As filed with the U.S. Securities and Exchange Commission on September 28, 1999
Registration Nos. 333-11125 and 811-07795
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 20
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 21
J.P. MORGAN SERIES TRUST
(formerly JPM Series Trust)
(Exact Name of Registrant as Specified in Charter)
60 State Street, Suite 1300, Boston, Massachusetts 02109
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (617) 557-0700
Margaret W. Chambers, c/o Funds Distributor, Inc.
60 State Street, Suite 1300, Boston, Massachusetts 02109
(Name and Address of Agent for Service)
Copy to: John E. Baumgardner, Jr., Esq.
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
It is proposed that this filing will become effective (check appropriate box):
[ ] Immediately upon filing pursuant to paragraph (b)
[X] on October 1, 1999 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of Rule 485.
EXPLANATORY NOTE
This post-effective amendment No. 20 to the registration statement of J.P.
Morgan Series Trust (the "Registrant") on Form N-1A to update the registrant's
disclosure in the Prospectuses and Statement of Additional Information relating
to the J.P. Morgan California Bond Fund (the "Fund"), a series of shares of the
Registrant, to include updated financial information for the fiscal year ended
May 31, 1999 and to update other information in the registration statement.
<PAGE>
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
OCTOBER 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
SmartIndex(TM) 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. JPMorgan
<PAGE>
- --------------------------------------------------------------------------------
<PAGE>
CONTENTS
- --------------------------------------------------------------------------------
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
J.P. Morgan Institutional SmartIndex(TM) 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 Institutional 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
Performance of private accounts ............................................ 18
Risk and reward elements ................................................... 20
Financial Highlights ....................................................... 22
FOR MORE INFORMATION ............................................... back cover
<PAGE>
J.P. MORGAN INSTITUTIONAL
DISCIPLINED EQUITY FUND | TICKER SYMBOL: JPIEX
- --------------------------------------------------------------------------------
[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 20-21.
[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]
PRINCIPAL STRATEGIES
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.
PRINCIPAL RISKS
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.
<PAGE>
REGISTRANT: J.P. MORGAN INSTITUTIONAL FUNDS
(J.P. MORGAN INSTITUTIONAL DISCIPLINED EQUITY FUND)
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $326
billion, including more than $27 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.
- --------------------------------------------------------------------------------
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>
- --------------------------------------------------------------------------------
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 some of the risks by showing the performance of the
fund's shares during its first complete calendar year of operations.
The table indicates some of 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%
32.35
30%
20%
10%
0%
- --------------------------------------------------------------------------------
[ ] J.P. MORGAN INSTITUTIONAL DISCIPLINED EQUITY FUND
The fund's year-to-date total return as of 6/30/99 was 12.91%. 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).
<TABLE>
<CAPTION>
Average annual total return (%) Shows performance over time, for periods ended December 31, 1998
- ------------------------------------------------------------------------------------------------------
Past 1 yr. Life of fund(1)
<S> <C> <C>
J.P. Morgan Institutional Disciplined Equity Fund (after expenses) 32.35 30.46
- ------------------------------------------------------------------------------------------------------
S&P 500 Index (no expenses) 28.58 28.37
- ------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
The expenses of the fund before and after 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 0.35
Marketing (12b-1) fees none
Other expenses 0.25
- --------------------------------------------------------------------------------
Total operating expenses 0.60
Fee waiver and
expense reimbursement(4) 0.15
- --------------------------------------------------------------------------------
Net expenses(4) 0.45
- --------------------------------------------------------------------------------
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:
$10,000 initial investment, 5% return each year, net expenses for the first 12
months and total operating expenses thereafter, and all shares sold at the end
of each time period. The example is for comparison only; the fund's actual
return and your actual costs may be higher or lower.
- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 46 177 320 736
- --------------------------------------------------------------------------------
(1) The fund commenced operations on 1/3/97 and life of fund performance is
calculated as of 1/31/97.
(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.
(4) Reflects an agreement dated 10/1/99 by Morgan Guaranty Trust Company of New
York ("Morgan Guaranty"), an affiliate of J.P. Morgan, to reimburse the fund
to the extent expenses (excluding extraordinary expenses) exceed 0.45% of
the fund's average daily net assets through 9/30/00.
J.P. MORGAN INSTITUTIONAL DISCIPLINED EQUITY FUND | 3
<PAGE>
J.P. MORGAN INSTITUTIONAL
U.S. EQUITY FUND | TICKER SYMBOL: JMUEX
- --------------------------------------------------------------------------------
[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 20-21.
[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]
PRINCIPAL STRATEGIES
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.
PRINCIPAL RISKS
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.
<PAGE>
REGISTRANT: J.P. MORGAN INSTITUTIONAL FUNDS
(J.P. MORGAN INSTITUTIONAL U.S. EQUITY FUND)
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $326
billion, including more than $15 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>
- --------------------------------------------------------------------------------
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 some of 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 some of 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%
31.40 34.12 32.83
30%
28.58
21.22
24.79
20%
11.06
10%
8.73
1.38
0%
(0.32)
(10%)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
[ ] J.P. Morgan Institutional U.S. Equity Fund
The fund's year-to-date total return as of 6/30/99 was 14.75%. For the period
covered by this year-by-year total return chart, the fund's highest quarterly
return was 21.46% (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)
- -------------------------------------------------------------------------------------------------------------
Past 1 yr. Past 5 yrs. Past 10 yrs.
<S> <C> <C> <C>
J.P. Morgan Institutional U.S. Equity Fund (after expenses) 24.79 20.83 18.71
- -------------------------------------------------------------------------------------------------------------
S&P 500 Index (no expenses) 28.58 24.06 19.21
- -------------------------------------------------------------------------------------------------------------
</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 0.40
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 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 0.20%
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
- --------------------------------------------------------------------------------
[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 20-21.
[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.
[GRAPHIC OMITTED]
PRINCIPAL STRATEGIES
Investment Approach
The fund invests primarily in small and medium sized U.S. companies whose market
capitalizations are greater than $100 million and less than $2 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.
PRINCIPAL RISKS
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.
<PAGE>
REGISTRANT: J.P. MORGAN INSTITUTIONAL FUNDS
(J.P. MORGAN INSTITUTIONAL U.S. SMALL COMPANY FUND)
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $326
billion, including more than $3.8 billion using similar strategies as the fund.
The portfolio management team is led by Marian U. Pardo, managing director,
Denise Higgins, vice president, and Alexandra F. Wells, vice president. 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. Ms. Higgins joined the
team in February 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. Wells joined
the team in March 1998 and has been with J.P. Morgan since 1992. Prior to
managing the fund, Ms. Wells managed large cap equity portfolios, and prior to
that served as an equity research analyst.
- --------------------------------------------------------------------------------
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 FUND
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE (unaudited)
The bar chart and table shown below provide some indication of the risks of
investing in J.P. Morgan Institutional U.S. Small Company Fund.
The bar chart indicates some of 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 some of 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.
<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
31.88
30%
29.01 20.84 22.70
18.98
8.59
0%
(5.81) (5.28)
(24.34)
(30%)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
[ ] J.P. Morgan Institutional U.S. Small Company Fund
The fund's year-to-date total return as of 6/30/99 was 6.18%. 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 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
- ---------------------------------------------------------------------------------------------------------------------
</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 0.60
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 1,049
- --------------------------------------------------------------------------------
(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 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 0.20%
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
- --------------------------------------------------------------------------------
[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 20-21.
[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]
PRINCIPAL STRATEGIES
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 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 13.) 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 13.
PRINCIPAL RISKS
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.
<PAGE>
REGISTRANT: J.P. MORGAN SERIES TRUST
(J.P. MORGAN TAX AWARE DISCIPLINED EQUITY FUND:
INSTITUTIONAL SHARES)
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $326
billion, including more than $27 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 some of the risks by showing changes in the performance
of the fund's shares during its first complete calendar year of operations.
The table indicates some of 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(1,2)
- --------------------------------------------------------------------------------
1998
40%
31.82
20%
0%
- --------------------------------------------------------------------------------
[ ] J.P. Morgan Institutional Tax Aware Disciplined Equity Fund
The fund's year-to-date total return as of 6/30/99 was 13.53%. 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).
<TABLE>
<CAPTION>
Average annual total return (%) Shows performance over time, for periods ended December 31, 1998
- ------------------------------------------------------------------------------------------------------------------
Past 1 yr. Life of fund(1)
<S> <C> <C>
J.P. Morgan Institutional Tax Aware Disciplined Equity Fund (after expenses) 31.82 31.26
- ------------------------------------------------------------------------------------------------------------------
S&P 500 Index (no expenses) 28.58 28.37
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
The expenses of the fund before and after 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 operating expenses 1.02
Fee waiver and
expense reimbursement(3) 0.47
- --------------------------------------------------------------------
Net expenses(3) 0.55
- --------------------------------------------------------------------
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:
$10,000 initial investment, 5% return each year, net expenses for the first 12
months and total operating expenses thereafter, and all shares sold at the end
of each time period. In the one year example, the first number assumes that you
continued to hold your shares, the second that you sold all shares for cash at
the end of the period. The example is for comparison only; the fund's actual
return and your actual costs may be higher or lower.
- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 56/156 278 518 1,205
- --------------------------------------------------------------------------------
(1) The fund commenced operations on 1/30/97, and returns reflect performance
of the fund from 1/31/97.
(2) The fund's fiscal year end is 10/31.
(3) Reflects an agreement dated 10/1/99 by Morgan Guaranty Trust Company of New
York ("Morgan Guaranty"), an affiliate of J.P. Morgan, to reimburse the
fund to the extent expenses (excluding extraordinary expenses) exceed 0.55%
of the fund's average daily net assets through 9/30/00.
J.P. MORGAN INSTITUTIONAL TAX AWARE DISCIPLINED EQUITY FUND | 9
<PAGE>
J.P. MORGAN INSTITUTIONAL
SMARTINDEX(TM) 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 20-21.
[GRAPHIC OMITTED]
GOAL
The fund's goal is to provide a consistently high total return from a broadly
diversified portfolio of approximately 350 equity securities while maintaining
risk characteristics similar to the S&P 500. This goal can be changed without
shareholder approval.
[GRAPHIC OMITTED]
PRINCIPAL STRATEGIES
Investment Approach
The fund invests primarily in large and medium capitalization U.S. and foreign
companies included in the S&P 500. While the fund seeks to invest in a portfolio
of stocks with risk characteristics similar to the S&P 500, the fund may invest
a portion of its assets in stocks which are not part of the index. The fund's
sector weightings are expected to be similar to those of the S&P 500. Within
each industry, the fund may moderately overweight stocks that appear undervalued
or fairly valued and underweight or not hold stocks that appear overvalued,
according to the investment process described on page 13. Accordingly, the
fund's performance is expected to differ from that of the S&P 500. The fund
expects to ordinarily hold a portfolio of approximately 350 stocks. The fund
generally considers selling stocks that appear significantly overvalued.
By controlling the sector weightings of the fund so they can differ only
moderately from the sector weightings of the S&P 500, the fund seeks to limit
its volatility to that of the overall market, as represented by this index.
PRINCIPAL RISKS
The value of your investment in the fund will fluctuate in response to movements
in the stock market. Fund performance also will depend on the effectiveness of
J.P. Morgan's research and the management team's stock picking decisions.
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>
REGISTRANT: J.P. MORGAN SERIES TRUST
(J.P. MORGAN SMARTINDEX FUND: INSTITUTIONAL SHARES)
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $326
billion, including more than $23 billion using the same strategy as the fund.
The portfolio management team is led by James C. Wiess and Timothy J. Devlin,
both vice presidents. 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.
10 | J.P. MORGAN INSTITUTIONAL SMARTINDEX FUND
<PAGE>
- --------------------------------------------------------------------------------
INVESTOR EXPENSES The estimated expenses of the fund before and after
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 0.25
Marketing (12b-1) fees none
Other expenses 5.19
- --------------------------------------------
Total operating expenses 5.44
Fee waiver and
expense reimbursement(2) 5.09
- --------------------------------------------
Net expenses(2) 0.35
- --------------------------------------------
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:
$10,000 initial investment, 5% return each year, net expenses for the first 12
months and total operating expenses thereafter, and all shares sold at the end
of each time period. The example is for comparison only; the fund's actual
return and your actual costs may be higher or lower.
- -------------------------------------------
1 yr. 3 yrs.
Your cost($) 36 1,169
- -------------------------------------------
(1) This table shows the fund's estimated expenses expressed as a
percentage of the
fund's estimated average net assets.
(2) Reflects an agreement dated 10/1/99 by Morgan Guaranty Trust Company of New
York ("Morgan Guaranty"), an affiliate of J.P. Morgan, to reimburse the
fund to the extent expenses (excluding extraordinary expenses) exceed 0.35%
of the fund's average daily net assets through 9/30/00.
J.P. MORGAN INSTITUTIONAL SMARTINDEX(TM) 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 380 analysts and portfolio managers
around the world and has more than $326 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.
<PAGE>
- --------------------------------------------------------------------------------
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.
o U.S. Small Company Fund
o U.S. Equity Fund
Return
o Tax Aware Disciplined Equity Fund
o Disciplined Equity Fund
o SmartIndex(TM) Fund
------------------------------------------------------------------------
Risk
12 | U.S. EQUITY MANAGEMENT APPROACH
<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 Disciplined Equity 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 Disciplined Equity Fund generally intends to pay redemption
proceeds in cash; however it reserves the right at its sole discretion to pay
redemptions over $250,000 in-kind as a portfolio of representative stocks rather
than cash. An in-kind redemption payment can shield the fund -- and other
shareholders -- from tax liabilities that might otherwise be incurred. It is not
subject to a redemption fee by the fund. However, the stocks received will
continue to fluctuate in value after redemption and will be subject to brokerage
or other transaction costs when liquidated.
U.S. EQUITY MANAGEMENT APPROACH | 13
<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, Tax
Aware Disciplined Equity and SmartIndex(TM) 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.
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.
<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 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 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 securityis 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 | 15
<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 15) 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, Tax Aware Disciplined Equity and SmartIndex(TM) 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.
<PAGE>
Dividends and distributions are reinvested in additional fund shares.
Alternatively, you may instruct your financial professional or J.P. Morgan Funds
Services to have them sent to you by check, credited to a separate account, or
invested in another J.P. Morgan Institutional Fund.
TAX CONSIDERATIONS
In general, selling shares for cash, exchanging shares, and receiving
distributions (whether reinvested or taken in cash) are all taxable events.
These transactions typically create the following tax liabilities for taxable
accounts:
- -----------------------------------------------------------------
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 Disciplined Equity and
SmartIndex(TM) funds) 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 Disciplined Equity and SmartIndex(TM) funds are each 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.
<PAGE>
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%
- --------------------------------------------------------------------------------
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 Disciplined Equity and SmartIndex(TM) funds, subject to the
expense reimbursements described earlier in this prospectus, pay J.P. Morgan the
following fees for investment advisory and other services:
- --------------------------------------------------------------------------------
Advisory services Percentage of the fund's
average net assets
Tax Aware Disciplined Equity 0.35%
SmartIndex(TM) 0.25%
- --------------------------------------------------------------------------------
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.
FUND DETAILS | 17
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
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. While the funds cannot predict at
this time the degree of impact, it is possible that foreign markets will be less
prepared than those in the U.S.
PERFORMANCE OF PRIVATE ACCOUNTS
The Disciplined Equity Fund's investment objective and policies are
substantially similar to those used by J.P. Morgan in managing certain
discretionary investment management accounts. The chart below shows the
historical investment performance for a composite of these private accounts.
The performance of the Disciplined Equity Private Account Composite (the
"Disciplined Equity Composite") does not represent the fund's performance nor
should it be interpreted as indicative of the fund's future performance. The
accounts in the Disciplined Equity Composite are not subject to the same
limitations imposed on mutual funds. If the accounts included in the Disciplined
Equity Composite had been subject to these limitations, their performance might
have been lower.
The performance of the Disciplined Equity Composite reflects the deductions of
the fund's total operating expenses, after expense reimbursement.
<TABLE>
<CAPTION>
Annual Total Returns for the Year Ended December 31,
1990 1991 1992 1993 1994 1995 1996
1997 1998
<S> <C> <C> <C> <C> <C> <C> <C>
<C> <C>
Disciplined Equity
Private Account Composite -2.94% 30.39% 11.75% 10.20% 2.21% 37.87% 23.26%
33.37% 31.91%
- -----------------------------------------------------------------------------------------------------------------------------------
S&P 500 -3.11% 30.47% 7.62% 10.08% 1.32% 37.58% 22.96%
33.36% 28.58%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Disciplined Equity Composite currently includes all discretionary accounts
managed by J.P. Morgan using substantially similar investment strategy as the
Disciplined Equity Fund. The inception date for the Disciplined Equity Composite
was October 31, 1989. Prior to January 1, 1993, when AIMR requirements went into
effect, the composite may not have included all discretionary accounts.
