redemption requests,
to respond to changes in the market, or to value accurately the Fund's portfolio
securities for purposes of determining the Fund's net asset value. See Appendix
A for more detailed information on these ratings.
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
The Fund may purchase and sell (a) exchange traded and over-the-counter
(OTC) put and call options on fixed income securities, indexes of fixed income
securities and futures contracts on fixed income securities and indexes of fixed
income securities and (b) futures contracts on fixed income securities and
indexes of fixed income securities. Each of these instruments is a derivative
instrument as its value derives from the underlying asset or index.
The Fund may use futures contracts and options for hedging and risk
management purposes. The Funds may not use futures contracts and options for
speculation.
The 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 the Fund's investments against price fluctuations. Other strategies,
including buying futures contracts 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 the
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 the Fund's return. While the use of these instruments by
the 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 the Fund's
return. Certain strategies limit the Fund's possibilities to realize gains as
well as 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, the 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.
<PAGE>
The 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 (i) the aggregate premiums
paid on all such options which are held at any time do not exceed 20% of the
Fund's net assets, and (ii) 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. In addition, the Fund will not purchase or sell (write) futures
contracts, options on futures contracts or commodity options for risk management
purposes if, as a result, the aggregate initial margin and options premiums
required to establish these positions exceed 5% of the net asset value of the
Fund.
Options
Purchasing Put and Call Options. By purchasing a put option, the 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. The Fund may
terminate its position in a put option it has purchased by allowing it to expire
or by exercising the option. The Fund may also close out a put option position
by entering into an offsetting transaction, if a liquid market exits. If the
option is allowed to expire, the Fund will lose the entire premium it paid. If
the Fund exercises a put option on a security, it will sell the instrument
underlying the option at the strike price. If the 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 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
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 the Fund writes a put
option, it takes the opposite side of the transaction from the option's
purchaser. In return for the receipt of the premium, the Fund assumes the
obligation to pay the strike price for the instrument underlying the option if
the party to the option chooses to exercise it. The 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, it must continue to be
<PAGE>
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 the 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. The Fund may purchase or sell put and call options
on any securities index based on securities in which the Fund may invest.
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 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.
The 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 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 the
Fund may not be able to close out an option position that it has previously
entered into. When the 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
Fund will be traded on a securities exchange or will be purchased or sold by
securities dealers (OTC options) that meet creditworthiness standards approved
by the Fund's Board of Trustees. While exchange-traded options are obligations
of the Options Clearing Corporation, in the case of OTC options, the Fund relies
on the dealer from which it purchased the option to perform if the option is
exercised. Thus, when the Fund purchases an OTC option, it relies on the dealer
from which it purchased the option to make or take
<PAGE>
delivery of the underlying securities. Failure by the dealer to do so
would result in the loss of the premium paid by the Fund as well as loss of the
expected benefit of the transaction.
Provided that the Fund has arrangements with certain qualified dealers
who agree that the Fund may repurchase any option it writes for a maximum price
to be calculated by a predetermined formula, the Fund may treat the underlying
securities used to cover written OTC options as liquid. In these cases, the OTC
option itself would only be considered illiquid to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the option.
Futures Contracts
When the Fund purchases a futures contract, it agrees to purchase a
specified quantity of an underlying instrument at a specified future date or to
make a cash payment based on the value of a securities index. When the Fund
sells a futures contract, it agrees to sell a specified quantity of the
underlying instrument at a specified future date or to receive a cash payment
based on the value of a securities index. The price at which the purchase and
sale will take place is fixed when the Fund enters into the contract. Futures
can be held until their delivery dates or the position can be (and normally is)
closed out before then. There is no assurance, however, that a liquid market
will exist when the Fund wishes to close out a particular position.
When the Fund purchases a futures contract, the value of the futures
contract tends to increase and decrease in tandem with the value of its
underlying instrument. Therefore, purchasing futures contracts will tend to
increase the Fund's exposure to positive and negative price fluctuations in the
underlying instrument, much as if it had purchased the underlying instrument
directly. When the Fund sells a futures contract, by contrast, the value of its
futures position will tend to move in a direction contrary to the value of the
underlying instrument. Selling futures contracts, therefore, will tend to offset
both positive and negative market price changes, much as if the underlying
instrument had been sold.
The purchaser or seller of a futures contract is not required to
deliver or pay for the underlying instrument unless the contract is held until
the delivery date. However, when the Fund buys or sells a futures contract it
will be required to deposit "initial margin" with its custodian in a segregated
account in the name of its futures broker, known as a futures commission
merchant (FCM). Initial margin deposits are typically equal to a small
percentage of the contract's value. If the value of either party's position
declines, that party will be required to make additional "variation margin"
payments equal to the change in value on a daily basis. The party that has a
gain may be entitled to receive all or a portion of this amount. The Fund may be
obligated to make payments of variation margin at a time when it is
disadvantageous to do so. Furthermore, it may not always be possible for the
Fund to close out its futures positions. Until it closes out a futures position,
the Fund will be obligated to continue to pay variation margin. Initial and
variation margin payments do not constitute purchasing on margin for purposes of
the Fund's investment restrictions. In the event of the bankruptcy of an FCM
that holds margin on behalf of the Fund, the Fund may be entitled to return of
margin owed to it only in proportion to the amount received by the FCM's other
customers, potentially resulting in losses to the Fund.
<PAGE>
The Fund will segregate liquid assets in connection with its use of
options and futures contracts to the extent required by the staff of the
Securities and Exchange Commission. Securities held in a segregated account
cannot be sold while the futures contract or option is outstanding, unless they
are replaced with other suitable assets. As a result, there is a possibility
that segregation of a large percentage of the Fund's assets could impede
portfolio management or the Fund's ability to meet redemption requests or other
current obligations.
Options on Futures Contracts. The Fund may purchase and sell put and
call options, including put and call options on futures contracts. Futures
contracts obligate the buyer to take and the seller to make delivery at a future
date of a specified quantity of a financial instrument or an amount of cash
based on the value of a securities index. Currently, futures contracts are
available on various types of fixed income securities, including but not limited
to U.S. Treasury bonds, notes and bills, Eurodollar certificates of deposit and
on indexes of fixed income securities.
Unlike a futures contract, which requires the parties to buy and sell a
security or make a cash settlement payment based on changes in a financial
instrument or securities index on an agreed date, an option on a futures
contract entitles its holder to decide on or before a future date whether to
enter into such a contract. If the holder decides not to exercise its option,
the holder may close out the option position by entering into an offsetting
transaction or may decide to let the option expire and forfeit the premium
thereon. The purchaser of an option on a futures contract pays a premium for the
option but makes no initial margin payments or daily payments of cash in the
nature of "variation" margin payments to reflect the change in the value of the
underlying contract as does a purchaser or seller of a futures contract.
The seller of an option on a futures contract receives the premium paid
by the purchaser and may be required to pay initial margin. Amounts equal to the
initial margin and any additional collateral required on any options on futures
contracts sold by the Fund are paid by the Fund into a segregated account, in
the name of the FCM, as required by the 1940 Act and the SEC's interpretations
thereunder.
Combined Positions. The Fund may purchase and write options in
combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of the overall
position. For example, the Fund may purchase a put option and write a call
option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call option
at one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial price
increase. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
Correlation of Price Changes. Because there are a limited number of
types of exchange-traded options and futures contracts, it is likely that the
standardized options and futures contracts available will not match the Fund's
current or anticipated investments exactly. The Fund may invest in options
<PAGE>
and futures contracts based on securities with different issuers, maturities, or
other characteristics from the securities in which it typically invests, which
involves a risk that the options or futures position will not track the
performance of the Fund's other investments.
Options and futures contracts prices can also diverge from the prices
of their underlying instruments, even if the underlying instruments match the
Fund's investments well. Options and futures contracts prices are affected by
such factors as current and anticipated short term interest rates, changes in
volatility of the underlying instrument, and the time remaining until expiration
of the contract, which may not affect security prices the same way. Imperfect
correlation may also result from differing levels of demand in the options and
futures markets and the securities markets, from structural differences in how
options and futures and securities are traded, or from imposition of daily price
fluctuation limits or trading halts. The Fund may purchase or sell options and
futures contracts with a greater or lesser value than the securities it wishes
to hedge or intends to purchase in order to attempt to compensate for
differences in volatility between the contract and the securities, although this
may not be successful in all cases. If price changes in the Fund's options or
futures positions are poorly correlated with its other investments, the
positions may fail to produce anticipated gains or result in losses that are not
offset by gains in other investments.
Liquidity of Options and Futures Contracts. There is no assurance a
liquid market will exist for any particular option or futures contract at any
particular time even if the contract is traded on an exchange. In addition,
exchanges may establish daily price fluctuation limits for options and futures
contracts and may halt trading if a contract's price moves up or down more than
the limit in a given day. On volatile trading days when the price fluctuation
limit is reached or a trading halt is imposed, it may be impossible for the Fund
to enter into new positions or close out existing positions. If the market for a
contract is not liquid because of price fluctuation limits or otherwise, it
could prevent prompt liquidation of unfavorable positions, and could potentially
require the Fund to continue to hold a position until delivery or expiration
regardless of changes in its value. As a result, the Fund's access to other
assets held to cover its options or futures positions could also be impaired.
(See "Exchange Traded and OTC Options" above for a discussion of the liquidity
of options not traded on an exchange.)
Position Limits. Futures exchanges can limit the number of futures and
options on futures contracts that can be held or controlled by an entity. If an
adequate exemption cannot be obtained, the Fund or the Advisor may be required
to reduce the size of its futures and options positions or may not be able to
trade a certain futures or options contract in order to avoid exceeding such
limits.
Asset Coverage for Futures Contracts and Options Positions. The Fund
intends to comply with Section 4.5 of the regulations under the Commodity
Exchange Act, which limits the extent to which a Fund can commit assets to
initial margin deposits and option premiums. In addition, the Fund will comply
with guidelines established by the SEC with respect to coverage of options and
futures contracts by mutual funds, and if the guidelines so require, will set
aside appropriate liquid assets in a segregated custodial account in the amount
prescribed. Securities held in a segregated account cannot be sold while the
futures contract or option is outstanding, unless
<PAGE>
they are replaced with other suitable assets. As a result, there is a
possibility that segregation of a large percentage of the Fund's assets could
impede portfolio management or the Fund's ability to meet redemption requests or
other current obligations.
Swaps and Related Swap Products. The Fund may engage in swap
transactions, including, but not limited to, interest rate, currency, securities
index, basket, specific security and commodity swaps, interest rate caps, floors
and collars and options on interest rate swaps (collectively defined as "swap
transactions").
The Fund may enter into swap transactions for any legal purpose
consistent with its investment objective and policies, such as for the purpose
of attempting to obtain or preserve a particular return or spread at a lower
cost than obtaining that return or spread through purchases and/or sales of
instruments in cash markets, to protect against currency fluctuations, as a
duration management technique, to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date, or to gain exposure
to certain markets in the most economical way possible. The Fund will not sell
interest rate caps, floors or collars if it does not own securities with coupons
which provide the interest that a Fund may be required to pay.
Swap agreements are two-party contracts entered into primarily by
institutional counterparties for periods ranging from a few weeks to several
years. In a standard swap transaction, two parties agree to exchange the returns
(or differentials in rates of return) that would be earned or realized on
specified notional investments or instruments. The gross returns to be exchanged
or "swapped" between the parties are calculated by reference to a "notional
amount," i.e., the return on or increase in value of a particular dollar amount
invested at a particular interest rate, in a particular foreign currency or
commodity, or in a "basket" of securities representing a particular index. The
purchaser of an interest rate cap or floor, upon payment of a fee, has the right
to receive payments (and the seller of the cap is obligated to make payments) to
the extent a specified interest rate exceeds (in the case of a cap) or is less
than (in the case of a floor) a specified level over a specified period of time
or at specified dates. The purchaser of an interest rate collar, upon payment of
a fee, has the right to receive payments (and the seller of the collar is
obligated to make payments) to the extent that a specified interest rate falls
outside an agreed upon range over a specified period of time or at specified
dates. The purchaser of an option on an interest rate swap, upon payment of a
fee (either at the time of purchase or in the form of higher payments or lower
receipts within an interest rate swap transaction) has the right, but not the
obligation, to initiate a new swap transaction of a pre-specified notional
amount with pre-specified terms with the seller of the option as the
counterparty.
The "notional amount" of a swap transaction is the agreed upon basis
for calculating the payments that the parties have agreed to exchange. For
example, one swap counterparty may agree to pay a floating rate of interest
(e.g., 3 month LIBOR) calculated based on a $10 million notional amount on a
quarterly basis in exchange for receipt of payments calculated based on the same
notional amount and a fixed rate of interest on a semi-annual basis. In the
event the Fund is obligated to make payments more frequently than it receives
payments from the other party, it will incur incremental credit exposure to that
swap counterparty. This risk may be mitigated somewhat by
<PAGE>
the use of swap agreements which call for a net payment to be made by the party
with the larger payment obligation when the obligations of the parties fall due
on the same date. Under most swap agreements entered into by the Fund, payments
by the parties will be exchanged on a "net basis", and the Fund will receive or
pay, as the case may be, only the net amount of the two payments.
The amount of the Fund's potential gain or loss on any swap transaction
is not subject to any fixed limit. Nor is there any fixed limit on the Fund's
potential loss if it sells a cap or collar. If the Fund buys a cap, floor or
collar, however, the Fund's potential loss is limited to the amount of the fee
that it has paid. When measured against the initial amount of cash required to
initiate the transaction, which is typically zero in the case of most
conventional swap transactions, swaps, caps, floors and collars tend to be more
volatile than many other types of instruments.
The use of swap transactions, caps, floors and collars involves
investment techniques and risks which are different from those associated with
portfolio security transactions. If the Advisor is incorrect in its forecasts of
market values, interest rates, and other applicable factors, the investment
performance of the Fund will be less favorable than if these techniques had not
been used. These instruments are typically not traded on exchanges. Accordingly,
there is a risk that the other party to certain of these instruments will not
perform its obligations to the Fund or that the Fund may be unable to enter into
offsetting positions to terminate its exposure or liquidate its position under
certain of these instruments when it wishes to do so. Such occurrences could
result in losses to the Fund.
The Advisor will, however, consider such risks and will enter into
swap and other derivatives transactions only when it believes that the risks are
not unreasonable.
The Fund will maintain cash or liquid assets in a segregated account
with its custodian in an amount sufficient at all times to cover its current
obligations under its swap transactions, caps, floors and collars. If the Fund
enters into a swap agreement on a net basis, it will segregate assets with a
daily value at least equal to the excess, if any, of the Fund's accrued
obligations under the swap agreement over the accrued amount the Fund is
entitled to receive under the agreement. If the Fund enters into a swap
agreement on other than a net basis, or sells a cap, floor or collar, it will
segregate assets with a daily value at least equal to the full amount of a
Fund's accrued obligations under the agreement.
The Fund will not enter into any swap transaction, cap, floor, or
collar, unless the counterparty to the transaction is deemed creditworthy by the
Advisor. If a counterparty defaults, the Fund may have contractual remedies
pursuant to the agreements related to the transaction. The swap markets in which
many types of swap transactions are traded have grown substantially in recent
years, with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the markets for certain types of swaps (e.g., interest rate swaps) have become
relatively liquid. The markets for some types of caps, floors and collars are
less liquid.
The liquidity of swap transactions, caps, floors and collars will be as
set forth in guidelines established by the Advisor and approved by the
<PAGE>
Trustees which are based on various factors, including (1) the
availability of dealer quotations and the estimated transaction volume for the
instrument, (2) the number of dealers and end users for the instrument in the
marketplace, (3) the level of market making by dealers in the type of
instrument, (4) the nature of the instrument (including any right of a party to
terminate it on demand) and (5) the nature of the marketplace for trades
(including the ability to assign or offset the Fund's rights and obligations
relating to the instrument). Such determination will govern whether the
instrument will be deemed within the 15% restriction on investments in
securities that are not readily marketable.
During the term of a swap, cap, floor or collar, changes in the value
of the instrument are recognized as unrealized gains or losses by marking to
market to reflect the market value of the instrument. When the instrument is
terminated, the Fund will record a realized gain or loss equal to the
difference, if any, between the proceeds from (or cost of) the closing
transaction and a Fund's basis in the contract.
The federal income tax treatment with respect to swap transactions,
caps, floors, and collars may impose limitations on the extent to which a Fund
may engage in such transactions.
Risk Management
The Fund may employ non-hedging risk management techniques. Examples of
such strategies include synthetically altering the duration of its portfolio or
the mix of securities in its portfolio. For example, if the Advisor wishes to
extend maturities in a fixed income portfolio in order to take advantage of an
anticipated decline in interest rates, but does not wish to purchase the
underlying long-term securities, it might cause the Fund to purchase futures
contracts on long-term debt securities. Similarly, if the Advisor wishes to
decrease exposure to fixed income securities or purchase equities, it could
cause the Fund to sell futures contracts on debt securities and purchase futures
contracts on a stock index. 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.
Special Factors Affecting the Fund
The Fund intends to invest a high proportion of its assets in municipal
obligations in California Municipal Securities. Payment of interest and
preservation of principal is dependent upon the continuing ability of California
issuers and/or obligors of California Municipal Securities to meet their
obligations thereunder.
The fiscal stability of California is related, at least in part, to the
fiscal stability of its localities and authorities. Various California agencies,
authorities and localities have issued large amounts of bonds and notes either
guaranteed or supported by California through lease-purchase arrangements, other
contractual arrangements or moral obligation provisions. While debt service is
normally paid out of revenues generated by projects of such California agencies,
authorities and localities, in the past the State has had to provide special
assistance, in some cases of a recurring nature, to enable such agencies,
authorities and localities to meet their financial
<PAGE>
obligations and, in some cases, to prevent or cure defaults. The
presence of such aid in the future should not be assumed. To the extent that
California agencies and local governments require State assistance to meet their
financial obligations, the ability of California to meet its own obligations as
they become due or to obtain additional financing could be adversely affected.
For further information concerning California Municipal Obligations,
see Appendix B to this Statement of Additional Information. The summary set
forth above and in Appendix B is based on information from an official statement
of California general obligation municipal obligations and does not purport to
be complete.
Portfolio Turnover
The Fund's expected portfolio turnover rate is set forth in the Fund's
Prospectus. A rate of 100% indicates that the equivalent of all of the 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.
Fund -- For the period December 23, 1996 (commencement of operations) through
April 30, 1997 and the fiscal year ended April 30, 1998: 40% and 44%,
respectively. For the six months ended October 31, 1998: 27%.
INVESTMENT RESTRICTIONS
The investment restrictions set forth below have been adopted by the
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 Fund. A "majority of the
outstanding voting securities" is defined in the 1940 Act as the lesser of (a)
67% or more of the voting securities present at a meeting if the holders of more
than 50% of the outstanding voting securities are present or represented by
proxy, or (b) more than 50% of the outstanding voting securities. The percentage
limitations contained in the restrictions below apply at the time of the
purchase of securities.
The Fund:
1. May not purchase any security which would cause the Fund to concentrate its
investments in the securities of issuers primarily engaged in any particular
industry except as permitted by the SEC;
2. May not issue senior securities, except as permitted under the Investment
Company Act of 1940 or any rule, order or interpretation thereunder;
3. May not borrow money, except to the extent permitted by applicable law;
4. May not underwrite securities of other issuers, except to the extent that the
Fund, in disposing of portfolio securities, may be deemed an underwriter within
the meaning of the 1933 Act;
<PAGE>
5. May not purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may (a) invest in securities or other instruments
directly or indirectly secured by real estate, (b) invest in securities or other
instruments issued by issuers that invest in real estate and (c) make direct
investments in mortgages;
6. 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 the Fund from purchasing, selling and entering into financial futures
contracts (including futures contracts on indices of securities, interest rates
and currencies), options on financial futures contracts (including futures
contracts on indices of securities, interest rates and currencies), warrants,
swaps, forward contracts, foreign currency spot and forward contracts or other
derivative instruments that are not related to physical commodities; and
7. May make loans to other persons, in accordance with the Fund's investment
objective and policies and to the extent permitted by applicable law.
Non-Fundamental Investment Restrictions. The investment restrictions
described below are not fundamental policies of the Fund and may be changed by
its Trustees. These non-fundamental investment policies require that the Fund:
(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 the 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.
Notwithstanding any other fundamental or non-fundamental investment
restriction or policy, the Fund reserves the right, without the approval of
shareholders, to invest all of its assets in another open-end registered
investment company with substantially the same fundamental investment objective,
restrictions and policies as the Fund.
There will be no violation of any investment restriction if that
restriction is complied with at the time the relevant action is taken
notwithstanding a later change in market value of an investment, in net or total
assets, in the securities rating of the investment, or any other later change.
For purposes of the fundamental investment restriction regarding
industry concentration, JPMIM may classify issuers by industry in accordance
with classifications set forth in the Directory of Companies Filing Annual
<PAGE>
Reports With The Securities and Exchange Commission (the "SEC") or
other sources. In the absence of such classification or if JPMIM 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, JPMIM 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 business addresses, principal
occupations during the past five years and dates of birth are set forth below.
FREDERICK S. ADDY--Trustee; Retired; Prior to April 1994, Executive Vice
President and Chief Financial Officer, Amoco Corporation. His address is 5300
Arbutus Cove, Austin, 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 HEALEY1--Trustee, Chairman and Chief Executive Officer;
Chairman, Pierpont Group, Inc., since prior to 1993. His address is Pine Tree
Country Club Estates, 10286 Saint Andrews Road, Boynton Beach, Florida 33436,
and his date of birth is August 23, 1937.
MICHAEL P. MALLARDI--Trustee; Retired; Prior to April 1996, Senior Vice
President, Capital Cities/ABC, Inc. and President, Broadcast Group. His address
is 10 Charnwood Drive, Suffern, 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), J.P. Morgan Funds and J.P. Morgan Institutional
Funds and is reimbursed for expenses incurred in connection with service as a
Trustee. The Trustees may hold various other directorships unrelated to the
Fund.
<PAGE>
Trustee compensation expenses paid by the Trust for the calendar year ended
December 31, 1998 are set forth below.
<TABLE>
<CAPTION>
<S> <C> <C>
TOTAL TRUSTEE COMPENSATION
ACCRUED BY THE MASTER
PORTFOLIOS(*), J.P. MORGAN
AGGREGATE TRUSTEE FUNDS, J.P. MORGAN
COMPENSATION INSTITUTIONAL FUNDS AND THE
PAID BY THE TRUST DURING 1998(**)
NAME OF TRUSTEE TRUST DURING 1998
- ------------------------------- ------------------- ----------------------------
- ------------------------------- ------------------- ----------------------------
Frederick S. Addy, Trustee $494 $75,000
- ------------------------------- ------------------- ----------------------------
- ------------------------------- ------------------- ----------------------------
William G. Burns, Trustee $494 $75,000
- ------------------------------- ------------------- ----------------------------
- ------------------------------- ------------------- ----------------------------
Arthur C. Eschenlauer, Trustee $494 $75,000
- ------------------------------- ------------------- ----------------------------
- ------------------------------- ------------------- ----------------------------
Matthew Healey, Trustee(***), $494 $75,000
Chairman and Chief Executive
Officer
- ------------------------------- ------------------- ----------------------------
- ------------------------------- ------------------- ----------------------------
Michael P. Mallardi, Trustee $494 $75,000
- ------------------------------- ------------------- ----------------------------
</TABLE>
(*) 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 19 separate master portfolios (collectively the
"Master Portfolios") for which JPMIM acts as investment adviser, 14 of which are
registered investment companies.
(**) No investment company within the fund complex has a pension or
retirement plan. Currently there are 17 investment companies (14 investment
companies comprising the Master Portfolios, the Trust, the J.P. Morgan Funds and
the J.P. Morgan Institutional Funds) in the fund complex.
(***) During 1998, Pierpont Group, Inc. paid Mr. Healey, in his role as
Chairman of Pierpont Group, Inc., compensation in the amount of $157,400,
contributed $23,610 to a defined contribution plan on his behalf and paid
$17,700 in insurance premiums for his benefit.
The Trustees decide upon matters of general policy 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 J.P. Morgan Family of Funds (formerly the "Pierpont Family of Funds"), and
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. 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 the Fund for the
period December 23, 1996 (commencement of operations) through April 30, 1997;
<PAGE>
the fiscal year ended April 30, 1998; and for the six months ended October
31, 1998 (unaudited), were $90; $1,472 and $854, respectively.
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.
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.
<PAGE>
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 in North
Easton, Massachusetts. 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 since 1990. 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 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
<PAGE>
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.
INVESTMENT ADVISOR
The Trust has retained JPMIM as Investment Advisor to provide
investment advice and portfolio management services to the Fund. Subject to the
supervision of the Trustees, the Advisor makes the Fund's day-to-day investment
decisions, arranges for the execution of portfolio transactions and generally
manages the Fund's investments. Prior to October 28, 1998, 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 approximately $316 billion.
J.P. Morgan has a long history of service as adviser, 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.
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 basis of the Advisor's investment process is fundamental investment
research as the firm believes that fundamentals should determine an asset's
value over the long term. J.P. Morgan currently employs over 100 full time
research analysts, among the largest research staffs in the money management
industry, in its investment management divisions located in New York, London,
Tokyo, Frankfurt 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 Advisor's fixed
income investment process is based on analysis of real rates, sector
diversification, and quantitative and credit analysis.
The investment advisory services the Advisor provides to the Fund are
not exclusive under the terms of the Investment Advisory Agreement. The Advisor
is free to and does render similar investment advisory services to others. 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
<PAGE>
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 Fund. Such accounts are
supervised by officers and employees of the Advisor who may also be acting in
similar capacities for the Fund. See "Portfolio Transactions."
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 Portfolio in which the Fund
invests is currently: Lehman Brothers 1-16 Year Municipal Bond Index.
The Fund is managed by officers of the Advisor who, in acting for their
clients, including the Fund, do not discuss their investment decisions with any
personnel of J.P. Morgan or any personnel of other divisions of the Advisor or
with any of its affiliated persons, with the exception of certain investment
management affiliates of J.P. Morgan.