<PAGE>
The SmartIndex(TM) Fund's investment objective and policies are substantially
similar to those used by J.P. Morgan in managing certain discretionary
investment management accounts. The chart below shows the historical investment
performance for a composite of these private accounts.
The performance of the SmartIndex(TM) Private Account Composite (the
"SmartIndex(TM) Composite") does not represent the fund's performance nor should
it be interpreted as indicative of the fund's future performance. The accounts
in the SmartIndex(TM) Composite are not subject to the same limitations imposed
on mutual funds. If the accounts included in the SmartIndex(TM) Composite had
been subject to these limitations, their performance might have been lower.
The performance of the SmartIndex(TM) Composite reflects the deduction of the
fund's total annual operating expenses, after expense reimbursements.
<TABLE>
<CAPTION>
Annual Total Returns for the Year Ended December 31,
1989 1990 1991 1992 1993 1994 1995 1996
1997 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C>
<C> <C>
SmartIndex(TM)Fund 1989 1990 1991 1992 1993 1994 1995 1996
1997 1998
Private Account Composite 30.24% -2.43% 29.76% 9.94% 10.44% 2.27% 38.38% 23.72%
33.98% 31.64%
- ------------------------------------------------------------------------------------------------------------------------------
S&P 500 Index 31.69% -3.11% 30.47% 7.62% 10.08% 1.32% 37.58% 22.96%
33.36% 28.58%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The SmartIndex(TM) Composite currently includes all discretionary accounts
managed by J.P. Morgan using the same investment strategy as the fund. The
inception date for the SmartIndex(TM) Composite was December 31, 1988. Prior to
January 1, 1993, when AIMR requirements went into effect, the composite may not
have included all discretionary accounts.
18 | FUND DETAILS
<PAGE>
- --------------------------------------------------------------------------------
(THIS PAGE IS INTENTIONALLY LEFT BLANK)
| 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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Potential risks Potential rewards Policies to balance risk and reward
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Market
conditions
o Each fund's share price and o Stocks have generally outperformed o Under normal circumstances the funds plan
performance will fluctuate in more stable investments (such as to remain fully invested, with at least
response to stock market movements bonds and cash equivalents) over 65% in stocks; stock investments may
the long term include U.S. and foreign common stocks,
o Adverse market conditions may from convertible securities, preferred stocks,
time to time cause a fund to take trust or partnership interests, warrants,
temporary defensive positions that rights, and investment company securities
are inconsistent with its principal
investment strategies and may o The funds seek to limit risk through
hinder a fund from achieving its diversification
investment objective
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 o J.P. Morgan focuses its active management
benchmark due to its securities and benchmark due to these same choices on securities selection, the area where
asset allocation choices 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 foreign investments will not exceed 20%
losses of assets
o A fund could lose money because
of foreign government actions, o Foreign investments, which o Each fund actively manages the currency
political instability, or lack of represent a major portion of the exposure of its foreign investments
adequate and accurate information world's securities, offer relative to its benchmark, and may hedge
attractive potential performance back into the U.S. dollar from time to
and opportunities for time (see also "Derivatives")
diversification
- ---------------------------------------------------------------------------------------------------------------------------------
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 offset leverage risk
could be exposed to leverage risk opportunities
if it does not use segregated
accounts
- ---------------------------------------------------------------------------------------------------------------------------------
Short-term trading
o Increased trading would raise a o A fund could realize gains in a o The funds generally avoid short-term
fund's brokerage and related costs short period of time trading, except to take advantage of
attractive or unexpected opportunities or
o Increased short-term capital gains o A fund could protect against losses to meet demands generated by shareholder
distributions would raise if a stock is overvalued and its activity. The turnover rate for each fund
shareholders' income tax liability value later falls for its most recent fiscal year end is as
follows: Disciplined Equity (51%), U.S.
Equity (84%), and U.S. Small Company(104%).
</TABLE>
20 | FUND DETAILS
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Potential risks Potential rewards Policies to balance risk and
reward
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Derivatives
o Derivatives such as futures, o Hedges that correlate well with o The funds use derivatives for hedging and
options, swaps, and forward foreign underlying positions can reduce or for risk management (i.e., to establish
currency contracts that are used eliminate losses at low cost or adjust exposure to particular
for hedging the portfolio or securities, markets or currencies); risk
specific securities may not fully o A fund could make money and protect management may include management of a
offset the underlying positions1 against losses if management's fund's exposure relative to its benchmark
and this could result in losses to analysis proves correct
the fund that would not have o The funds only establish hedges that they
otherwise occurred o Derivatives that involve leverage expect will be highly correlated with
could generate substantial gains at underlying positions
o Derivatives used for risk low cost
management may not have the o While the funds may use derivatives that
intended effects and may result in incidentally involve leverage, they do
losses or missed opportunities not use them for the specific purpose of
leveraging their portfolios
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, there o A fund may enhance income through o J.P. Morgan maintains a list of approved
is a risk that the loaned the investment of the collateral borrowers
securities may not be returned if received from the borrower
the borrower defaults o The fund receives collateral equal to at
least 100% of the current value of
o The collateral will be subject to securities loaned
the risks of the securities in
which it is invested o The lending agentsindemnify 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
- ------------------------------------------------------------------------------------------------------------------------------------
Illiquid holdings
o A fund could have difficulty o These holdings may offer more o No fund may invest more than 15% of net
valuing these holdings precisely attractive yields or potential assets in illiquid holdings
growth than comparable widely
o A fund could be unable to sell traded securities o To maintain adequate liquidity to meet
these holdings at the time or price redemptions, each fund may hold
it 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 331/3% 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 | 21
<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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
J.P. MORGAN INSTITUTIONAL DISCIPLINED EQUITY FUND
Per-share data For fiscal periods ended May 31
- ----------------------------------------------------------------------------------------------
1997(1) 1998 1999
<S> <C> <C> <C>
Net asset value, beginning of period ($) 10.00 11.47 14.96
- ----------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.04 0.12 0.17
Net realized and unrealized gain
on investment ($) 1.43 3.62 3.18
- ----------------------------------------------------------------------------------------------
Total from investment operations ($) 1.47 3.74 3.35
- ----------------------------------------------------------------------------------------------
Less distributions to shareholders from:
Net investment income ($) -- (0.12) (0.15)
Net realized gains ($) -- (0.13) (0.59)
- ----------------------------------------------------------------------------------------------
Total distributions to shareholders ($) -- (0.25) (0.74)
- ----------------------------------------------------------------------------------------------
Net asset value, end of period ($) 11.47 14.96 17.57
- ----------------------------------------------------------------------------------------------
Ratios and supplemental data
- ----------------------------------------------------------------------------------------------
Total return (%) 14.70(2) 32.98 23.07
- ----------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 49,726 296,191 1,008,435
- ----------------------------------------------------------------------------------------------
Ratio to average net assets:
- ----------------------------------------------------------------------------------------------
Net expenses (%) 0.45(3) 0.45 0.45
- ----------------------------------------------------------------------------------------------
Net investment income (%) 1.58(3) 1.27 1.14
- ----------------------------------------------------------------------------------------------
Expenses without reimbursement (%) 1.34(3) 0.72 0.60
- ----------------------------------------------------------------------------------------------
</TABLE>
(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 years ended May 31
- -----------------------------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
<S> <C> <C> <C> <C>
<C>
Net asset value, beginning of year ($) 10.92 12.10 14.00 15.66
16.73
- -----------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.18 0.27 0.17 0.15
0.16
Net realized and unrealized gain
on investment ($) 1.42 2.66 3.02 3.81
2.39
- -----------------------------------------------------------------------------------------------------------------------
Total from investment operations ($) 1.60 2.93 3.19 3.96
2.55
- -----------------------------------------------------------------------------------------------------------------------
Less distributions to shareholders from:
Net investment income ($) (0.14) (0.20) (0.25) (0.18)
(0.17)
Net realized gains ($) (0.28) (0.83) (1.28) (2.71)
(4.03)
- -----------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders ($) (0.42) (1.03) (1.53) (2.89)
(4.20)
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, end of year ($) 12.10 14.00 15.66 16.73
15.08
- -----------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------------------------
Total return (%) 15.40 25.43 25.21 28.53
18.66
- -----------------------------------------------------------------------------------------------------------------------
Net assets, end of year ($ thousands) 172,497 221,368 329,776 378,988
278,253
- -----------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
- -----------------------------------------------------------------------------------------------------------------------
Net expenses (%) 0.60 0.60 0.60 0.60
0.60
- -----------------------------------------------------------------------------------------------------------------------
Net investment income (%) 2.07 2.08 1.33 0.89
0.89
- -----------------------------------------------------------------------------------------------------------------------
Expenses without reimbursement (%) 0.71 0.62 0.65 0.63
0.63
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
22 | FUND DETAILS
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
J.P. MORGAN INSTITUTIONAL U.S. SMALL COMPANY
FUND
Per-share data For fiscal years ended May
31
- ------------------------------------------------------------------------------------------------------------------------------
1995 1996 1997
1998 1999
<S> <C> <C> <C>
<C> <C>
Net asset value, beginning of year ($) 10.03 11.16 13.97
14.09 15.30
- ------------------------------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income ($) 0.10 0.13 0.10
0.09 0.08
Net realized and unrealized gain
(loss)
on investment ($) 1.12 3.66 1.07
3.04 (1.83)
- ------------------------------------------------------------------------------------------------------------------------------
Total from investment operations ($) 1.22 3.79 1.17
3.13 (1.75)
- ------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders
from
Net investment income ($) (0.09) (0.12) (0.13)
(0.08) (0.08)
Net realized gain ($) -- (0.86) (0.92)
(1.84) (1.49)
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders ($) (0.09) (0.98) (1.05)
(1.92) (1.57)
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year ($) 11.16 13.97 14.09
15.30 11.98
- ------------------------------------------------------------------------------------------------------------------------------
Ratios and supplemental
data
- ------------------------------------------------------------------------------------------------------------------------------
Total return (%) 12.26 35.60 9.44
23.55 (10.79)
- ------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year ($ thousands) 149,279 291,931 401,797
420,413 344,776
- ------------------------------------------------------------------------------------------------------------------------------
Ratio to average net
assets:
- ------------------------------------------------------------------------------------------------------------------------------
Net expenses (%) 0.80 0.80 0.80
0.80 0.80
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (%) 1.14 1.20 0.81
0.55 0.55
- ------------------------------------------------------------------------------------------------------------------------------
Expenses without reimbursement and including interest expense (%) 0.91 0.83 0.85
0.85 0.85
- ------------------------------------------------------------------------------------------------------------------------------
Interest expense (%) -- -- --
0.00(1) --
- ------------------------------------------------------------------------------------------------------------------------------
- -------------------
(1) Less than 0.01%.
<PAGE>
- -----------------------------------------------------------------------------------------------------
J.P. MORGAN INSTITUTIONAL TAX AWARE DISCIPLINED EQUITY FUND
Per-share data For fiscal periods ended
- -----------------------------------------------------------------------------------------------------
10/31/97(1) 10/31/98 4/30/99
(unaudited)
<S> <C> <C> <C>
Net asset value, beginning of period ($) 10.00 12.08 14.71
- -----------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.06 0.11 0.07
Net realized and unrealized gain
on investment ($) 2.02 2.68 3.50
- -----------------------------------------------------------------------------------------------------
Total from investment operations ($) 2.08 2.79 3.57
- -----------------------------------------------------------------------------------------------------
Less distributions to shareholders from:
Net investment income ($) -- (0.16) (0.07)
- -----------------------------------------------------------------------------------------------------
Net asset value, end of period ($) 12.08 14.71 18.21
- -----------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------
Total return (%) 20.80(2) 23.26 24.31(2)
- -----------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 12,026 90,079 221,633
- -----------------------------------------------------------------------------------------------------
Ratio to average net assets:
- -----------------------------------------------------------------------------------------------------
Net expenses (%) 0.55(3) 0.55 0.55(3)
- -----------------------------------------------------------------------------------------------------
Net investment income (%) 1.19(3) 0.97 0.84(3)
- -----------------------------------------------------------------------------------------------------
Expenses without reimbursement (%) 4.59(3) 1.02 0.67(3)
- -----------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 35 57 19
- -----------------------------------------------------------------------------------------------------
</TABLE>
- -------------------
(1) The fund commenced operations on 1/30/97.
(2) Not annualized.
(3) Annualized.
FUND DETAILS | 23
<PAGE>
- --------------------------------------------------------------------------------
J.P. MORGAN INSTITUTIONAL SMARTINDEX(TM) FUND
Per-share data For fiscal period ended May 31
- --------------------------------------------------------------------------------
1999(1)
Net asset value, beginning of period ($) 15.00
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.07
- --------------------------------------------------------------------------------
Net realized and unrealized gain
on investment ($) 1.02
- --------------------------------------------------------------------------------
Total from investment operations ($) (1.09)
- --------------------------------------------------------------------------------
Less distributions to shareholders from:
Net Investment income (0.03)
- --------------------------------------------------------------------------------
Net asset value, end of period ($) 16.06
- --------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------
Total return (%) 7.27(2)
- --------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 5,36(3)
- --------------------------------------------------------------------------------
Ratios to average net assets:
- --------------------------------------------------------------------------------
Net Expenses (%) 0.35(3)
- --------------------------------------------------------------------------------
Net investment income(%) 1.13(3)
- --------------------------------------------------------------------------------
Expenses without reimbursement (%) 5.44(3)
- --------------------------------------------------------------------------------
Portfolio turnover (%) 19
- --------------------------------------------------------------------------------
- -------------------
(1) The fund commenced operations on 12/31/98.
(2) Not annualized.
(3) Annualized.
24 | FUND DETAILS
<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 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:
<TABLE>
<CAPTION>
<S> <C>
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 SmartIndex(TM) Fund .................... 811-07795 and 333-11125
</TABLE>
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
IM0587
<PAGE>
OCTOBER 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. JPMorgan
<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
Performance of private accounts ................................... 18
Risk and reward elements .......................................... 20
Financial highlights .............................................. 22
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)
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 20-21.
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.
PRINCIPAL STRATEGIES
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.
PRINCIPAL RISKS
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.
<PAGE>
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $326
billion, including more than $27 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 some of the risks by showing the performance of the
fund's shares during its first complete calendar year of operations.
The table indicates some of 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(1,3)
- --------------------------------------------------------------------------------
1998
40% 31.98
30%
20%
10%
0%
- --------------------------------------------------------------------------------
[ ] J.P. Morgan Disciplined Equity Fund
The fund's year-to-date total return as of 6/30/99 was 12.79%. 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).
<TABLE>
<CAPTION>
Average annual total return (%) Shows performance over time, for periods ended
December 31, 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Past 1 yr. Life of fund(2)
J.P. Morgan Disciplined Equity Fund (after expenses) 31.98 30.27
- -------------------------------------------------------------------------------------------------
S&P 500 Index (no expenses) 28.58 28.37
- -------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
INVESTOR EXPENSES
The expenses of the fund before and after 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(4) (%)
(expenses that are deducted from fund assets)
Management fees 0.35
Marketing (12b-1) fees none
Other expenses 0.51
- --------------------------------------------------------------------
Total operating expenses 0.86
Fee waiver and
expense reimbursement(5) 0.11
- --------------------------------------------------------------------
Net expenses (5) 0.75
- --------------------------------------------------------------------
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:
$10,000 initial investment, 5% return each year, net expenses for the first 12
months and total operating expenses thereafter, and all shares sold at the end
of each time period. The example is for comparison only; the fund's actual
return and your actual costs may be higher or lower.
- ------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 77 263 466 1,051
- ------------------------------------------------------------
(1) The fund commenced operations on 12/31/97.
(2) Life of the fund performance is calculated commencing 1/31/97 as follows:
all performance data from 12/31/97 is that of the fund, and 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.
(3) The fund's fiscal year end is 5/31.
(4) 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.
(5) Reflects an agreement dated 10/1/99 by Morgan Guaranty Trust Company of New
York ("Morgan Guaranty"), an affiliate of J.P. Morgan, to reimburse the
fund to the extent expenses (excluding extraordinary expenses) exceed 0.75%
of the fund's average daily net assets through 9/30/00.
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)
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 20-21.
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.
PRINCIPAL STRATEGIES
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.
PRINCIPAL RISKS
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.