As compensation for the services rendered and related expenses such as
salaries of advisory personnel borne by the Advisor under the Investment
Advisory Agreement, the Fund has agreed to pay the Advisor a fee, which is
computed daily and may be paid monthly, equal to the annual rate of 0.30% of the
Fund's average daily net assets.
The advisory fees paid by the Fund to Morgan and JPMIM, as applicable,
for the period December 23, 1996 (commencement of operations) through April 30,
1997; the fiscal year ended April 30, 1998; and the six months ended October 31,
1998 (unaudited), were: $10,233; $133,208 and $91,316, respectively.
The Investment Advisory Agreement between the Advisor and the Trust, on
behalf of the 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 the 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 Fund
contemplated by the Investment Advisory Agreement without violation of the
Glass-Steagall Act or other applicable banking laws or regulations. State laws
on this issue may differ from the interpretation of relevant federal law,
<PAGE>
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 Fund.
If the Advisor were prohibited from acting as investment advisor to the
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 the Fund's shares. In that capacity,
FDI has been granted the right, as agent of the Trust, to solicit and accept
orders for the purchase of the Fund's shares in accordance with the terms of the
Distribution Agreement between the Trust and FDI. Under the terms of the
Distribution Agreement between FDI and the Trust, FDI receives no compensation
in its capacity as the Fund's distributor.
The Distribution Agreement will continue in effect with respect to the
Fund for a period of two years after execution only if it is approved at least
annually thereafter (i) by a vote of the holders of a majority of the Fund's
outstanding 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 the 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. 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
<PAGE>
fully responsible for the acts and omissions of any subcontractor as it
would for its own acts or omissions. See "Services Agent" below.
FDI (i) provides office space, equipment and clerical personnel for
maintaining the organization and books and records of the Trust; (ii) provides
officers for the Trust; (iii) prepares and files documents required for
notification of state securities administrators; (iv) reviews and files
marketing and sales literature; (v) files regulatory documents and mails
communications to Trustees and investors; and (vi) maintains related books and
records.
For its services under the Co-Administration Agreement, the Fund has
agreed to pay FDI fees equal to its allocable share of an annual complex-wide
charge of $425,000 plus FDI's out-of-pocket expenses. The amount allocable to
the Fund is based on the ratio of its net assets to the aggregate net assets of
the Trust and other investment companies subject to similar agreements with FDI.
The administrative fees paid to FDI for the period December 23, 1996
(commencement of operations) through April 30, 1997; the fiscal year ended April
30, 1998; and the six months ended October 31, 1998 (unaudited), were: $68; $714
and $389, respectively.
SERVICES AGENT
The Trust, on behalf of the Fund, has entered into an Administrative
Services Agreement (the "Services Agreement") with Morgan pursuant to which
Morgan is responsible certain administrative and related services provided to
the Fund. The Services Agreements may be terminated at any time, without
penalty, by the Trustees or Morgan, in each case on not more than 60 days' nor
less than 30 days' written notice to the other party.
Under the Services Agreements, Morgan provides certain administrative
and related services to the Fund, including services related to tax compliance,
preparation of financial statements, calculation of performance data, oversight
of service providers and certain regulatory and Board of Trustee matters.
Under the Services Agreement, the Fund has agreed to pay Morgan fees
equal to its allocable share of an annual complex-wide charge. This charge is
calculated daily based on the aggregate net assets of the Fund, the other series
of the Trust 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 the Fund is determined by the proportionate share that its net assets
bear to the total net assets of the Trust and certain other investment companies
provided administrative services by Morgan.
The fees paid to Morgan, as Services Agent, for the period December 23,
1996 (commencement of operations) through April 30, 1997; the fiscal year ended
April 30, 1998; and the six months ended October 31, 1998 (unaudited) were:
$1,332; $26,754 and $17,371, respectively.
<PAGE>
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 the 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 the Fund, has entered into a Shareholder
Servicing Agreement with Morgan pursuant to which Morgan acts as shareholder
servicing agent for its customers and for other Fund investors who are customers
of a Financial Professional. Under this agreement, Morgan is responsible for
performing shareholder account, administrative and servicing functions, which
include but are not limited to, answering inquiries regarding account status and
history, the manner in which purchases and redemptions of Fund shares may be
effected, and certain other matters pertaining to the Fund; assisting customers
in designating and changing dividend options, account designations and
addresses; providing necessary personnel and facilities to coordinate the
establishment and maintenance of shareholder accounts and records with the
Fund's transfer agent; transmitting purchase and redemption orders to the Fund's
transfer agent and arranging for the wiring or other transfer of funds to and
from customer accounts in connection with orders to purchase or redeem Fund
shares; verifying purchase and redemption orders, transfers among and changes in
accounts; informing the Distributor of the gross amount of purchase orders for
Fund shares; monitoring the activities of the Fund's transfer agent; and
providing other related services.
Effective August 1, 1998, under the Shareholder Servicing Agreement,
the Fund has agreed to pay Morgan for these services a fee at an annual rate of
0.25% for Select Shares and 0.10% for Institutional Shares. These rates are
expressed as a percentage of the average daily net assets of Fund shares owned
by or for shareholders.
The table below sets forth for each class of shares the shareholder
servicing fees paid by the Fund to Morgan for the fiscal periods indicated.
Select Shares -- For the period April 21, 1997 (commencement of operations)
through April 30, 1997; the fiscal year ended April 30, 1998 and the six months
ended October 31, 1998 (unaudited): $16; $7,131 and $15,575, respectively.
Institutional Shares -- For the period December 23, 1996 (commencement of
operations) through April 30, 1997; the fiscal year ended April 30, 1998 and for
the six months ended October 31, 1998 (unaudited): $1,543; $20,775 and $18,360,
respectively.
As discussed under "Investment Advisor," the Glass-Steagall Act and
other applicable laws and regulations limit the activities of bank holding
<PAGE>
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 Fund under
the Services Agreement and the activities of JPMIM in acting as Advisor to the
Fund 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 Prospectus 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 Agreement and the Services Agreements, the Trustees would
seek an alternative provider of such services. In such event, changes in the
operation of the Fund might occur and a shareholder might no longer be able to
avail himself or herself of any services then being provided to shareholders by
Morgan.
The Fund may be sold to or through financial intermediaries who are
customers of 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 Fund. See
"Financial Professionals" below. Organizations that provide record keeping or
other services to certain employee benefit or retirement plans that include the
Fund 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 Fund,
financial professionals may establish their own terms and conditions for
providing their services and may charge investors a transaction or other fee for
their services. Such charges may vary among financial professionals and will not
be remitted to the Fund or J.P. Morgan.
The Fund has authorized one or more brokers to accept purchase and
redemption orders on its behalf. Such brokers are authorized to designate other
intermediaries to accept purchase and redemption orders on the Fund's behalf.
The Fund will be deemed to have received a purchase or redemption order when an
authorized broker or, if applicable, a broker's authorized designee, accepts the
order. These orders will be priced at the Fund's net asset value next calculated
after they are so accepted.
<PAGE>
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 the Fund, assists in the preparation and/or review of the Fund's federal and
state income tax returns and consults with the Fund as to matters of accounting
and federal and state income taxation.
EXPENSES
In addition to the fees payable to Pierpont Group, Inc., JPMIM, Morgan
and FDI under various agreements discussed under "Trustees and Officers,"
"Investment Advisor," "Co-Administrator", "Distributor", "Services Agent" and
"Shareholder Servicing" above, the Fund is 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.
J.P. Morgan has agreed that it will reimburse the Fund until further
notice to the extent necessary to maintain the Fund's total operating expenses
(which include expenses of the Fund and the Portfolio) at the annual rate of
0.50% of the Fund's average daily net assets with respect to Institutional
Shares and 0.65% of the Fund's average daily net assets with respect to Select
Shares.
This limit does not cover extraordinary expenses. This reimbursement
arrangement can be changed at any time at the option of J.P. Morgan.
Fund -- For the period December 23, 1996 (commencement of operations) through
April 30, 1997; the fiscal year ended April 30, 1998 and for the six months
ended October 31, 1998 (unaudited): $102,848; $151,366 and $77,425,
respectively.
PURCHASE OF SHARES
Investors may open Fund accounts and purchase shares as described in
the Prospectus. References in the Prospectus 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 the Fund may make transactions in shares of the Fund.
The Fund may, at its own option, accept securities in payment for
shares. The securities so delivered are valued by the method described under
"Net Asset Value" as of the day the Fund receives the securities. This is a
taxable transaction to the shareholder. Securities may be accepted in payment
<PAGE>
for shares only if they are, in the judgment of the Advisor,
appropriate investments for the Fund. In addition, securities accepted in
payment for shares must: (i) meet the investment objective and policies of the
Fund; (ii) be acquired by the 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. The Fund reserves the right to accept or reject at its own
option any and all securities offered in payment for its shares.
Prospective investors may purchase shares with the assistance of a
Financial Professional, and a Financial Professional may charge the investor a
fee for this service and other services it provides to its customers.
REDEMPTION OF SHARES
Investors may redeem shares as described in the Prospectus.
If the Trust determines that it would be detrimental to the best
interest of the remaining shareholders of the Fund to make payment wholly or
partly in cash, payment of the redemption price may be made in whole or in part
by a distribution in kind of securities from the Fund, in lieu of cash. 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 Fund.
If the requested relief is granted, the 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.
Further Redemption Information. Investors should be aware that
redemptions from the Fund may not be processed if a redemption request is not
submitted in proper form. To be in proper form, the Fund must have received the
shareholder's taxpayer identification number and address. In addition, if a
shareholder sends a check for the purchase of Fund shares and shares are
purchased before the check has cleared, the transmittal of redemption proceeds
from the shares will occur upon clearance of the check which may take up to 15
days. The Trust, on behalf of the Fund, 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 on such Exchange
is restricted as determined by the SEC by rule or regulation, (iii) during
periods in which an emergency, as determined by the SEC, exists that causes
disposal by the Fund of, or evaluation of the net asset value of, its portfolio
securities to be unreasonable or impracticable, or (iv) for such other periods
as the SEC may permit. For information regarding redemption orders placed
through a financial professional, please see "Financial Professionals" above.
EXCHANGE OF SHARES
An investor may exchange shares of the Fund for shares of any J.P. Morgan
Fund, J.P. Morgan Institutional Fund or J.P. Morgan Series Trust 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
<PAGE>
a value of at least that fund's minimum investment amount. Shareholders
should read the prospectus of the fund into which they are exchanging and may
only exchange between fund accounts that are registered in the same name,
address and taxpayer identification number. Shares are exchanged on the basis of
relative net asset value per share. Exchanges are in effect redemptions from one
fund and purchases of another fund and the usual purchase and redemption
procedures and requirements are applicable to exchanges. Shareholders subject to
federal income tax who exchange shares in one fund for shares in another fund
may recognize capital gain or loss for federal income tax purposes. Shares of
the fund to be acquired are purchased for settlement when the proceeds from
redemption become available. In the case of investors in certain states, state
securities laws may restrict the availability of the exchange privilege. The
Fund reserves the right to discontinue, alter or limit its exchange privilege at
any time.
DIVIDENDS AND DISTRIBUTIONS
The Fund declares and pays dividends and distributions as described
under "Dividends and Distributions" in the prospectus.
Dividends and capital gains distributions paid by the Fund are
automatically reinvested in additional shares of the Fund unless the shareholder
has elected to have them paid in cash. Dividends and distributions to be paid in
cash are credited to the shareholder's account at Morgan or at his financial
professional or, in the case of certain Morgan customers, are mailed by check in
accordance with the customer's instructions. The Fund reserves the right to
discontinue, alter or limit the automatic reinvestment privilege at any time.
If a shareholder has elected to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service is unable to
deliver checks to the shareholder's address of record, such shareholder's
distribution option will automatically be converted to having all dividend and
other distributions reinvested in additional shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
NET ASSET VALUE
The Fund computes its net asset value separately for each class of
shares outstanding once daily as of the close of trading on the New York Stock
Exchange (normally 4:00 p.m. eastern time) on each business day as 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 time. The Fund 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 Fund's business days.
The net asset value of the Fund is equal to the value of the Fund's
investment less the Fund's liabilities. The following is a discussion of the
procedures used by the Fund in valuing its assets.
<PAGE>
Portfolio securities are valued at the last sale price on the
securities exchange or national securities market on which such securities are
primarily traded. Unlisted securities are valued at the last 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.
Securities or other assets for which market quotations are not readily
available (including certain restricted and illiquid securities) are valued at
fair value in accordance with procedures established by and under the general
supervision and responsibility of the Trustees. Such procedures include the use
of independent pricing services which use prices based upon yields or prices of
securities of comparable quality, coupon, maturity and type; indications as to
values from dealers; and general market conditions. Short-term investments which
mature in 60 days or less are valued at amortized cost if their original
maturity was 60 days or less, or by amortizing their value on the 61st day prior
to maturity, if their original maturity when acquired by the Portfolio was more
than 60 days, unless this is determined not to represent fair value by the
Trustees.
Trading in securities in most foreign markets is normally completed
before the close of trading in U.S. markets and may also take place on days on
which the U.S. markets are closed. If events materially affecting the value of
securities occur between the time when the market in which they are traded
closes and the time when the Fund's net asset value is calculated, such
securities will be valued at fair value in accordance with procedures
established by and under the general supervision of the Trustees.
PERFORMANCE DATA
From time to time, the Fund may quote performance in terms of yield,
tax equivalent yield, actual distributions, total return or capital appreciation
in reports, sales literature and advertisements published by the Trust. Current
performance information for the Fund may be obtained by calling the number
provided on the cover page of this Statement of Additional Information. See also
the Prospectus.
Comparative performance information may be used from time to time in
advertising the Fund's 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.
The classes of shares of the Fund may bear different shareholder
servicing fees and other expenses, which may cause the performance of a class to
differ from the performance of another class. Performance quotations will be
computed separately for each class of the Fund's shares. Any fees charged by an
institution directly to its customers' accounts in connection with investments
in the Fund will not be included in calculations of total return or yield.
Yield Quotations. As required by regulations of the SEC, the annualized
yield for the Fund's Select and Institutional shares is computed by dividing net
investment income per share earned during a 30-day period by the net asset value
on the last day of the period. The average daily number of shares
<PAGE>
outstanding during the period that are eligible to receive dividends is
used in determining the net investment income per share. Income is computed by
totaling the interest earned on all debt obligations during the period and
subtracting from that amount the total of all recurring expenses incurred during
the period. The 30-day yield is then annualized on a bond-equivalent basis
assuming semi-annual reinvestment and compounding of net investment income.
Annualized tax-equivalent yield reflects the approximate annualized yield that a
taxable investment must earn for shareholders at specified federal and
California income tax levels to produce an after-tax yield equivalent to the
annualized tax-exempt yield.
Below is set forth historical yield information for the periods
indicated:
Select Shares: (October 31, 1998): 30-day yield: 3.42%; 30-day tax
equivalent yield at 39.6%; tax rate: 5.66%.
Institutional Shares: (October 31, 1998): 30-day yield: 3.63%; 30-day tax
equivalent yield at 39.6%; tax rate: 6.01%.
Total Return Quotations. The Fund may advertise "total return" and
non-standardized total return data. The total return shows what an investment in
the Fund would have earned over a specified period of time (one, five or ten
years or since commencement of operations, if less) assuming that all
distributions and dividends by the Fund were reinvested on the reinvestment
dates during the period and less all recurring fees. This method of calculating
total return is required by regulations of the SEC. Total return data similarly
calculated, unless otherwise indicated, over other specified periods of time may
also be used. All performance figures are based on historical earnings and are
not intended to indicate future performance.
As required by regulations of the SEC, the average annual total return
of the Fund for a period is computed by assuming a hypothetical initial payment
of $1,000. It is then assumed that all of the dividends and distributions by the
Fund over the period are reinvested. It is then assumed that at the end of the
period, the entire amount is redeemed. The 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.
Aggregate total returns, reflecting the cumulative percentage change
over a measuring period, may also be calculated.
Historical performance for periods prior to the establishment of Select
Shares of the Fund will be that of the Institutional Shares of the Fund and will
be presented in accordance with applicable SEC staff interpretations. Such
historical performance information may reflect operating expenses which were
lower than those associated with holding Select Shares. Accordingly, the
historical yield and historical returns for the Select Shares may be higher than
would have occurred if an investment had been made during the indicated periods
in Institutional Shares of the Fund.
Below is set forth historical return information for the Fund for the
periods indicated:
<PAGE>
Select Shares: (October 31, 1998): Average annual total return, 1 year:
7.13%; average annual total return, 5 years: N/A; average annual total return,
commencement of operations (April 21, 1997) to period end: 7.04%; aggregate
total return, 1 year: 7.13%; aggregate total return, 5 years: N/A; aggregate
total return, commencement of operations (April 21, 1997) to period end: 13.48%.
Institutional Shares: (October 31, 1998): Average annual total return, 1
year: 7.27%; average annual total return, 5 years: N/A; average annual total
return, commencement of operations (December 23, 1996) to period end: 7.15%;
aggregate total return, 1 year: 7.27%; aggregate total return, 5 years: N/A;
aggregate total return, commencement of operations (December 23, 1996) to period
end: 13.68%.
General. The Fund's 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 the Fund's performance for any specified period in the future.
In addition, because performance will fluctuate, it may not provide a basis for
comparing an investment in the Fund with certain bank deposits or other
investments that pay a fixed yield or return for a stated period of time.
From time to time, the Fund may, in addition to any other permissible
information, include the following types of information in advertisements,
supplemental sales literature and reports to shareholders: (1) discussions of
general economic or financial principles (such as the effects of compounding and
the benefits of dollar-cost averaging); (2) discussions of general economic
trends; (3) presentations of statistical data to supplement such discussions;
(4) descriptions of past or anticipated portfolio holdings for the Fund; (5)
descriptions of investment strategies for the Fund; (6) descriptions or
comparisons of various savings and investment products (including, but not
limited to, qualified retirement plans and individual stocks and bonds), which
may or may not include the Fund; (7) comparisons of investment products
(including the Fund) with relevant markets or industry indices or other
appropriate benchmarks; (8) discussions of fund rankings or ratings by
recognized rating organizations; and (9) discussions of various statistical
methods quantifying the Fund's volatility relative to its benchmark or to past
performance, including risk adjusted measures. The Fund may also include
calculations, such as hypothetical compounding examples, which describe
hypothetical investment results in such communications. Such performance
examples will be based on an express set of assumptions and are not indicative
of the performance of the Fund.
PORTFOLIO TRANSACTIONS
The Advisor places orders for the Fund for all purchases and sales of
portfolio securities, enters into repurchase agreements and may enter into
reverse repurchase agreements and execute loans of portfolio securities on
behalf of the Fund. See "Investment Objective and Policies."
Fixed income and debt securities and municipal bonds and notes 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
<PAGE>
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.
Portfolio transactions for the Fund will be undertaken principally to
accomplish the Fund's objective in relation to expected movements in the general
level of interest rates. The Fund may engage in short-term trading consistent
with its objective. See "Investment Objective and Policies -- Portfolio
Turnover".
In connection with portfolio transactions for the Fund, the Advisor
intends to seek the best execution on a competitive basis for both purchases and
sales of securities.
Subject to the overriding objective of obtaining the best execution of
orders, the Advisor may allocate a portion of the Fund's brokerage transactions
to affiliates of the Advisor. In order for affiliates of the Advisor to effect
any portfolio transactions for the 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 are not
"interested persons," have adopted procedures which are reasonably designed to
provide that any commissions, fees, or other remuneration paid to such
affiliates are consistent with the foregoing standard.
Portfolio securities will not be purchased from or through or sold to
or through the Co-Administrator, the Distributor or the Advisor or any other
"affiliated person" (as defined in the 1940 Act) of the Co-Administrator,
Distributor or Advisor when such entities are acting as principals, except to
the extent permitted by law. In addition, the Fund will not purchase securities
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 Fund may only
sell a security to other portfolios or 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 the 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 the 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
<PAGE>
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 the Fund. In some instances, this procedure might adversely
affect the Fund.
MASSACHUSETTS TRUST
The Trust is a "Massachusetts business trust" of which the Fund is a
separate and distinct series. A copy of the Declaration of Trust for the Trust
is on file in the office of the Secretary of The Commonwealth of Massachusetts.
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 January 1, 1998, the name of the Trust was changed from "JPM
Series Trust" to "J.P. Morgan Series Trust"; the name of the Fund was changed
from "California Bond Fund" to "J.P. Morgan California Bond Fund"; and the names
of the shares changed from "JPM Pierpont Shares" and "JPM Institutional Shares"
to "Select Shares" and "Institutional Shares", respectively. The Trust's
Declaration of Trust further provides that no Trustee, officer, employee, or
agent of the Trust is liable to the Fund or to a shareholder, and that no
Trustee, officer, employee, or agent is liable to any third persons in
connection with the affairs of the Fund, except as such liability may arise from
his or its own bad faith, willful misfeasance, gross negligence or reckless
disregard of his or its duties to such third persons ("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 the 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 the Fund, except liabilities arising from disabling conduct.
The Trust shall continue without limitation of time subject to the
provisions in the Declaration of Trust concerning termination by action of the
shareholders or by action of the Trustees upon notice to the shareholders.
DESCRIPTION OF SHARES
The Trust is an open-end management investment company organized as a
Massachusetts business trust in which the Fund represents a separate series of
shares of beneficial interest. See "Massachusetts Trust."
The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares ($0.001 par value) of one or more series
and classes within any series and to divide or combine the shares of any series
without changing the proportionate beneficial interest of each shareholder in
the Fund.
Each share represents an equal proportional interest in the Fund with
each other share of the same class. Upon liquidation of the Fund, holders are
entitled to share pro rata in the net assets of the Fund available for
distribution to such shareholders. Shares of the Fund have no preemptive or
<PAGE>
conversion rights. The rights of redemption and exchange are described in
the Prospectus and elsewhere in this Statement of Additional Information.
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, provided, however, that 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 so that holders
of more than 50% of the shares voting can, if they choose, elect all Trustees
being selected while the shareholders of the remaining shares would be unable to
elect any Trustees. It is the intention of the Trust not to hold meetings of
shareholders annually. The Trustees may call meetings of shareholders for action
by shareholder vote as may be required by either the 1940 Act or the Trust's
Declaration of Trust.
Shareholders of the Trust have the right, upon the declaration in
writing or vote of shareholders whose shares represent two-thirds of the net
asset value of the Trust, to remove a Trustee. The Trustees will call a meeting
of shareholders to vote on removal of a Trustee upon the written request of the
shareholders whose shares represent 10% of the net asset value of the Trust. The
Trustees are also required, under certain circumstances, to assist shareholders
in communicating with other shareholders.
For information relating to mandatory redemption of Fund shares or
their redemption at the option of the Trust under certain circumstances, see the
Prospectus.
As of January 31, 1999, following owned of record or, to the knowledge
of management, beneficially owned more than 5% of the outstanding shares of:
Select Shares: -- Morgan as Agent for J. Farrand (22.67%); Morgan as Agent
for J. Marcketta (15.58%); Morgan as Agent for J. Tuttleman (8.63%); Morgan as
Agent for A. Chernik (7.26%); Morgan as Agent for Gelber Property Trust (6.45%);
and Morgan as Agent for Kitaj Trust (6.26%).
Institutional Shares: -- Morgan as Agent for R. Hastings or P. Quillin
(13.46%); Morgan as Agent for G. Kaufman Marital Trust New York (8.31%); Morgan
as Agent for G. Judis CRT (7.90%); and Morgan as Agent for S.& A. Sheldon Rev
Trust DTD (5.31%).
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 Fund intends to qualify and remain qualified as a regulated
investment company under Subchapter M of the Code. As a regulated investment
company, the Fund must, among other things, (a) derive at least 90% of its gross
income from dividends, interest, payments with respect to loans of stock and
securities, gains from the sale or other disposition of stock, securities or
foreign currency and other income (including but not limited to gains from
<PAGE>
options, futures, and forward contracts) derived with respect to its business of
investing in such stock, securities or foreign currency; (b) diversify its
holdings so that, at the end of each fiscal quarter, (i) at least 50% of the
value of the 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 the Fund's total assets, and 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its total assets is
invested in the securities of any one issuer (other than U.S. Government
securities or the securities of other regulated investment companies).
As a regulated investment company, the Fund (as opposed to its
shareholders) will not be subject to federal income taxes on the net investment
income and capital 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.
Under the Code, the Fund will be subject to a 4% excise tax on a
portion of its undistributed income if it fails to meet certain distribution
requirements by the end of the calendar year. The Fund intends to make
distributions in a timely manner and accordingly does not expect to be subject
to the excise tax.
For federal income tax purposes, dividends that are declared by the
Fund in October, November or December as of a record date in such month and
actually paid in January of the following year will be treated as if they were
paid on December 31 of the year declared. Therefore, such dividends will
generally be taxable to a shareholder in the year declared rather than the year
paid.
The Fund intends to qualify to pay exempt-interest dividends to its
shareholders by having, at the close of each quarter of its taxable year, at
least 50% of the value of its total assets consist of tax exempt securities. An
exempt-interest dividend is that part of dividend distributions made by the Fund
which consists of interest received by the Fund on tax exempt securities.
Shareholders will not incur any federal income tax on the amount of
exempt-interest dividends received by them from the Fund. In view of the Fund's
investment policies, it is expected that a substantial portion of all dividends
will be exempt-interest dividends, although the Fund may from time to time
realize and distribute net short-term capital gains and may invest limited
amounts in taxable securities under certain circumstances.
Distributions of net investment income (other than exempt-interest
dividends) and realized net short-term capital gains in excess of net long-term
capital losses are generally taxable to shareholders of the Fund as ordinary
income whether such distributions are taken in cash or reinvested in additional
shares. The Fund generally pays a monthly dividend. If dividend payments exceed
income earned by the Fund, the over distribution would be considered a return of
capital rather than a dividend payment. The Fund intends to pay dividends in
such a manner so as to minimize the possibility of a return of capital.
Distributions of net long-term capital gains (i.e., net long-term capital gains
in excess of net short-term capital losses) are taxable to shareholders of the
Fund as long-term capital gains, regardless of whether such distributions are
taken in cash or reinvested in additional
<PAGE>
shares and regardless of how long a shareholder has held shares in the
Fund. In general, long-term capital gain of an individual shareholder will be
subject to a 20% rate of tax.
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. If an option written by the Fund lapses or is terminated
through a closing transaction, such as a repurchase by the Fund of the option
from its holder, the Fund will realize a short-term capital gain or loss,
depending on whether the premium income is greater or less than the amount paid
by the Fund in the closing transaction. If securities are purchased by the Fund
pursuant to the exercise of a put option written by it, the Fund will subtract
the premium received from its cost basis in the securities purchased.
Any distribution of net investment income or capital gains will have
the effect of reducing the net asset value of Fund shares held by a shareholder
by the same amount as the distribution. If the net asset value of the shares is
reduced below a shareholder's cost as a result of such a distribution, the
distribution, although constituting a return of capital to the shareholder, will
be taxable as described above. Investors should thus consider the consequences
of purchasing shares in the Fund shortly before the Fund declares a sizable
dividend distribution.
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. Long-term capital gain of an
individual holder is subject to maximum tax rate of 20%. However, any loss
realized by a shareholder upon the redemption or exchange of shares in the Fund
held for six months or less (i) 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, and (ii) will be disallowed to the
extent of any exempt-interest dividends received by the shareholder with respect
to such shares. Investors are urged to consult their tax advisors concerning the
limitations on the deductibility of capital losses. In addition, no loss will be
allowed on the redemption or exchange of shares of the Fund, if within a period
beginning 30 days before the date of such redemption or exchange and ending 30
days after such date, the shareholder acquires (such as through dividend
reinvestment) securities that are substantially identical to shares of the Fund.
Certain options and futures held by the Fund at the end of each 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.
<PAGE>
If a correct and certified taxpayer identification number is not on
file, the Fund is required, subject to certain exemptions, to withhold 31% of
certain payments made or distributions declared to non-corporate shareholders.
State and Local Taxes. The Fund may be subject to state or local taxes
in jurisdictions in which the Fund is deemed to be doing business. In addition,
the treatment of the Fund and its shareholders in those states which have income
tax laws might differ from treatment under the federal income tax laws.
Shareholders should consult their own tax advisors with respect to any state or
local taxes.
Other Taxation. Under current law, neither the Trust nor the Fund is
liable for any income or franchise tax in The Commonwealth of Massachusetts,
provided that the Fund continues to qualify as a regulated investment company
under Subchapter M of the Code.
ADDITIONAL INFORMATION
Telephone calls to the Fund, J.P. Morgan or a Financial Professional as
shareholder servicing agent may be tape recorded. With respect to the securities
offered hereby, this Statement of Additional Information and the Prospectus do
not contain all the information included in the Trust's registration statement
filed with the SEC under the 1933 Act and the Trust's and the Portfolio's
registration statements 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 Fund or the Distributor. The Prospectus and this Statement of
Additional Information do not constitute an offer by the Fund or by the
Distributor to sell or solicit any offer to buy any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful for the Fund or
the Distributor to make such offer in such jurisdictions.
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 erroneous results, ranging from system malfunctions to incorrect or
incomplete transaction processing. If not
<PAGE>
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 has substantially completed
renovation, testing, and validation of its key systems and is preparing 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. For potential failure
scenarios where the risks are deemed significant and where such risk is
considered to have a higher probability of occurrence, J.P. Morgan will attempt
to develop business recovery/contingency plans. These plans, which are being
developed in the first half of 1999, will define the infrastructure that should
be put in place for managing a failure during the millennium event itself.
Costs associated with efforts to prepare J.P. Morgan's systems for the
year 2000 approximated $95 million in 1997 and $112 million for the first nine
months of 1998. In 1999, J.P. Morgan is continuing its efforts to prepare its
systems for the year 2000. The total cost to become year-2000 compliant is
estimated at $300 million (for firmwide systems upgrade, not just for systems
relating to mutual funds), for internal systems renovation and testing, testing
equipment, and both internal and external resources working on the project. The
costs associated with J.P. Morgan becoming year-2000 compliant will be borne by
J.P. Morgan and not the Funds.
FINANCIAL STATEMENTS
The financial statements and the report thereon of
PricewaterhouseCoopers LLP are incorporated herein by reference to the Fund's
April 30, 1998 annual report filing made with the SEC on July 14, 1998
(Accession Number 0001047469-98-027154) and the October 31, 1998 semi-annual
report filing made with the SEC on January 20, 1999, pursuant to Section 30(b)
of the 1940 Act and Rule 30b2-1 thereunder (Accession Number
0001047469-99-001553). The financial statements are available without charge
upon request by calling J.P. Morgan Funds Services at (800) 521-5411 for the
Select Shares and (800) 766-7722 for the Institutional Shares.
<PAGE>
APPENDIX A
Description of Security Ratings
STANDARD & POOR'S
Corporate and Municipal Bonds
AAA - Debt rated AAA have the highest ratings assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA - Debt rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in a small degree.
A - Debt rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher rated categories.
BBB - Debt rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in
higher rated categories.
BB - Debt rated BB are regarded as having less near-term vulnerability to
default than other speculative issues. However, they face major ongoing
uncertainties or exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to meet timely
interest and principal payments.
B - An obligation rated B is more vulnerable to nonpayment than
obligations rated BB, but the obligor currently has the capacity to
meet its financial commitment on the obligation. Adverse business,
financial, or economic conditions will likely impair the obligor's
capacity or willingness to meet its financial commitment on the
obligation.
CCC - An obligation rated CCC is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation. In
the event of adverse business, financial, or economic conditions, the
obligor is not likely to have the capacity to meet its financial
commitment on the obligation.
CC - An obligation rated CC is currently highly vulnerable to nonpayment.
C - The C rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments
on this obligation are being continued.
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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. MOODY'S
Corporate and Municipal Bonds
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks
appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
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Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection
of interest and principal payments may be very moderate, and thereby
not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
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.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
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.
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APPENDIX B
Additional Information Concerning California Municipal Securities
The following information is a summary of special factors affecting
investments in California Municipal Securities and is drawn from the Official
Statement issued by the State for its public bond issue on December 9, 1998. The
sources of payment for such obligations and the marketability thereof may be
affected by financial or other difficulties experienced by the State of
California and certain of its municipalities and public authorities. It does not
purport to be a complete description and is based on information from official
statements relating to securities offerings of California issuers.
State Finances
The Budget Process
The State's fiscal year begins on July 1 and ends on June 30. The State
operates on a budget basis, using a modified accrual system of accounting, with
revenues credited in the period in which they are measurable and available and
expenditures debited in the period in which the corresponding liabilities are
incurred.
The annual budget is proposed by the Governor by January 10 of each
year for the next fiscal year (the "Governor's Budget"). Under State law, the
annual proposed Governor's Budget cannot provide for projected expenditures in
excess of projected revenues and balances available from prior fiscal years.
Following the submission of the Governor's Budget, the Legislature takes up the
proposal.
Under the State Constitution, money may be drawn from the Treasury only
through an appropriation made by law. The primary source of the annual
expenditure authorizations is the Budget Act as approved by the Legislature and
signed by the Governor. The Budget Act must be approved by a two-thirds majority
vote of each House of the Legislature. The Governor may reduce or eliminate
specific line items in the Budget Act or any other appropriations bill without
vetoing the entire bill. Such individual line-item vetoes are subject to
override by a two-thirds majority vote of each House of the Legislature.
Appropriations also may be included in legislation other than the
Budget Act (except for K-14 education) must be approved by a two-thirds majority
vote in each House of the Legislature and be signed by the Governor. Bills
containing K-14 education appropriations only require a simple majority vote.
Continuing appropriations, available without regard to fiscal year, may also be
provided by statute or the State Constitution.
Funds necessary to meet an appropriation need not be in the State
Treasury at the time such appropriation is enacted; revenues may be appropriated
in anticipation of their receipt.
The General Fund
The moneys of the State are segregated into the General Fund and over
900 Special Funds, including Bond, Trust and Pension Funds. The General Fund
consists of revenues received by the State Treasury and not required by law to
be credited to any other fund, as well as earnings from the investment of State
moneys not allocable to another fund. The General Fund is the principal
operating fund for the majority of governmental activities and is the depository
of most of the major revenue sources of the State. The General
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Fund may be expended as a consequence of appropriation measures enacted by the
Legislature and approved by the Governor, as well as appropriations pursuant to
various constitutional authorizations and initiative statutes.
The Special Fund for Economic Uncertainties
The Special Fund for Economic Uncertainties ("SFEU") is funded with
General Fund revenues and was established to protect the State from unforeseen
revenue reductions and/or unanticipated expenditure increases. Amounts in the
SFEU may be transferred by the State Controller as necessary to meet cash needs
of the General Fund. The State Controller is required to return moneys so
transferred without payment of interest as soon as there are sufficient moneys
in the General Fund.
The legislation creating the SFEU contains a continuous appropriation
from the General Fund authorizing the State Controller to transfer to the SFEU,
as of the end of each fiscal year, the lesser of (i) the unencumbered balance in
the General Fund and (ii) the difference between the State's "appropriations
subject to limitation" for the fiscal year then ended and its "appropriations
limit" as defined in Section 8 of Article XIII B of the State Constitution and
established in the Budget Act for that fiscal year, as jointly estimated by the
State's Legislative Analyst's Office and the Department of Finance. In certain
circumstances, moneys in the SFEU may be used in connection with disaster
relief.
For budgeting and accounting purposes, any appropriation made from the
SFEU is deemed an appropriation from the General Fund. For year-end reporting
purposes, the State Controller is required to add the balance in the SFEU to the
balance in the General Fund so as to show the total moneys then available for
General Fund purposes.
The SFEU projection reflects the enactment of the Budget Act on August
21, 1998. This figure contains the latest revenue projections and expenditure
amounts appropriated in the Budget Act and trailer bills at that point in time.
As in any year, the Budget Act and related trailer bills are not the only pieces
of legislation which appropriate funds. Other factors including re-estimates of
revenues and expenditures, existing statutory requirements, and additional
legislation introduced and passed by the Legislature may impact the reserve
amount.
In the Budget Act for Fiscal Year 1998-99, signed on August 21, 1998,
the Department of Finance projects the SFEU will have a balance of about $1.255
billion at June 30, 1999.
Prior Fiscal Years' Financial Results
Fiscal Years Prior to 1995-96
Pressures on the State's budget in the late 1980's and early 1990's
were caused by a combination of external economic conditions (including a
recession which began in 1990) and growth of the largest General Fund Programs -
K-14 education, health, welfare and corrections - at rates faster than the
revenue base. During this period, expenditures exceeded revenues in four out of
six years up to 1992-93, and the State accumulated and sustained a budget
deficit approaching $2.8 billion at its peak at June 30, 1993. Between the
1991-92 and 1994-95 Fiscal Years, each budget required multibillion dollar
actions to bring projected revenues and expenditures into balance, including
significant cuts in health and welfare program expenditures; transfers of
program responsibilities and funding from the State to local governments,
transfer of about $3.6 billion in annual local property tax revenues from other
local
<PAGE>
governments to local school districts, thereby reducing State funding for
schools under Proposition 98; and revenue increases (particularly in the 1991-92
Fiscal Year Budget), most of which were for a short duration.
Despite these budget actions, the effects of the recession led to
large, unanticipated budget deficits. By the 1993-94 Fiscal Year, the
accumulated deficit was so large that it was impractical to budget to retire it
in one year, so a two-year program was implemented, using the issuance of
revenue anticipation warrants to carry a portion of the deficit over the end of
the fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95, again using cross-fiscal year
revenue anticipation warrants to partly finance the deficit into the 1995-96
fiscal year.
Another consequence of the accumulated budget deficits, together with
other factors such as disbursement of funds to local school districts "borrowed"
from future fiscal years and hence not shown in the annual budget, was to
significantly reduce the State's cash resources available to pay its ongoing
obligations. When the Legislature and the Governor failed to adopt a budget for
the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the State to
carry out its normal annual cash flow borrowing to replenish its cash reserves,
the State Controller issued registered warrants to pay a variety of obligations
representing prior years' or continuing appropriations, and mandates from court
orders. Available funds were used to make constitutionally-mandated payments,
such as debt service on bonds and warrants. Between July 1 and September 4,
1992, when the budget was adopted, the State Controller issued a total of
approximately $3.8 billion of registered warrants.
For several fiscal years during the recession, the State was forced to
rely on external debt markets to meet its cash needs, as a succession of notes
and revenue anticipation warrants were issued in the period from June 1992 to
July 1994, often needed to pay previously maturing notes or warrants. These
borrowings were used also in part to spread out the repayment of the accumulated
budget deficit over the end of a fiscal year, as noted earlier. The last and
largest of these borrowings was $4.0 billion of revenue anticipation warrants
which were issued in July, 1994 and matured on April 25, 1996.
1995-96 and 1996-97 Fiscal Years
The State's financial condition improved markedly during the 1995-96,
1996-97 and 1997-98 fiscal years, with a combination of better than expected
revenues, slowdown in growth of social welfare programs, and continued spending
restraint based on the actions taken in earlier years. The State's cash position
also improved, and no external deficit borrowing has occurred over the end of
these three fiscal years.
The economy grew strongly during these fiscal years, and as a result,
the General Fund took in substantially greater tax revenues (around $2.2 billion
in 1995-96, $1.6 billion in 1996-97 and $2.2 billion in 1997-98) than were
initially planned when the budgets were enacted. These additional funds were
largely directed to school spending as mandated by Proposition 98, and to make
up shortfalls from reduced federal health and welfare aid in 1995-96 and
1996-97. The accumulated budget deficit from the recession years was finally
eliminated. The Department of Finance estimates that the State's budget reserve
(the SFEU) totaled $639.8 million as of June 30, 1997 and $1.782 billion at June
30, 1998.
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The following were major features of the 1997-98 Budget Act:
1. For the second year in a row, the Budget contained a large
increase in funding for K-14 education under Proposition 98,
reflecting strong revenues which exceeded initial budgeted
amounts. Part of the nearly $1.75 billion in increased
spending was allocated to prior fiscal years. Funds were
provided to fully pay for the cost-of-living-increase
component of Proposition 98, and to extend the class size
reduction and reduction and reading initiatives.
2. The Budget Act reflected the $1.228 billion pension case
judgment payment, and brought funding of the State's pension
contribution back to the quarterly basis which existed prior
to the deferral actions which were invalidated by the courts.
3. Funding from the General Fund for the University of California
and California State University was increased by about 6
percent ($121 million and $107 million, respectively), and
there was no increase in student fees.
4. Because of the effect of the pension payment, most other State
programs were continued at 1996-97 levels, adjusted for
caseload changes.
5. Health and welfare costs were contained, continuing generally
the grant levels from prior years, as part of the initial
implementation of the new CalWORKs program.
6. Unlike prior years, this Budget Act did not depend on
uncertain federal budget actions. About $300 million in
federal funds, already included in the federal FY 1997 and
1998 budgets, was included in the Budget Act, to offset
incarceration costs for illegal aliens.
7. The Budget Act contained no tax increases, and no tax
reductions. The Renters Tax Credit was suspended for another
year, saving approximately $500 million.
The Department of Finance released updated estimates for the 1997-98
Fiscal Year on January 9, 1998 as part of the Governor's 1998-99 Fiscal Year
Budget Proposal. Total revenues and transfers are projected at $52.9 billion, up
approximately $360 million from the Budget Act projection. Expenditures for the
fiscal year are expected to rise approximately $200 million above the original
Budget Act, to $53.0 billion. The balance in the budget reserve, the SFEU, is
projected to be $329 million at June 30, 1998, compared to $461 million at June
30, 1997.
Current State Budget
1998-99 Fiscal Year Budget
When the Governor released his proposed 1998-99 Fiscal Year Budget on
January 9, 1998, he projected General Fund revenues for the 1998-99 Fiscal Year
of $55.4 billion, and proposed expenditures in the same amount. By the time the
Governor released the May Revision to the 1998-99 Budget ("May Revision") on May
14, 1998, the Administration projected that revenues for the 1997-98 and 1998-99
Fiscal Years combined would be more than $4.2 billion
<PAGE>
higher than was projected in January. The Governor proposed that most of this
increased revenue be dedicated to fund a 75% cut in the Vehicle License Fee
("VLF").
The Legislature passed the 1998-99 Budget Bill on August 11, 1998, and
the Governor signed it on August 21, 1998. Some 33 companion bills necessary to
implement the budget were also signed. In signing the Budget Bill, the Governor
used his line-item veto power to reduce expenditures by $1.360 billion from the
General Fund, and $160 million from Special Funds. Of this total, the Governor
indicated that about $250 million of vetoed funds were "set aside" to fund
programs for education. Vetoed items included education funds, salary increases
and many individual resources and capital projects.
The 1998-99 Budget Act is based on projected General Fund revenues and
transfers of $57.0 billion (after giving effect to various tax reductions
enacted in 1997 and 1998), a 4.2% increase from the revised 1997-98 figures.
Special Fund revenues were estimated at $14.3 billion. The revenue projections
were based on the May Revision. Economic problems overseas since that time may
affect the May Revision projections. See "Economic Assumptions" below.
After giving effect to the Governor's vetoes, the Budget Act provides
authority for expenditures of $57.3 billion from the General Fund (a 7.3%
increase from 1997-98), $14.7 billion from Special Funds, and $3.4 billion from
bond funds. The Budget Act projects a balance in the SFEU at June 30, 1999 (but
without including the "set aside" veto amount) of $1.255 billion, a little more
than 2% of General Fund revenues. The Budget Act assumes the State will carry
out its normal intra-year cash flow borrowing in the amount of $1.7 billion of
revenue anticipation notes, which were issued on October 1, 1998.
The most significant feature of the 1998-99 budget was agreement on a
total of $1.4 billion of tax cuts. The central element is a bill which provides
for a phased-in reduction of the VLF. Since the VLF is currently transferred to
cities and counties, the bill provides for the General Fund to replace the lost
revenues. Starting on January 1, 1999, the VLF will be reduced by 25%, at a cost
to the General Fund of approximately $500 million in the 1998-99 Fiscal Year and
about $1 billion annually thereafter.
In addition to the cut in VLF, the 1998-99 budget includes both
temporary and permanent increase in the personal income tax dependent credit
($612 million General Fund cost in 1998-99, but less in future years), a
nonrefundable renters tax credit ($133 million), and various targeted business
tax credits ($106 million).
Other significant elements of the 1998-99 Budget Act are as follows:
1. Proposition 98 funding for K-12 schools is increased by $1.7 billion
in General Fund moneys over revised 1997-98 levels, about $300 million higher
than the minimum Proposition 98 guaranty. An additional $600 million was
appropriated to "settle up" prior years' Proposition 98 entitlements, and was
primarily devoted to one-time uses such as block grants, deferred maintenance,
and computer and laboratory equipment. Of the 1998-99 funds, major new programs
include money for instructional and library materials, deferred maintenance,
support for increasing the school year to 180 days and reduction of class sizes
in Grade 9. The Governor held $250 million of education funds which were vetoed
as set-aside for enactment of additional reforms. Overall, per-pupil spending
for K-12 schools under Proposition 98 is increased to $5,695, more than
one-third higher than the level in the last recession year of 1993-94. The
Budget also includes $250 million as repayment
<PAGE>
of prior years' loans to schools, as part of the settlement of the CTA v.
Gould lawsuit.
2. Funding for higher education increased substantially above the level
called for in the Governor's four-year compact. General Fund support was
increased by $340 million (15.6%) for the University of California and $267
million (14.1%) for the California State University system. In addition,
Community Colleges received a $300 million (6.6%) increase under Proposition 98.
3. The Budget includes increased funding for health, welfare and social
services programs. A 4.9% grant increase was included in the basic welfare
grants, the first increase in those grants in 9 years. Future increases will
depend on sufficient General Fund revenue to trigger the phased cuts in VLF
described above.
4. Funding for the judiciary and criminal justice programs increased by
about 11% over 1997-98, primarily to reflect increased State support for local
trial courts and rising prison population.
5. Various other highlights of the Budget included new funding for
resources projects, dedication of $376 million of General Fund moneys for
capital outlay projects, funding of a 3% State employee salary increase, funding
of 2,000 new Department of Transportation positions to accelerate transportation
construction projects, and funding of the Infrastructure and Economic
Development Bank ($50 million).
6. The State of California received approximately $167 million of
federal reimbursements to offset costs related to the incarceration of
undocumented alien felons for federal fiscal year 1997. The State anticipates
receiving approximately $195 million in federal reimbursements for federal
fiscal year 1998.
After the Budget Act was signed, and prior to the close of the
Legislative session on August 31, 1998, the Legislature passed a variety of
fiscal bills. The Governor had until September 30, 1998 to sign or veto these
bills. The bills with the most significant fiscal impact which the Governor
signed include $235 million for certain water system improvements in Southern
California, $243 million for the State's share of the purchase of
environmentally sensitive forest lands, $178 million for state prisons, $160
million for housing assistance ($40 million of which was included in the 1998-99
Budget Act and an additional $120 million reflected in Proposition IA), and $125
million for juvenile facilities. The Governor also signed bills totaling $223
million for education programs which were part of the Governor's $250 million
veto "set aside," and $32 million for local governments fiscal relief. In
addition, he signed a bill reducing by $577 million the State's obligation to
contribute to the State Teachers' Retirement System in the 1998-99 Fiscal Year.
Based solely on the legislation enacted, on a net basis, the reserve
for June 30, 1999, was reduced by $256 million. On the other hand, 1997-98
revenues have been increased by $160 million. The revised June 30, 1999, reserve
is projected to be $1,159 million or $96 million below the level projected at
the Budget Act. The reserve projected in the Budget Act was $1,255 million. It
is important to emphasize that the new reserve level is based on 1998-99 revenue
and expenditure assumptions as of the Budget Act except to augment for
legislation signed after the budget enactment. These assumptions will not be
updated until the 1999-00 Governor's Budget is released on January 10, 1999. In
November, 1998, the Legislative Analyst's Office released a report predicting
that General Fund revenues for 1998-99
<PAGE>
would be somewhat lower, and expenditures somewhat higher, than the Budget Act
forecasts, but the net variance would be within the projected $1.2 billion
year-end reserve amount.
Local Governments
The primary units of local government in California are the counties,
ranging in population from 1,200 in Alpine County to almost 9,600,000 in Los
Angeles County. Counties are responsible for the provision of many basic
services, including indigent health care, welfare, jails and public safety in
unincorporated areas. There are also about 480 incorporated cities, and
thousands of other special districts formed for education, utility and other
services. The fiscal condition of local governments has been constrained since
the enactment of "Proposition 13" in 1978, which reduced and limited the future
growth of property taxes, and limited the ability of local governments to impose
"special taxes" (those devoted to a specific purpose) without two-thirds voter
approval. Counties, in particular, have had fewer options to raise revenues than
many other local government entities, and have been required to maintain many
services.
Historically, funding for the State's trial court system was divided
between the State and the counties. However, Chapter 850, Statutes of 1997,
implemented a restructuring of the State's trial court funding system. Funding
for the courts, with the exception of costs for facilities, local judicial
benefits, and revenue collection, was consolidated at the State level. The
county contribution for both their general fund and fine and penalty amounts is
capped at the 1994-95 level and becomes part of the Trial Court Trust Fund,
which supports all trial court operations. The State assumed responsibility for
future growth in trial court funding. The consolidation of funding is intended
to streamline the operation of the courts, provide a dedicated revenue source,
and relieve fiscal pressure on the counties. Beginning in 1998-99, the county
general fund contribution for court operations is reduced by $300 million,
including $10.7 million to buy out the contribution of the 20 smallest counties,
and cities will retain $62 million in fine and penalty revenue previously
remitted to the state; the General Fund backfilled the $362 million revenue loss
to the Trial Court Trust Fund. In addition to this general fund backfill, a $50
million augmentation is included in the 1998 Budget Act for the trial courts to
fund workload increases and high priority issues such as court security. In
1999-2000, the county general fund contribution will be further reduced by an
additional $92 million to buy out the next 17 smallest counties and reduce by 10
percent of the general fund contribution of the remaining 21 counties.
The entire statewide welfare system has been changed in response to the
change in federal welfare law enacted in 1996 (see "Welfare Reform" above).
Under the CalWORKs program, counties are given flexibility to develop their own
plans, consistent with state law, to implement the program and to administer
many of its elements, and their costs for administrative and supportive services
are capped at the 1996-97 levels. Counties are also given financial incentives
if, at the individual county level or statewide, the CalWORKs program produces
savings associated with specified standards. Counties will still be required to
provide "general assistance" aid to certain persons who cannot obtain welfare
from other programs.
In the aftermath of Proposition 13, the State provided aid from the
General Fund to make up some of the loss of property tax moneys, including
taking over the principal responsibility for funding K-12 schools and community
colleges. During the recession, the Legislature eliminated most of the remaining
components of post-Proposition 13 aid to local government entities other than
K-14 education districts, although it has also provided additional funding
sources (such as sales taxes) and reduced certain mandates
<PAGE>
for local services. Since then the State has also provided additional funding to
counties and cities through such programs as health and welfare realignment,
welfare reform, trial court restructuring, the COPs program supporting local
public safety departments, and various other measures.
In 1996, voters approved Proposition 218, entitled the "Right to Vote
on Taxes Act," which incorporates new Articles XIIIC and XIIID into the
California Constitution. These new provisions place limitations on the ability
of local government agencies to impose or raise various taxes, fees, charges and
assessments without voter approval. Certain "general taxes" imposed after
January 1, 1995 must be approved by voters in order to remain in effect. In
addition, Article XIIIC clarifies the right of local voters to reduce taxes,
fees, assessments or charges through local initiatives. There are a number of
ambiguities concerning the Proposition and its impact on local governments and
their bonded debt which will require interpretation by the courts or the
Legislature. Proposition 218 does not affect the State or its ability to levy or
collect taxes.
On December 23, 1997, a consortium of California counties filed a test
claim with the Commission on State Mandates (the "Commission") asking the
Commission to determine whether the property tax shift from counties to the
Educational Revenue Augmentation Fund, which is a funding source for schools, is
a reimbursable state mandated cost. On August 11, 1998, the State Department of
Justice, on behalf of the State Department of Finance, filed a rebuttal in
opposition to the counties' claim. The issue is currently scheduled to be heard
by the Commission on October 22, 1998. The fiscal impact to the State General
fund if the Commission determines that the property tax shifts created a
reimbursable state mandate could total approximately $8 billion for the 1996-97
($2.5 billion), 1997-98 ($2.6 billion) and 1998-99 ($2.7 billion) property tax
shifts. Ongoing costs to the State General Fund would be approximately $2.7
billion annually. Any Commission decision adverse to the State can be appealed
to the courts.