<PAGE>
PORTFOLIO MANAGEMENT
The fund's assets are managed by J.P. Morgan, which currently manages over $326
billion, including more than $15 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 some of 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 some of 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)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
40%
34.12
30% 31.40 32.48
28.41 24.45
20% 21.06
10% 11.02
8.73
0% 1.38
(0.61)
(10%)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
[ ] J.P. Morgan U.S. Equity Fund
The fund's year-to-date total return as of 6/30/99 was 14.65%. 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)
- ------------------------------------------------------------------------------------------------------
Past 1 yr. Past 5 yrs. Past 10 yrs.
<S> <C> <C> <C>
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 0.39
- --------------------------------------------------------------------
Total annual fund
operating expenses 0.79
- --------------------------------------------------------------------
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:
$10,000 initial investment, 5% return each year, total operating expenses
unchanged, and all shares sold at the end of each time period. The example is
for comparison only; the fund's actual return and your actual costs may be
higher or lower.
- ----------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 81 252 439 978
- ----------------------------------------------------------------
(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)
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 20-21.
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.
PRINCIPAL STRATEGIES
Investment Approach
The fund invests primarily in small and medium sized U.S. companies whose market
capitalizations are greater than $100 million and less than $2 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.
PRINCIPAL RISKS
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 $326 billion, including more than $3.8
billion using similar strategies as the fund.
The portfolio management team is led by Marian U. Pardo, managing director,
Denise Higgins, vice president, and Alexandra F. Wells, vice president. 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. Ms. Higgins joined the
team in February 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.Wells joined the
team in March 1998 and has been with J.P. Morgan since 1992. Prior to managing
the fund, Ms. Wells managed large cap equity portfolios, and prior to that
served as an equity research analyst.
- --------------------------------------------------------------------
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 some of 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 some of 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.
<TABLE>
<CAPTION>
Year-by-year total return(%) Shows changes in returns by calendar year(1,2)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<C>
1989 1990 1991 1992 1993 1994 1995 1996 1997
1998
60%
59.59
31.86
30%
29.01 22.75
20.75
18.98
0%
(5.89)
8.58
(24.34)
(30%) (5.89)
</TABLE>
[ ] J.P. Morgan U.S. Small Company Fund
The fund's year-to-date total return as of 6/30/99 was 6.10%. 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)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Past 1 yr. Past 5 yrs. Past 10 yrs.
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 0.42
- --------------------------------------------------------------------
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:
$10,000 initial investment, 5% return each year, total operating expenses
unchanged, and all shares sold at the end of each time period. The example is
for comparison only; the fund's actual return and your actual costs may be
higher or lower.
- -------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 104 325 563 1,248
- -------------------------------------------------------------------
(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)
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 20-21.
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.
PRINCIPAL STRATEGIES
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.
PRINCIPAL RISKS
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 medium-
or 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 $326
billion, including more than $1.4 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 Carolyn Jones, 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. Jones
has been with J.P. Morgan since July 1998. Prior to managing this fund, Ms.
Jones served as a portfolio manager in J.P. Morgan's private banking group and
as a product specialist at Merrill Lynch Asset Management.
- ----------------------
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 some of the risks by showing the performance of the
fund's shares during its first complete calendar year of operations.
The table indicates some of 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(1,2)
- -------------------------------------------------------------------
1998
20%
10%
0% 5.21
[ ] J.P. Morgan U.S. Small Company Opportunities Fund
The fund's year-to-date total return as of 6/30/99 was 11.55%. 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
- --------------------------------------------------------------------------------------------------------
Past 1 yr. Life of fund(1)
<S> <C> <C>
J.P. Morgan U.S. Small Company Opportunities Fund (after expenses) 5.21 13.66
- --------------------------------------------------------------------------------------------------------
Russell 2000 Growth Index (no expenses) 1.23 5.69
- --------------------------------------------------------------------------------------------------------
</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 0.47
- --------------------------------------------------------------------
Total annual fund
operating expenses 1.07
- --------------------------------------------------------------------
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:
$10,000 initial investment, 5% return each year, total operating expenses
unchanged, and all shares sold at the end of each time period. The example is
for comparison only; the fund's actual return and your actual costs may be
higher or lower.
- ------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 109 340 590 1,306
- ------------------------------------------------------------------
(1) The fund commenced operations on 6/16/97 and returns reflect performance of
the fund from 6/30/97.
(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 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)
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 20-21.
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.
PRINCIPAL STRATEGIES
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.
PRINCIPAL RISKS
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 $326
billion, including more than $1.7 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 some of 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 some of 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(1,2)
- -----------------------------------------------------------------------------
1997 1998
40%
31.18
30.32
20%
0%
[ ] J.P. Morgan Tax Aware U.S. Equity Fund
The fund's year-to-date total return as of 6/30/99 was 12.82%. 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
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Past 1 yr. Life of fund(1)
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 and after 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
Fee waiver and expense
reimbursement(3) 0.24
- --------------------------------------------------------------------
Net expenses(3) 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:
$10,000 initial investment, 5% return each year, net expenses for the first 12
months and total operating expenses thereafter, and all shares sold at the end
of each time period. In the one year example, the first number assumes that you
continued to hold your shares, the second that you sold all shares for cash at
the end of the period. The example is for comparison only; the fund's actual
return and your actual costs may be higher or lower.
- --------------------------------------------------------------------------------
1 yr. 3 yrs. 5 yrs. 10 yrs.
Your cost($) 87/187 323 578 1,307
- --------------------------------------------------------------------------------
(1) The fund commenced operations on 12/18/96, and returns reflect performance
of the fund from 12/31/96.
(2) The fund's fiscal year end is 10/31.
(3) Reflects an agreement dated 10/1/99 by Morgan Guaranty Trust Company of New
York ("Morgan Guaranty"), an affiliate of J.P. Morgan, to reimburse the fund
to the extent expenses (excluding extraordinary expenses) exceed 0.85% of
the fund's average daily net assets through 9/30/00.
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 380 analysts and portfolio managers
around the world and has more than $326 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.
<PAGE>
Potential risk and return
The positions of the funds in this graph reflect long-term performance goals
only and are relative, not absolute.
Return
U.S. Small Company Opportunities Fund o
U.S. Small Company Fund o
oo Tax Aware U.S. Equity Fund
U.S. Equity Fund
o Disciplined Equity Fund
Risk
12 U.S. EQUITY MANAGEMENT APPROACH
<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:
J.P. Morgan analysts develop proprietary
fundamental research
Research J.P. Morgan takes an in-depth look at company prospects over a
relatively long period -- often as much as five years -- rather than focusing on
near-term expectations. This approach is designed to provide insight into a
company's real growth potential. J.P. Morgan's in-house research is developed by
an extensive worldwide network of over 120 career analysts. The team of analysts
dedicated to U.S. equities includes more than 20 members, with an average of
over ten years of experience.
Stocks in each industry are ranked
with the help of models
Valuation The research findings allow J.P. Morgan to rank the companies in each
industry group according to their relative value. The greater a company's
estimated worth compared to the current market price of its stock, the more
undervalued the company. The valuation rankings are produced with the help of a
variety of models that quantify the research team's findings.
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 U.S. Equity 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 U.S. Equity Fund generally intends to pay redemption proceeds in
cash; however it reserves the right at its sole discretion to pay redemptions
over $250,000 in-kind as a portfolio of representative stocks rather than cash.
An in-kind redemption payment can shield the fund -- and other shareholders
- -from tax liabilities that might otherwise be incurred. It is not subject to a
redemption fee by the fund. However, the stocks received will continue to
fluctuate in value after redemption and will be subject to brokerage or other
transaction costs when liquidated.
U.S. EQUITY MANAGEMENT APPROACH 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.
<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 securityis 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 15
<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 U.S. Equity 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.
<PAGE>
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 U.S. Equity 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 U.S. Equity 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.
<PAGE>
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%
Distributor, Inc.) of the first $7 billion in
J.P.Morgan-advised portfolios,
plus 0.04% of averagenet assets over
$7 billion
- --------------------------------------------------------------------------------
Shareholder services 0.25% of the fund's average net assets
- --------------------------------------------------------------------------------
The Tax Aware U.S. Equity 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
(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.
FUND DETAILS 17
<PAGE>
- --------------------------------------------------------------------------------
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. While the funds cannot predict at
this time the degree of impact, it is possible that foreign markets will be
less prepared than those in the U.S.
PERFORMANCE OF PRIVATE ACCOUNTS
The Disciplined Equity Fund's investment objective and policies are
substantially similar to those used by J.P. Morgan in managing certain
discretionary investment management accounts. The chart below shows the
historical investment performance for a composite of these private accounts.
The performance of the Disciplined Equity Private Account Composite (the
"Composite") does not represent the fund's performance nor should it be
interpreted as indicative of the fund's future performance. The accounts in the
Composite are not subject to the same limitations imposed on mutual funds. If
the accounts included in the Composite had been subject to these limitations,
their performance might have been lower.
The performance of the Composite reflects the deductions of the fund's total
operating expenses, after expense reimbursement.
<TABLE>
<CAPTION>
Annual Total Returns for the Year Ended December 31,
1990 1991 1992 1993 1994 1995 1996
1997 1998
<S> <C> <C> <C> <C> <C> <C> <C>
<C> <C>
Disciplined Equity
Private Account Composite -3.24% 30.01% 11.42% 9.87% 1.90% 37.47% 22.90%
32.97% 31.52%
- -----------------------------------------------------------------------------------------------------------------------------------
S&P 500 -3.11% 30.47% 7.62% 10.08% 1.32% 37.58% 22.96%
33.36% 28.58%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Composite currently includes all discretionary accounts managed by J.P.
Morgan using substantially similar investment strategy as the Disciplined Equity
Fund. The inception date for the Disciplined Equity Private Account Composite
was October 31, 1989. Prior to January 1, 1993, when AIMR requirements went into
effect, the composite may not have included all discretionary accounts.
18 YOUR INVESTMENT
<PAGE>
- --------------------------------------------------------------------------------
(THIS PAGE IS INTENTIONALLY LEFT BLANK
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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Potential risks Potential rewards Policies to balance risk
and reward
- ------------------------------------------------------------------------------------------------------------------------------------
Market conditions
<S> <C> <C>
o Each fund's share price and o Stocks have generally outperformed o Under normal circumstances the funds
performance will fluctuate in more stable investments (such as plan to remain fully invested, with
response to stock market movements bonds and cash equivalents) over the at least 65% in stocks; stock
long term investments may include U.S. and
o Adverse market conditions may from foreign common stocks, convertible
time to time cause a fund to take securities, preferred stocks, trust
temporary defensive positions that or partnership interests, warrants,
are inconsistent with its principal rights, and investment company
investment strategies and may hinder securities
a fund from achieving its investment
objective 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
- ------------------------------------------------------------------------------------------------------------------------------------
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 The funds generally avoid short-term
fund's brokerage and related costs period of time trading, except to take advantage of
attractive or unexpected
o Increased short-term capital gains o A fund could protect against losses opportunities or to meet demands
distributions would raise if a stock is overvalued and its generated by shareholder activity.
shareholders' income tax liability value later falls The turnover rate for each fund for
its most recent fiscal year end is as
follows: Disciplined Equity (51%),
U.S. Equity (84%), U.S. Small Company
(104%), U.S. Small Company
Opportunities (116%), and Tax Aware
U.S. Equity (44%)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
20 FUND DETAILS
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Potential risks Potential rewards Policies to balance risk
and reward
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Derivatives
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 (the U.S. Small Company Opportunities
o Derivatives that involve leverage Fund is permitted to use derivatives,
o Derivatives used for risk management could generate substantial gains at however, it has no current intention
may not have the intended effects and low cost to do so)
may result in losses or missed
opportunities o The funds only establish hedges that
they expect will be highly correlated
o The counterparty to a derivatives with underlying positions
contract could default
o While the funds may use derivatives
o Derivatives that involve leverage that incidentally involve leverage,
could magnify losses they do not use them for the specific
purpose of leveraging their
o Certain types of derivatives involve portfolios
costs to the funds which can reduce
returns
- ------------------------------------------------------------------------------------------------------------------------------------
Securities Lending
o When a fund lends a security, there o A fund may enhance income through the o J.P. Morgan maintains a list of
is a risk that the loaned securities investment of the collateral received approved borrowers
may not be returned if the borrower from the
borrower
defaults o The fund receives collateral equal to
at least 100% of the current value of
o The collateral will be subject to the securities loaned
risks of the securities in which it
is invested 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
- ------------------------------------------------------------------------------------------------------------------------------------
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 331/3% 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 21
<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 May 31
- -------------------------------------------------------------------------------
1998(1) 1999
Net asset value, beginning of period ($) 12.98 14.95
- -------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.03 0.12
Net realized and unrealized gain
on in stment ($) 1.96 3.28
- -------------------------------------------------------------------------------
Total from investment operations ($) 1.99 3.40
- -------------------------------------------------------------------------------
Less distributions to shareholders from:
Net investment income ($) (0.02) (0.09)
Net realized gains ($) -- (0.04)
- -------------------------------------------------------------------------------
Total distributions to shareholders ($) (0.02) (0.13)
- -------------------------------------------------------------------------------
Net asset value, end of period ($) 14.95 18.22
- -------------------------------------------------------------------------------
Ratios and supplemental data
- -------------------------------------------------------------------------------
Total return (%) 15.33(2) 22.86
- -------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 18,037 120,592
- -------------------------------------------------------------------------------
Ratio to average net assets:
Net expenses (%) 0.75(3) 0.75
- -------------------------------------------------------------------------------
Net investment income (%) 1.00(3) 0.89
- -------------------------------------------------------------------------------
Expenses without reimbursement (%) 3.28(3) 0.86
- -------------------------------------------------------------------------------
(1) The fund commenced operations on 12/31/97.
(2) Not annualized.
(3) Annualized.
22 FUND DETAILS
<PAGE>
- --------------------------------------------------------------------------------
J.P. MORGAN U.S. EQUITY FUND
<TABLE>
<CAPTION>
Per-share data For fiscal years ended May 31
- -----------------------------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
<C>
Net asset value, beginning of year ($) 19.38 19.42 22.15 24.63
25.66
- -----------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.32 0.38 0.25 0.18
0.18
Net realized and unrealized gain
on investment ($) 2.17 4.23 4.72 5.92
3.91
- -----------------------------------------------------------------------------------------------------------------------
Total from investment operations ($) 2.49 4.61 4.97 6.10
4.09
- -----------------------------------------------------------------------------------------------------------------------
Less distributions to shareholders from:
Net investment income ($) (0.28) (0.29) (0.36) (0.23)
(0.19)
Net realized gains ($) (2.17) (1.59) (2.13) (4.84)
(4.47)
- -----------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders ($) (2.45) (1.88) (2.49) (5.07)
(4.66)
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, end of year ($) 19.42 22.15 24.63 25.66
25.09
- -----------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------------------------
Total return (%) 15.11 25.18 25.00 28.35
18.39
- -----------------------------------------------------------------------------------------------------------------------
Net assets, end of year ($ thousands) 259,338 330,014 362,603 448,144
440,965
- -----------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
- -----------------------------------------------------------------------------------------------------------------------
Net expenses (%) 0.90 0.81 0.80 0.78
0.79
- -----------------------------------------------------------------------------------------------------------------------
Net investment income (%) 1.74 1.87 1.13 0.71
0.70
- -----------------------------------------------------------------------------------------------------------------------
Expenses without reimbursement (%) 0.91 0.81 0.80 0.78
0.79
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
FUND DETAILS 23
<PAGE>
- --------------------------------------------------------------------------------
J.P. MORGAN U.S. SMALL COMPANY FUND
<TABLE>
<CAPTION>
Per-share data For fiscal periods ended May 31
- -----------------------------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
<S> <C> <C> <C> <C>
<C>
Net asset value, beginning of period ($) 21.40 22.02 26.20 26.04
27.68
- -----------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.22 0.26 0.18 0.11
0.08
Net realized and unrealized gain (loss)
on investment ($) 2.13 6.96 2.00 5.58
(3.30)
- -----------------------------------------------------------------------------------------------------------------------
Total from investment operations ($) 2.35 7.22 2.18 5.69
(3.22)
- -----------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income ($) (0.21) (0.26) (0.21) (0.14)
(0.08)
Net realized gain ($) (1.52) (2.78) (2.13) (3.91)
(2.84)
- -----------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders ($) (1.73) (3.04) (2.34) (4.05)
(2.92)
- -----------------------------------------------------------------------------------------------------------------------
Net asset value, end of period ($) 22.02 26.20 26.04 27.68
21.54
- -----------------------------------------------------------------------------------------------------------------------
Ratios and supplemental data
- -----------------------------------------------------------------------------------------------------------------------
Total return (%) 12.28 35.48 9.49 23.37
(10.95)
- -----------------------------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 179,130 220,917 237,985 261,804
186,879
- -----------------------------------------------------------------------------------------------------------------------
Ratio to average net assets:
- -----------------------------------------------------------------------------------------------------------------------
Net expenses (%) 0.90 0.90 0.90 0.97
1.02
- -----------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (%) 1.02 1.10 0.71 0.39
0.34
- -----------------------------------------------------------------------------------------------------------------------
Expenses without reimbursement (%) 1.12 1.03 1.03 1.03
1.02
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
J.P. MORGAN U.S. SMALL COMPANY OPPORTUNITIES FUND
<TABLE>
<CAPTION>
Per-share data For fiscal years ended May 31
- ------------------------------------------------------------------------------
1998(1) 1999
<S> <C> <C> <C>
Net asset value, beginning of period ($) 10.00 12.57
- ------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) ($) (0.02) (0.01)
Net realized and unrealized gain
on investment ($) 2.59 (0.08)
- ------------------------------------------------------------------------------
Total from investment operations ($) 2.57 (0.09)
- ------------------------------------------------------------------------------
Distributions to shareholders from:
Net realized gain ($) -- (0.31)
- ------------------------------------------------------------------------------
Total distributions to shareholders ($) -- (0.31)
- ------------------------------------------------------------------------------
Net asset value, end of period ($) 12.57 12.17
- ------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------
Total return (%) 25.70(2) (0.49)
- ------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 188,932 286,082
- ------------------------------------------------------------------------------
Ratio to average net assets:
- ------------------------------------------------------------------------------
Net expenses (%) 1.19(3) 1.07
- ------------------------------------------------------------------------------
Net investment income (loss) (%) (0.37)(3) (0.42)
- ------------------------------------------------------------------------------
Expenses without reimbursement (%) 1.25(3) 1.07
- ------------------------------------------------------------------------------
</TABLE>
(1) The fund commenced operations on 6/16/97.