State Appropriations Limit
The State is subject to an annual appropriations limit imposed by
Article XIII B of the State Constitution (the "Appropriations Limit"). The
Appropriations Limit does not restrict appropriations to pay debt service on the
Bonds or other voter-authorized bonds.
Article XIII B prohibits the State from spending "appropriations
subject to limitation" in excess of the Appropriations Limit. "Appropriations
subject to limitation," with respect to the State, are authorizations to spend
"proceeds of taxes," which consist of tax revenues, and certain other funds,
including proceeds from regulatory licenses, user charges or other fees to the
extent that such proceeds exceed "the cost reasonably borne by that entity in
providing the regulation, product or service," but "proceeds of taxes" exclude
most state subventions to local governments, tax refunds and some benefit
payments such as unemployment insurance. No limit is imposed on appropriations
of funds which are not "proceeds of taxes," such as reasonable user charges or
fees and certain other non-tax funds.
Not included in the Appropriations Limit are appropriations for the
debt service costs of bonds existing or authorized by January 1, 1979, or
subsequently authorized by the voters, appropriations required to comply with
mandates of courts or the federal government, appropriations for qualified
capital outlay projects, appropriations of revenues derived from any increase in
gasoline taxes and motor vehicle weight fees above January 1, 1990 levels, and
appropriation of certain special taxes imposed by initiative (e.g., cigarette
and tobacco taxes). The Appropriations Limit may also be exceeded in cases of
emergency.
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The State's Appropriations Limit in each year is based on the limit for
the prior year, adjusted annually for changes in State per capita personal
income and changes in population, and adjusted, when applicable, for any
transfer of financial responsibility of providing services to or from another
unit of government. The measurement of change in population is a blended average
of statewide overall population growth, and change in attendance at local school
and community college ("K-14") districts. The Appropriations Limit is tested
over consecutive two-year periods. Any excess of the aggregate "proceeds of
taxes" received over such two-year transfers to K-14 districts and refunds to
taxpayers.
The Legislature has enacted legislation to implement Article XIII B
which defines certain terms used in Article XIII B and sets forth the methods
for determining the Appropriations Limit. California Government Code Section
7912 requires an estimate of the Appropriations Limit to be included in the
Governor's Budget, and thereafter to be subject to the budget process and
established in the Budget Act.
In the Budget Act for Fiscal Year 1998-99 enacted August 21, 1998, the
Department of Finance projects the State's Appropriations Subject to Limitations
will be $6.3 billion under the State's Appropriations Limit in Fiscal Year
1998-99.
Proposition 98
On November 8, 1988, voters of the State approved Proposition 98, a
combined initiative constitutional amendment and statute called the "Classroom
Instructional Improvement and Accountability Act." Proposition 98 changed State
funding of public education below the university level and the operation of the
State Appropriations Limit, primarily by guaranteeing K-14 schools a minimum
share of General Fund revenues. Under Proposition 98 (as modified by Proposition
111, which was enacted on June 5, 1990), K-14 schools are guaranteed the greater
of (a) in general, a fixed percent of General Fund revenues ("Test 1"), (b) the
amount appropriated to K-14 schools in the prior year, adjusted for changes in
the cost of living (measured as in Article XIII B by reference to State per
capita personal income) and enrollment ("Test 2"), or (c) a third test, which
would replace Test 2 in any year when the percentage growth in per capita
General Fund revenues from the prior year plus one half of one percent is less
than the percentage growth in State per capita personal income ("Test 3"). Under
Test 3, schools would receive the amount appropriated in the prior year adjusted
for changes in enrollment and per capita General Fund revenues, plus an
additional small adjustment factor. If Test 3 is used in any year, the
difference between Test 3 and Test 2 would become a "credit" to schools which
would be the basis of payments in future years when per capita General Fund
revenue growth exceeds per capita personal income growth. Legislation adopted
prior to the end of the 1988-89 Fiscal Year, implementing Proposition 98,
determined the K-14 schools' funding guarantee under Test 1 to be 40.3 percent
of the General Fund tax revenues, based on 1986-87 appropriations. However, that
percent has been adjusted to approximately 35 percent to account for a
subsequent redirection of local property taxes, since such redirection directly
affects the share of General Fund revenues to schools.
Proposition 98 permits the Legislature by two-thirds vote of both
houses, with the Governor's concurrence, to suspend the K-14 schools' minimum
funding formula for a one-year period. Proposition 98 also contains provisions
transferring certain State tax revenues in excess of the Article XIII B limit to
K-14 schools.
<PAGE>
During the recent recession, General Fund revenues for several years
were less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The Legislature responded to these developments by designating the
"extra" Proposition 98 payments in one year as a "loan" from future years'
Proposition 98 entitlements, and also intended that the "extra" payments would
not be included in the Proposition 98 "base" for calculating future years'
entitlements. By implementing these actions, per-pupil funding from Proposition
98 sources stayed almost constant at approximately $4,200 from Fiscal Year
1991-92 to Fiscal Year 1993-94.
In 1992, a lawsuit was filed, called California Teachers' Association
v. Gould, which challenged the validity of these off-budget loans. The
settlement of this case, finalized in July, 1996, provides, among other things,
that both the State and K-14 schools share in the repayment of prior years'
emergency loans to schools. Of the total $1.76 billion in loans, the State will
repay $935 million by forgiveness of the amount owed, while schools will repay
$825 million. The State share of the repayment will be reflected as an
appropriation above the current Proposition 98 base calculation. The schools'
share of the repayment will count as appropriations that count toward satisfying
the Proposition 98 guarantee, or from "below" the current base. Repayments are
spread over the eight-year period of 1994-95 through 2001-02 to mitigate any
adverse fiscal impact.
Substantially increased General Fund revenues, above initial budget
projections, in the fiscal years 1994-95 and thereafter have resulted or will
result in retroactive increases in Proposition 98 appropriations from subsequent
fiscal years' budgets. Because of the State's increasing revenues, per-pupil
funding at the K-12 level has increased by about 36% from the level in place
from 1991-92 through 1993-94, and is estimated at about $5,695 per ADA in
1998-99. A significant amount of the "extra" Proposition 98 monies in the last
few years have been allocated to special programs, most particularly an
initiative to allow each classroom from grades K-3 to have no more than 20
pupils by the end of the 1997-98 school year. There are also new initiatives
increasing instructional time, for purchasing new instructional and library
materials, and expanding teacher preparation and support.
Economy and Population
Introduction
California's economy, the largest among the 50 states and one of the
largest in the world, has major components in high technology, trade,
entertainment, agriculture, manufacturing, tourism, construction and services.
Since 1994, California's economy has been performing strongly after suffering a
deep recession between 1990-94.
Population and Labor Force
The State's July 1, 1997 population of over 32.9 million represented over
12 percent of the total United States population.
California's population is concentrated in metropolitan areas. As of
the April 1, 1990 census, 96 percent resided in the 23 Metropolitan Statistical
Areas in the State. As of July 1, 1997, the 5-county Los Angeles area accounted
for 49 percent of the State's population, with 16.0 million residents, and the
10-county San Francisco Bay Area represented 21 percent, with a population of
6.9 million.
<PAGE>
The following table shows California's population data for 1992 through
1997.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Population 1992-97
% Increase Over % Increase Over
Preceding Year Preceding Year California as % of
California United States United States
Year Population(a) Population(a)
1992 31,188,000 2.0 255,011,000 1.2 12.2
1993 31,517,000 1.1 257,795,000 1.1 12.2
1994 31,790,000 0.9 260,372,000 1.0 12.2
1995 32,063,000 0.9 262,890,000 1.0 12.2
1996 32,383,000 1.0 265,284,000 0.9 12.2
1997 32,957,000 1.8 267,575,000 0.9 12.3
</TABLE>
- ------------------------
(a)Population as of July 1.
SOURCE: U.S. Department of Commerce, Bureau of the Census; State of
California, Department of Finance.
The following table presents civilian labor force data for the resident
population, age 16 and over, for the years 1992 to 1997.
Labor Force
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1992-97
Labor Force Trends (Thousands) Unemployment Rate(%)
Year Labor Force Employment California United States
1992 15,404 13,973 9.3 7.5
1993 15,359 13,918 9.4 6.9
1994 15,450 14,122 8.6 6.1
1995 15,412 14,203 7.8 5.6
1996 15,568 14,444 7.2 5.4
1997 15,971 14,965 6.3 4.9
- --------------------
SOURCE: State of California, Employment Development Department.
</TABLE>
<PAGE>
Employment, Income, Construction and Retail Sales
The following table shows California's nonagricultural employment
distribution and growth for 1990 and 1997.
Payroll Employment By Major Sector
1990 and 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Employment % Distribution
(Thousands) of Employment
Industry Sector 1990 1997 1990 1997
--------------- ---- ---- ---- ----
Mining.................................... 39 29 0.3 0.2
Construction.............................. 605 554 4.8 4.2
Manufacturing
Nondurable goods..................... 721 728 5.7 5.5
High Technology...................... 686 517 5.4 3.9
Other Durable goods.................. 690 669 5.4 5.1
Transportation and Utilities.............. 624 663 4.9 5.1
Wholesale and Retail Trade................ 3,002 3,057 23.7 23.2
Finance, Insurance
and Real Estate...................... 825 756 6.5 5.7
Services.................................. 3,395 4,051 26.8 30.8
Government
Federal.............................. 362 285 2.9 2.2
State and Local...................... 1,713 1,858 13.5 14.1
----- ----- ---- ----
TOTAL
AGRICULTURAL......................... 12,662 13,167 100 100
</TABLE>
------------------- SOURCE: State of California, Employment Development
Department and State of California, Department of Finance.
The following tables show California's total and per capita income
patterns for selected years.
Total Personal Income 1992-97
California
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year Millions %Change California % of U.S.
---- -------- ------- --------------------
1992 684,674 4.8(*) 13.1
1993 698,130 2.0 12.8
1994(a) 718,321 2.9 12.5
1995 754,269 5.0 12.4
1996 798,020 5.8 12.5
1997 846,017 6.0 12.5
- ---------------------
</TABLE>
(*) Change from prior year.
(a) Reflects Northridge earthquake, which caused an estimated $15 billion drop
in personal income. Note: Omits income for government employees overseas.
SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis.
<PAGE>
Per Capita Personal Income 1992-97
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
California
Year California % Change United States % Change % of U.S.
---- ---------- -------- ------------- -------- ---------
1992.......... 22,163 3.2(*) 20,546 4.7(*) 107.9
1993.......... 22,388 1.0 21,220 3.3 105.5
1994(a)....... 23,899 2.3 22,056 3.9 103.8
1995.......... 23,901 4.4 23,063 4.6 103.6
1996.......... 25,050 4.8 24,169 4.8 103.6
1997.......... 26,218 4.7 25,298 4.7 103.6
</TABLE>
- ------------------------
(*) Change from prior year.
(a) Reflects Northridge earthquake, which caused an estimated $15 billion drop
in personal income.
SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis.
Litigation
.........In the case of Board of Administration, California Public
Employees' Retirement System, et al. v. Pete Wilson, Governor, et al.,
plaintiffs challenged the constitutionality of legislation which deferred
payment of the State's employer contribution to the Public Employees' Retirement
System beginning in Fiscal Year 1992-93. On January 11, 1995, the Sacramento
County Superior Court entered a judgment finding that the legislation
unconstitutionally impaired the vested contract rights of PERS members. The
judgment provides for issuance of a writ of mandate directing State defendants
to disregard the provisions of the legislation, to implement the statute
governing employer contributions that existed before the changes in the
legislation found to be unconstitutional, and to transfer to PERS the
contributions that were unpaid to date. On February 19, 1997, the State Court of
Appeal affirmed the decision of the Superior Court, and the Supreme Court
subsequently refused to hear the case, making the Court of Appeals' ruling
final.
.........On July 30, 1997, the Controller transferred $1.228 billion from
the General Fund to PERS in repayment of the principal amount determined to have
been improperly deferred. Subsequent State payments to PERS will be made on a
quarterly basis. On July 7, 1998, pursuant to Chapter 94, Statutes of 1998, the
State paid PERS $332.7 million for the accrued interest on the judgment and
interest on the unpaid accrued interest amount. See "CURRENT STATE BUDGET -
1998-99 Fiscal Year Budget" above.
.........On June 24, 1998, plaintiffs in Howard Jarvis Taxpayers
Association et al. v. Kathleen Connell filed a complaint for certain declaratory
and injunctive relief challenging the authority of the State Controller to make
payments from the State Treasury in the absence of a state budget. On July 21,
1998, the trial court issued a preliminary injunction prohibiting the State
Controller from paying moneys from the State Treasury for fiscal year 1998-99,
with certain limited exceptions, in the absence of a state budget. The
preliminary injunction, among other things, prohibited the State Controller from
making any payments pursuant to any continuing appropriation.
<PAGE>
.........On July 22 and 27, 1998, various employee unions which had
intervened in the case appealed the trial court's preliminary injunction and
asked the Court of Appeal to stay the preliminary injunction. On July 28, 1998,
the Court of Appeal granted the unions' requests and stayed the preliminary
injunction pending the Court of Appeal's decision on the merits of the appeal.
On August 5, 1998, the Court of Appeal denied the plaintiffs' request to
reconsider the stay. Also on July 22, 1998, the State Controller asked the
California Supreme Court to immediately stay the trial court's preliminary
injunction and to overrule the order granting the preliminary injunction on the
merits. On July 29, 1998, the Supreme Court transferred the State Controller's
request to the Court of Appeal. The matters are now pending before the Court of
Appeal.
.........In Jordan v. Department of Motor Vehicles, plaintiff challenged
the validity and constitutionality of the State's smog impact fee and requested
a refund of the fee. In October 1997, the trial court ruled in favor of
plaintiff and, in addition, ordered the State to provide refunds to all persons
who paid the smog impact fee from three years before the filing of the lawsuit
in 1995 to the present. Plaintiff asserts that the total amount required to be
refunded will exceed $350 million. The State has appealed.
.........A judgment was entered for plaintiffs in California Ambulance
Association v. Shalala et al., described at page 63 of Exhibit I to this
Appendix. The Ninth Circuit Court of Appeals, however, reversed the trial
court's decision. Plaintiffs filed a petition for certiorari at the United
States Supreme Court, which the State opposed. The petition is currently pending
at the Supreme Court.
.........A judgment was entered for plaintiff in August 1998 in the case of
Ceridian Corporation v. Franchise Tax Board, described at pages 63-64 of Exhibit
1. The State will appeal.
.........In Hathaway, et al. v. Wilson, et al., described at page 65 of
Exhibit 1, the plaintiffs and the State reached a settlement which resolved all
the issues presented in the case. Pursuant to the settlement, judgment was
entered in August 1998, requiring the State to return $19,427,000 from the
General Fund to one special fund.
.........In Thomas Hayes v. Commission on State Mandates, described at page
64 of Exhibit 1, the Commission on State Mandates is now expected to issue a
final consolidated decision in late 1998.
.........In February 1998, the Court of Appeal in California State
Employees Association v. Wilson, described at page 64 of Exhibit 1, modified,
then affirmed, a judgment in favor of the plaintiffs invalidating the transfer
of $12,290,000 from the State Highway Account to the General Fund.
.........In July 1998, the parties in Beno v. Sullivan and Welch v.
Anderson, described at page 65 of Exhibit 1, entered into a settlement agreement
in which the State agreed to pay $42 million in return for plaintiffs' agreement
to dismiss both actions.
Information Technology
.........The State's reliance on information technology in every aspect of
its operations has made Year 2000-related ("Y2K") information technology ("IT")
issues a high priority for the State. The Department of Information Technology
("DOIT"), an independent office reporting directly to the Governor, is
responsible for ensuring the State's information technology processes are fully
functional before the year 2000. The DOIT has created a Year 2000 Task Force and
a California 2000 Office to establish statewide policy requirements;
<PAGE>
to gather, coordinate, and share information; and to monitor statewide progress.
In December 1996, the DOIT began requiring departments to report on Y2K
activities and currently requires departmental monthly reporting of Y2K status.
The DOIT has emphasized to departments that efforts should be focused on
applications that support mission-critical business practices.
.........The risks posed by Y2K information technology related issues are not
confined to computer systems, but also include problems presented by embedded
microchips (products or systems that contain microchips to perform functions
such as traffic control, instruments used in hospitals or medical laboratories,
and California Aqueduct monitoring). To address these problems, the Governor
issued Executive Order W-163-97, broadening the responsibilities of the DOIT to
resolve these issues as well as legal questions associated with Y2K issues. The
executive order also required that mission critical systems be remediated by
December 31, 1998, that purchases of new systems, hardware, software and
equipment be Year 2000 compliant and further limited new computer projects to
those required by law until a department's Y2K problems are resolved. The DOIT
has also more recently required departments to address interfacing of State IT
systems with external IT systems, and to report on contingency planning status
for problems which might occur if IT systems are not fully remediated by the end
of 1999.
.........In its quarterly report for the period ending June 30, 1998 (the
"July Quarterly Report"), the DOIT reported that departments under its
supervision had identified 642 mission critical IT systems out of a total of
2,432 systems. Of the mission-critical systems, 87 were reported as already Y2K
compliant. Of the remaining 555 mission critical systems requiring remediation,
128 were reported as completed. While the DOIT does not oversee certain
independent State entities, such as the judiciary, the Legislature, the
University of California and California State University System, it believes
these other agencies are well under way with their own Y2K remediation plans.
.........In its quarterly report for the period ending September 30, 1998 (the
"October Quarterly Report"), the DOIT updated its survey of State departments,
and reported that the number of mission-critical systems needing remediation was
reduced to 532, and 220 of them had been remediated. However, the DOIT reported
that fewer projects were completed by September 30, 1998 than had been planned
by departments, and more projects were falling into fourth quarter 1998 and
first quarter 1999. Thus, some mission-critical systems (less than 10%) would
not meet the Governor's Executive Order target to be remediated by December 31,
1998.
.........In late August, 1998, the State Auditor ("BSA") released a report on
"Year 2000 Computer Problems." The BSA surveyed 39 State departments and
compared their status to the March 31, 1998 DOIT quarterly report. (The work for
BSA's report was done before the DOIT July Quarterly Report was ready.) The BSA
Report concluded that some agencies had fallen behind schedule by as much as 1-3
months compared to their March expectations. The BSA Report also noted concern
that departments were not making adequate plans to test remediated systems, were
not focusing sufficiently on problems associated with data interface with other
governmental and private bodies, and were not far enough along in developing
"business continuation plans" to ensure continued operations after January 1,
2000 in the event of IT problems. The DOIT responded in some detail to the BSA
report, generally agreeing with its identification of issue areas, and stating
that it was following up on all areas with the departments.
.........In the July Quarterly Report, the DOIT estimates total Y2K costs
identified by the departments under its supervision at about $239 million, of
which more than $100 million was projected to be expended in fiscal years
<PAGE>
1998-99 and 1999-2000. The October Quarterly Report indicated the total costs
were now estimated to be at least $290 million, and the estimate would likely
increase in the future. These costs are part of much larger overall IT costs
incurred annually by State departments and do not include costs for remediation
for embedded technology, desktop systems and additional costs resulting from
discoveries in the testing process. For fiscal year 1998-99, the Legislature
created a $20 million fund for unanticipated Y2K costs, which can be increased
if necessary.
.........Although the DOIT reports that State departments are making substantial
progress overall toward the goal of Y2K compliance, the task is very large and
will likely encounter unexpected difficulties. The State cannot predict whether
all mission critical systems will be ready and tested by late 1999 or what
impact failure of any particular IT system(s) or of outside interfaces with
State IT systems might have. The State Treasurer's Office and the State
Controller's Office report that they are both on schedule to complete their Y2K
remediation projects by December 31, 1998, allowing full testing during 1999.
These systems include debt service payments on State debt and the State fiscal
and accounting system.
- --------
1 Mr. Healey is an "interested person" (as defined in the 1940 Act) of the
Trust. Mr. Healey is also an "interested person" (as defined in the 1940 Act) of
the Advisor due to his son's affiliation with JPMIM.
J.P. MORGAN SERIES TRUST
J.P. MORGAN GLOBAL 50 FUND: SELECT SHARES
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 1999
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS, BUT CONTAINS
ADDITIONAL INFORMATION WHICH SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS
DATED MARCH 1, 1999 FOR THE FUND LISTED ABOVE, AS SUPPLEMENTED FROM TIME TO
TIME. ADDITIONALLY, THIS STATEMENT OF ADDITIONAL INFORMATION INCORPORATES BY
REFERENCE THE FINANCIAL STATEMENTS INCLUDED IN THE SHAREHOLDER REPORT RELATING
TO THE FUND LISTED ABOVE DATED OCTOBER 31, 1998. THE PROSPECTUS AND THESE
FINANCIAL STATEMENTS, INCLUDING THE INDEPENDENT ACCOUNTANTS' REPORT IN THE
ANNUAL FINANCIAL STATEMENTS, ARE AVAILABLE, WITHOUT CHARGE UPON REQUEST FROM
FUNDS DISTRIBUTOR, INC., ATTENTION: J.P. MORGAN SERIES TRUST (800)221-7930.
<PAGE>
Table of Contents
Page
General . . . . . . . . . . . . . . . . . . . 1
Investment Objective and Policies . . . . . . 1
Investment Restrictions . . . . . . . . . . . 18
Trustees and Officers . . . . . . . . . . . . 19
Investment Advisor . . . . . . . . . . . . . . 22
Distributor . . . . . . . . . . . . . . . . . 24
Co-Administrator . . . . . . . . . . . . . . . 25
Services Agent . . . . . . . . . . . . . . . . 25
Custodian and Transfer Agent . . . . . . . . . 26
Shareholder Servicing . . . . . . . . . . . . 26
Financial Professionals. . . . . . . . . . . . 27
Independent Accountants . . . . . . . . . . . 27
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 . . . . . . . . . . . . . . . . . . . . 35
Additional Information . . . . . . . . . . . 40
Financial Statements. . . . . . . . . . . . . 41
Appendix A - Description of Securities
Ratings . . . . . . . . . . . . . . . . . . . A-1
<PAGE>
GENERAL
J.P. Morgan Global 50 Fund (the "Fund") is a series of J.P. Morgan
Series Trust, an open-end management investment company organized as a
Massachusetts business trust (the "Trust"). The Trustees of the Trust have
authorized the issuance and sale of shares of two classes of the Fund (Select
Shares and Institutional Shares); currently, only Select Shares are available
for sale to the public.
This Statement of Additional Information describes the financial
history, investment objective and policies, management and operation of the Fund
and provides additional information with respect to the Fund and should be read
in conjunction with the Fund's current Prospectus (the "Prospectus").
Capitalized terms not otherwise defined herein have the meanings accorded to
them in the Prospectus. The Fund's executive offices are located at 60 State
Street, Suite 1300, Boston, Massachusetts 02109.
The Fund is advised by J.P. Morgan Investment Management, Inc. ("JPMIM" or
the "Advisor").
Investments in the Fund are not deposits or obligations of, or
guaranteed or endorsed by, JPMIM. Shares of the Fund are not federally insured
by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other governmental agency. An investment in the Fund is subject to risk that may
cause the value of the investment to fluctuate, and when the investment is
redeemed, the value may be higher or lower than the amount originally invested
by the investor.
INVESTMENT OBJECTIVE AND POLICIES
J.P. Morgan Global 50 Fund (the "Fund") is designed for investors with
a long term investment horizon who want to diversify their investment portfolio
by investing in an actively managed portfolio of approximately 50 global equity
securities. The Fund's investment objective is to provide high total return.
The Fund seeks to achieve its investment objective by investing
primarily in equity securities. Equity securities consist of common stocks and
other securities with equity characteristics such as preferred stocks,
depository receipts, warrants, rights, convertible securities, trust or limited
partnership interests and equity participations (collectively, "Equity
Securities". Under normal circumstances, the Fund expects to invest at least 65%
of its total assets in such securities.
Investment Process for the Global 50 Fund
Stock selection: JPMIM's more than 85 career analysts forecast
normalized earnings and dividend payouts for roughly 2,500 companies -- taking a
long-term perspective rather than the short time frame common to consensus
estimates. These forecasts are converted into comparable expected returns by a
dividend discount model, and then companies are ranked from most to least
attractive. The universe of stocks is narrowed to a group of roughly 500 which
JPMIM's analysts believe have an exceptional return potential relative to other
companies. The portfolio manager's objective is to select from these 500 stocks
the approximately fifty stocks with the greatest potential for high total
return. These selections are not constrained by country or sector weightings,
although under normal conditions the Fund will invest in securities of at least
three countries, including the United States. Where available, warrants and
convertibles may be purchased instead of common stock if they are deemed a more
attractive means of investing in a company.
<PAGE>
Currency management: The Advisor actively manages the currency exposure
of the Fund's investments with the goal of protecting and possibly enhancing the
Fund's total return. JPMIM's currency decisions are supported by a proprietary
tactical model which forecasts currency movements based on an analysis of four
fundamental factors -- trade balance trends, purchasing power parity, real
short-term interest differentials and real bond yields -- plus a technical
factor designed to improve the timing of transactions. Combining the output of
this model with a subjective assessment of economic, political and market
factors, JPMIM's currency specialists recommend currency strategies that are
implemented in conjunction with the Fund's investment strategy.
Equity Investments
The Equity Securities in which the Fund invests includes those listed
on any domestic or foreign securities exchange or traded in the over-the-counter
(OTC) market as well as certain restricted or unlisted securities.
Equity Securities. The Equity Securities in which the Fund may invest may
or may not pay dividends and may or may not carry voting rights. Common stock
occupies the most junior position in a company's capital structure.
The convertible securities in which the Fund may invest include any
debt securities or preferred stock which may be converted into common stock or
which carry the right to purchase common stock. Convertible securities entitle
the holder to exchange the securities for a specified number of shares of common
stock, usually of the same company, at specified prices within a certain period
of time.
The terms of any convertible security determine its ranking in a
company's capital structure. In the case of subordinated convertible debentures,
the holders' claims on assets and earnings are subordinated to the claims of
other creditors, and are senior to the claims of preferred and common
shareholders. In the case of convertible preferred stock, the holders' claims on
assets and earnings are subordinated to the claims of all creditors and are
senior to the claims of common shareholders.
Common Stock Warrants
The Fund may invest in common stock warrants that entitle the holder to
buy common stock from the issuer of the warrant at a specific price (the strike
price) for a specific period of time. The market price of warrants may be
substantially lower than the current market price of the underlying common
stock, yet warrants are subject to similar price fluctuations. As a result,
warrants may be more volatile investments than the underlying common stock.
Warrants generally do not entitle the holder to dividends or voting
rights with respect to the underlying common stock and do not represent any
rights in the assets of the issuer company. A warrant will expire worthless if
it is not exercised on or prior to the expiration date.
Foreign Investments
The Fund will make substantial investments in foreign countries.
Investors should realize that the value of the Fund's investments in foreign
securities may be adversely affected by changes in political or social
conditions, diplomatic relations, confiscatory taxation, expropriation,
nationalization, limitation on the removal of funds or assets, or imposition of
(or change in) exchange control or tax regulations in those foreign countries.
In addition, changes in government administrations or economic or monetary
policies in the United States or abroad could result in appreciation
<PAGE>
or depreciation of portfolio securities and could favorably or
unfavorably affect the Fund's operations. Furthermore, the economies of
individual foreign nations may differ from the U.S. economy, whether favorably
or unfavorably, in areas such as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position; it may also be more difficult to obtain and enforce a
judgment against a foreign issuer. Any foreign investments made by the Fund must
be made in compliance with U.S. and foreign currency restrictions and tax laws
restricting the amounts and types of foreign investments.
Generally, investment in securities of foreign issuers involves
somewhat different investment risks from those affecting securities of U.S.
domestic issuers. There may be limited publicly available information with
respect to foreign issuers, and foreign issuers are not generally subject to
uniform accounting, auditing and financial standards and requirements comparable
to those applicable to domestic companies. Dividends and interest paid by
foreign issuers may be subject to withholding and other foreign taxes which may
decrease the net return on foreign investments as compared to dividends and
interest paid to the Fund by domestic companies.
In addition, while the volume of transactions effected on foreign stock
exchanges has increased in recent years, in most cases it remains appreciably
below that of domestic security exchanges. Accordingly, the Fund's foreign
investments may be less liquid and their prices may be more volatile than
comparable investments in securities of U.S. companies. Moreover, the settlement
periods for foreign securities, which are often longer than those for securities
of U.S. issuers, may affect portfolio liquidity. In buying and selling
securities on foreign exchanges, purchasers normally pay fixed commissions that
are generally higher than the negotiated commissions charged in the United
States. In addition, there is generally less government supervision and
regulation of securities exchanges, brokers and issuers located in foreign
countries than in the United States.
Foreign investments may be made directly in securities of foreign
issuers or in the form of American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs") or other
similar securities of foreign issuers. ADRs are securities, typically issued by
a U.S. financial institution (a "depositary"), that evidence ownership interests
in a security or a pool of securities issued by a foreign issuer and deposited
with the depositary. ADRs include American Depositary Shares and New York
Shares. EDRs are receipts issued by a European financial institution. GDRs,
which are sometimes referred to as Continental Depositary Receipts ("CDRs"), are
securities, typically issued by a non-U.S. financial institution, that evidence
ownership interests in a security or a pool of securities issued by either a
U.S. or foreign issuer. ADRs, EDRs, GDRs and CDRs may be available for
investment through "sponsored" or "unsponsored" facilities. A sponsored facility
is established jointly by the issuer of the security underlying the receipt and
a depositary, whereas an unsponsored facility may be established by a depositary
without participation by the issuer of the receipt's underlying security.
Holders of an unsponsored depositary receipt generally bear all costs
of the unsponsored facility. The depositary of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited security or to pass through to the
holders of the receipts voting rights with respect to the deposited securities.
Since investments in foreign securities may involve foreign currencies,
the value of the Fund's assets as measured in U.S. dollars may be affected
favorably or unfavorably by changes in currency rates and in exchange control
<PAGE>
regulations, including currency blockage. The Fund may enter into
forward commitments for the purchase or sale of foreign currencies in connection
with the settlement of foreign securities transactions or to manage the Fund's
currency exposure related to foreign investments.
The Fund may also invest in countries with emerging economies or
securities markets. Political and economic structures in many of such countries
may be undergoing significant evolution and rapid development, and such
countries may lack the social, political and economic stability characteristic
of more developed countries. Certain of such countries may have in the past
failed to recognize private property rights and have at times nationalized or
expropriated the assets of private companies. As a result, the risks described
above, including the risks of nationalization or expropriation of assets, may be
heightened. In addition, unanticipated political or social developments may
affect the values of the Fund's investments in those countries and the
availability to such Fund of additional investments in those countries. The
small size and inexperience of the securities markets in certain of such
countries and the limited volume of trading in securities in those countries may
make the Fund's investments in such countries illiquid and more volatile than
investments in more developed countries, and the Fund may be required to
establish special custodial or other arrangements before making certain
investments in those countries. There may be little financial or accounting
information available with respect to issuers located in certain of such
countries, and it may be difficult as a result to assess the value or prospects
of an investment in such issuers.
Foreign Currency Exchange Transactions. Because the Fund buys and sells
securities and receives interest and dividends in currencies other than the U.S.
dollar, the Fund may enter from time to time into foreign currency exchange
transactions. The Fund either enters into these transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign currency exchange market,
or uses forward contracts to purchase or sell foreign currencies. The cost of
the Fund's spot currency exchange transactions is generally the difference
between the bid and offer spot rate of the currency being purchased or sold.
A foreign currency forward exchange contract is an obligation by the
Fund to purchase or sell a specific currency at a future date, which may be any
fixed number of days from the date of the contract. Foreign currency forward
exchange contracts establish an exchange rate at a future date. These contracts
are derivative instruments, as their value derives from the spot exchange rates
of the currencies underlying the contracts. These contracts are entered into in
the interbank market directly between currency traders (usually large commercial
banks) and their customers. A foreign currency forward exchange contract
generally has no deposit requirement, and is traded at a net price without
commission. Neither spot transactions nor foreign currency forward exchange
contracts eliminate fluctuations in the prices of the Fund's securities or in
foreign exchange rates, or prevent loss if the prices of these securities should
decline.
The Fund may enter into foreign currency forward exchange contracts in
connection with settlements of securities transactions and other anticipated
payments or receipts. In addition, from time to time, the Advisor may reduce the
Fund's foreign currency exposure by entering into forward foreign currency
exchange contracts to sell a foreign currency in exchange for the U.S. dollar.
Forward foreign currency exchange contracts may involve the purchase or sale of
a foreign currency in exchange for U.S. dollars or may involve two foreign
currencies.
Although these transactions are intended to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time they
<PAGE>
limit any potential gain that might be realized should the value of the
hedged currency increase. In addition, forward contracts that convert a foreign
currency into another foreign currency will cause the Fund to assume the risk of
fluctuations in the value of the currency purchased vis a vis the hedged
currency and the U.S. dollar. The precise matching of the forward contract
amounts and the value of the securities involved will not generally be possible
because the future value of such securities in foreign currencies will change as
a consequence of market movements in the value of such securities between the
date the forward contract is entered into and the date it matures. The
projection of currency market movements is extremely difficult, and the
successful execution of a hedging strategy is highly uncertain.
Money Market Instruments
Although the Fund intends under normal circumstances and to the extent
practicable, to be fully invested in Equity Securities, it may, for defensive
purposes, invest in money market instruments. The Fund may make money market
investments pending other investment or settlement, for liquidity or in adverse
market conditions. A description of the various types of money market
instruments that may be purchased by the Fund appears below.
Also see "Quality and Diversification Requirements."
U.S. Treasury Securities. The Fund may invest in direct obligations of the
U.S. Treasury, including Treasury bills, notes and bonds, all of which are
backed as to principal and interest payments by the full faith and credit of the
United States.
Additional U.S. Government Obligations. The Fund may invest in
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities. These obligations may or may not be backed by the "full faith
and credit" of the United States. Securities which are backed by the full faith
and credit of the United States include obligations of the Government National
Mortgage Association, the Farmers Home Administration, and the Export-Import
Bank. In the case of securities not backed by the full faith and credit of the
United States, the Fund must look principally to the federal agency issuing or
guaranteeing the obligation for ultimate repayment and may not be able to assert
a claim against the United States itself in the event the agency or
instrumentality does not meet its commitments. Securities in which the Fund may
invest that are not backed by the full faith and credit of the United States
include, but are not limited to: (i) obligations of the Tennessee Valley
Authority, the Federal Home Loan Mortgage Corporation, the Federal Home Loan
Bank and the U.S. Postal Service, each of which has the right to borrow from the
U.S. Treasury to meet its obligations; (ii) securities issued by the Federal
National Mortgage Association, which are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; and (iii)
obligations of the Federal Farm Credit System and the Student Loan Marketing
Association, each of whose obligations may be satisfied only by the individual
credits of the issuing agency.
Foreign Government Obligations. The Fund may also invest in short-term
obligations of foreign sovereign governments or of their agencies,
instrumentalities, authorities or political subdivisions. These securities may
be denominated in the U.S. dollar or in another currency. See "Foreign
Investments."
Bank Obligations. The Fund may invest in negotiable certificates of
deposit, time deposits and bankers' acceptances of (i) banks, savings and loan
associations and savings banks which have more than $2 billion in total assets
and are organized under the laws of the United States or any state,
<PAGE>
(ii) foreign branches of these banks or of foreign banks of equivalent
size (Euros) and (iii) U.S. branches of foreign banks of equivalent size
(Yankees). The Fund will not invest in obligations for which the Advisor, or any
of its affiliated persons, is the ultimate obligor or accepting bank. The Fund
may also invest in international banking institutions designated or supported by
national governments to promote economic reconstruction, development or trade
between nations (e.g., the European Investment Bank, the Inter-American
Development Bank, or the World Bank).
Commercial Paper. The Fund may invest in commercial paper, including
master demand obligations. Master demand obligations are obligations that
provide for a periodic adjustment in the interest rate paid and permit daily
changes in the amount borrowed. Master demand obligations are governed by
agreements between the issuer and JPMIM acting as agent, for no additional fee,
in its capacity as investment advisor to the Fund and as fiduciary for other
clients for whom it exercises investment discretion. The monies loaned to the
borrower come from accounts managed by the Advisor or its affiliates, pursuant
to arrangements with such accounts. Interest and principal payments are credited
to such accounts. The Advisor, acting as a fiduciary on behalf of its clients,
has the right to increase or decrease the amount provided to the borrower under
an obligation. The borrower has the right to pay without penalty all or any part
of the principal amount then outstanding on an obligation together with interest
to the date of payment. Since these obligations typically provide that the
interest rate is tied to the Federal Reserve commercial paper composite rate,
the rate on master demand obligations is subject to change. Repayment of a
master demand obligation to participating accounts depends on the ability of the
borrower to pay the accrued interest and principal of the obligation on demand
which is continuously monitored by the Advisor. Since master demand obligations
typically are not rated by credit rating agencies, the Fund may invest in such
unrated obligations only if at the time of an investment the obligation is
determined by the Advisor to have a credit quality which satisfies the Fund's
quality restrictions. See "Quality and Diversification Requirements." Although
there is no secondary market for master demand obligations, such obligations are
considered by the Fund to be liquid because they are payable upon demand. The
Fund does not have any specific percentage limitation on investments in master
demand obligations. It is possible that the issuer of a master demand obligation
could be a client of Morgan Guaranty Trust Company of New York ("Morgan"), an
affiliate of the Advisor, to whom Morgan, in its capacity as a commercial bank,
has made a loan.
Repurchase Agreements. The Fund may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines approved by the
Trustees of the Trust. In a repurchase agreement, the Fund buys a security from
a seller that has agreed to repurchase the same security at a mutually agreed
upon date and price. The resale price normally is in excess of the purchase
price, reflecting an agreed upon interest rate. This interest rate is effective
for the period of time the Fund is invested in the agreement and is not related
to the coupon rate on the underlying security. A repurchase agreement may also
be viewed as a fully collateralized loan of money by the Fund to the seller. The
period of these repurchase agreements will usually be short, from overnight to
one week, and at no time will the Fund invest in repurchase agreements for more
than thirteen months. The securities which are subject to repurchase agreements,
however, may have maturity dates in excess of thirteen months from the effective
date of the repurchase agreement. The Fund will always receive securities as
collateral whose market value is, and during the entire term of the agreement
remains, at least equal to 100% of the dollar amount invested by the Fund in
each agreement plus accrued interest, and the Fund will make payment for such
securities only upon physical delivery or upon evidence of book entry transfer
to the account of the Custodian. If the seller defaults, the Fund might incur a
loss if the value of the
<PAGE>
collateral securing the repurchase agreement declines and might incur
disposition costs in connection with liquidating the collateral. In addition, if
bankruptcy proceedings are commenced with respect to the seller of the security,
realization upon disposal of the collateral by a Fund may be delayed or limited.
The Fund may make investments in other debt securities with remaining
effective maturities of not more than thirteen months, including without
limitation corporate and foreign bonds, asset-backed securities and other
obligations described in this Statement of Additional Information.
Corporate Bonds and Other Debt Securities
The Fund may, although it has no current intention to do so, invest in
bonds and other debt securities of domestic and foreign issuers when the Advisor
believes that such securities offer a more attractive return potential than
equity securities. A description of these investments appears below. See
"Quality and Diversification Requirements." For information on short-term
investments in these securities, see "Money Market Instruments."
Corporate Fixed Income Securities. The Fund may invest in publicly and
privately issued high grade, investment grade and below investment grade debt
obligations of U.S. and non-U.S. corporations, including obligations of
industrial, utility, banking and other financial issuers. The Fund will not
invest in debt securities rated below B by Moody's or Standard & Poor's. See
Appendix A for a description of securities ratings. These securities are subject
to the risk of an issuer's inability to meet principal and interest payments on
the obligation and may also be subject to price volatility due to such factors
as market interest rates, market perception of the creditworthiness of the
issuer and general market liquidity.
The Fund may purchase privately issued corporate fixed income
securities pursuant to Rule 144A of the Securities Act of 1933 ("Rule 144A") or
pursuant to a directly negotiated agreement between the investors, including the
Fund, and the corporate issuer. At times, the Fund may be the only investor in a
privately issued fixed income security, or one of only a few institutional
investors. In this circumstance, there may be restrictions on the Fund's ability
to resell the privately issued fixed income security that result from
contractual limitations in the offering agreement and a limited trading market.
The Advisor will monitor the liquidity of privately issued fixed income
securities in accordance with guidelines established by the Advisor and
monitored by the Trustees. See Illiquid Investments; Privately Placed and Other
Unregistered Securities.
Mortgage-Backed Securities. The Fund may invest in mortgage-backed
securities. Each mortgage pool underlying mortgage-backed securities consists of
mortgage loans evidenced by promissory notes secured by first mortgages or first
deeds of trust or other similar security instruments creating a first lien on
owner occupied and non-owner occupied one-unit to four-unit residential
properties, multifamily (i.e., five or more) properties, agriculture properties,
commercial properties and mixed use properties. The investment characteristics
of adjustable and fixed rate mortgage-backed securities differ from those of
traditional fixed income securities. The major differences include the payment
of interest and principal on mortgage-backed securities on a more frequent
(usually monthly) schedule and the possibility that principal may be prepaid at
any time due to prepayments on the underlying mortgage loans or other assets.
These differences can result in significantly greater price and yield volatility
than is the case with traditional fixed income securities. As a result, a faster
than expected prepayment rate will reduce both the market value and the yield to
maturity from those which were anticipated. A prepayment rate that is slower
than
<PAGE>
expected will have the opposite effect of increasing yield to maturity and
market value.
Government Guaranteed Mortgage-Backed Securities. Government National
Mortgage Association mortgage-backed certificates ("Ginnie Maes") are supported
by the full faith and credit of the United States. Certain other U.S. Government
securities, issued or guaranteed by federal agencies or government sponsored
enterprises, are not supported by the full faith and credit of the United
States, but may be supported by the right of the issuer to borrow from the U.S.
Treasury. These securities include obligations of instrumentalities such as the
Federal Home Loan Mortgage Corporation ("Freddie Macs") and the Federal National
Mortgage Association ("Fannie Maes"). No assurance can be given that the U.S.
Government will provide financial support to these federal agencies,
authorities, instrumentalities and government sponsored enterprises in the
future.
There are several types of guaranteed mortgage-backed securities
currently available, including guaranteed mortgage pass-through certificates and
multiple class securities, which include guaranteed real estate mortgage
investment conduit certificates ("REMIC Certificates"), other collateralized
mortgage obligations ("CMOs") and stripped mortgage-backed securities.
Mortgage pass-through securities are fixed or adjustable rate
mortgage-backed securities which provide for monthly payments that are a
"pass-through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans, net
of any fees or other amounts paid to any guarantor, administrator and/or
servicer of the underlying mortgage loans.
Multiple class securities include CMOs and REMIC Certificates issued by
U.S. Government agencies, instrumentalities (such as Fannie Mae) and sponsored
enterprises (such as Freddie Mac) or by trusts formed by private originators of,
or investors in, mortgage loans, including savings and loan associations,
mortgage bankers, commercial banks, insurance companies, investment banks and
special purpose subsidiaries of the foregoing. In general, CMOs are debt
obligations of a legal entity that are collateralized by, and multiple class
mortgage-backed securities represent direct ownership interests in, a pool of
mortgage loans or mortgaged-backed securities and payments on which are used to
make payments on the CMOs or multiple class mortgage-backed securities.
CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie
Mac are types of multiple class mortgage-backed securities. Investors may
purchase beneficial interests in REMICs, which are known as "regular" interests
or "residual" interests. The Funds do not intend to purchase residual interests
in REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed mortgage-backed securities (the "Mortgage Assets"). The
obligations of Fannie Mae and Freddie Mac under their respective guaranty of the
REMIC Certificates are obligations solely of Fannie Mae and Freddie Mac,
respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class
of CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Principal prepayments on the assets underlying
the CMOs or REMIC Certificates may cause some or all of the classes of CMOs or
REMIC Certificates to be retired substantially earlier than their final
scheduled distribution dates. Generally, interest is paid or accrues on all
classes of CMOs or REMIC Certificates on a monthly basis.
<PAGE>
Stripped Mortgage-Backed Securities. Stripped mortgage-backed
securities ("SMBS") are derivative multiclass mortgage securities, issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or by
private issuers. Although the market for such securities is increasingly liquid,
privately issued SMBS may not be readily marketable and will be considered
illiquid securities. The Advisor may determine that SMBS which are U.S.
Government securities are liquid for purposes of the Fund's limitation on
investment in illiquid securities, in accordance with procedures adopted by the
Board of Trustees. The market value of the class consisting entirely of
principal payments generally is unusually volatile in response to changes in
interest rates. The yields on a class of SMBS that receives all or most of the
interest from Mortgage Assets are generally higher than prevailing market yields
on other mortgage-backed securities because their cash flow patterns are more
volatile and there is a greater risk that the initial investment will not be
fully recouped.
Zero Coupon, Pay-in-Kind and Deferred Payment Securities. Zero coupon
securities are securities that are sold at a discount to par value and on which
interest payments are not made during the life of the security. Upon maturity,
the holder is entitled to receive the par value of the security. Pay-in-kind
securities are securities that have interest payable by delivery of additional
securities. Upon maturity, the holder is entitled to receive the aggregate par
value of the securities. The Fund accrues income with respect to zero coupon and
pay-in-kind securities prior to the receipt of cash payments. Deferred payment
securities are securities that remain zero coupon securities until a
predetermined date, at which time the stated coupon rate becomes effective and
interest becomes payable at regular intervals. While interest payments are not
made on such securities, holders of such securities are deemed to have received
"phantom income." Because the Fund will distribute "phantom income" to
shareholders, to the extent that shareholders elect to receive dividends in cash
rather than reinvesting such dividends in additional shares, the Fund will have
fewer assets with which to purchase income producing securities. Zero coupon,
pay-in-kind and deferred payment securities may be subject to greater
fluctuation in value and lesser liquidity in the event of adverse market
conditions than comparably rated securities paying cash interest at regular
interest payment periods.
Asset-Backed Securities. Asset-backed securities directly or indirectly
represent a participation interest in, or are secured by and payable from, a
stream of payments generated by particular assets such as motor vehicle or
credit card receivables or other asset-backed securities collateralized by such
assets. Payments of principal and interest may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution unaffiliated with the entities issuing the securities. The
asset-backed securities in which the Fund may invest are subject to the Fund's
overall credit requirements. However, asset-backed securities, in general, are
subject to certain risks. Most of these risks are related to limited interests
in applicable collateral. For example, credit card debt receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts on credit card debt thereby reducing the
balance due. Additionally, if the letter of credit is exhausted, holders of
asset-backed securities may also experience delays in payments or losses if the
full amounts due on underlying sales contracts are not realized. Because
asset-backed securities are relatively new, the market experience in these
securities is limited and the market's ability to sustain liquidity through all
phases of the market cycle has not been tested.
<PAGE>
Additional Investments
When-Issued and Delayed Delivery Securities. The Fund may purchase
securities on a when-issued or delayed delivery basis. For example, delivery of
and payment for these securities can take place a month or more after the date
of the purchase commitment. The purchase price and the interest rate payable, if
any, on the securities are fixed on the purchase commitment date or at the time
the settlement date is fixed. The value of such securities is subject to market
fluctuation and for money market instruments and other fixed income securities
no interest accrues to the Fund until settlement takes place. At the time the
Fund makes the commitment to purchase securities on a when-issued or delayed
delivery basis, it will record the transaction, reflect the value each day of
such securities in determining its net asset value and calculate the maturity
for the purposes of average maturity from that date. At the time of settlement a
when-issued security may be valued at less than the purchase price. To
facilitate such acquisitions, the Fund will maintain with the custodian a
segregated account with liquid assets, consisting of cash, U.S. Government
securities or other appropriate securities, in an amount at least equal to such
commitments. On delivery dates for such transactions, the Fund will meet its
obligations from maturities or sales of the securities held in the segregated
account and/or from cash flow. If the Fund chooses to dispose of the right to
acquire a when-issued security prior to its acquisition, it could, as with the
disposition of any other portfolio obligation, incur a gain or loss due to
market fluctuation. Also, a Fund may be disadvantaged if the other party to the
transaction defaults. It is the current policy of the Fund not to enter into
when-issued commitments exceeding in the aggregate 15% of the market value of
the Fund's total assets, less liabilities other than the obligations created by
when-issued commitments.
Investment Company Securities. Securities of other investment companies
may be acquired by the Fund to the extent permitted under the 1940 Act or any
order pursuant thereto. These limits currently require that, as determined
immediately after a purchase is made, (i) not more than 5% of the value of the
Fund's total assets will be invested in the securities of any one investment
company, (ii) not more than 10% of the value of its total assets will be
invested in the aggregate in securities of investment companies as a group, and
(iii) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Fund. As a shareholder of another investment
company, the Fund would bear, along with other shareholders, its pro rata
portion of the other investment company's expenses, including advisory fees.
These expenses would be in addition to the advisory and other expenses that the
Fund bears directly in connection with its own operations.
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreements. In a reverse repurchase agreement, 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 is also considered as
the borrowing of money by the Fund and, therefore, a form of leverage. Leverage
may cause any gains or losses for the Fund to be magnified. The Fund will invest
the proceeds of borrowings under reverse repurchase agreements. In addition,
except for liquidity purposes, the Fund will enter into a reverse repurchase
agreement only when the expected return from the investment of the proceeds is
greater than the expense of the transaction. The Fund will not invest the
proceeds of a reverse repurchase agreement for a period which exceeds the
duration of the reverse repurchase agreement. The Fund will establish and
maintain with the custodian a separate account with a segregated portfolio of
securities in an amount at least equal to its purchase obligations under its
reverse repurchase agreements. See "Investment Restrictions" for the Fund's
limitations on reverse repurchase agreements and bank borrowings.
Loans of Securities. The Fund may lend its securities if such loans are
secured continuously by cash or equivalent collateral or by a letter of credit
in favor of the Fund at least equal at all times to 100% of the market value of
the securities loaned, plus accrued interest. While such securities are on loan,
the borrower will pay the Fund any income accruing thereon. Loans will be
subject to termination by the Fund in the normal settlement time, generally
three business days after notice, or by the borrower on one day's notice.
Borrowed securities must be returned when the loan is terminated. Any gain or
loss in the market price of the borrowed securities which occurs during the term
of the loan inures to the Fund and its respective investors. The Fund may pay
reasonable finders' and custodial fees in connection with a loan. In addition,
the Fund will consider all facts and circumstances, including the
creditworthiness of the borrowing financial institution, and the Fund will not
make any loans in excess of one year. The Fund will not lend securities to any
officer, Trustee, Director, employee or other affiliate of the Fund or the
Trust, the Advisor or the Distributor, unless otherwise permitted by applicable
law.
Privately Placed and Certain Unregistered Securities. The Fund may not
acquire any illiquid holdings if, as a result thereof, more than 15% of the
Fund's net assets would be in illiquid investments. Subject to this
non-fundamental policy limitation, the Fund may acquire investments that are
illiquid or have limited liquidity, such as private placements or investments
that are not registered under the 1933 Act and cannot be offered for public sale
in the United States without first being registered under the 1933 Act. An
illiquid investment is any investment that cannot be disposed of within seven
days in the normal course of business at approximately the amount at which it is
valued by the Fund. The price the Fund pays for illiquid holdings or receives
upon resale may be lower than the price paid or received for similar holdings
with a more liquid market. Accordingly the valuation of these holdings will
reflect any limitations on their liquidity.
The Fund may also purchase Rule 144A securities sold to institutional
investors without registration under the 1933 Act. These securities may be
determined to be liquid in accordance with guidelines established by the Advisor
and approved by the Trustees. The Trustees will monitor the Advisor's
implementation of these guidelines on a periodic basis.