(2) Not annualized.
(3) Annualized.
24 FUND DETAILS
<PAGE>
- --------------------------------------------------------------------------------
J.P. MORGAN TAX AWARE U.S. EQUITY FUND
<TABLE>
<CAPTION>
Per-share data For fiscal periods ended
- ------------------------------------------------------------------------------------------------
10/31/97(1) 10/31/98 4/30/99
(unaudited)
<S> <C> <C> <C> <C>
Net asset value, beginning of period ($) 10.00 12.57 15.19
- ------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.06 0.08 0.04
Net realized and unrealized gain
on investment ($) 2.52 2.65 3.50
- ------------------------------------------------------------------------------------------------
Total from investment operations ($) 2.58 2.73 3.54
- ------------------------------------------------------------------------------------------------
Less distributions to shareholders from:
Net investment income ($) (0.01) (0.11) (0.05)
- ------------------------------------------------------------------------------------------------
Net asset value, end of period ($) 12.57 15.19 (18.68)
- ------------------------------------------------------------------------------------------------
Ratios and supplemental data
- ------------------------------------------------------------------------------------------------
Total return (%) 25.83(2) 21.81 23.32(2)
- ------------------------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 25,649 76,924 124,535
- ------------------------------------------------------------------------------------------------
Ratio to average net assets:
- ------------------------------------------------------------------------------------------------
Net expenses (%) 0.85(3) 0.85 0.85(3)
- ------------------------------------------------------------------------------------------------
Net investment income (%) 0.70(3) 0.63 0.49(3)
- ------------------------------------------------------------------------------------------------
Expenses without reimbursement (%) 2.16(3) 1.09 0.94(3)
- ------------------------------------------------------------------------------------------------
Portfolio turnover rate (%) 23 44 20
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) The fund commenced operations on 12/18/96.
(2) Not annualized.
(3) Annualized.
FUND DETAILS 25
<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.
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 021109
1-800-521-5411 1-800-221-7930
IM0586
<PAGE>
OCTOBER 1, 1999 PROSPECTUS
J.P. MORGAN INSTITUTIONAL
LARGE CAP GROWTH FUND
- ------------
Seeking to outperform the Russell 1000 Growth Index over the long term through a
disciplined management approach
This prospectus contains essential information for anyone investing in the fund.
Please read it carefully and keep it for reference.
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 Distributon, Inc. JPMorgan
<PAGE>
CONTENTS
- --------------------------------------------------------------------------------
1
The fund's goal, investment
approach, risks and expenses
J.P. MORGAN INSTITUTIONAL LARGE CAP GROWTH FUND
Fund description .................................................. 1
Investor Expenses ................................................. 1
2
U.S. GROWTH STOCK MANAGEMENT APPROACH
J.P. Morgan ....................................................... 2
J.P. Morgan Institutional Large Cap Growth Fund ................... 2
Who may want to invest ............................................ 2
U.S. growth stock investment process .............................. 3
4
Investing in the J.P. Morgan
Institutional Large Cap Growth Fund
YOUR INVESTMENT
Investing through a financial professional ........................ 4
Investing through an employer-sponsored retirement plan ........... 4
Investing through an IRA or rollover IRA .......................... 4
Investing directly ................................................ 4
Opening your account .............................................. 4
Adding to your account ............................................ 4
Selling shares .................................................... 5
Account and transaction policies .................................. 5
Dividends and distributions ....................................... 6
Tax considerations ................................................ 6
7
More about risk and the fund's
business operations
FUND DETAILS
Business structure ................................................ 7
Management and administration ..................................... 7
Risk and reward elements .......................................... 8
Financial Highlights .............................................. 10
FOR MORE INFORMATION .............................................. back cover
<PAGE>
J.P. MORGAN INSTITUTIONAL
LARGE CAP GROWTH FUND
- --------------------------------------------------------------------------------
REGISTRANT: J.P. MORGAN SERIES TRUST
(J.P. MORGAN LARGE CAP GROWTH 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 8-9.
GOAL
The fund's goal is to provide long term growth from a portfolio of large cap
stocks. This goal can be changed without shareholder approval.
PRINCIPAL STRATEGIES
Investment Approach
The fund invests primarily in stocks of U.S., and to a lesser extent foreign,
companies with market capitalizations of $8 billion or more. The fund focuses on
stock selection to attempt to achieve superior returns and while it generally
holds stocks in many sectors, it emphasizes industries with higher earnings
growth potential and does not track the sector weightings of the overall large
cap market. Because the stock prices of growth companies are based in part on
future expectations, they may fall sharply if investors believe the prospects
for a stock, industry or the economy in general are weak. Growth stocks also
typically lack the dividend yield that could cushion stock prices in market
downturns.
In searching for companies, the fund uses a growth-oriented approach, as
described on page 3, that focuses on each company's business strategies and its
competitive environment. The fund seeks to buy stocks when they are undervalued
and display potential for long-term earnings growth. Stocks become candidates
for sale when they appear overvalued or fairly valued, but the fund may continue
to hold them if it believes further substantial growth is possible.
PRINCIPAL RISKS
The value of your investment in the fund will fluctuate in response to movements
in the stock market. Fund performance also will depend on the effectiveness of
J.P. Morgan's research and the management team's stock picking decisions.
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 $326
billion, including more than $1.6 billion using the same strategy as the fund.
The portfolio management team is led by Nadav Peles, vice president, who has
been with J.P. Morgan since 1994 as a capital markets researcher, and Kathleen
Tait, CFA, vice president, who has been with J.P. Morgan since 1992 and has held
positions in large cap growth equity portfolio management, new business
development and defined contribution.
- ----------------------
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.
<PAGE>
- --------------------------------------------------------------------------------
INVESTOR EXPENSES The estimated expenses of the fund before and after
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 expenses1(%)
(expenses that are deducted from fund assets)
Management fees 0.50
Marketing (12b-1) fees none
Other expenses 3.51
- --------------------------------------------------------------------
Total
operating expenses 4.01
Fee waiver and expense
reimbursement(2) 3.26
- --------------------------------------------------------------------
Net expenses(2) 0.75
- --------------------------------------------------------------------
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:
$10,000 initial investment, 5% return each year, net expenses for the first 12
months and total operating expenses thereafter, and all shares sold at the end
of each time period. The example is for comparison only; the fund's actual
return and your actual costs may be higher or lower.
- --------------------------------------------------------------------------------
1 yr. 3 yrs.
Your cost($) 77 921
- --------------------------------------------------------------------------------
(1) This table shows the fund's estimated expenses expressed as a percentage
of the fund's estimated average net assets.
(2) Reflects an agreement dated 10/1/99 by Morgan Guaranty Trust Company of New
York ("Morgan Guaranty"), an affiliate of J.P. Morgan to reimburse the fund
to the extent expenses (excluding extraordinary expenses) exceed 0.75% of
the fund's average daily net assets through 9/30/00.
J.P. MORGAN INSTITUTIONAL LARGE CAP GROWTH FUND 1
<PAGE>
U.S. GROWTH STOCK MANAGEMENT APPROACH
- --------------------------------------------------------------------------------
- --------------------------------------------------------------
Who may want to invest The fund is designed for investors who:
o are pursuing a long-term goal such as retirement
o want to add an investment with growth potential to further diversify a
portfolio
o want a fund that seeks to outperform the markets in which it invests over
the long term
The fund is not designed for investors who:
o want a fund that pursues market trends or focuses only on particular
industries or sectors
o require regular income or stability of principal
o are pursuing a short-term goal or investing emergency reserves
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 380 analysts and portfolio managers
around the world and has more than $326 billion in assets under management,
including assets managed by the fund's advisor, J.P. Morgan Investment
Management Inc.
J.P. MORGAN INSTITUTIONAL LARGE CAP GROWTH FUND
The fund invests primarily in U.S. stocks with market capitalizations of $8
billion or more. As a shareholder, you should anticipate risks and rewards
beyond those of a typical bond fund or a typical balanced fund.
2 U.S. GROWTH STOCK MANAGEMENT APPROACH
<PAGE>
- --------------------------------------------------------------------------------
The fund invests primarily in large cap U.S. stocks. The fund's investment
philosophy, developed by the advisor, focuses on stock picking while largely
avoiding sector or market-timing strategies. Also, under normal market
conditions, the fund will remain fully invested.
U.S. GROWTH STOCK INVESTMENT PROCESS
In managing the fund, J.P. Morgan employs a three-step process:
J.P. Morgan analysts develop proprietary
fundamental research
Research J.P. Morgan takes an in-depth look at company prospects over the short,
intermediate, and longer time periods. This approach is designed to provide
insight into a company's earnings 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 has an average of over
ten years of experience.
Stocks in each industry are ranked
with the help of models
Valuation The research findings allow J.P. Morgan to rank the companies in each
industry group according to their normalized earnings growth projections. The
projected slower growing companies are eliminated from consideration. Then
rankings are produced with the help of a variety of models that quantify the
research teams' findings. Additionally, our analyst's near-term earnings
estimates changes are blended with in-house valuation models to create a growth
stock valuation signal.
Using research and valuations,
the fund's management team
chooses stocks for the fund
Stock selection The fund buys and sells stocks according to its policies, using
the research and a growth stock valuation signal as a basis for the rankings.
Stocks displaying inferior earnings growth potential relative to peers are
excluded from the selection process. In general, the management team buys stocks
displaying above average earnings growth potential relative to its current stock
price and other companies in its industry. Along with attractive growth
prospects, the fund's managers often consider a number of other criteria:
o catalysts that could trigger a rise in a stock's price
o high potential reward compared to potential risk
o temporary mispricings caused by market overreactions
U.S. GROWTH STOCK MANAGEMENT APPROACH 3
<PAGE>
YOUR INVESTMENT
- --------------------------------------------------------------------------------
For your convenience, the fund offers 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 Determine the amount you are investing. The minimum amount for initial
investment is $3,000,000 and for additional investments $25,000, although
these minimums may be less for some investors. For more information on
minimum investments, call 1-800-766-7722.
o Complete the application, indicating how much of your investment you want to
allocate to which fund(s). Please apply now for any account privileges you
may want to use in the future, in order to avoid the delays associated with
adding them later on.
o Mail in your application, making your initial investment as shown 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.
4 YOUR INVESTMENT
<PAGE>
- --------------------------------------------------------------------------------
SELLING SHARES
By phone - wire payment
o Call the Shareholder Services Agent to verify that the wire redemption
privilege is in place on your account. If it is not, a representative can
help you add it.
o Place your wire request. If you are transferring money to a non-Morgan
account, you will need to provide the representative with the personal
identification number (PIN) that was provided to you when you opened your
fund account.
By phone - check payment
o Call the Shareholder Services Agent and place your request. Once your
request has been verified, a check for the net cash amount, payable to the
registered owner(s), will be mailed to the address of record. For checks
payable to any other party or mailed to any other address, please make your
request in writing (see below).
In writing
o Write a letter of instruction that includes the following information: The
name of the registered owner(s) of the account; the account number; the fund
name; the amount you want to sell; and the recipient's name and address or
wire information, if different from those of the account registration.
o Indicate whether you want any cash proceeds sent by check or by wire.
o Make sure the letter is signed by an authorized party. The Shareholder
Services Agent may require additional information, such as a signature
guarantee.
o Mail the letter to the Shareholder Services Agent.
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 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 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.
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 (normally 4:00 p.m. eastern time). The fund's securities are
typically priced using market quotes or pricing services. When these methods are
not available or do not represent a security's value at the time of pricing
(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. The fund has the right to suspend redemption of shares and to
postpone payment of proceeds for up to seven days or as permitted by law.
- --------------------------------------------------------------------------------
Shareholder Services Agent
J.P. Morgan Funds Services
522 Fifth Avenue
New York, NY 10036
1-800-766-7722
Representatives are available 8:00 a.m. to 5:00 p.m. eastern
time on fund business days.
YOUR INVESTMENT 5
<PAGE>
- --------------------------------------------------------------------------------
Timing of settlements When you buy shares, you will become the owner of record
when the fund receives your payment, generally the day following execution. When
you sell shares, cash proceeds are generally available the day following
execution and will be forwarded according to your instructions.
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 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), the fund reserves the right to request that you buy more shares or
close your account. If your account balance is still below the minimum 60 days
after notification, the fund reserves the right to close out your account and
send the proceeds to the address of record.
DIVIDENDS AND DISTRIBUTIONS
Income dividends are typically paid four times a year. The fund typically makes
capital gains distributions, if any, once per year. However, the fund may make
more or fewer payments in a given year, depending on its investment results and
its tax compliance situation. The 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.
<PAGE>
- --------------------------------------------------------------------------------
TAX CONSIDERATIONS
In general, selling shares for cash, exchanging shares, and receiving
distributions (whether reinvested or taken in cash) are all taxable events.
These transactions typically create the following tax liabilities for taxable
accounts:
- --------------------------------------------------------------------------------
Transaction Tax status
- --------------------------------------------------------------------------------
Income dividends Ordinary income
- --------------------------------------------------------------------------------
Short-term capital gains Ordinary income
distributions
- --------------------------------------------------------------------------------
Long-term capital gains Capital gains
distributions
- --------------------------------------------------------------------------------
Sales or exchanges of shares Capital gains or losses
owned for more than one year
- --------------------------------------------------------------------------------
Sales or exchanges of shares Gains are treated as ordinary
owned for one year or less income; losses are subject
to special rules
- --------------------------------------------------------------------------------
Because long-term capital gains distributions are taxable as capital gains
regardless of how long you have owned your shares, you may want to avoid making
a substantial investment when the fund is about to declare a long-term capital
gains distribution.
Every January, the fund issues tax information on its distributions for the
previous year.
Any investor for whom the fund does not have a valid taxpayer identification
number will be subject to backup withholding for taxes.
The tax considerations described in this section do not apply to tax-deferred
accounts or other non-taxable entities.
Because each investor's tax circumstances are unique, please consult your tax
professional about your fund investment.
6 YOUR INVESTMENT
<PAGE>
FUND DETAILS
- --------------------------------------------------------------------------------
BUSINESS STRUCTURE
The fund is a series of J.P. Morgan Series Trust, a Massachusetts business
trust. Information about other series or classes is available by calling
1-800-766-7722. In the future, the trustees could create other series or share
classes, which would have different expenses. Fund shareholders are entitled to
one full or fractional vote for each dollar or fraction of a dollar invested.
MANAGEMENT AND ADMINISTRATION
The fund and the other series of J.P. Morgan Series Trust are governed by the
same trustees. The trustees are responsible for overseeing all business
activities. The trustees are assisted by Pierpont Group, Inc., which they own
and operate on a cost basis. Costs of the trust are shared by all funds governed
by these trustees. Funds Distributor, Inc., as co-administrator, along with J.P.