As to illiquid investments, the Fund is subject to a risk that should
the Fund decide to sell them when a ready buyer is not available at a price the
Fund deems representative of their value, the value of the Fund's net assets
could be adversely affected. Where an illiquid security must be registered under
the 1933 Act before it may be sold, the Fund may be obligated to pay all or part
of the registration expenses, and a considerable period may elapse between the
time of the decision to sell and the time the Fund may be permitted to sell a
holding under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell.
Quality and Diversification Requirements
Although the Fund is not limited by the diversification requirements of
the 1940 Act, the Fund will comply with the diversification requirements imposed
by the Internal Revenue Code of 1986, as amended (the "Code"), for qualification
as a regulated investment company. See "Taxes." To meet these requirements, the
Fund must diversify its holdings so that, with respect to 50% of the Fund's
assets, no more than 5% of its assets are invested in the
<PAGE>
securities of any one issuer other than the U.S. Government at the
close of each quarter of the Fund's taxable year. The Fund may, with respect to
the remaining 50% of its assets, invest up to 25% of its assets in the
securities of any one issuer (except this limitation does not apply to U.S.
Government securities).
The Fund may invest in convertible debt securities, for which there are
no specific quality requirements. In addition, at the time the Fund invests in
any commercial paper, bank obligation or repurchase agreement, the issuer must
have outstanding debt rated A or higher by Moody's or Standard & Poor's, the
issuer's parent corporation, if any, must have outstanding commercial paper
rated Prime-1 by Moody's or A-1 by Standard & Poor's, or if no such ratings are
available, the investment must be of comparable quality in the Advisor's
opinion. At the time the Fund invests in any other short-term debt securities,
they must be rated A or higher by Moody's or Standard & Poor's, or if unrated,
the investment must be of comparable quality in the Advisor's opinion. At the
time the Fund invests in any corporate debt securities, they must be rated B or
better by Standard & Poor's or Moody's. See Appendix A for a description of
securities ratings.
Below Investment Grade Debt. Although the Fund has no current intention
to do so, it may purchase certain lower rated securities, such as those rated Ba
or B by Moody's or BB or B by Standard & Poor's (commonly known as junk bonds),
which may be subject to certain risks with respect to the issuing entity's
ability to make scheduled payments of principal and interest and to greater
market fluctuations. While generally providing greater income than investments
in higher quality securities, lower quality fixed income securities involve
greater risk of loss of principal and income, including the possibility of
default or bankruptcy of the issuers of such securities, and have greater price
volatility, especially during periods of economic uncertainty or change. These
lower quality fixed income securities tend to be affected by economic changes
and short-term corporate and industry developments to a greater extent than
higher quality securities, which react primarily to fluctuations in the general
level of interest rates. To the extent that the Fund invests in such lower
quality securities, the achievement of its investment objective may be more
dependent on the Advisor's own credit analysis.
Lower quality fixed income securities are affected by the market's
perception of their credit quality, especially during times of adverse
publicity, and the outlook for economic growth. Economic downturns or an
increase in interest rates may cause a higher incidence of default by the
issuers of these securities, especially issuers that are highly leveraged. The
market for these lower quality fixed income securities is generally less liquid
than the market for investment grade fixed income securities. It may be more
difficult to sell these lower rated securities to meet redemption requests, to
respond to changes in the market, or to determine accurately the Fund's net
asset value.
In determining suitability of investment in a particular unrated
security, the Advisor takes into consideration asset and debt service coverage,
the purpose of the financing, history of the issuer, existence of other rated
securities of the issuer, and other relevant conditions, such as comparability
to other issuers.
Options and Futures Transactions
Exchange Traded and OTC Options. All options purchased or sold by the
Fund will be traded on a securities exchange or will be purchased or sold by
securities dealers (OTC options) that meet creditworthiness standards approved
by the Trust's Board of Trustees. While exchange-traded options are
<PAGE>
obligations of the Options Clearing Corporation, in the case of OTC
options, the Fund relies on the dealer from which it purchased the option to
perform if the option is exercised. Thus, when the Fund purchases an OTC option,
it relies on the dealer from which it purchased the option to make or take
delivery of the underlying securities. Failure by the dealer to do so would
result in the loss of the premium paid by the Fund as well as loss of the
expected benefit of the transaction.
Provided that the Fund has arrangements with certain qualified dealers
who agree that the Fund may repurchase any option it writes for a maximum price
to be calculated by a predetermined formula, the Fund may treat the underlying
securities used to cover written OTC options as liquid. In these cases, the OTC
option itself would only be considered illiquid to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the option.
Futures Contracts and Options on Futures Contracts. The Fund may
purchase or sell (write) futures contracts and purchase or sell (write) put and
call options, including put and call options on futures contracts. Futures
contracts obligate the buyer to take and the seller to make delivery at a future
date of a specified quantity of a financial instrument or an amount of cash
based on the value of a securities index. Currently, futures contracts are
available on various types of fixed income securities, including but not limited
to U.S. Treasury bonds, notes and bills, Eurodollar certificates of deposit and
on indexes of fixed income securities and indexes of equity securities.
Unlike a futures contract, which requires the parties to buy and sell a
security or make a cash settlement payment based on changes in a financial
instrument or securities index on an agreed date, an option on a futures
contract entitles its holder to decide on or before a future date whether to
enter into such a contract. If the holder decides not to exercise its option,
the holder may close out the option position by entering into an offsetting
transaction or may decide to let the option expire and forfeit the premium
thereon. The purchaser of an option on a futures contract pays a premium for the
option but makes no initial margin payments or daily payments of cash in the
nature of "variation" margin payments to reflect the change in the value of the
underlying contract as does a purchaser or seller of a futures contract.
The seller of an option on a futures contract receives the premium paid
by the purchaser and may be required to pay initial margin. Amounts equal to the
initial margin and any additional collateral required on any options on futures
contracts sold by the Fund are paid into a segregated account, in the name of
the Futures Commission Merchant, as required by the 1940 Act and the Security
and Exchange Commission's (the "SEC") interpretations thereunder.
Combined Positions. The Fund is permitted to purchase and write options
in combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of the overall
position. For example, the Fund may purchase a put option and write a call
option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call option
at one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial price
increase. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
<PAGE>
Correlation of Price Changes. Because there are a limited number of
types of exchange-traded options and futures contracts, it is likely that the
standardized options and futures contracts available will not match the Fund's
current or anticipated investments exactly. The Fund may invest in options and
futures contracts based on securities with different issuers, maturities, or
other characteristics from the securities in which it typically invests, which
involves a risk that the options or futures position will not track the
performance of the Fund's other investments.
Options and futures contracts prices can also diverge from the prices
of their underlying instruments, even if the underlying instruments match the
Fund's investments well. Options and futures contracts prices are affected by
such factors as current and anticipated short term interest rates, changes in
volatility of the underlying instrument, and the time remaining until expiration
of the contract, which may not affect security prices the same way. Imperfect
correlation may also result from differing levels of demand in the options and
futures markets and the securities markets, from structural differences in how
options and futures and securities are traded, or from imposition of daily price
fluctuation limits or trading halts. The Fund may purchase or sell options and
futures contracts with a greater or lesser value than the securities it wishes
to hedge or intends to purchase in order to attempt to compensate for
differences in volatility between the contract and the securities, although this
may not be successful in all cases. If price changes in the Fund's options or
futures positions are poorly correlated with its other investments, the
positions may fail to produce anticipated gains or result in losses that are not
offset by gains in other investments.
Liquidity of Options and Futures Contracts. There is no assurance a
liquid market will exist for any particular option or futures contract at any
particular time even if the contract is traded on an exchange. In addition,
exchanges may establish daily price fluctuation limits for options and futures
contracts and may halt trading if a contract's price moves up or down more than
the limit in a given day. On volatile trading days when the price fluctuation
limit is reached or a trading halt is imposed, it may be impossible for the Fund
to enter into new positions or close out existing positions. If the market for a
contract is not liquid because of price fluctuation limits or otherwise, it
could prevent prompt liquidation of unfavorable positions, and could potentially
require the Fund to continue to hold a position until delivery or expiration
regardless of changes in its value. As a result, the Fund's access to other
assets held to cover its options or futures positions could also be impaired.
(See "Exchange Traded and OTC Options" above for a discussion of the liquidity
of options not traded on an exchange.)
Position Limits. Futures exchanges can limit the number of futures and
options on futures contracts that can be held or controlled by an entity. If an
adequate exemption cannot be obtained, the Fund or the Advisor may be required
to reduce the size of its futures and options positions or may not be able to
trade a certain futures or options contract in order to avoid exceeding such
limits.
Asset Coverage for Futures Contracts and Options Positions. The Fund
intends to comply with Section 4.5 of the regulations under the Commodity
Exchange Act, which limits the extent to which the Fund can commit assets to
initial margin deposits and option premiums. In addition, the Fund will comply
with guidelines established by the SEC with respect to coverage of options and
futures contracts by mutual funds, and if the guidelines so require, will set
aside appropriate liquid assets in a segregated custodial account in the amount
prescribed. Securities held in a segregated account cannot be sold while the
futures contract or option is outstanding, unless they are replaced with other
suitable assets. As a result, there is a
<PAGE>
possibility that segregation of a large percentage of the Fund's assets
could impede portfolio management or the Fund's ability to meet redemption
requests or other current obligations.
Swaps and Related Swap Products. The Fund may engage in swap
transactions, including, but not limited to, interest rate, currency, index,
basket, specific security and commodity swaps, interest rate caps, floors and
collars and options on interest rate swaps (collectively defined as "swap
transactions").
The Fund may enter into swap transactions for any legal purpose
consistent with its investment objective, such as for the purpose of attempting
to obtain or preserve a particular return or spread at a lower cost than
investing directly in an instrument that yields that return or spread, to
protect against currency fluctuations, as a duration management technique, to
protect against any increase in the price of securities the Fund anticipates
purchasing at a later date, or to gain exposure to certain markets in the most
economical way possible. The Fund will not sell interest rate caps, floors or
collars if it does not own securities with coupons which yield the interest that
the Fund may be required to pay.
Swap agreements are two-party contracts entered into primarily by
institutional investors for periods ranging from a few weeks to several years.
In a standard swap transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments. The gross returns to be exchanged or "swapped"
between the parties are calculated with respect to a "notional amount," i.e.,
the return on or increase in value of a particular dollar amount invested at a
particular interest rate, in a particular foreign currency or commodity, or in a
"basket" of securities representing a particular index. The purchaser of an
interest rate cap or floor, upon payment of a fee, has the right to receive
payments (and the seller of the cap is obligated to make payments) to the extent
a specified interest rate exceeds (in the case of a cap) or is less than (in the
case of a floor) a specified level over a specified period of time or at
specified dates. The purchaser of an interest rate collar, upon payment of a
fee, has the right to receive payments (and the seller of the collar is
obligated to make payments) to the extent that a specified interest rate falls
outside an agreed upon range over a specified period of time or at specified
dates. The purchaser of an option on an interest rate swap, upon payment of a
fee (either at the time of purchase or in the form of higher payments or lower
receipts within an interest rate swap transaction) has the right, but not the
obligation, to initiate a new swap transaction of a prespecified notional amount
with prespecified terms with the seller of the option as the counterparty.
The "notional amount" of the swap transaction is the agreed upon basis
for calculating the obligations that the parties to a swap agreement have agreed
to exchange. An example would be the obligation to pay a floating rate of
interest (e.g., U.S. 3 month LIBOR) on a quarterly basis in exchange for receipt
of a fixed rate of interest on a semi-annual basis. In the event the Fund is
obligated to make payments more frequently than it receives payments from the
other party, the Fund will incur incremental credit exposure to that swap
counterparty. This risk may be mitigated somewhat by the use of swap agreements
which call for a net payment to be made by the party with the larger payment
obligation when the obligations of the parties fall due on the same date. Under
most swap agreements entered into by the Fund, the obligations of the parties
will be exchanged on a "net basis". That is, the two payment streams are netted
out in a cash settlement on the payment date or dates specified in the
instrument. The Fund will receive or pay, as the case may be, only the net
amount of the two payments.
<PAGE>
The amount of the Fund's potential gain or loss on any swap transaction
is not subject to any fixed limit. Nor is there any fixed limit on the Fund's
potential loss if it sells a cap, floor or collar. If the Fund buys a cap, floor
or collar, however, the Fund's potential loss is limited to the amount of the
fee that it has paid. When measured against the initial amount of cash required
to initiate the transaction, which is typically zero in the case of most
conventional interest rate swaps, swap transactions tend to be more volatile
than many other types of investments.
The use of swap transactions involves investment techniques and risks
which are similar to those associated with other portfolio security
transactions. If the Advisor is incorrect in its forecasts of market values,
interest rates, currency rates and other applicable factors, the investment
performance of the Fund will be less favorable than if these techniques had not
been used. These instruments are typically not traded on exchanges. Accordingly,
there is a risk that the other party to certain of these instruments will not
perform its obligations to the Fund or that the Fund may be unable to enter into
offsetting positions to terminate its exposure or liquidate its investment under
certain of these instruments when it wishes to do so. Such occurrences could
result in losses to the Fund. The Advisor will, however, consider such risks and
will enter into swap transactions only when it believes that the risks are not
unreasonable.
The Fund will maintain cash or liquid assets in a segregated account
with its custodian in an amount sufficient at all times to cover its current
obligations under its swap transactions. If the Fund enters into a swap
agreement on a net basis, it will segregate assets with a daily value at least
equal to the excess, if any, of the Fund's accrued obligations under the swap
agreement over the accrued amount the Fund is entitled to receive under the
agreement. If the Fund enters into a swap agreement on other than a net basis,
or sells a cap, floor or collar, it will segregate assets with a daily value at
least equal to the full amount of the Fund's accrued obligations under the
agreement.
The Fund will not enter into any swap transaction, unless the
counterparty to the transaction is deemed creditworthy by the Advisor. If a
counterparty defaults, the Fund may have contractual remedies pursuant to the
agreements related to the transaction. The markets in which swap transactions
are traded have grown substantially in recent years, with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized documentation. As a result, these markets have become
relatively liquid.
The liquidity of swap transactions will be determined by the Advisor
based on various factors, including (1) the frequency of trades and quotations,
(2) the number of dealers and prospective purchasers in the marketplace, (3)
dealer undertakings to make a market, (4) the nature of the instrument
(including any demand or tender features) and (5) the nature of the marketplace
for trades (including the ability to assign or offset the Fund's rights and
obligations relating to the investment). Such determination will govern whether
the instrument will be deemed within the 15% restriction on investments in
securities that are not readily marketable.
During the term of a swap, changes in the value of the swap are
recognized as unrealized gains or losses by marking to market to reflect the
market value of the swap. When the swap is terminated, the Fund will record a
realized gain or loss equal to the difference, if any, between the proceeds from
(or cost of) the closing transaction and the Fund's basis in the contract.
<PAGE>
The federal income tax treatment with respect to swap transactions may
impose limitations on the extent to which the Fund may engage in such
transactions.
Risk Management
The Fund may employ non-hedging risk management techniques. Risk
management strategies are used to keep the Fund fully invested and to reduce the
transaction costs associated with cash flows into and out of the Fund. The
objective where equity futures are used to "equitize" cash is to match the
notional value of all futures contracts to the Fund's cash balance. The notional
value of futures and of the cash is monitored daily. As the cash is invested in
securities and/or paid out to participants in redemptions, the Advisor
simultaneously adjusts the futures positions. Through such procedures, the Fund
not only gains equity exposure from the use of futures, but also benefits from
increased flexibility in responding to client cash flow needs. Additionally,
because it can be less expensive to trade a list of securities as a package or
program trade rather than as a group of individual orders, futures provide a
means through which transaction costs can be reduced. Such non-hedging risk
management techniques are not speculative, but because they involve leverage
include, as do all leveraged transactions, the possibility of losses as well as
gains that are greater than if these techniques involved the purchase and sale
of the securities themselves rather than their synthetic derivatives.
Portfolio Turnover
For the period May 29, 1998 (commencement of operations) through
October 31, 1998, the Fund's portfolio turnover rate was 54%. A rate of 100%
indicates that the equivalent of all of the 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.
INVESTMENT RESTRICTIONS
The investment restrictions below have been adopted by the Trust with
respect to the Fund. Except where otherwise noted, these investment restrictions
are "fundamental" policies which, under the 1940 Act, may not be changed without
the vote of a majority of the outstanding voting securities of the Fund. A
"majority of the outstanding voting securities" is defined in the 1940 Act as
the lesser of (a) 67% or more of the voting securities present at a security
holders meeting if the holders of more than 50% of the outstanding voting
securities are present or represented by proxy, or (b) more than 50% of the
outstanding voting securities. The percentage limitations contained in the
restrictions below apply at the time of the purchase of securities.
The Fund:
1. May not purchase any security which would cause the Fund to concentrate its
investments in the securities of issuers primarily engaged in any particular
industry except as permitted by the SEC.
2. May not issue senior securities, except as permitted under the 1940 Act or
any rule, order or interpretation thereunder.
3. May not borrow money, except to the extent permitted by applicable law.
<PAGE>
4. May not underwrite securities of other issuers, except to the extent that the
Fund, in disposing of portfolio securities, may be deemed an underwriter within
the meaning of the 1933 Act.
5. May not purchase or sell real estate, except that, to the extent permitted by
applicable law, the Fund may invest in (a) securities directly or indirectly
secured by real estate or (b) securities issued by issuers that invest in real
estate.
6. May not purchase or sell commodities or commodity contracts unless acquired
as a result of ownership of securities or other instruments issued by persons
that purchase or sell commodities or commodity contracts; but this shall not
prevent the Fund from purchasing, selling and entering into financial futures
contracts (including futures contracts on indices of securities, interest rates
and currencies), options on financial futures contracts (including futures
contracts on indices of securities, interest rates and currencies), warrants,
swaps, forward contracts, foreign currency spot and forward contracts or other
derivative instruments that are not related to physical commodities.
7. May make loans to other persons, in accordance with the Fund's investment
objectives and policies and to the extent permitted by applicable law.
Non-Fundamental Investment Restrictions. The investment restrictions
described below are not fundamental policies of the Fund and may be changed by
the Trustees. These non-fundamental investment policies require that:
1. The Fund not acquire any illiquid securities, such as repurchase agreements
with more than seven days to maturity or fixed time deposits with a duration of
over seven calendar days, if as a result thereof, more than 15% of the market
value of the Fund's net assets would be in investments that are illiquid.
2. The Fund 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.
3. The Fund may not acquire securities of other investment companies, except as
permitted by the 1940 Act or any order pursuant thereto.
There will be no violation of any investment restriction if that
restriction is complied with at the time the relevant action is taken
notwithstanding a later change in market value of an investment, in net or total
assets, in the securities rating of the investment, or any other later change.
For purposes of fundamental investment restrictions regarding industry
concentration, the Advisor may classify issuers by industry in accordance with
classifications set forth in the Directory of Companies Filing Annual Reports
With the Securities and Exchange Commission or other sources. In the absence of
such classification or if the Advisor determines in good faith based on its own
information that the economic characteristics affecting a particular issuer make
it more appropriately considered to be engaged in a different industry, the
Advisor may classify an issuer accordingly. For instance, personal credit
finance companies and business credit finance companies are deemed to be
separate industries and wholly owned finance companies are
<PAGE>
considered to be in the industry of their parents if their activities
are primarily related to financing the activities of their parents.
TRUSTEES AND OFFICERS
The Trustees of the Trust, their business addresses, principal
occupations during the past five years and dates of birth are set forth below.
Frederick S. Addy -- Trustee; Retired; Prior to April 1994, Executive
Vice President and Chief Financial Officer, Amoco Corporation. His address is
5300 Arbutus Cove, Austin, 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 (*) -- Trustee; Chairman and Chief Executive Officer;
Chairman, Pierpont Group, Inc. ("Pierpont Group") since prior to 1993. His
address is Pine Tree Country Club Estates, 10286 Saint Andrews Road, Boynton
Beach, Florida 33436, and his date of birth is August 23, 1937.
Michael P. Mallardi -- Trustee; Retired; Prior to April 1996, Senior Vice
President, Capital Cities/ABC, Inc. and President, Broadcast Group. His address
is 10 Charnwood Drive, Suffern, 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), J.P. Morgan Funds and J.P. Morgan Institutional
Funds and is reimbursed for expenses incurred in connection with service as a
Trustee. The Trustees may hold various other directorships unrelated to these
funds.
* Mr. Healey is an "interested person" (as defined
in the 1940 Act) of the Trust. Mr. Healy is also an "interested person" (as
defined in the 1940 Act) of the Advisor due to his son's affiliation with JPMIM.
<PAGE>
Trustee compensation expenses paid by the Trust for the calendar year ended
December 31, 1998 are set forth below.
- ------------------------------ ------------------ -----------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
TOTAL TRUSTEE COMPENSATION
AGGREGATE TRUSTEE ACCRUED BY THE MASTER
COMPENSATION PORTFOLIOS(*), J.P. MORGAN
PAID BY THE TRUST FUNDS, J.P. MORGAN
DURING 1998 INSTITUTIONAL FUNDS AND THE
NAME OF TRUSTEE TRUST 1998(**)
- -------------------------------- ------------------ -----------------------------
- -------------------------------- ------------------ -----------------------------
Frederick S. Addy, Trustee $494 $75,000
- -------------------------------- ------------------ -----------------------------
- -------------------------------- ------------------ -----------------------------
William G. Burns, Trustee $494 $75,000
- -------------------------------- ------------------ -----------------------------
- -------------------------------- ------------------ -----------------------------
Arthur C. Eschenlauer, Trustee $494 $75,000
- -------------------------------- ------------------ -----------------------------
- -------------------------------- ------------------ -----------------------------
Matthew Healey, Trustee (***) $494 $75,000
Chairman and Chief Executive
Officer
- -------------------------------- ------------------ -----------------------------
- -------------------------------- ------------------ -----------------------------
Michael P. Mallardi, Trustee $494 $75,000
- -------------------------------- ------------------ -----------------------------
</TABLE>
(*) Includes each portfolio in which a series of J.P. Morgan Funds or J.P.
Morgan Institutional Funds invests.
(**) No investment company within the fund complex has a pension or
retirement plan. Currently there are 17 investment companies (14 investment
companies comprising the Master Portfolios, J.P. Morgan Funds, J.P. Morgan
Institutional Funds and the Trust) in the fund complex.
(***) During 1998, Pierpont Group, Inc. paid Mr. Healey, in his role as
Chairman of Pierpont Group, Inc., compensation in the amount of $157,400,
contributed $23,610 to a defined contribution plan on his behalf and paid
$17,700 in insurance premiums for his benefit.
The Trustees decide upon matters of general policies and are responsible
for overseeing the Trust's and Portfolio'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 J.P. Morgan Family of Funds (formerly "The Pierpont Family of
Funds"), and the Trustees are the equal and sole shareholders of Pierpont Group,
Inc. The Trust, J.P. Morgan Funds, J.P. Morgan Institutional Funds and each
Master Portfolio have agreed to pay Pierpont Group, Inc. a fee in an amount
representing its reasonable costs in performing these services. These costs are
periodically reviewed by the Trustees. The principal offices of Pierpont Group,
Inc. are located at 461 Fifth Avenue, New York, New York 10017.
The aggregate fee paid to Pierpont Group, Inc. by the Fund for the
period May 29, 1998 (commencement of operations) through October 31, 1998 was
$780.
<PAGE>
Officers
The Trust's executive officers (listed below), other than the Chief
Executive Officer and the officers who are employees of the Advisor, are
provided and compensated by Funds Distributor, Inc. ("FDI"), a wholly owned
indirect subsidiary of Boston Institutional Group, Inc. The officers conduct and
supervise the business operations of the Trust. The Trust has no employees.
The officers of the Trust, their principal occupations during the past
five years and dates of birth are set forth below. The business address of each
of the officers unless otherwise noted is Funds Distributor, Inc., 60 State
Street, Suite 1300, Boston, Massachusetts 02109.
MATTHEW HEALEY; Chief Executive Officer; Chairman, Pierpont Group,
since prior to 1993. His address is Pine Tree Club Estates, 10286 Saint Andrews
Road, Boynton Beach, FL 33436. His date of birth is August 23, 1937.
MARGARET W. CHAMBERS, Vice President and Secretary. Senior Vice President
and General Counsel of FDI since April, 1998. From August 1996 to March 1998,
Ms. Chambers was Vice President and Assistant General Counsel for Loomis, Sayles
& Company, L.P. From January 1986 to July 1996, she was an associate with the
law firm of Ropes & Gray. Her date of birth is October 12, 1959. Address: 60
State Street, Boston, MA 02109.
MARIE E. CONNOLLY; Vice President and Assistant Treasurer. President, Chief
Executive Officer, Chief Compliance Officer and Director of FDI, Premier Mutual
Fund Services, Inc., an affiliate of FDI ("Premier Mutual") and an officer of
certain investment companies distributed or administered by FDI. Prior to July
1994, she was President and Chief Compliance Officer of FDI. Her date of birth
is August 1, 1957.
DOUGLAS C. CONROY; Vice President and Assistant Treasurer. Assistant Vice
President and Assistant Department Manager of Treasury Services and
Administration of FDI and an officer of certain investment companies distributed
or administered by FDI. Prior to April 1997, Mr. Conroy was Supervisor of
Treasury Services and Administration of FDI. From April 1993 to January 1995,
Mr. Conroy was a Senior Fund Accountant for Investors Bank & Trust Company. His
date of birth is March 31, 1969.
KAREN JACOPPO-WOOD; Vice President and Assistant Secretary. Vice President
and Senior Counsel of FDI and an officer of certain investment companies
distributed or administered by FDI. From June 1994 to January 1996, Ms.
Jacoppo-Wood was a Manager of SEC Registration at Scudder, Stevens & Clark, Inc.
Prior to May 1994, Ms. Jacoppo-Wood was a senior paralegal at The Boston Company
Advisors, Inc. ("TBCA"). Her date of birth is December 29, 1966. CHRISTOPHER J.