Morgan, provides certain trust 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 0.50% of the fund's
average net assets
- --------------------------------------------------------------------------------
Administrative services Fund's pro-rata portion
(fee shared with Funds of 0.09% of the first
Distributor, Inc.) $7 billion of average net assets
in J.P. Morgan-advised portfolios,
plus 0.04% of average net assets over
$7 billion
- --------------------------------------------------------------------------------
Shareholder services 0.10% 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 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 dates thereafter. J.P. Morgan is working to
avoid these date-related 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. While the fund cannot predict at this
time the degree of impact, it is possible that foreign markets will be less
prepared than those in the U.S.
FUND DETAILS 7
<PAGE>
- --------------------------------------------------------------------------------
RISK AND REWARD ELEMENTS
This table discusses the main elements that make up the fund's overall risk and
reward characteristics. It also outlines the fund's policies toward various
securities, including those that are designed to help the fund manage risk.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Potential risks Potential rewards Policies to balance risk and
reward
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Market
conditions
o The fund's share price and o Stocks have generally outperformed o Under normal circumstances the fund
performance will fluctuate in more stable investments (such as plans to remain fully invested, with
response to stock market movements bonds and cash equivalents) over the at least 65% in stocks; stock
long term investments may include U.S. and
o Adverse market conditions may from foreign common stocks, convertible
time to time cause the fund to take securities, preferred stocks, trust
temporary defensive positions that or partnership interests, warrants,
are inconsistent with its principal rights, and investment company
investment strategies and may hinder securities
the fund from achieving its
investment objective o The fund seeks to limit risk through
diversification
o During severe market downturns, the
fund has the option of investing up
to 100% of assets in investment-grade
short-term securities
- ----------------------------------------------------------------------------------------------------------------------------
Management choices
o The fund could underperform its o The fund could outperform its o J.P. Morgan focuses its active
benchmark due to its securities and benchmark due to these same choices management on securities selection,
asset allocation choices the area where it believes its
commitment to research can most
enhance returns
- ----------------------------------------------------------------------------------------------------------------------------
Foreign investments
o The fund could lose money because of o Foreign investments, which represent o The fund anticipates that its total
foreign government actions, political a major portion of the world's foreign investments will not exceed
instability, or lack of adequate and securities, offer attractive 20% of assets
accurate information potential performance and
opportunities for diversification
- ----------------------------------------------------------------------------------------------------------------------------
Derivatives
o Futures contracts1 may not have the o The fund could make money if o The fund uses futures contracts to
intended effects and may result in management's analysis proves correct equitize cash in order to keep the
losses or missed opportunities fund fully invested and not for
o Futures contracts allow the fund to speculative purposes. The fund
o The counterparty to a futures gain equity exposure when investing invests in futures contracts on
contract could default in individual stocks is not practical recognized security indexes
o Futures contracts that involve o Futures contracts that involve o While the fund may use futures
leverage could magnify losses leverage could generate substantial contracts that incidentally involve
gains at low cost leverage, it does not use them for
o Futures contracts involve costs to the specific purpose of leveraging
the fund which can reduce returns its portfolio
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) A futures contract is an agreement to buy or sell a set quantity of an
underlying instrument at a future date, or to make or receive a cash payment
based on changes in the value of a securities index.
8 FUND DETAILS
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Potential risks Potential rewards Policies to balance risk and
reward
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Illiquid holdings
o The fund could have difficulty o These holdings may offer more
valuing these holdings precisely attractive yields or potential growth o The fund may not invest more than 15%
than comparable widely traded of net assets in illiquid holdings
o The fund could be unable to sell securities
these holdings at the time or price o To maintain adequate liquidity to
it desires meet redemptions, the fund may hold
investment-grade short-term
securities (including repurchase
agreements and reverse repurchase
agreements) and, for temporary or
extraordinary purposes, may borrow
from banks up to 331/3% of the value
of its total assets
- ---------------------------------------------------------------------------------------------------------------------------------
When-issued and delayed
delivery securities
o When the fund buys securities before o The fund can take advantage of o The 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 the o The fund could realize gains in a o The fund generally avoids short-term
fund's brokerage and related costs short period of time trading, except to take advantage of
attractive or unexpected
o Increased short-term capital gains o The fund could protect against losses opportunities or to meet demands
distributions would raise if a stock is overvalued and its generated by shareholder activity
shareholders' income tax liability value later falls
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
FUND DETAILS 9
<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 INSTITUTIONAL LARGE CAP GROWTH FUND
Per share data For fiscal period ended May 31
- --------------------------------------------------------------------------------
1999(1)
Net asset value, beginning of period ($) 15.00
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.00(2)
Net realized and unrealized gain
on investment ($) 0.78
- --------------------------------------------------------------------------------
Total from investment operations ($) 0.78
- --------------------------------------------------------------------------------
Net asset value, end of period ($) 15.78
- --------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------
Total return (%) 5.20%(3)
- --------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 5,261
- --------------------------------------------------------------------------------
Ratios to average net assets:
Net Expenses (%) 0.75(4)
- --------------------------------------------------------------------------------
Net investment loss (%) (0.03%)(4)
- --------------------------------------------------------------------------------
Expenses without reimbursement (%) 4.01%(4)
- --------------------------------------------------------------------------------
Portfolio turnover (%) 33
- --------------------------------------------------------------------------------
(1) The fund commenced operations on 12/31/98.
(2) Less than 0.01%.
(3) Not annualized.
(4) Annualized.
10 J.P. MORGAN INSTITUTIONAL LARGE CAP GROWTH
<PAGE>
FOR MORE INFORMATION
- --------------------------------------------------------------------------------
For investors who want more information on the fund, the following documents are
available free upon request:
Annual/Semi-annual Reports Contain financial statements, performance data,
information on portfolio holdings, and a written analysis of market conditions
and fund performance for the fund's most recently completed fiscal year or
half-year.
Statement of Additional Information (SAI) Provides a fuller technical and legal
description of the fund's policies, investment restrictions, and business
structure. This prospectus incorporates the SAI by reference.
Copies of the current versions of these documents, along with other information
about the fund, may be obtained by contacting:
J.P. Morgan Institutional 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
fund's investment company and 1933 Act registration numbers are: 811-07795 and
333-11125.
J.P. MORGAN INSTITUTIONAL FUNDS AND THE MORGAN TRADITION The J.P. Morgan
Institutional Funds combine a heritage of integrity and financial leadership
with comprehensive, sophisticated analysis and management techniques. Drawing on
J.P. Morgan's extensive experience and depth as an investment manager, the J.P.
Morgan Institutional Funds offer a broad array of distinctive opportunities for
mutual fund investors.
JPMorgan
- --------------------------------------------------------------------------------
J.P. Morgan Institutional Funds
Advisor Distributor
J.P. Morgan Investment Management Inc. Funds Destributor, Inc.
522 Fifth Avenue 60 State Street
New York, NY 10036 Boston, MA 02109
1-800-766-7722 1-800-221-7930
ILCGP-9910
<PAGE>
<PAGE>
OCTOBER 1, 1999
PROSPECTUS
J.P. MORGAN INSTITUTIONAL
MARKET NEUTRAL FUND
Seeking to provide long term capital appreciation while neutralizing the risks
associated with stock market investing
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 INSTITUTIONAL MARKET NEUTRAL FUND
Fund description ............................................................ 2
Investor expenses ........................................................... 3
4
U.S. EQUITY MANAGEMENT APPROACH
J.P. Morgan ................................................................. 4
J.P. Morgan Institutional Market Neutral Fund ............................... 4
Who may want to invest ...................................................... 4
U.S. equity investment process .............................................. 5
6
Investing in the J.P. Morgan
Institutional Market Neutral 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
Performance of private account .............................................. 9
Risk and reward elements .................................................... 10
Financial Highlights ........................................................ 12
FOR MORE INFORMATION ................................................ back cover
<PAGE>
J.P. MORGAN INSTITUTIONAL
MARKET NEUTRAL FUND
- --------------------------------------------------------------------------------
REGISTRANT: J.P. MORGAN SERIES TRUST
(J.P. MORGAN MARKET NEUTRAL FUND: INSTITUTIONAL 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 10-11.
[GRAPHIC OMITTED] GOAL
The fund's goal is to provide long-term capital appreciation from a broadly
diversified portfolio of U.S. stocks while neutralizing the general risks
associated with stock market investing. This goal can be changed without
shareholder approval.
[GRAPHIC OMITTED] PRINCIPAL STRATEGIES
Investment Approach
The fund takes long and short positions in different stocks with characteristics
similar to those of the Russell 1000 Growth Index in an effort to insulate the
fund's performance from the effects of general stock market movements. In rising
markets, the fund expects that the long positions will appreciate more rapidly
than the short positions, and in declining markets, that the short positions
will decline faster than the long positions. The fund expects that this
difference in rates of appreciation, along with any returns on cash generated by
short sales, will generate a positive return; the fund pursues returns exceeding
those of 90-day U.S. Treasury Bills.
The fund purchases securities that it believes are undervalued and sells short
securities that it believes are overvalued. The long and short portfolios are
matched on a variety of risk characteristics in order to limit exposure to
macroeconomic factors. In each sector in which the fund invests, it balances the
dollars invested in long and short positions to remain sector neutral. In
attempting to neutralize market and sector risks, the fund emphasizes stock
picking as the primary means of generating returns.
PRINCIPAL RISKS
While the fund's market neutral approach seeks to minimize the risks of
investing in the overall stock market, it may involve more risk than other funds
that do not engage in short selling. The fund's long positions could decline in
value while the value of the securities sold short increases, thereby increasing
the potential for loss. It also is possible that the combination of securities
held long and sold short will fail to protect the fund from overall stock market
risk as anticipated.
The fund will have substantial short positions and must borrow the security to
make delivery to the buyer. The fund may not always be able to borrow a security
it wants to sell short. The fund also may be unable to close out an established
short position at an acceptable price, and may have to sell long positions at
disadvantageous times to cover its short positions.
The value of your investment in the fund will fluctuate in response to movements
in the stock market. fund performance also will depend on the effectiveness of
J.P. morgan's research and the management team's stock picking decisions.
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 $326
billion, including approximately $965 million using the same strategy as the
fund.
The portfolio management team is led by James C. Wiess, vice president and Marc
N. Roston, vice president. 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. Roston has been on the equity team since 1996. Prior to 1996, Mr.
Roston was completing his Ph.D.
- --------------------------------------------------------------------------------
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 MARKET NEUTRAL FUND
<PAGE>
INVESTOR EXPENSES
The estimated expenses of the fund before and after 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 1.50
Marketing (12b-1) fees none
Other expenses 4.16
- -----------------------------------------------
Total operating expenses 5.66
Fee waiver and expense reimbursement(2) 4.41
- -----------------------------------------------
Net expenses(2) 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:
$10,000 initial investment, 5% return each year, net expenses for the first 12
months and total operating expenses thereafter, and all shares sold at the end
of each time period. The example is for comparison only; the fund's actual
return and your actual costs may be higher or lower.
- -----------------------------------
1 yr. 3 yrs.
Your cost($) 127 1,294
- -----------------------------------
(1) This table shows the fund's estimated expenses expressed as a
percentage of the funds estimated average net assets.
(2) Reflects an agreement dated 10/1/99 by Morgan Guaranty Trust Company of New
York ("Morgan Guaranty"), an affiliate of J.P. Morgan, to reimburse the fund
to the extent expenses (excluding extraordinary expenses) exceed 1.25% of
the fund's average daily net assets through 9/30/00.
J.P. MORGAN INSTITUTIONAL MARKET NEUTRAL FUND 3
<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 380 analysts and portfolio managers
around the world and has more than $326 billion in assets under management,
including assets managed by the fund's advisor, J.P. Morgan Investment
Management Inc.
J.P. MORGAN INSTITUTIONAL MARKET NEUTRAL FUND
The fund takes long and short positions in U.S. stocks with characteristics
similar to those of the Russell 1000 Growth Index. As a shareholder, you should
anticipate risks and rewards beyond those of 90-day U.S. Treasury Bills.
WHO MAY WANT TO INVEST
The fund is designed for investors who:
o are pursuing long-term capital appreciation but want to minimize exposure to
general stock market risk
o want returns that exceed those of 90-day U.S. Treasury Bills with controlled
risk
The fund is not designed for investors who:
o want a fund that pursues market trends or focuses only on particular
industries or sectors
o require regular income or stability of principal
o are pursuing a short-term goal or investing emergency reserves
o are seeking returns similar to those of typical stock funds
4 U.S. EQUITY MANAGEMENT APPROACH
<PAGE>
The fund invests primarily in U.S. stocks. The fund's investment philosophy,
developed by the advisor, focuses on stock picking while largely avoiding sector
or market-timing strategies.
U.S. EQUITY INVESTMENT PROCESS
In managing the fund, J.P. Morgan employs a three-step process:
[GRAPHIC OMITTED]
J.P. Morgan analysts develop proprietary fundamental research
Research J.P. Morgan takes an in-depth look at company prospects over a
relatively long period -- often as much as five years -- rather than focusing on
near-term expectations. This approach is designed to provide insight into a
company's real growth potential. J.P. Morgan's in-house research is developed by
an extensive worldwide network of over 120 career analysts. The team of analysts
dedicated to U.S. equities includes more than 20 members, with an average of
over ten years of experience.
[GRAPHIC OMITTED]
Stocks in each industry are ranked with the help of models
Valuation The research findings allow J.P. Morgan to rank the companies in each
industry group according to their relative value. The greater a company's
estimated worth compared to the current market price of its stock, the more
undervalued the company. The valuation rankings are produced with the help of a
variety of models that quantify the research team's findings.
[GRAPHIC OMITTED]
Using research and valuations, the fund's management team chooses stocks for the
fund
Stock selection The fund buys and sells stocks according to its policies, using
the research and valuation rankings as a basis. In general, the management team
buys stocks that are identified as undervalued and considers selling them when
they appear overvalued. Along with attractive valuation, the fund's managers
often consider a number of other criteria:
o catalysts that could trigger a significant change in a stock's price
o high potential reward compared to potential risk
o temporary mispricings caused by market overreactions
U.S. EQUITY MANAGEMENT APPROACH 5
<PAGE>
YOUR INVESTMENT
- --------------------------------------------------------------------------------
For your convenience, the fund offers 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 Determine the amount you are investing. The minimum amount for initial
investment is $3,000,000 and for additional investments $25,000, although
these minimums may be less for some investors. For more information on minimum
investments, call 1-800-766-7722.
o Complete the application, indicating how much of your investment you want to
allocate to which fund(s). Please apply now for any account privileges you may
want to use in the future, in order to avoid the delays associated with adding
them later on.
o Mail in your application, making your initial investment as shown 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.
6 YOUR INVESTMENT
<PAGE>
SELLING SHARES
By phone - wire payment
o Call the Shareholder Services Agent to verify that the wire redemption
privilege is in place on your account. If it is not, a representative can help
you add it.
o Place your wire request. If you are transferring money to a non-Morgan
account, you will need to provide the representative with the personal
identification number (PIN) that was provided to you when you opened your fund
account.
By phone - check payment
o Call the Shareholder Services Agent and place your request. Once your request
has been verified, a check for the net cash amount, payable to the registered
owner(s), will be mailed to the address of record. For checks payable to any
other party or mailed to any other address, please make your request in
writing (see below).
In writing
o Write a letter of instruction that includes the following information: The
name of the registered owner(s) of the account; the account number; the fund
name; the amount you want to sell; and the recipient's name and address or
wire information, if different from those of the account registration.
o Indicate whether you want any cash proceeds sent by check or by wire.
o Make sure the letter is signed by an authorized party. The Shareholder
Services Agent may require additional information, such as a signature
guarantee.
o Mail the letter to the Shareholder Services Agent.
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 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 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.
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 (normally 4:00 p.m. eastern time). The fund's securities are
typically priced using market quotes or pricing services. When these methods are
not available or do not represent a security's value at the time of pricing,
(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. The fund has the right to suspend redemption of shares and to
postpone payment of proceeds for up to seven days or as permitted by law.
- --------------------------------------------------------------------------------
Shareholder Services Agent
J.P. Morgan Funds Services
522 Fifth Avenue
New York, NY 10036
1-800-766-7722
Representatives are available 8:00 a.m. to 5:00 p.m. eastern time on fund
business days.
YOUR INVESTMENT 7
<PAGE>
Timing of settlements When you buy shares, you will become the owner of record
when the fund receives your payment, generally the day following execution. When
you sell shares, cash proceeds are generally available the day following
execution and will be forwarded according to your instructions.
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 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), the fund reserves the right to request that you buy more shares or
close your account. If your account balance is still below the minimum 60 days
after notification, the fund reserves the right to close out your account and
send the proceeds to the address of record.
DIVIDENDS AND DISTRIBUTIONS
Income dividends are typically paid four times a year. The fund typically makes
capital gains distributions, if any, once per year. However, the fund may make
more or fewer payments in a given year, depending on its investment results and
its tax compliance situation. The 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.
<PAGE>
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 distributions Ordinary income
- --------------------------------------------------------------------------------
Long-term capital gains distributions Capital gains
- --------------------------------------------------------------------------------
Sales or exchanges of shares Capital gains or losses
owned for more than one year
- --------------------------------------------------------------------------------
Sales or exchanges of shares owned Gains are treated as ordinary
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
1-800-766-7722. In the future, the trustees could create other series or share
classes, which would have different expenses. Fund shareholders are entitled to
one full or fractional vote for each dollar or fraction of a dollar invested.
MANAGEMENT AND ADMINISTRATION
The fund and the other series of J.P. Morgan Series Trust are governed by the
same trustees. The trustees are responsible for overseeing business activities.
The trustees are assisted by Pierpont Group, Inc., which they own and operate on
a cost basis. Costs of the trust are shared by all funds governed by these
trustees. Funds Distributor, Inc., as co-administrator, along with J.P. Morgan,
provides trust 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 1.50% of the fund's average net assets
- --------------------------------------------------------------------------------
Administrative services Fund's pro-rata portion of 0.09% of the
(fee shared with Funds first $7 billion of average net assets in
Distributor, Inc.) 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 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 dates thereafter. J.P. Morgan is working to
avoid these date-related problems and to obtain assurances from other service
providers that they are taking similar steps. However, it is not certain that
these actions will be sufficient to prevent these problems from adversely
impacting fund operations and shareholders. In addition, to the extent that
operations of issuers of securities held by the fund are impaired by
date-related problems or prices of securities decline as a result of real or
perceived date-related problems of issuers held by the fund or generally, the
net asset value of the fund will decline. While the fund cannot predict at this
time the degree of impact, it is possible that foreign markets will be less
prepared than those in the U.S.
<PAGE>
PERFORMANCE OF PRIVATE ACCOUNTS
The fund's goal and policies are substantially similar to those used by J.P.
Morgan in managing certain discretionary investment management accounts. The
chart below shows the historical investment performance for a composite of these
private accounts.
The performance of the Market Neutral Private Account Composite (the
"Composite") does not represent the fund's performance nor should it be
interpreted as indicative of the fund's future performance. The accounts in the
Composite are not subject to the same limitations imposed on mutual funds. If
the accounts included in the Composite had been subject to these limitations,
their performance might have been lower.
The performance of the Composite reflect the deductions of the fund's total
annual operating expenses, after expense reimbursements.
<TABLE>
<CAPTION>
Annual Total Returns for the Year Ended December 31,
1990 1991 1992 1993 1994 1995 1996
1997 1998
<S> <C> <C> <C> <C> <C> <C> <C>
<C> <C>
Private Account Composite 3.02% 4.88% 15.89% -0.96% 2.56% 5.77% 13.52%
4.12% 11.50%
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bill 7.21% 5.60% 3.51% 2.87% 3.90% 5.60% 5.21%
5.26% 4.86%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Composite currently includes all discretionary accounts managed by J.P.
Morgan using substantially similar investment strategy as the fund. The
inception date for the Composite was January 31, 1990. Prior to January 1, 1993,
when AIMR requirements went into effect, the Composite may not have included all
discretionary accounts.
FUND DETAILS 9
<PAGE>
RISK AND REWARD ELEMENTS
This table discusses the main elements that make up the fund's overall risk and
reward characteristics. It also outlines the fund's policies toward various
securities, including those that are designed to help the fund manage risk.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Potential risks Potential rewards Policies to balance risk and reward
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Market conditions
o The fund's share price and o Stocks have generally o Under normal circumstances the fund plans to remain fully
performance will fluctuate outperformed more stable invested, with at least 65% in stocks; stock investments may
in response to stock market investments (such as include U.S. and foreign common stocks, convertible securities,
movements bonds and cash preferred stocks, trust or partnership interests, warrants,
equivalents) over the rights, and investment company securities
long term
o Adverse market conditions o The fund seeks to limit risk through diversification
may from time to time cause
the fund to take temporary o During periods of adverse market conditions, the fund has the
defensive positions that are option of investing up to 100% of assets in investment-grade
inconsistent with its short-term securities
principal investment
strategies and may hinder
the fund from achieving its
investment objective
- ------------------------------------------------------------------------------------------------------------------------------------
Management choices
o The fund could underperform o The fund could o J.P. Morgan focuses its active management on securities
its benchmark due to its outperform its benchmark selection, the area where it believes its commitment to research
securities and asset due to these same can most enhance returns
allocation choices choices
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign investments
o Currency exchange rate o Favorable exchange rate o The fund anticipates that its total foreign investments will not
movements could reduce gains movements could generate exceed 20% of assets
or create losses gains or reduce losses
o The fund actively manages the currency exposure of its foreign
o The fund could lose money o Foreign investments, investments relative to its benchmark, and may hedge back into
because of foreign which represent a major the U.S. dollar from time to time (see also "Derivatives")
government actions, portion of the world's
political instability, or securities, offer
lack of adequate and attractive potential
accurate information performance and
opportunities for
diversification
- ------------------------------------------------------------------------------------------------------------------------------------
Derivatives
o Derivatives such as futures, o Hedges that correlate o The fund uses derivatives for hedging and for risk management
options, swaps and forward well with underlying (i.e., to establish or adjust exposure to particular securities,
foreign currency contracts positions can reduce or markets or currencies); risk management may include management of
that are used for hedging eliminate losses at low the fund's exposure relative to its benchmark
the portfolio or specific
cost
securities may not fully o The fund only establishes hedges that it expects will be highly
offset the underlying o The fund could make correlated with underlying positions
positions(1) and this could money and protect
result in losses to the fund against losses if o While the fund may use derivatives that incidentally involve
that would not otherwise management's analysis leverage, it does not use them for the specific purpose of
have occurred proves correct leveraging its portfolio
o Derivatives used for risk o Derivatives that involve
management may not have the leverage could generate
intended effects and may substantial gains at low
result in losses or missed cost
opportunities
o The counterparty to a
derivatives contract could
default
o Certain types of derivatives
involve costs to the fund
which can reduce returns
o Derivatives that involve
leverage could magnify
losses
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(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.
10 FUND DETAILS
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Potential risks Potential rewards Policies to balance risk and reward
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Illiquid holdings
o The fund could have o These holdings may offer o The fund may not invest more than 15% of net assets in illiquid
difficulty valuing these more attractive yields holdings
holdings precisely or potential growth than
comparable widely traded o To maintain adequate liquidity to meet redemptions, the fund may
o The fund could be unable to securities hold investment-grade short-term securities (including repurchase
sell these holdings at the agreements and reverse repurchase agreements) and, for temporary
time or price it desires or extraordinary purposes, may borrow from banks up to 33 1/3% of
the value of its total assets
- ------------------------------------------------------------------------------------------------------------------------------------
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 issue or advantage of attractive
for delayed delivery, it transaction
could be exposed to leverage opportunities
risk if it does not use
segregated accounts
- ------------------------------------------------------------------------------------------------------------------------------------
Short-term trading
o Increased trading would o The fund could realize o The fund generally avoids short-term trading, except to take
raise the fund's brokerage gains in a short period advantage of attractive or unexpected opportunities or to meet
and related costs of time demands generated by shareholder activity
o Increased short-term capital o A fund could protect gains distributions would
against lossses if a raise shareholders' income stock is overvalued and tax
liability its value later falls
- ------------------------------------------------------------------------------------------------------------------------------------
Short selling
o Short sales may not have the o The fund could make o The fund will not engage in short selling if the total market
intended effects and may money and protect value of all securities sold short would exceed 100% of the
result in losses against losses if fund's net assets
management's analysis
o The fund may not be able to proves correct o The fund sets aside liquid assets in segregated accounts to cover
close out a short position short positions and offset leverage risk
at a particular time or at o Short selling may allow
an acceptable price the fund to generate
positive returns in
o The fund may not be able to declining markets borrow certain securities to
sell short, resulting in missed opportunities
o Segregated accounts with respect to short sales may limit the fund's
investment flexibility
o Short sales involve leverage risk, have no cap on maximum losses, and gains
are limited to the price of the stock at the time of the short sale
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 report, along
with the fund's financial statements, are included in the fund's annual report,
which is available upon request.
================================================================================
J.P. MORGAN INSTITUTIONAL MARKET NEUTRAL FUND
Per share data For fiscal period ended May 31
- --------------------------------------------------------------------------------
1999(1)
Net asset value, beginning of period ($) 15.00
- --------------------------------------------------------------------------------
Income from investment operations:
Net investment income ($) 0.13
Net realized and unrealized gain
on investments ($) 0.07
- --------------------------------------------------------------------------------
Total from investment operations ($) 0.20
- --------------------------------------------------------------------------------
Less dividends to shareholders from:
Net investment income (0.04)
- --------------------------------------------------------------------------------
Net asset value, end of period ($) 15.16
- --------------------------------------------------------------------------------
Ratios and supplemental data
- --------------------------------------------------------------------------------
Total return (%) 1.34(2)
- --------------------------------------------------------------------------------
Net assets, end of period ($ thousands) 10,143
- --------------------------------------------------------------------------------
Ratios to average net assets:
Net Expenses (Excluding dividend expense) (%) 2.00(3)
- --------------------------------------------------------------------------------
Net investment income (%) 2.14(3)
- --------------------------------------------------------------------------------
Expenses without reimbursement (Including dividend expense) (%) 5.66(3)
- --------------------------------------------------------------------------------
Portfolio turnover (%) 195
- --------------------------------------------------------------------------------
(1) The fund commenced operations on 12/31/98.
(2) Not annualized.
(3) Annualized.
12 FUND DETAILS
<PAGE>
(THIS PAGE IS INTENTIONALLY LEFT BLANK)
<PAGE>
- --------------------------------------------------------------------------------
FOR MORE INFORMATION
- --------------------------------------------------------------------------------
For investors who want more information on the fund, the following documents are
available free upon request:
Annual/Semi-annual Reports Contain financial statements, performance data,
information on portfolio holdings, and a written analysis of market conditions
and fund performance for the fund's most recently completed fiscal year or
half-year.
Statement of Additional Information (SAI) Provides a fuller technical and legal
description of the fund's policies, investment restrictions, and business
structure. This prospectus incorporates the SAI by reference.
Copies of the current versions of these documents, along with other information
about the fund, may be obtained by contacting:
J.P. Morgan Institutional 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
fund's investment company and 1933 Act registration numbers are: 811-07795 and
333-11125.
J.P. MORGAN INSTITUTIONAL FUNDS AND THE MORGAN TRADITION The J.P. Morgan
Institutional Funds combine a heritage of integrity and financial leadership
with comprehensive, sophisticated analysis and 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>
- --------------------------------------------------------------------------------
J.P. MORGAN SERIES TRUST
J.P. MORGAN INSTITUTIONAL LARGE CAP GROWTH FUND
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 1, 1999
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS BUT CONTAINS
ADDITIONAL INFORMATION WHICH SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS DATED OCTOBER 1, 1999, 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
DATED MAY 31, 1999. THE PROSPECTUS AND THESE FINANCIAL STATEMENTS, INCLUDING THE
INDEPENDENT ACCOUNTANT'S REPORT ON 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-------------------------------------------------16
TRUSTEES AND OFFICERS---------------------------------------------------18
INVESTMENT ADVISOR------------------------------------------------------23
DISTRIBUTOR-------------------------------------------------------------25
CO-ADMINISTRATOR--------------------------------------------------------26
SERVICES AGENT----------------------------------------------------------27
CUSTODIAN AND TRANSFER AGENT--------------------------------------------27
SHAREHOLDER SERVICING---------------------------------------------------27
FINANCIAL PROFESSIONALS-------------------------------------------------29
INDEPENDENT ACCOUNTANTS-------------------------------------------------29
EXPENSES----------------------------------------------------------------29
PURCHASE OF SHARES------------------------------------------------------30
REDEMPTION OF SHARES----------------------------------------------------31
EXCHANGE OF SHARES------------------------------------------------------32
DIVIDENDS AND DISTRIBUTIONS---------------------------------------------32
NET ASSET VALUE---------------------------------------------------------33
PERFORMANCE DATA--------------------------------------------------------34
PORTFOLIO TRANSACTIONS--------------------------------------------------35
MASSACHUSETTS TRUST-----------------------------------------------------37
DESCRIPTION OF SHARES---------------------------------------------------37
TAXES-------------------------------------------------------------------38
ADDITIONAL INFORMATION--------------------------------------------------42
FINANCIAL STATEMENTS----------------------------------------------------44
APPENDIX A - DESCRIPTION OF
SECURITIES RATINGS------------------------------------------------------A-1
<PAGE>
GENERAL
J.P. Morgan Institutional Large Cap Growth 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"). To date, the Trustees
of the Trust have authorized the issuance of two classes of
shares--Institutional Shares and Select Shares. The Fund currently offers
Institutional Shares only.
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 assigned to
them in the Prospectus. The Trust'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").
Shares of the Fund are not deposits or obligations of, or guaranteed
or endorsed by any 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 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 the Fund.
The Fund is designed for investors seeking long term growth from a
portfolio of large company growth stocks, focusing on those growth stocks that
the Advisor believes can provide returns in excess of the Russell 1000 Growth
Index.
The various types of securities in which the Fund may invest are
described below.
Equity Investments
The Fund invests primarily in equity securities consisting of U.S. and,
to a lesser extent, 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 Equity
Securities in which the Fund invests may include exchange-traded,
over-the-counter ("OTC") and unlisted common and preferred stocks. A discussion
of the various types of equity investments that may be purchased by the Fund
appears below. See also "Quality and Diversification Requirements."
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 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 prior to the expiration date.
Foreign Investments
The Fund may invest up to 20% of its 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 Fund's investments in
foreign securities may be adversely affected by changes in political or social
conditions, diplomatic relations, confiscatory taxation, expropriation,
nationalization, limitation on the removal of funds or assets, or imposition of
(or change in) exchange control or tax regulations in those foreign countries.
In addition, changes in government administrations or economic or monetary
policies in the United States or abroad could result in appreciation or
depreciation of portfolio securities and could favorably or unfavorably affect
the Fund's operations. Furthermore, the economies of individual foreign nations
may differ from the U.S. economy, whether favorably or unfavorably, in areas
such as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position; it may
also be more difficult to obtain and enforce a judgment against a foreign
issuer. Any foreign investments made by the Fund must be made in compliance with
U.S. and foreign currency restrictions and tax laws restricting the amounts and
types of foreign investments.
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 (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 voting
rights to the holders of the receipts with respect to the deposited securities.
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 no interest will accrue 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 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, the 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 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 fund obligation)
incur a gain or loss due to market fluctuation. Also, the Fund may be
disadvantaged if the other party to the transaction defaults.
Investment Company Securities. Securities of other investment companies
may be acquired by the Fund to the extent permitted under the Investment Company
Act of 1940, as amended (the "1940 Act"). These limits require that, as
determined immediately after a purchase is made, (i) not more than 5% of the
value of the Fund's total assets will be invested in the securities of any one
investment company, (ii) not more than 10% of the value of the Fund's 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 Securities and Exchange Commission ("SEC") has granted the Fund an
exemptive order permitting it to invest its uninvested cash in any of the
following affiliated money market funds: J.P. Morgan Institutional Prime Money
Market Fund, J.P. Morgan Institutional Tax Exempt Money Market Fund, J.P. Morgan
Institutional Federal Money Market Fund and J.P. Morgan Institutional Treasury
Money Market Fund. The order sets the following conditions: (1) the Portfolio
may invest in one or more of the permitted money market funds up to an aggregate
limit of 25% of its assets; and (2) the Advisor will waive and/or reimburse its
advisory fee from the Portfolio in an amount sufficient to offset any doubling
up of investment advisory and shareholder servicing fees. The Portfolio has
applied for additional exemptive relief from the SEC to permit the Portfolio to
invest in additional affiliated investment companies. If the requested relief is
granted, the Portfolio would then be permitted to invest in non-money market
affiliated funds, subject to certain conditions specified in the applicable
order.
Reverse Repurchase Agreements. The Fund may enter into reverse
repurchase agreements. In a reverse repurchase agreement, the Fund sells a
security and agrees to repurchase the same security at a mutually agreed upon
date and price, reflecting the interest rate effective for the term of the
agreement. For purposes of the 1940 Act, a reverse repurchase agreement may be
deemed to be a borrowing of money by the Fund and, therefore, a form of
leverage. Leverage may cause any gains or losses for the Fund to be magnified.