KELLEY; Vice President and Assistant Secretary. Vice President and Senior
Associate General Counsel of FDI and Premier Mutual and an officer of certain
investment companies distributed or administered by FDI. From April 1994 to July
1996, Mr. Kelley was Assistant Counsel at Forum Financial Group. Prior to April
1994, Mr. Kelley was employed by Putnam Investments in legal and compliance
capacities. His date of birth is December 24, 1964.
MARY A. NELSON; Vice President and Assistant Treasurer. Vice President and
Manager of Treasury Services and Administration of FDI and Premier Mutual and an
officer of certain investment companies distributed or administered by FDI.
Prior to August 1994, Ms. Nelson was an Assistant Vice President and
<PAGE>
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.
STEPHANIE D. PIERCE; Vice President and Assistant Secretary. Vice
President, Client Development Manager for FDI since April, 1998. From April 1997
to March, 1998, Ms. Pierce was employed by Citibank, NA as an officer of
Citibank and Relationship Manager on the Business and Professional Banking team
handling over 22,000 clients. Her date of birth is August 18, 1968. Address: 200
Park Avenue, 45th Floor, New York, NY 10166.
MICHAEL S. PETRUCELLI; Vice President and Assistant Secretary. Senior Vice
President and Director of Strategic Client Initiatives for FDI since December
1996. From December 1989 through November 1996, Mr. Petrucelli was employed with
GE Investments where he held various financial, business development and
compliance positions. He also served as Treasurer of the GE Funds and as
Director of GE Investment Services. Address: 200 Park Avenue, New York, New
York, 10166. His date of birth is May 18, 1961.
GEORGE A. RIO, President and Treasurer of the Trust. Executive Vice
President, Client Service Director of FDI (since April 1998). From June 1995 to
March 1998, Mr. Rio was Senior Vice President, Senior Key Account Manager for
Putnam Mutual Funds. From May 1994 to June 1995, Mr. Rio was Director of
Business Development for First Data Corporation. From September 1983 to May
1994, Mr. Rio was Senior Vice President & Manager of Client Services and
Director of Internal Audit at The Boston Company. His date of birth is January
2, 1955. Address: 60 State Street, Boston, MA 02109.
CHRISTINE ROTUNDO; Assistant Treasurer. Vice President, 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.
INVESTMENT ADVISOR
The Advisor is a wholly owned subsidiary of J.P. Morgan & Co.
Incorporated ("J.P. Morgan"), a bank holding company organized under the laws of
the State of Delaware. The Advisor, whose principal offices are 522 Fifth
Avenue, New York, New York 10036, is a Delaware corporation. J.P. Morgan,
together with its predecessors, has been in the investment advisory business for
over 100 years and today, through JPMIM and its other subsidiaries, offers a
wide range of investment management services to governmental, institutional,
corporate and individual clients, managing over $316 billion in assets.
Through offices in New York City and abroad, the Advisor offers a wide
range of services, primarily to governmental, institutional, corporate and high
net worth individual customers in the United States and throughout the world.
The basis of the Advisor's investment process is fundamental investment
research as the firm believes that fundamentals should determine an asset's
value over the long term. J.P. Morgan currently employs over 100 full time
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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 investment advisory services the Advisor provides to the Fund are
not exclusive under the terms of the Investment Advisory Agreement. The Advisor
is free to and does render similar investment advisory services to others, and
is a registered investment adviser under the Investment Advisers Act of 1940, as
amended. The Advisor also manages employee benefit funds of corporations, labor
unions and state and local governments and the accounts of other institutional
investors, including investment companies. Certain of the assets of employee
benefit accounts under its management are invested in commingled pension trust
funds for which Morgan serves as trustee; the Advisor advises Morgan on
investment of the commingled pension trust funds. The accounts which are managed
or advised by the Advisor have varying investment objectives and the Advisor
invests assets of such accounts in investments substantially similar to, or the
same as, those which are expected to constitute the principal investments of the
Fund. Such accounts are supervised by officers and employees of the Advisor who
may also be acting in similar capacities for the Fund. See "Portfolio
Transactions."
The Fund is managed by officers of the Advisor who, in acting for their
customers, including the Fund, do not discuss their investment decisions with
any personnel of J.P. Morgan or any personnel of other divisions of the Advisor
or with any of its affiliated persons, with the exception of certain other
investment management affiliates of J.P. Morgan.
As compensation for the services rendered and related expenses such as
salaries of advisory personnel borne by the Advisor under the Investment
Advisory Agreements, the Fund has agreed to pay the Advisor a fee, which is
computed daily and may be paid monthly, equal to 1.25% of the average daily net
assets of the Fund.
For the period May 29, 1998 (commencement of operations) through
October 31, 1998, the Fund paid to J.P. Morgan $432,723 in advisory fees.
The Investment Advisory Agreement provides that it will continue in
effect for a period of two years after execution only if specifically approved
thereafter annually in the same manner as the Distribution Agreement. See
"Distributor" below. The Investment Advisory Agreement will terminate
automatically if assigned and is terminable at any time without penalty by a
vote of a majority of the Trustees, or by a vote of the holders of a majority of
the Fund's outstanding voting securities, on 60 days' written notice to the
Advisor and by the Advisor on 90 days' written notice to the Trust. See
"Additional Information."
The Glass-Steagall Act and other applicable laws generally prohibit
subsidiaries of bank holding companies, such as the Advisor, from engaging in
the business of underwriting or distributing securities, and the Board of
Governors of the Federal Reserve System has issued an interpretation to the
effect that under these laws a bank holding company registered under the federal
Bank Holding Company Act or certain subsidiaries thereof may not sponsor,
organize, or control a registered open-end investment company continuously
engaged in the issuance of its shares, such as the Trust. The interpretation
does not prohibit a holding company or a subsidiary thereof from acting as
investment advisor to such an investment company. The Advisor believes that it
may perform the services for the Fund contemplated by the Investment Advisory
Agreement without violation of the Glass-Steagall Act or
<PAGE>
other applicable banking laws or regulations. State laws on this issue
may differ from the interpretation of relevant federal law, and bank holding
company subsidiaries and financial institutions may be required to register as
dealers pursuant to state securities laws. However, it is possible that future
changes in either federal or state statutes and regulations concerning the
permissible activities of bank holding company subsidiaries or trust companies,
as well as further judicial or administrative decisions and interpretations of
present and future statutes and regulations, might prevent the Advisor from
continuing to perform such services for the Fund.
If the Advisor were prohibited from acting as investment advisor to any
Fund, it is expected that the Trustees of the Trust would recommend to investors
that they approve the Fund's entering into a new investment advisory agreement
with another qualified investment advisor selected by the Trustees.
Under separate agreements, Morgan, an affiliate of the Advisor, also
provides certain financial, fund accounting and administrative services to the
Trust and the Fund and shareholder services for 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 the Fund's shares. In that capacity,
FDI has been granted the right, as agent of the Trust, to solicit and accept
orders for the purchase of the Fund's shares in accordance with the terms of the
Distribution Agreement between the Trust and FDI. Under the terms of the
Distribution Agreement between FDI and the Trust, FDI receives no compensation
in its capacity as the Trust's distributor. FDI is a wholly owned indirect
subsidiary of Boston Institutional Group, Inc. FDI currently provides
administration and distribution services for a number of other investment
companies.
The Distribution Agreement shall continue in effect with respect to the
Fund for a period of two years after execution only if it is approved at least
annually thereafter (i) by a vote of the holders of a majority of the Fund's
outstanding shares or by its Trustees and (ii) by a vote of a majority of the
Trustees of the Trust who are not "interested persons" (as defined by the 1940
Act) of the parties to the Distribution Agreement, cast in person at a meeting
called for the purpose of voting on such approval (see "Trustees and Officers").
The Distribution Agreement will terminate automatically if assigned by either
party thereto and is terminable at any time without penalty by a vote of a
majority of the Trustees of the Trust, a vote of a majority of the Trustees who
are not "interested persons" of the Trust, or by a vote of the holders of a
majority of the Fund's outstanding shares as defined under "Additional
Information," in any case without payment of any penalty on 60 days' written
notice to the other party. The principal offices of FDI are located at 60 State
Street, Suite 1300, Boston, Massachusetts 02109.
CO-ADMINISTRATOR
Under Co-Administration Agreements with the Trust dated August 1, 1996,
FDI also serves as the Trust's Co-Administrator. The Co-Administration Agreement
may be renewed or amended by the Trustees without a shareholder vote. The
Co-Administration Agreement is terminable at any time without penalty by a vote
of a majority of the Trustees, as applicable, on not more than 60 days' written
notice nor less than 30 days' written notice to the other party. The
Co-Administrator may subcontract for the performance of its obligations,
provided, however, that unless the Trust expressly agrees in writing, the
Co-Administrator shall be fully responsible for the acts and
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omissions of any subcontractor as it would for its own acts or omissions.
See "Services Agent" below.
FDI (i) provides office space, equipment and clerical personnel for
maintaining the organization and books and records of the Trust; (ii) provides
officers for the Trust; (iii) prepares and files documents required for
notification of state securities administrators; (iv) reviews and files
marketing and sales literature; (v) files Trust regulatory documents and mails
Trust communications to Trustees and investors; and (vi) maintains related books
and records.
For its services under the Co-Administration Agreements, the Fund has
agreed to pay FDI fees equal to its allocable share of an annual complex-wide
charge of $425,000 plus FDI's out-of-pocket expenses. The amount allocable to
the Fund is based on the ratio of its net assets to the aggregate net assets of
the Trust, the Master Portfolios and other investment companies subject to
similar agreements with FDI.
For the period May 29, 1998 (commencement of operations) through October
31, 1998, the Fund paid to FDI $438 in administrative fees.
SERVICES AGENT
The Trust has entered into Administrative Services Agreement (the
"Services Agreements") with Morgan pursuant to which Morgan is responsible for
certain administrative and related services provided to the Fund. The Services
Agreement may be terminated at any time, without penalty, by the Trustees or
Morgan, in each case on not more than 60 days' nor less than 30 days' written
notice to the other party.
Under the Services Agreements, Morgan provides certain administrative
and related services to the Fund, including services related to tax compliance,
preparation of financial statements, calculation of performance data, oversight
of service providers and certain regulatory and Board of Trustee matters.
Under the amended Services Agreements, the Fund has agreed to pay
Morgan fees equal to its allocable share of an annual complex-wide charge. This
charge is calculated daily based on the aggregate net assets of the Master
Portfolios and the Trust in accordance with the following annual schedule: 0.09%
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 the Fund
is determined by the proportionate share that its net assets bear to the total
net assets of the Trust, the Master Portfolios, and the other investors in the
Master Portfolios for which Morgan provides similar services.
For the period May 29, 1998 (commencement of operations) through
October 31, 1998, the Fund paid to Morgan, as Services Agent, $19,674.
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company ("State Street"), 225 Franklin
Street, Boston, Massachusetts 02110, serves as the Trust's custodian and fund
accounting agent and transfer and dividend disbursing agent. Pursuant to the
Custodian Contract, State Street is responsible for maintaining the books of
account and records of portfolio transactions and holding portfolio securities
and cash. In addition, the Custodian has entered into a subcustodian agreements
on behalf of the Fund with Bankers Trust Company for the purpose of holding TENR
Notes and with Bank of New York and Chemical Bank, N.A. for the purpose of
holding certain variable rate demand notes. In the case of foreign
<PAGE>
assets held outside the United States, the Custodian employs various
subcustodians who were approved by the Trustees in accordance with the
regulations of the SEC. The Custodian maintains portfolio transaction records.
As Transfer Agent and Dividend Disbursing Agent, State Street is responsible for
maintaining account records detailing the ownership of Fund shares and for
crediting income, capital gains and other changes in share ownership to
shareholder accounts.
SHAREHOLDER SERVICING
The Trust has entered into a Shareholder Servicing Agreement with
Morgan pursuant to which Morgan acts as shareholder servicing agent for its
customers and for other Fund investors who are customers of a financial
professional. Under this agreement, Morgan is responsible for performing
shareholder account, administrative and servicing functions, which include but
are not limited to, answering inquiries regarding account status and history,
the manner in which purchases and redemptions of Fund shares may be effected,
and certain other matters pertaining to the Fund; assisting customers in
designating and changing dividend options, account designations and addresses;
providing necessary personnel and facilities to coordinate the establishment and
maintenance of shareholder accounts and records with the Fund's transfer agent;
transmitting purchase and redemption orders to the Funds' transfer agent and
arranging for the wiring or other transfer of funds to and from customer
accounts in connection with orders to purchase or redeem Fund shares; verifying
purchase and redemption orders, transfers among and changes in accounts;
informing the Distributor of the gross amount of purchase orders for Fund
shares; and providing other related services.
Under the Shareholder Servicing Agreement, the Fund has agreed to pay
Morgan a fee for these services at the annual rate of 0.25% (expressed as a
percentage of the average daily net assets of Fund shares). Morgan acts as
shareholder servicing agent for all shareholders.
For the period May 29, 1998 (commencement of operations) through
October 31, 1998 the Fund paid Morgan, as shareholder servicing agent, $86,545.
As discussed under "Investment Advisor," the Glass-Steagall Act and
other applicable laws and regulations limit the activities of bank holding
companies and certain of their subsidiaries in connection with registered
open-end investment companies. The activities of Morgan in acting as shareholder
servicing agent for Fund shareholders under the Shareholder Servicing Agreement
and providing administrative services to the Fund under the Services Agreement
may raise issues under these laws. However, Morgan believes that it may properly
perform these services and the other activities described herein without
violation of the Glass-Steagall Act or other applicable banking laws or
regulations.
If Morgan were prohibited from providing any of the services under the
Shareholder Servicing Agreement and the Services Agreements, the Trustees would
seek an alternative provider of such services. In such event, changes in the
operation of the Fund might occur and a shareholder might no longer be able to
avail himself or herself of any services then being provided to shareholders by
Morgan.
The Fund may be sold to or through financial intermediaries who are
customers of 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 Fund. See
"Financial Professionals" below. Organizations that provide recordkeeping or
other services to certain employee benefit or retirement plans that include the
Fund as an investment alternative may also be paid a fee.
<PAGE>
FINANCIAL PROFESSIONALS
The services provided by financial professionals may include
establishing and maintaining shareholder accounts, processing purchase and
redemption transactions, arranging for bank wires, performing shareholder
subaccounting, answering client inquiries regarding the Trust, assisting clients
in changing dividend options, account designations and addresses, providing
periodic statements showing the client's account balance and integrating these
statements with those of other transactions and balances in the client's other
accounts serviced by the financial professional, transmitting proxy statements,
periodic reports, updated prospectuses and other communications to shareholders
and, with respect to meetings of shareholders, collecting, tabulating and
forwarding executed proxies and obtaining such other information and performing
such other services as Morgan or the financial professional's clients may
reasonably request and agree upon with the financial professional.
Although there is no sales charge levied directly by the Fund,
financial professionals may establish their own terms and conditions for
providing their services and may charge investors a transaction-based or other
fee for their services. Such charges may vary among financial professionals but
in all cases will be retained by the financial professional and not remitted to
the Fund or J.P. Morgan.
The Fund has authorized one or more brokers to accept purchase and
redemption orders on its behalf. Such brokers are authorized to designate other
intermediaries to accept purchase and redemption orders on the Fund's behalf.
The Fund will be deemed to have received a purchase or redemption order when an
authorized broker or, if applicable, a broker's authorized designee, accepts the
order. These orders will be priced at the Fund's net asset value next calculated
after they are so accepted.
INDEPENDENT ACCOUNTANTS
The independent accountants of the Trust are PricewaterhouseCoopers
LLP, 1177 Avenue of the Americas, New York, New York 10036.
PricewaterhouseCoopers LLP conducts an annual audit of the financial statements
of the Fund, assists in the preparation and/or review of the Fund's federal and
state income tax returns and consults with the Fund as to matters of accounting
and federal and state income taxation.
EXPENSES
In addition to the fees payable to Pierpont Group, Inc., JPMIM, Morgan and
FDI under various agreements discussed under "Trustees and Officers,"
"Investment Advisor," "Co-Administrator and Distributor," "Services Agent" and
"Shareholder Servicing" above, the Fund is responsible for usual and customary
expenses associated with their respective operations. Such expenses include
organization expenses, legal fees, accounting and audit expenses, insurance
costs, the compensation and expenses of the Trustees, registration fees under
federal securities laws, extraordinary expenses applicable to the Fund,
transfer, registrar and dividend disbursing costs, the expenses of printing and
mailing reports, notices and proxy statements to Fund shareholders, filing fees
under state securities laws, applicable registration fees under foreign
securities laws, custodian fees and brokerage expenses.
J.P. Morgan has agreed that it will reimburse the Fund until further notice
to the extent necessary to maintain the Fund's total operating expenses at the
annual rate of 1.50% of the Fund's average daily assets. This limit
<PAGE>
does not cover extraordinary expenses. This reimbursement
arrangement can be changed at any time at the option of J.P. Morgan.
For the period May 29, 1998, commencement of operations, to October 31,
1998, J.P. Morgan reimbursed the Fund $197,250 under the expense reimbursement
arrangement described above.
PURCHASE OF SHARES
Method of Purchase. Investors may open accounts with the Fund only
through the Distributor. All purchase transactions in Fund accounts are
processed by Morgan as shareholder servicing agent and the Fund is authorized to
accept any instructions relating to a Fund account from Morgan as shareholder
servicing agent for the customer. All purchase orders must be accepted by the
Distributor. Prospective investors who are not already customers of Morgan may
apply to become customers of Morgan for the sole purpose of Fund transactions.
There are no charges associated with becoming a Morgan customer for this
purpose. Morgan reserves the right to determine the customers that it will
accept, and the Trust reserves the right to determine the purchase orders that
it will accept.
References in the Prospectus and this Statement of Additional
Information to customers of Morgan or a financial professional include customers
of their affiliates and references to transactions by customers with Morgan or a
financial professional include transactions with their affiliates. Only Fund
investors who are using the services of a financial institution acting as
shareholder servicing agent pursuant to an agreement with the Trust on behalf of
the Fund may make transactions in shares of the Fund.
The Fund may, at its own option, accept securities in payment for
shares. The securities delivered in such a transaction are valued by the method
described in "Net Asset Value" as of the day the Fund receives the securities.
This is a taxable transaction to the shareholder. Securities may be accepted in
payment for shares only if they are, in the judgment of JPMIM, appropriate
investments for the Fund. In addition, securities accepted in payment for shares
must: (i) meet the investment objective and policies of the acquiring Fund; (ii)
be acquired by the Fund for investment and not for resale; (iii) be liquid
securities which are not restricted as to transfer either by law or liquidity of
market; and (iv) if stock, have a value which is readily ascertainable as
evidenced by a listing on a stock exchange, OTC market or by readily available
market quotations from a dealer in such securities. The Fund reserves the right
to accept or reject at its own option any and all securities offered in payment
for its shares.
Prospective investors may purchase shares with the assistance of a
financial professional, and the financial professional may establish its own
minimums and charge the investor a fee for this service and other services it
provides to its customers. Morgan may pay fees to financial professionals for
services in connection with fund investments. See "Financial Professionals"
above.
REDEMPTION OF SHARES
If the Trust on behalf of the Fund determines that it would be
detrimental to the best interest of the remaining shareholders of the Fund to
make payment wholly or partly in cash, payment of the redemption price may be
made in whole or in part by a distribution in kind of securities, in lieu of
cash, in conformity with the applicable rule of the SEC. If shares are redeemed
in kind, the redeeming shareholder might incur transaction costs in converting
the assets into cash. The method of valuing portfolio securities is described
under "Net Asset Value," and such valuation will be made as of
<PAGE>
the same time the redemption price is determined. The Trust, on behalf
of the Fund, has elected to be governed by Rule 18f-1 (for the Fund only, and
not for any other series of the Trust) under the 1940 Act pursuant to which the
Fund is obligated to redeem shares solely in cash up to the lesser of $250,000
or one percent of the net asset value of the Fund during any 90 day period for
any one shareholder.
Further Redemption Information. Investors should be aware that
redemptions from the Fund may not be processed if a redemption request is not
submitted in proper form. To be in proper form, the Fund must have received the
shareholder's taxpayer identification number and address. In addition, if a
shareholder sends a check for the purchase of fund shares and shares are
purchased before the check has cleared, the transmittal of redemption proceeds
from the shares will occur upon clearance of the check which may take up to 15
days. The Trust, on behalf of the Fund, 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 on such Exchange
is restricted as determined by the SEC by rule or regulation, (iii) during
periods in which an emergency, as determined by the SEC, exists that causes
disposal by the Fund of, or evaluation of the net asset value of, its portfolio
securities to be unreasonable or impracticable, or (iv) for such other periods
as the SEC may permit.
For information regarding redemption orders placed through a financial
professional, please see "Financial Professionals" above.
EXCHANGE OF SHARES
An investor may exchange shares from the Fund into shares of any other
J.P. Morgan Series Trust Fund, J.P. Morgan Institutional Fund or J.P. Morgan
Fund without charge. An exchange may be made so long as after the exchange the
investor has shares, in each fund in which he or she remains an investor, with a
value of at least that fund's minimum investment amount. Shareholders should
read the prospectus of the fund into which they are exchanging and may only
exchange between fund accounts that are registered in the same name, address and
taxpayer identification number. Shares are exchanged on the basis of relative
net asset value per share. Exchanges are in effect redemptions from one fund and
purchases of another fund and the usual purchase and redemption procedures and
requirements are applicable to exchanges. Shareholders subject to federal income
tax who exchange shares in one fund for shares in another fund may recognize
capital gain or loss for federal income tax purposes. Shares of the fund to be
acquired are purchased for settlement when the proceeds from redemption become
available. The Trust reserves the right to discontinue, alter or limit the
exchange privilege at any time.
DIVIDENDS AND DISTRIBUTIONS
The Fund declares and pays dividends and distributions as described
under "Dividends and Distributions" in the Prospectus.
Dividends and capital gains distributions paid by the Fund are
automatically reinvested in additional shares of the Fund unless the shareholder
has elected to have them paid in cash. Dividends and distributions to be paid in
cash are credited to the shareholder's account at Morgan or at his financial
professional or, in the case of certain Morgan customers, are mailed by check in
accordance with the customer's instructions. The Fund reserve the right to
discontinue, alter or limit the automatic reinvestment privilege at any time.
<PAGE>
If a shareholder has elected to receive dividends and/or capital gain
distributions in cash and the postal or other delivery service is unable to
deliver checks to the shareholder's address of record, such shareholder's
distribution option will automatically be converted to having all dividend and
other distributions reinvested in additional shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
NET ASSET VALUE
The Fund computes its net asset value once daily on Monday through
Friday at the time 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. The Fund 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 Fund's business days.
The value of investments listed on a domestic securities exchange, is
based on the last sale prices on such exchange. In the absence of recorded
sales, investments are valued at the average of readily available closing bid
and asked prices on such exchange. Securities listed on a foreign exchange are
valued at the last quoted sale prices on such exchange. Unlisted securities are
valued at the average of the quoted bid and asked prices in the OTC market. The
value of each security for which readily available market quotations exist is
based on a decision as to the broadest and most representative market for such
security. For purposes of calculating net asset value, all assets and
liabilities initially expressed in foreign currencies will be converted into
U.S.
dollars at the prevailing currency exchange rate on the valuation date.
Securities or other assets for which market quotations are not readily
available (including certain restricted and illiquid securities) are valued at
fair value in accordance with procedures established by and under the general
supervision and responsibility of the Trustees. Such procedures include the use
of independent pricing services which use prices based upon yields or prices of
securities of comparable quality, coupon, maturity and type; indications as to
values from dealers; and general market conditions. Short-term investments which
mature in 60 days or less are valued at amortized cost if their original
maturity was 60 days or less, or by amortizing their value on the 61st day prior
to maturity, if their original maturity when acquired by the Portfolio was more
than 60 days, unless this is determined not to represent fair value by the
Trustees.
Trading in securities on most foreign exchanges and OTC markets is
normally completed before the close of trading of the New York Stock Exchange
(normally 4:00 p.m.)and may also take place on days on which the New York Stock
Exchange is closed. If events materially affecting the value of securities occur
between the time when the exchange on which they are traded closes and the time
when a Portfolio's net asset value is calculated, such securities will be valued
at fair value in accordance with procedures established by and under the general
supervision of the Trustees.
PERFORMANCE DATA
From time to time, the Fund may quote performance in terms of actual
distributions, total return or capital appreciation in reports, sales literature
and advertisements published by the Trust. Shareholders may obtain current
performance information by calling Morgan at (800) 766-7722.
<PAGE>
The classes of shares of the Fund may bear different shareholder
servicing fees and other expenses, which may cause the performance of a class to
differ from the performance of another class. Performance quotations will be
computed separately for each class of the Fund's shares. Any fees charged by an
institution directly to its customers' accounts in connection with investments
in the Funds will not be included in calculations of total return.
Total Return Quotations. The Fund may advertise "total return" and
non-standardized total return data. The total return shows what an investment in
a Fund would have earned over a specified period of time (one, five or ten years
or since commencement of operations, if less) assuming that all distributions
and dividends by the Fund were reinvested on the reinvestment dates during the
period and less all recurring fees. This method of calculating total return is
required by regulations of the SEC. Total return data similarly calculated,
unless otherwise indicated, over the specified periods of time may also be used.
All performance figures are based on historical earnings and are not intended to
indicate future performance.
As required by regulations of the SEC, the annualized total return of
the Fund for a period is computed by assuming a hypothetical initial payment of
$1,000. It is then assumed that all of the dividends and distributions by the
Fund over the period are reinvested. It is then assumed that at the end of the
period, the entire amount is redeemed. The annualized total return is then
calculated by determining the annual rate required for the initial payment to
grow to the amount which would have been received upon redemption.
Aggregate total returns, reflecting the cumulative percentage change
over a measuring period, may also be calculated.
Below is set forth historical return information for the Fund for the
periods indicated:
Historical return information for the Fund is as follows: (October 31,
1998): Average annual total return, 1 year: N/A; average annual total return, 5
years: N/A; average annual total return, commencement of operations (May 29,
1998) to period end: (10.93%); aggregate total return, 1 year: N/A; aggregate
total return, 5 years: N/A; aggregate total return, commencement of operations
(May 29, 1998) to period end: (10.93%).