The Fund will invest the proceeds of borrowings under reverse repurchase
agreements. In addition, the Fund will enter into a reverse repurchase agreement
only when the expected return to be earned from the investment of the proceeds
is greater than the interest expense of the transaction. The Fund may not enter
into reverse repurchase agreements exceeding in the aggregate one-third of the
market value of its total assets less liabilities (other than reverse repurchase
agreements and other borrowings). See "Investment Restrictions."
Loans of Portfolio Securities. The Fund is permitted to lend its
securities in an amount up to 33-1/3% of the value of the Fund's net 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 that occurs during the term of the loan inures to the Fund
and its respective shareholders. The Fund may pay reasonable finders' and
custodial fees in connection with a loan. In addition, the Fund will consider
all facts and circumstances before entering into such an agreement, 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 Fund's 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 its 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 certain 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 Fund. 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.
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 1933 Act, before it may be sold, the 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, the Fund might obtain a less
favorable price than prevailed when it decided to sell.
Money Market Instruments
Although the Fund intends, under normal circumstances and to the extent
practicable, to be fully invested in equity securities, the Fund 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 Fund appears below. 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
credit of the issuing agency.
Bank Obligations. Unless otherwise noted below, the Fund may invest in
negotiable certificates of deposit, time deposits and bankers' acceptances of
(i) banks, savings and loan associations and savings banks which have more than
$2 billion in total assets and are organized under the laws of the United States
or any state, (ii) foreign branches of these banks or of foreign banks of
equivalent size (Euros) and (iii) U.S. branches of foreign banks of equivalent
size (Yankees). The Fund will not invest in obligations for which the Advisor,
or any of its affiliated persons, is the ultimate obligor or accepting bank. The
Fund may also invest in 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. 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 Guaranty Trust Company of New York
("Morgan"), an affiliate of the Advisor 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 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
Trust'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 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 the Fund to the seller. The period of these
repurchase agreements will usually be short, from overnight to one week, and at
no time will the Fund invest in repurchase agreements for more than thirteen
months. The securities which are subject to repurchase agreements, however, may
have maturity dates in excess of thirteen months from the effective date of the
repurchase agreement. The Fund will always receive securities as collateral
whose market value is, and during the entire term of the agreement remains, at
least equal to 100% of the dollar amount invested by the Fund in each agreement
plus accrued interest, and the Fund will make payment for such securities only
upon physical delivery or upon evidence of book entry transfer to the account of
the custodian. If the seller defaults, the Fund might incur a loss if the value
of the collateral securing the repurchase agreement declines and might incur
disposition costs in connection with liquidating the collateral. In addition, if
bankruptcy proceedings are commenced with respect to the seller of the security,
realization upon disposal of the collateral by the Fund may be delayed or
limited.
Quality and Diversification Requirements
The Fund intends to meet the diversification requirements of the 1940
Act. Current 1940 Act diversification requirements require that with respect to
75% of the assets of the Fund: (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 the 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 Fund 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 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 Investors Service, Inc.
("Moody's") or Standard & Poor's Ratings Group ("S&P"), the issuer's parent
corporation, if any, must have outstanding commercial paper rated Prime-1 by
Moody's or A-1 by S&P, 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 S&P, 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
The Fund may use futures contracts and options for hedging and risk
management purposes, although it currently intends only to use futures contracts
and only for the purpose of "equitizing" cash as described below.
The Fund may not use futures contracts and options for speculation.
The Fund intends to use futures contracts 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.
The Fund may use options and futures contracts to manage its exposure
to changing 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, 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 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 limiting its exposure to losses. The 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.
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.
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 also may close out a put option position
by entering into an offsetting transaction, if a liquid market exists. 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 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 the 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. 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, 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 also will 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. 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 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 the
Fund may not be able to close out an option position into which it has
previously entered. When the Fund purchases an OTC option (as defined below), 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 Board of Trustees. While exchange traded options are obligations of the
Options Clearing Corporation, in the case of OTC options, the Fund relies on the
dealer from which it purchased the option to perform if the option is exercised.
Thus, when the Fund purchases an OTC option, it relies on the dealer from which
it purchased the option to make or take delivery of the underlying securities.
Failure by the dealer to do so would result in the loss of the premium paid by
the Fund as well as the 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 put and call
options, including put and call options on futures contracts. In addition, the
Fund 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 futures
contracts sold by the 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
interpretations of the Securities and Exchange Commission ("SEC") thereunder.
Combined Positions. The Fund is permitted to purchase and write options
in combination with other series of the Trust, or in combination with futures or
forward contracts, to adjust the risk and return characteristics of the overall
position. For example, the Fund may purchase a put option and write a call
option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call option
at one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial price
increase. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
Correlation of Price Changes. Because there are a limited number of
types of exchange traded options and futures contracts, it is likely that the
standardized options and futures contracts available will not match the Fund's
current or anticipated investments exactly. The Fund may invest in options and
futures contracts based on securities with different issuers, maturities, or
other characteristics from the securities in which it typically invests, which
involves a risk that the options or futures position will not track the
performance of the Fund's other investments.
Options and futures contracts prices also can 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 also may 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 also could 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. Although
the Fund will not be commodity pools, certain derivatives subject the Fund to
the rules of the Commodity Futures Trading Commission which limit the extent to
which the Fund can invest in such derivatives. The Fund may invest in futures
contracts and options with respect thereto for hedging purposes without limit.
However, the Fund may not invest in such contracts and options for other
purposes if the sum of the amount of initial margin deposits and premiums paid
for unexpired options with respect to such contracts, other than for bona fide
hedging purposes, exceeds 5% of the liquidation value of the Fund's assets,
after taking into account unrealized profits and unrealized losses on such
contracts and options; provided, however, that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount may be excluded in
calculating the 5% limitation.
In addition, the Fund will comply with guidelines established by the
SEC with respect to coverage of options and futures contracts by mutual funds,
and if the guidelines so require, will set aside appropriate liquid assets in a
segregated custodial account in the amount prescribed. Securities held in a
segregated account cannot be sold while the futures contract or option is
outstanding, unless they are replaced with other suitable assets. As a result,
there is a possibility that segregation of a large percentage of the Fund's
assets could impede portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
Swaps and Related Swap Products
The Fund may engage in swap transactions, including, but not limited
to, interest rate, currency, 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 matters 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 the 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 specified interest rate falls
outside an agreed upon range over a specified period of time or at specified
dates. The purchase 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., three 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 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 typically are 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 derivative 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 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 using 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 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 the 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 the Fund
may engage in such transactions.
Portfolio Turnover
For the period December 31, 1998 (commencement of operations) through
May 31, 1999, the Fund's portfolio turnover rate was 33%. 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 set forth below have been adopted by the
Trust with respect to 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 purchasing securities to the market value of the Fund's assets.
The Fund:
1. May not make any investments inconsistent with the Fund's classification as a
diversified investment company under the 1940 Act;
2. 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;
3. May not issue senior securities, except as permitted under the 1940 Act
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 the 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, the 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 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
8. 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 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 acquire securities of other investment companies, except
as permitted by the 1940 Act or any order pursuant thereto; and
(iii) 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.
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 the 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, Former 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 1992. 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 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.
TOTAL TRUSTEE
AGGREGATE TRUSTEE COMPENSATION ACCRUED BY
COMPENSATION PAID THE MASTER PORTFOLIOS
NAME OF TRUSTEE AND TITLE BY THE TRUST (*), J.P. MORGAN
DURING 1998 INSTITUTIONAL FUNDS,
J.P. MORGAN FUNDS AND
THE TRUST DURING 1998(**)
- ------------------------------- ---------------------- -------------------------
Frederick S. Addy, Trustee $0.00 $75,000
William G. Burns, Trustee $0.00 $75,000
Arthur C. Eschenlauer, Trustee $0.00 $75,000
Matthew Healey, Trustee (***) $0.00 $75,000
Chairman and Chief Executive
Officer
Michael P. Mallardi, Trustee $0.00 $75,000
(*) 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 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 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 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 fee paid to Pierpont Group, Inc. by the Fund for the
period December 31, 1998 (commencement of operations) through May 31, 1999 was
$48.
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.
JOHN P. COVINO; Vice President and Assistant Treasurer. Vice President and
Treasury Group Manager of Treasury Servicing and Administration of FDI. Prior to
November 1998, Mr. Covino was employed by Fidelity Investments where he held
multiple positions in its Institutional Brokerage Group. Prior to joining
Fidelity, Mr. Covino was employed by SunGard Brokerage systems where he was
responsible for the technology and development of the accounting product group.
His date of birth is October 8, 1963.
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 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.
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. From August 1995 to April 1997, she was an Assistant Vice
President with Hudson Valley Bank, and from September 1990 to August 1995, she
was a Second Vice President with Chase Manhattan Bank. Her address is 200 Park
Avenue, New York, New York 10166. Her date of birth is August 18, 1968.
GEORGE A. RIO-President and Assistant 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 Fund. Subject to the
supervision of the Fund's 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.
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 $326 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 380
capital market researchers, portfolio managers and traders. The conclusions of
the equity analysts' fundamental research are quantified into a set of projected
returns for individual companies through the use of a dividend discount model.
These returns are projected for two to five years to enable analysts to take a
longer term view. These returns, or normalized earnings, are used to establish
relative values among stocks in each industrial sector. These values may not be
the same as the markets' current valuations of these companies. This provides
the basis for ranking the attractiveness of the companies in an industry
according to five distinct quintiles or rankings. This ranking is one of the
factors considered in determining the stocks purchased and sold in each sector.
The investment advisory services the Advisor provides to the 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 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 Fund is the Russell 1000 Growth
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 Fund is managed by employees 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 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 Fund has agreed to pay the Advisor a fee, which is computed
daily and may be paid monthly, equal to 0.50% of the Fund's average daily net
assets.
For the period December 31, 1998 (commencement of operations) through
May 31, 1999, the Fund paid to the Advisor $10,884 in advisory fees.
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, 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 and will continue thereafter only
if it is approved at least annually (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. 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 Fund; (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 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.
For the period December 31, 1998 (commencement of operations) through May
31, 1999, the Fund paid to FDI $61 in administrative fees.
See "Expenses" below for applicable expense limitations.
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 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 Agreement, 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 Trust's
other series 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 the other investment companies
provided administrative services by Morgan.
For the period December 31, 1998 (commencement of operations) through
May 31, 1999, the Fund paid to Morgan, as Services Agent, $1,269.
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 for 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 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 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 FDI 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 for these services a fee of 0.10% (expressed as a percentage of the
average daily net asset value 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.
For the period December 31, 1998 (commencement of operations) through
May 31, 1999, the Fund paid to Morgan, as Shareholder Servicing Agent, $2,177.
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 Fund under the Services
Agreement, and 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 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 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.
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-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.
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, 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 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 as described in
the Prospectus until September 30, 2000 to the extent necessary to maintain the
Fund's total operating expenses at the annual rate of 0.75% of the Fund's
average daily assets. This limit does not cover extraordinary expenses. This
reimbursement arrangement can be changed or terminated at any time at the option
of J.P. Morgan.
For the period December 31, 1998 (commencement of operations) to May
31, 1999, J.P. Morgan reimbursed the Fund $70,819 under the expense
reimbursement arrangement described above.
PURCHASE OF SHARES
Additional Minimum Balance Information. 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 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 Fund reserves the right to determine the purchase orders that
they will accept.
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
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 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 Fund as described in the Prospectus.
The Fund generally intends to pay redemption proceeds in cash; however, it
reserves the right at its sole discretion to pay redemptions over $250,000
in-kind as a portfolio of representative stocks rather than cash. See below and
"Exchange of Shares."
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 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 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.
If the Trust determines that it would be detrimental to the best
interests 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 has been granted exemptive relief
from the SEC with respect to redemptions in-kind by the Fund. The Fund is
permitted to pay redemptions to greater than 5% shareholders in securities,
rather than in cash, to the extent permitted by the SEC. 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, the Fund will attempt to select securities for in-kind
redemptions that approximate the overall characteristics of the Fund's
portfolio. The 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 the Fund's portfolio securities.
The 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.
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 the 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. The 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
the 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 Fund generally intends to pay
redemption proceeds in cash, however, since it reserves the right at its sole
discretion to pay redemptions over $250,000 in-kind as a portfolio of
representative stocks rather than in cash, the fund reserves the right to deny
an exchange request in excess of that amount. 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
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 gains
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 also may close for purchases and
redemptions at such other times as may be determined by the Board of Trustees to
the extent permitted by applicable law. The days on which net asset value is
determined are the Fund's business days.
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. 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 average
currency exchange rate on the valuation date.
Securities or other assets for which market quotations are not readily
available (including certain restricted and illiquid securities) are valued at
fair value in accordance with procedures established by and under the general
supervision and responsibility of the Trustees. Such procedures include the use
of independent pricing services, which use prices based upon yields or prices of
securities of comparable quality, coupon, maturity and type; indications as to
values from dealers; and general market conditions. Short-term investments which
mature in 60 days or less are valued at amortized cost if their original
maturity was 60 days or less, or by amortizing their value on the 61st day prior
to maturity, if their original maturity when acquired by the Fund was more than
60 days, unless this is determined not to represent fair value by the Trustees.
Trading in securities 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 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.
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. As required by regulations of the SEC, average
annual total return of each class of shares 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, also may 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: (May 31,
1999): Average annual total return, 1 year: N/A; average annual total return, 5
years: N/A; average annual total return, commencement of operations (December
31, 1998) to period end: 5.20%; aggregate total return, 1 year: N/A; aggregate
total return, 5 years: N/A; aggregate total return, commencement of operations
(December 31, 1998) to period end: 5.20%.
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 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 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 Objectives and Policies."
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 Fund
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 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 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.
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.
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 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 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 only may sell
a security to another series of the Trust 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 the Fund, as
well as other clients including other clients, 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 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
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 the
Fund and that every written agreement, obligation, instrument or undertaking
made on behalf of the Fund will contain a provision to the effect that the
shareholders are not personally liable thereunder.
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 Fund paid the following approximate brokerage commissions for the
period December 31, 1998 (commencement of operations) through May 31, 1999:
$7,767.
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. To date, the Fund is authorized to issue Institutional Shares and
Select Shares, but only Institutional Shares are currently offered.
Each share represents an equal proportional interest in the Fund with
each other share of the same class. Upon liquidation of the Fund, holders are
entitled to share pro rata in the net assets of the Fund available for
distribution to such shareholders. Shares of the Fund have no preemptive or
conversion rights.
The shareholders of the Trust are entitled to one full or fractional
vote for each dollar or fraction of a dollar invested in shares. Subject to the
1940 Act, the Trustees have the power to alter the number and the terms of
office of the Trustees, to lengthen their own terms, or to make their terms of
unlimited duration, subject to certain removal procedures, and to appoint their
own successors. However, immediately after such appointment, the requisite
majority of the Trustees must have been elected by the shareholders of the
Trust. The voting rights of shareholders are not cumulative. The Trust does not
intend to hold annual meetings of shareholders. The Trustees may call meetings
of shareholders for action by shareholder vote if required by either the 1940
Act or the Trust's Declaration of Trust.
Shareholders of the Trust have the right, upon the declaration in
writing or vote of shareholders whose shares represent two-thirds of the net
asset value of the Trust, to remove a Trustee. The Trustees will call a meeting
of shareholders to vote on removal of a Trustee upon the written request of the
shareholders whose shares represent 10% of the net asset value of the Trust. The
Trustees also are required, under certain circumstances, to assist shareholders
in communicating with other shareholders.
As of August 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: JPMIM (99.99%).
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 Statement of Additional Information. These
laws and regulations are subject to change by legislative or administrative
action, possibly on a retroactive basis.
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 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 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 in accordance with the Code's requirements. If the Fund does not
qualify as a regulated investment company, it will be treated for tax purposes
as an ordinary corporation subject to federal income tax.
Under the Code, the Fund will be subject to a 4% excise tax on a
portion of its undistributed taxable income and capital gains if it fails to
meet certain distribution requirements by the end of the calendar year. The Fund
intends to make distributions in a timely manner and accordingly does not expect
to be subject to the excise tax.
For federal income tax purposes, dividends that are declared by the
Fund in October, November or December as of a record date in such month and
actually paid in January of the following year will be treated as if they were
paid on December 31 of the year declared. Therefore, such dividends will
generally be taxable to a shareholder in the year declared rather than the year
paid.
Distributions of net investment income and realized net short-term
capital gain in excess of net long-term capital loss is 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 overdistribution
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. Investors should consult their tax advisors concerning the
treatment of capital gains and losses.
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.
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 option 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, the
Fund will subtract the premium received from its cost basis in the securities
purchased.