General. The Fund's performance will vary from time to time depending
upon market conditions and its operating expenses. Consequently, any given
performance quotation should not be considered representative of the Fund's
performance for any specified period in the future. In addition, because
performance will fluctuate, it may not provide a basis for comparing an
investment in the Fund with certain bank deposits or other investments that pay
a fixed yield or return for a stated period of time.
Comparative performance information may be used from time to time in
advertising the Fund's 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 Fund may, in addition to any other permissible
information, include the following types of information in advertisements,
supplemental sales literature and reports to shareholders: (1) discussions of
general economic or financial principles (such as the effects of compounding and
the benefits of dollar-cost averaging); (2) discussions of general economic
trends; (3) presentations of statistical data to supplement such discussions;
(4) descriptions of past or anticipated portfolio holdings for
<PAGE>
one or more of the funds; (5) descriptions of investment strategies for one or
more of the funds; (6) descriptions or comparisons of various savings and
investment products (including, but not limited to, qualified retirement plans
and individual stocks and bonds), which may or may not include the Fund; (7)
comparisons of investment products (including the Fund) with relevant markets or
industry indices or other appropriate benchmarks; (8) discussions of fund
rankings or ratings by recognized rating organizations; and (9) discussions of
various statistical methods quantifying the Fund's volatility relative to its
benchmark or to past performance, including risk adjusted measures. The Fund may
also include calculations, such as hypothetical compounding examples, which
describe hypothetical investment results in such communications. Such
performance examples will be based on an express set of assumptions and are not
indicative of the performance of the Fund.
PORTFOLIO TRANSACTIONS
The Advisor places orders for all purchases and sales of portfolio
securities, enters into repurchase agreements, and may enter into reverse
repurchase agreements and execute loans of portfolio securities on behalf of the
Fund. See "Investment Objectives and Policies."
Portfolio transactions for the Fund will be undertaken principally to
accomplish the Fund's objectives The Fund may engage in short-term trading
consistent with its objective. See "Investment Objectives and Policies --
Portfolio Turnover".
In connection with portfolio transactions, the overriding objective is
to obtain the best execution of purchase and sales orders.
In selecting a broker, the Advisor considers a number of factors
including: the price per unit of the security; the broker's reliability for
prompt, accurate confirmations and on-time delivery of securities; the firm's
financial condition; as well as the commissions charged. A broker may be paid a
brokerage commission in excess of that which another broker might have charged
for effecting the same transaction if, after considering the foregoing factors,
the Advisor decides that the broker chosen will provide the best execution. The
Advisor monitors the reasonableness of the brokerage commissions paid in light
of the execution received. The Trustees of the Trust review regularly the
reasonableness of commissions and other transaction costs incurred by the Fund
in light of facts and circumstances deemed relevant from time to time, and, in
that connection, will receive reports from the Advisor and published data
concerning transaction costs incurred by institutional investors generally.
Research services provided by brokers to which the Advisor has allocated
brokerage business in the past include economic statistics and forecasting
services, industry and company analyses, portfolio strategy services,
quantitative data, and consulting services from economists, political analysts
and electronic trading tools. Research services furnished by brokers are used
for the benefit of all the Advisor's clients and not solely or necessarily for
the benefit of the Fund. The Advisor believes that the value of research
services received is not determinable and does not significantly reduce its
expenses. The Fund does not reduce its fee to the Advisor by any amount that
might be attributable to the value of such services.
Subject to the overriding objective of obtaining the best execution of
orders, the Advisor may allocate a portion of the Fund's brokerage transactions
to affiliates of the Advisor. In order for affiliates of the Advisor to effect
any portfolio transactions, the commissions, fees or other remuneration received
by such affiliates must be reasonable and fair compared to the commissions,
fees, or other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time.
<PAGE>
Furthermore, the Trustees, including a majority of the Trustees who are
not "interested persons," have adopted procedures which are reasonably designed
to provide that any commissions, fees, or other remuneration paid to such
affiliates are consistent with the foregoing standard.
Portfolio securities will not be purchased from or through or sold to
or through the Co-Administrator, the Distributor or the Advisor or any other
"affiliated person" (as defined in the 1940 Act) of the Co-Administrator,
Distributor or Advisor when such entities are acting as principals, except to
the extent permitted by law. In addition, the Fund will not purchase securities
during the existence of any underwriting group relating thereto of which the
Advisor or an affiliate of the Advisor is a member, except to the extent
permitted by law.
On those occasions when the Advisor deems the purchase or sale of a
security to be in the best interests of the Fund as well as other customers, the
Advisor to the extent permitted by applicable laws and regulations, may, but is
not obligated to, aggregate the securities to be sold or purchased for the Fund
with those to be sold or purchased for other customers in order to obtain best
execution, including lower brokerage commissions if appropriate. In such event,
allocation of the securities so purchased or sold as well as any expenses
incurred in the transaction will be made by the Advisor in the manner it
considers to be most equitable and consistent with its fiduciary obligations to
the Fund. In some instances, this procedure might adversely affect the Fund.
If the Fund effects a closing purchase transaction with respect to an
option written by it, normally such transaction will be executed by the same
broker-dealer who executed the sale of the option. The writing of options by the
Fund will be subject to limitations established by each of the exchanges
governing the maximum number of options in each class which may be written by a
single investor or group of investors acting in concert, regardless of whether
the options are written on the same or different exchanges or are held or
written in one or more accounts or through one or more brokers. The number of
options which the Fund may write may be affected by options written by the
Advisor for other investment advisory clients. An exchange may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
The Fund paid the following approximate brokerage commissions for the
period May 29, 1998 (commencement of operations) through October 31, 1998:
$287,256.
MASSACHUSETTS TRUST
The Trust is a trust fund of the type commonly known as a
"Massachusetts business trust" of which the Fund is a separate and distinct
series. A copy of the Declaration of Trust for the Trust is on file in the
office of the Secretary of The Commonwealth of Massachusetts. The Declaration of
Trust and the By-Laws of the Trust are designed to make the Trust similar in
most respects to a Massachusetts business corporation. The principal distinction
between the two forms concerns shareholder liability described below.
Effective January 1, 1998, the name of the Trust was changed from "JPM
Series Trust" to "J.P. Morgan Series Trust."
Under Massachusetts law, shareholders of such a trust may, under
certain circumstances, be held personally liable as partners for the obligations
of the trust which is not the case for a corporation. However, the Trust's
Declaration of Trust provides that the shareholders shall not be subject to any
personal liability for the acts or obligations of any Fund and that every
written agreement, obligation, instrument or undertaking made on behalf of any
<PAGE>
Fund shall contain a provision to the effect that the shareholders are
not personally liable thereunder.
No personal liability will attach to the shareholders under any
undertaking containing such provision when adequate notice of such provision is
given, except possibly in a few jurisdictions. With respect to all types of
claims in the latter jurisdictions, (i) tort claims, (ii) contract claims where
the provision referred to is omitted from the undertaking, (iii) claims for
taxes, and (iv) certain statutory liabilities in other jurisdictions, a
shareholder may be held personally liable to the extent that claims are not
satisfied by the Fund. However, upon payment of such liability, the shareholder
will be entitled to reimbursement from the general assets of the Fund. The
Trustees intend to conduct the operations of the Trust in such a way so as to
avoid, as far as possible, ultimate liability of the shareholders for
liabilities of the Funds.
The Trust's Declaration of Trust further provides that the name of the
Trust refers to the Trustees collectively as Trustees, not as individuals or
personally, that no Trustee, officer, employee or agent of the Fund is liable to
the Fund or to a shareholder, and that no Trustee, officer, employee, or agent
is liable to any third persons in connection with the affairs of the Fund,
except as such liability may arise from his or its own bad faith, willful
misfeasance, gross negligence or reckless disregard of his or its duties to such
third persons. It also provides that all third persons shall look solely to Fund
property for satisfaction of claims arising in connection with the affairs of
the Fund. With the exceptions stated, the Trust's Declaration of Trust provides
that a Trustee, officer, employee, or agent is entitled to be indemnified
against all liability in connection with the affairs of the Fund.
The Trust shall continue without limitation of time subject to the
provisions in the Declaration of Trust concerning termination by action of the
shareholders or by action of the Trustees upon notice to the shareholders.
DESCRIPTION OF SHARES
The Fund represents a separate series of shares of beneficial interest of
the Trust. Fund shares are further divided into separate classes. See
"Massachusetts Trust."
The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares ($0.001 par value) of one or more series
and classes within any series and to divide or combine the shares of any series
without changing the proportionate beneficial interest of each shareholder in
the Fund.
Each share represents an equal proportional interest in the Fund with
each other share of the same class. Upon liquidation of the Fund, holders are
entitled to share pro rata in the net assets of the Fund available for
distribution to such shareholders. Shares of the Fund have no preemptive or
conversion rights.
The shareholders of the Trust are entitled to one vote for each dollar
of net asset value (or a proportionate fractional vote in respect of a
fractional dollar amount), on matters on which shares of the Fund shall be
entitled to vote. 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
<PAGE>
are not cumulative. The Trust does not intend to hold annual meetings of
shareholders. The Trustees may call meetings of shareholders for action by
shareholder vote if required by either the 1940 Act or the Trust's Declaration
of Trust.
Shareholders of the Trust have the right, upon the declaration in
writing or vote of shareholders whose shares represent two-thirds of the net
asset value of the Trust, to remove a Trustee. The Trustees will call a meeting
of shareholders to vote on removal of a Trustee upon the written request of the
shareholders whose shares represent 10% of the net asset value of the Trust. The
Trustees are also required, under certain circumstances, to assist shareholders
in communicating with other shareholders.
For information relating to mandatory redemption of Fund shares or
their redemption at the option of the Trust under certain circumstances, see
"Redemption of Shares".
As of January 31, 1999, the following owned of record or, to the knowledge
of management, beneficially owned more than 5% of the outstanding shares of the
Fund: Morgan Guaranty Trust Co. NY as agent for Three M Operating Subs Ltd Attn:
Priv Bking JRL Audit: (6.40%).
The address of each owner listed above is c/o Morgan, 522 Fifth Avenue,
New York, NY 10036. As of the date of this Statement of Additional Information,
the officers and Trustees as a group owned less than 1% of the shares of the
Fund.
TAXES
The Fund intends to qualify as a regulated investment company under
Subchapter M of the Code. As a regulated investment company, the Fund must,
among other things, (a) derive at least 90% of its gross income from dividends,
interest, payments with respect to loans of stock and securities, gains from the
sale or other disposition of stock, securities or foreign currency and other
income (including but not limited to gains from options, futures, and forward
contracts) derived with respect to its business of investing in such stock,
securities or foreign currency; and (b) diversify its holdings so that, at the
end of each quarter of its taxable year, (i) at least 50% of the value of the
Fund's total assets is represented by cash, cash items, U.S. Government
securities, securities of other regulated investment companies, and other
securities limited, in respect of any one issuer, to an amount not greater than
5% of the Fund's total assets, and 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its total assets is
invested in the securities of any one issuer (other than U.S. Government
securities or securities of other regulated investment companies.
As a regulated investment company, the Fund (as opposed to its
shareholders) will not be subject to federal income taxes on the net investment
income and capital gain that it distributes to its shareholders, provided that
at least 90% of its net investment income and realized net short-term capital
gain in excess of net long-term capital loss for the taxable year is distributed
in accordance with the Code's timing requirements.
Under the Code, the Fund will be subject to a 4% excise tax on a
portion of its undistributed taxable income and capital gains if it fails to
meet certain distribution requirements by the end of the calendar year. The Fund
intends to make distributions in a timely manner and accordingly does not expect
to be subject to the excise tax.
<PAGE>
For federal income tax purposes, dividends that are declared by the
Fund in October, November or December as of a record date in such month and
actually paid in January of the following year will be treated as if they were
paid on December 31 of the year declared. Therefore, such dividends will be
taxable to a shareholder in the year declared rather than the year paid.
For federal income tax purposes, the Fund had a capital loss
carryforward at October 31, 1998 of $5,471,804, all of which expires in the year
2000. To the extent that this capital loss is used to offset future capital
gains, it is probable that gains so offset will not be distributed to
shareholders.
Distributions of net investment income, certain foreign currency gains,
and realized net short-term capital gain in excess of net long-term capital loss
(other than exempt interest dividends) are generally taxable to shareholders of
the Fund as ordinary income whether such distributions are taken in cash or
reinvested in additional shares. The Fund expects that a portion of these
distributions to corporate shareholders will be eligible for the
dividends-received deduction, subject to applicable limitations under the Code.
If dividend payments exceed income earned by the Fund, the over distribution
would be considered a return of capital rather than a dividend payment. The Fund
intends to pay dividends in such a manner so as to minimize the possibility of a
return of capital. Distributions of net long-term capital gain (i.e., net
long-term capital gain in excess of net short-term capital loss) are taxable to
shareholders of the Fund as long-term capital gain, regardless of whether such
distributions are taken in cash or reinvested in additional shares and
regardless of how long a shareholder has held shares in the Fund. In general,
long-term capital gain of an individual shareholder will be subject to a 20%
rate of tax.
Gains or losses on sales of portfolio securities will be treated as
long-term capital gains or losses if the securities have been held for more than
one year except in certain cases where a put is acquired or a call option is
written thereon or the straddle rules described below are otherwise applicable.
Other gains or losses on the sale of securities will be short-term capital gains
or losses. Gains and losses on the sale, lapse or other termination of options
on securities will be treated as gains and losses from the sale of securities.
Except as described below, if an option written by the Fund lapses or is
terminated through a closing transaction, such as a repurchase by the Fund of
the option from its holder, the Fund will realize a short-term capital gain or
loss, depending on whether the premium income is greater or less than the amount
paid by the Fund in the closing transaction. If securities are purchased by the
Fund pursuant to the exercise of a put option written by it, the Fund will
subtract the premium received from its cost basis in the securities purchased.
Any distribution of net investment income or capital gains will have
the effect of reducing the net asset value of Fund shares held by a shareholder
by the same amount as the distribution. If the net asset value of the shares is
reduced below a shareholder's cost as a result of such a distribution, the
distribution, although constituting a return of capital to the shareholder, will
be taxable as described above.
Any gain or loss realized on the redemption or exchange of Fund shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held for more than one year, and
otherwise as short-term capital gain or loss. Long-term capital gain of an
individual holder is subject to a maximum tax rate of 20%. However, any loss
realized by a shareholder upon the redemption or exchange of shares in the
<PAGE>
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. Investors are urged to consult their
tax advisors concerning the limitations on the deductibility of capital losses.
In addition, no loss will be allowed on the redemption or exchange of shares of
the Fund, if within a period beginning 30 days before the date of such
redemption or exchange and ending 30 days after such date, the shareholder
acquires (such as through dividend reinvestment) securities that are
substantially identical to shares of the Fund.
Under the Code, gains or losses attributable to disposition of foreign
currency or to certain foreign currency contracts, or to fluctuations in
exchange rates between the time the Fund accrues income or receivables or
expenses or other liabilities denominated in a foreign currency and the time the
Fund actually collects such income or pays such liabilities, are generally
treated as ordinary income or ordinary loss. Similarly, gains or losses on the
disposition of debt securities held by the Fund, if any, denominated in foreign
currency, to the extent attributable to fluctuations in exchange rates between
the acquisition and disposition dates are also treated as ordinary income or
loss.
Forward currency contracts, options and futures contracts entered into
by the Fund may create "straddles" for U.S. federal income tax purposes and this
may affect the character and timing of gains or losses realized by the Portfolio
on forward currency contracts, options and futures contracts or on the
underlying securities.
Certain options, futures and foreign currency contracts held by the
Fund at the end of each taxable year will be required to be "marked to market"
for federal income tax purposes -- i.e., treated as having been sold at market
value. For options and futures contracts, 60% of any gain or loss recognized on
these deemed sales and on actual dispositions will be treated as long-term
capital gain or loss, and the remainder will be treated as short-term capital
gain or loss regardless of how long the Portfolio has held such options or
futures. However, gain or loss recognized on certain foreign currency contracts
will be treated as ordinary income or loss.
The Fund may invest in Equity Securities of foreign issuers. If the
Fund purchases shares in certain foreign corporations (referred to as passive
foreign investment companies ("PFICs") under the Code), it may be subject to
federal income tax on a portion of an "excess distribution" from such foreign
corporation, including any gain from the disposition of such shares, even though
a portion of such income may have to be distributed as a taxable dividend by the
Fund to its shareholders. In addition, certain interest charges may be imposed
on the Fund as a result of such distributions. Alternatively, the Fund may in
some cases be permitted to include each year in its income and distribute to
shareholders a pro rata portion of the foreign investment fund's income, whether
or not distributed to the Fund.
The Fund will be permitted to "mark to market" any marketable stock
held by it in a PFIC. The Fund will include in income each year an amount equal
to its share of the excess, if any, of the fair market value of the PFIC stock
as of the close of the taxable year over the adjusted basis of such stock. The
Fund would be allowed a deduction for its share of the excess, if any, of the
adjusted basis of the PFIC stock over its fair market value as of the close of
the taxable year, but only to the extent of any net mark-to-market gains with
respect to the stock included by the Fund for prior taxable years.
If a correct and certified taxpayer identification number is not on
file, the Fund is required, subject to certain exemptions, to withhold 31% of
certain payments made or distributions declared to non-corporate shareholders.
<PAGE>
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, the Fund may be required to withhold U.S. federal
income tax as "backup withholding" at the rate of 31% from distributions treated
as long-term capital gains and from the proceeds of redemptions, exchanges or
other dispositions of Fund shares unless IRS Form W-8 is provided. Transfers by
gift of shares of the Fund by a foreign shareholder who is a nonresident alien
individual will not be subject to U.S. federal gift tax, but the value of shares
of the Fund held by such a shareholder at his or her death will be includible in
his or her gross estate for U.S. federal estate tax purposes.
Foreign Taxes. It is expected that the Fund may be subject to foreign
withholding taxes or other foreign taxes with respect to income (possibly
including, in some cases, capital gains) received from sources within foreign
countries. So long as more than 50% in value of the total assets of the Fund at
the close of any taxable year consists of stock or securities of foreign
corporations, the Fund may elect to treat any foreign income taxes deemed paid
by it as paid directly by its shareholders. The Fund will make such an election
only if it deems it to be in the best interest of its shareholders. The Fund
will notify its shareholders in writing each year if it makes the election and
of the amount of foreign income taxes, if any, to be treated as paid by the
shareholders and the amount of foreign taxes, if any, for which shareholders of
the Fund will not be eligible to claim a foreign tax credit because the holding
period requirements (described below) have not been satisfied. If the Fund makes
the election, each shareholder will be required to include in his income (in
addition to the dividends and distributions he receives) his proportionate share
of the amount of foreign income taxes deemed paid by the Fund and will be
entitled to claim either a credit (subject to the limitations discussed below)
or, if he itemizes deductions, a deduction for his share of the foreign income
taxes in computing federal income tax liability. (No deduction will be permitted
in computing an individual's alternative minimum tax liability.) Effective for
dividends paid after September 5, 1997, shareholders of the Fund will not be
eligible to claim a foreign tax credit with respect to taxes paid by the Fund
(notwithstanding that the Fund elects to treat the foreign taxes deemed paid by
it as paid directly by its shareholders) unless certain holding period
requirements are met. A shareholder who is a nonresident alien individual or a
foreign corporation may be subject to U.S. withholding tax on the income
resulting from the election described in this paragraph, but may not be able to
claim a credit or deduction against such U.S. tax for the foreign taxes treated
as having been paid by such shareholder. A tax-exempt shareholder will not
ordinarily benefit from this election. Shareholders who choose to utilize a
credit (rather than a deduction) for foreign taxes will be subject to the
limitation that the credit may not exceed the shareholder's U.S. tax
<PAGE>
(determined without regard to the availability of the credit)
attributable to his or her total foreign source taxable income. For this
purpose, the portion of dividends and distributions paid by the Fund from its
foreign source net investment income will be treated as foreign source income.
The Fund's gains and losses from the sale of securities will generally be
treated as derived from U.S. sources, however, and certain foreign currency
gains and losses likewise will be treated as derived from U.S. sources. The
limitation on the foreign tax credit is applied separately to foreign source
"passive income," such as the portion of dividends received from the Fund which
qualifies as foreign source income. In addition, the foreign tax credit is
allowed to offset only 90% of the alternative minimum tax imposed on
corporations and individuals. Because of these limitations, if the election is
made, shareholders may nevertheless be unable to claim a credit for the full
amount of their proportionate shares of the foreign income taxes paid by the
Fund. Effective for taxable years of a shareholder beginning after December 31,
1997, individual shareholders of the Fund with $300 or less of creditable
foreign taxes ($600 in the case of an individual shareholder filing jointly) may
elect to be exempt from the foreign tax credit limitation rules described above
(other than the 90% limitation applicable for purposes of the alternative
minimum tax), provided that all of such individual shareholder's foreign source
income is "qualified passive income" (which generally includes interest,
dividends, rents, royalties and certain other types of income) and further
provided that all of such foreign source income is shown on one or more payee
statements furnished to the shareholder. Shareholders making this election will
not be permitted to carry over any excess foreign taxes to or from a tax year to
which such an election applies.
State and Local Taxes. The Fund may be subject to state or local taxes
in jurisdictions in which the Fund is deemed to be doing business. In addition,
the treatment of the Fund and its shareholders in those states which have income
tax laws might differ from treatment under the federal income tax laws.
Shareholders should consult their own tax advisors with respect to any state or
local taxes.
Other Taxation. The Trust is organized as a Massachusetts business
trust and, under current law, neither the Trust nor the Fund is liable for any
income or franchise tax in The Commonwealth of Massachusetts, provided that the
Fund continues to qualify as a regulated investment company under Subchapter M
of the Code.
ADDITIONAL INFORMATION
As used in this Statement of Additional Information and the Prospectus,
the term "majority of the outstanding voting securities" means the vote of (i)
67% or more of the Fund's shares present at a meeting, if the holders of more
than 50% of the Fund's outstanding shares are present or represented by proxy,
or (ii) more than 50% of the Fund's outstanding shares, whichever is less.
Telephone calls to the Fund, Morgan or a financial professional as
shareholder servicing agent may be tape recorded. With respect to the securities
offered hereby, this Statement of Additional Information and the Prospectus do
not contain all the information included in the Trust's Registration Statement
filed with the SEC under the 1933 Act and the Trust's Registration Statements
filed under the 1940 Act. Pursuant to the rules and regulations of the SEC,
certain portions have been omitted. The Registration Statements including the
exhibits filed therewith may be examined at the office of the SEC in Washington
D.C.
Statements contained in this Statement of Additional Information and
the Prospectus concerning the contents of any contract or other document are not
necessarily complete, and in each instance, reference is made to the copy of
<PAGE>
such contract or other document filed as an exhibit to the applicable
Registration Statements. Each such statement is qualified in all respects by
such reference.
No dealer, salesman or any other person has been authorized to give any
information or to make any representations, other than those contained in the
Prospectus and this Statement of Additional Information, in connection with the
offer contained therein and, if given or made, such other information or
representations must not be relied upon as having been authorized by any of the
Trust, the Fund or the Distributor. The Prospectus and this Statement of
Additional Information do not constitute an offer by the Fund or by the
Distributor to sell or solicit any offer to buy any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful for the Fund or
the Distributor to make such offer in such jurisdictions.
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 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 has substantially completed
renovation, testing, and validation of its key systems and is preparing 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. For potential failure
scenarios where the risks are deemed significant and where such risk is
considered to have a higher probability of occurrence, J.P. Morgan will attempt
to develop business recovery/contingency plans. These plans, which are being
developed in the first half of 1999, will define the infrastructure that should
be put in place for managing a failure during the millennium event itself.
Costs associated with efforts to prepare J.P. Morgan's systems for the
year 2000 approximated $95 million in 1997 and $112 million for the first nine
months of 1998. In 1999, J.P. Morgan is continuing its efforts to prepare its
systems for the year 2000. The total cost to become year-2000 compliant is
estimated at $300 million (for firmwide systems upgrade, not just for systems
relating to mutual funds), for internal systems renovation and testing, testing
equipment, and both internal and external resources working on the
<PAGE>
project. The costs associated with J.P. Morgan becoming year-2000 compliant
will be borne by J.P. Morgan and not the Funds.
The Euro. Effective January 1, 1999 the euro, a single multinational
currency, replaced the national currencies of certain countries in the Economic
Monetary Union (EMU).
J.P. Morgan will monitor potential currency risk resulting from
increased volatility in exchange rates between EMU countries and
non-participating countries.
The I.R.S has concluded that euro conversion will not cause a U.S.
taxpayer to realize gain or loss to the extent taxpayer's rights and obligations
are altered solely by reason of the conversion.
FINANCIAL STATEMENTS
The financial statements and the report thereon of
PricewaterhouseCoopers LLP are incorporated herein by reference to the Fund's
October 31, 1998 annual report filing made with the SEC on January 4, 1999
pursuant to Section 30(b) of the 1940 Act and Rule 30b2-1 thereunder (Accession
Number 0001047469-99-000033). The financial statements are available without
charge upon request by calling J.P. Morgan Funds Services at (800) 521-5411.
<PAGE>
APPENDIX A
Description of Security Ratings
STANDARD & POOR'S
Corporate and Municipal Bonds
AAA - Debt rated AAA have the highest ratings assigned by Standard & Poor's to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA - Debt rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in a small degree.
A - Debt rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB - Debt rated BBB are regarded as having an adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB - Debt rated BB are regarded as having less near-term vulnerability to
default than other speculative issues. However, they face major ongoing
uncertainties or exposure to adverse business, financial or economic conditions
which could lead to inadequate capacity to meet timely interest and principal
payments.
B - An obligation rated B is more vulnerable to nonpayment than obligations
rated BB, but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
Commercial Paper
A - Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designations 1, 2, and 3 to indicate the relative degree of safety.
A-1 - This designation indicates that the degree of safety regarding timely
payment is very strong.
MOODY'S
Corporate and Municipal Bonds
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
<PAGE>
Aa - Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Commercial Paper
Prime-1 - Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
- Leading market positions in well established industries. - High rates of
return on funds employed. - Conservative capitalization structures with moderate
reliance on debt and ample asset protection. - Broad margins in earnings
coverage of fixed financial charges and high internal cash generation. - Well
established access to a range of financial markets and assured sources of
alternate liquidity.