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 shareholder
with respect to such shares. In addition, no loss will be allowed on the
redemption or exchange of shares of the Fund, if within a period beginning 30
days before the date of such redemption or exchange and ending 30 days after
such date, the shareholder acquires (such as through dividend reinvestment)
securities that are substantially identical to shares of the Fund. Investors are
urged to consult their tax advisors concerning the limitations on the
deductibility of capital losses.
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 Fund 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 Fund 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 Funds 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), the Fund 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 the Fund in a PFIC. If the 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. 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.
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 from the proceeds of redemptions, exchanges or other
dispositions of Fund shares unless IRS Form W-8 (or any successor form) 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 Funds may be subject to foreign
withholding taxes or other foreign taxes with respect to income (possibly
including, in some cases, capital gains) received from sources within foreign
countries.
State and Local Taxes. The Fund may be subject to state or local taxes
in jurisdictions in which the Fund is deemed to be doing business. In addition,
the treatment of the Fund and its shareholders in those states that 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
Telephone calls to the Fund, 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. Pursuant to
the rules and regulations of the SEC, certain portions have been omitted. The
registration statement, including the exhibits filed therewith, may be examined
at the office of the SEC in Washington, D.C.
Statements contained in this Statement of Additional Information and
the Prospectus concerning the contents of any contract or other document are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the applicable
Registration Statements.
Each such statement is qualified in all respects by such reference.
No dealer, salesman or any other person has been authorized to give any
information or to make any representations, other than those contained in the
Prospectus and this Statement of Additional Information, in connection with the
offer contained therein and, if given or made, such other information or
representations must not be relied upon as having been authorized by any of the
Trust, the Funds or FDI. The Prospectus and this Statement of Additional
Information do not constitute an offer by the 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 will continue to examine 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 is attempting
to develop business recovery/contingency plans. These plans 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 $93.3 million in 1997, $132.7 million in 1998 and
$36.6 million for the first eight months of 1999. Over the next few months, J.P.
Morgan will continue its efforts to prepare its systems for the year 2000. The
total cost to become year-2000 compliant is estimated at $300 million, 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 Fund.
FINANCIAL STATEMENTS
The financial statements and the report thereon of
PricewaterhouseCoopers LLP are incorporated herein by reference to the Fund's
May 31, 1999 annual report filing made with the SEC on August 8, 1999 pursuant
to Section 30(b) of the 1940 Act and Rule 30b2-1 thereunder (Accession Number
000104769-99-029686). The financial statements are available without charge upon
request by calling J.P. Morgan Funds Services at (800) 766-7722.
<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.
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.
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.
- --------
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.
<PAGE>
J.P. MORGAN SERIES TRUST
J.P. MORGAN INSTITUTIONAL MARKET NEUTRAL FUND
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 1, 1999
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS BUT CONTAINS
ADDITIONAL INFORMATION WHICH SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS DATED OCTOBER 1, 1999, 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
DATED MAY 31, 1999. THE PROSPECTUS AND THE FINANCIAL STATEMENTS, INCLUDING THE
INDEPENDENT ACCOUNTANTS' REPORT THEREON 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 OBJECTIVES AND POLICIES-----------------------------------1
INVESTMENT RESTRICTIONS---------------------------------------------17
TRUSTEES AND OFFICERS-----------------------------------------------19
INVESTMENT ADVISOR--------------------------------------------------23
DISTRIBUTOR---------------------------------------------------------26
CO-ADMINISTRATOR----------------------------------------------------26
SERVICES AGENT------------------------------------------------------27
CUSTODIAN AND TRANSFER AGENT----------------------------------------27
SHAREHOLDER SERVICING-----------------------------------------------28
FINANCIAL PROFESSIONALS---------------------------------------------29
INDEPENDENT ACCOUNTANTS---------------------------------------------30
EXPENSES------------------------------------------------------------30
PURCHASE OF SHARES--------------------------------------------------30
REDEMPTION OF SHARES------------------------------------------------31
EXCHANGE OF SHARES--------------------------------------------------32
DIVIDENDS AND DISTRIBUTIONS-----------------------------------------33
NET ASSET VALUE-----------------------------------------------------33
PERFORMANCE DATA----------------------------------------------------34
PORTFOLIO TRANSACTIONS----------------------------------------------35
MASSACHUSETTS TRUST-------------------------------------------------37
DESCRIPTION OF SHARES-----------------------------------------------38
TAXES---------------------------------------------------------------39
ADDITIONAL INFORMATION----------------------------------------------43
FINANCIAL STATEMENTS------------------------------------------------44
APPENDIX A - DESCRIPTION OF
SECURITIES RATINGS--------------------------------------------------A-1
<PAGE>
GENERAL
J.P. Morgan Institutional Market Neutral 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"). To date, the Trustees of the
Trust have authorized the issuance of two classes of shares--Institutional
Shares and Select Shares. The Fund currently offers Institutional Shares only.
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 assigned to
them in the Prospectus. The Trust'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").
Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by any 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 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 the Fund.
The Fund is designed for investors seeking long term capital
appreciation, while seeking to neutralize the risks of stock market investing.
The various types of securities in which the Fund may invest are
described below.
Equity Investments
- ---------The Fund invests primarily in equity securities consisting of U.S. and,
to a lesser extent, 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 Equity
Securities in which the Fund invests may include exchange-traded,
over-the-counter ("OTC") and unlisted common and preferred stocks. A discussion
of the various types of equity investments that may be purchased by the Fund
appears below. See also "Quality and Diversification Requirements."
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 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 prior to the expiration date.
Foreign Investments
The Fund may invest up to 20% of its 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 Fund's investments in
foreign securities may be adversely affected by changes in political or social
conditions, diplomatic relations, confiscatory taxation, expropriation,
nationalization, limitation on the removal of funds or assets, or imposition of
(or change in) exchange control or tax regulations in those foreign countries.
In addition, changes in government administrations or economic or monetary
policies in the United States or abroad could result in appreciation or
depreciation of portfolio securities and could favorably or unfavorably affect
the Fund's operations. Furthermore, the economies of individual foreign nations
may differ from the U.S. economy, whether favorably or unfavorably, in areas
such as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position; it may
also be more difficult to obtain and enforce a judgment against a foreign
issuer. Any foreign investments made by the Fund must be made in compliance with
U.S. and foreign currency restrictions and tax laws restricting the amounts and
types of foreign investments.
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 (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.
Generally, ADRs, in registered form, are designed for use in the U.S. securities
markets, and EDRs, in bearer form, are designed for use in European securities
markets.
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 voting
rights to the holders of the receipts with respect to the deposited securities.
Short Selling
The Fund will engage heavily in short selling. In these transactions,
the Fund sells a security it does not own in anticipation of a decline in the
market value of the security. To complete the transaction, the Fund must borrow
the security to make delivery to the buyer. The Fund is obligated to replace the
security borrowed by purchasing it subsequently at the market price at the time
of replacement. The price at such time may be more or less than the price at
which the security was sold by the Fund, which may result in a loss or gain,
respectively. Unlike purchasing a stock, where potential losses are limited to
the purchase price, short sales have no cap on maximum losses, and gains are
limited to the price of the stock at the time of the short sale.
The Fund will not sell securities short if, after effect is given to
any such short sale, the total market value of all securities sold short would
exceed 100% of the Fund's net assets.
The Fund also may make short sales "against the box," in which the Fund
enters into a short sale of a security which it owns or has the right to obtain
at no additional cost.
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 no interest will accrue 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 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, the 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 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 fund obligation)
incur a gain or loss due to market fluctuation. Also, the Fund may be
disadvantaged if the other party to the transaction defaults.
Investment Company Securities. Securities of other investment companies
may be acquired by the Fund to the extent permitted under the Investment Company
Act of 1940, as amended (the "1940 Act"). These limits require that, as
determined immediately after a purchase is made, (i) not more than 5% of the
value of the Fund's total assets will be invested in the securities of any one
investment company, (ii) not more than 10% of the value of the Fund's 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 Securities and Exchange Commission ("SEC") has granted the Fund an
exemptive order permitting it to invest its uninvested cash in any of the
following affiliated money market funds: J.P. Morgan Institutional Prime Money
Market Fund, J.P. Morgan Institutional Tax Exempt Money Market Fund, J.P. Morgan
Institutional Federal Money Market Fund and J.P. Morgan Institutional Treasury
Money Market Fund. The order sets the following conditions: (1) the Portfolio
may invest in one or more of the permitted money market funds up to an aggregate
limit of 25% of its assets; and (2) the Advisor will waive and/or reimburse its
advisory fee from the Portfolio in an amount sufficient to offset any doubling
up of investment advisory and shareholder servicing fees. The Portfolio has
applied for additional exemptive relief from the SEC to permit the Portfolio to
invest in additional affiliated investment companies. If the requested relief is
granted, the Portfolio would then be permitted to invest in non-money market
affiliated funds, subject to certain conditions specified in the applicable
order.
Reverse Repurchase Agreements. The Fund may enter into reverse
repurchase agreements. In a reverse repurchase agreement, the Fund sells a
security and agrees to repurchase the same security at a mutually agreed upon
date and price, reflecting the interest rate effective for the term of the
agreement. For purposes of the 1940 Act, a reverse repurchase agreement may be
deemed to be a borrowing of money by the Fund and, therefore, a form of
leverage. Leverage may cause any gains or losses for the Fund to be magnified.
The Fund will invest the proceeds of borrowings under reverse repurchase
agreements. In addition, the Fund will enter into a reverse repurchase agreement
only when the expected return to be earned from the investment of the proceeds
is greater than the interest expense of the transaction. The Fund may not enter
into reverse repurchase agreements exceeding in the aggregate one-third of the
market value of its total assets less liabilities (other than reverse repurchase
agreements and other borrowings). See "Investment Restrictions."
Loans of Portfolio Securities. The Fund is permitted to lend its
securities in an amount up to 33-1/3% of the value of the Fund's net 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 that occurs during the term of the loan inures to the Fund
and its respective shareholders. The Fund may pay reasonable finders' and
custodial fees in connection with a loan. In addition, the Fund will consider
all facts and circumstances before entering into such an agreement, 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 Fund's 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 its 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 certain 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 Fund. 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.
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 1933 Act, before it may be sold, the 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, the Fund might obtain a less
favorable price than prevailed when it decided to sell.
Money Market Instruments
Although the Fund intends, under normal circumstances and to the extent
practicable, to be fully invested in equity securities, the Fund 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 Fund appears below. 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
credit of the issuing agency.
Bank Obligations. Unless otherwise noted below, the Fund may invest in
negotiable certificates of deposit, time deposits and bankers' acceptances of
(i) banks, savings and loan associations and savings banks which have more than
$2 billion in total assets and are organized under the laws of the United States
or any state, (ii) foreign branches of these banks or of foreign banks of
equivalent size (Euros) and (iii) U.S. branches of foreign banks of equivalent
size (Yankees). The Fund will not invest in obligations for which the Advisor,
or any of its affiliated persons, is the ultimate obligor or accepting bank. The
Fund may also invest in 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. 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 Guaranty Trust Company of New York
("Morgan"), an affiliate of the Advisor 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 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
Trust'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 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 the Fund to the seller. The period of these
repurchase agreements will usually be short, from overnight to one week, and at
no time will the Fund invest in repurchase agreements for more than thirteen
months. The securities which are subject to repurchase agreements, however, may
have maturity dates in excess of thirteen months from the effective date of the
repurchase agreement. The Fund will always receive securities as collateral
whose market value is, and during the entire term of the agreement remains, at
least equal to 100% of the dollar amount invested by the Fund in each agreement
plus accrued interest, and the Fund will make payment for such securities only
upon physical delivery or upon evidence of book entry transfer to the account of
the custodian. If the seller defaults, the Fund might incur a loss if the value
of the collateral securing the repurchase agreement declines and might incur
disposition costs in connection with liquidating the collateral. In addition, if
bankruptcy proceedings are commenced with respect to the seller of the security,
realization upon disposal of the collateral by the Fund may be delayed or
limited.
Quality and Diversification Requirements
The Fund intends to meet the diversification requirements of the 1940
Act. Current 1940 Act diversification requirements require that with respect to
75% of the assets of the Fund: (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 the 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 Fund 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 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 Investors Service, Inc.
("Moody's") or Standard & Poor's Ratings Group ("S&P"), the issuer's parent
corporation, if any, must have outstanding commercial paper rated Prime-1 by
Moody's or A-1 by S&P, 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 S&P, 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
The Fund may use futures contracts and options for hedging and risk
management purposes. See "Risk Management" below. The Fund may not use futures
contracts and options for speculation.
The Fund may use options and futures contracts to manage its exposure
to changing 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, 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 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 limiting its exposure to losses. The 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.
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.
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 also may close out a put option position
by entering into an offsetting transaction, if a liquid market exists. 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 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 the 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. 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, 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 also will 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. 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 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 the
Fund may not be able to close out an option position into which it has
previously entered. When the Fund purchases an OTC option (as defined below), 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 Board of Trustees. While exchange traded options are obligations of the
Options Clearing Corporation, in the case of OTC options, the Fund relies on the
dealer from which it purchased the option to perform if the option is exercised.
Thus, when the Fund purchases an OTC option, it relies on the dealer from which
it purchased the option to make or take delivery of the underlying securities.
Failure by the dealer to do so would result in the loss of the premium paid by
the Fund as well as the 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 put and call
options, including put and call options on futures contracts. In addition, the
Fund 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 futures
contracts sold by the 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
interpretations of the SEC thereunder.
Combined Positions. The Fund is permitted to purchase and write options
in combination with other series of the Trust, or in combination with futures or
forward contracts, to adjust the risk and return characteristics of the overall
position. For example, the Fund may purchase a put option and write a call
option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call option
at one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial price
increase. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
Correlation of Price Changes. Because there are a limited number of
types of exchange traded options and futures contracts, it is likely that the
standardized options and futures contracts available will not match the Fund's
current or anticipated investments exactly. The Fund may invest in options and
futures contracts based on securities with different issuers, maturities, or
other characteristics from the securities in which it typically invests, which
involves a risk that the options or futures position will not track the
performance of the Fund's other investments.
Options and futures contracts prices also can 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 also may 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 also could 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. Although
the Fund will not be commodity pools, certain derivatives subject the Fund to
the rules of the Commodity Futures Trading Commission which limit the extent to
which the Fund can invest in such derivatives. The Fund may invest in futures
contracts and options with respect thereto for hedging purposes without limit.
However, the Fund may not invest in such contracts and options for other
purposes if the sum of the amount of initial margin deposits and premiums paid
for unexpired options with respect to such contracts, other than for bona fide
hedging purposes, exceeds 5% of the liquidation value of the Fund's assets,
after taking into account unrealized profits and unrealized losses on such
contracts and options; provided, however, that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount may be excluded in
calculating the 5% limitation.
In addition, the Fund will comply with guidelines established by the
SEC with respect to coverage of options and futures contracts by mutual funds,
and if the guidelines so require, will set aside appropriate liquid assets in a
segregated custodial account in the amount prescribed. Securities held in a
segregated account cannot be sold while the futures contract or option is
outstanding, unless they are replaced with other suitable assets. As a result,
there is a possibility that segregation of a large percentage of the Fund's
assets could impede portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
Swaps and Related Swap Products
The Fund may engage in swap transactions, including, but not limited
to, interest rate, currency, 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 matters 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 the 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 specified interest rate falls
outside an agreed upon range over a specified period of time or at specified
dates. The purchase 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., three 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 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 typically are 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 derivative 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 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 using 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 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 the 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 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 December 31, 1998 (commencement of operations) through
May 31, 1999, the Fund's portfolio turnover rate was 195%. 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 set forth below have been adopted by the
Trust with respect to 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 purchasing securities to the market value of the Fund's assets.
The Fund:
1. May not make any investments inconsistent with the Fund's
classification as a diversified investment company under the 1940 Act;
2. 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;
3. May not issue senior securities, except as permitted under the 1940
Act 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 the 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, the 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 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
8. 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 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; and
(ii) 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 the 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, Former 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 1992. 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 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.
<PAGE>
Trustee compensation expenses paid by the Trust for the calendar year ended
December 31, 1998 is set forth below.
TOTAL TRUSTEE COMPENSATION
ACCRUED BY THE MASTER
AGGREGATE TRUSTEE PORTFOLIOS(*), J.P. MORGAN
NAME OF TRUSTEE AND TITLE COMPENSATION PAID INSTITUTIONAL FUNDS, J.P.
BY THE TRUST DURING MORGAN FUNDS AND THE TRUST
1998 DURING 1998(**)
- ------------------------------ -------------------- --------------------------
Frederick S. Addy, Trustee $0.00 $75,000
William G. Burns, Trustee $0.00 $75,000
Arthur C. Eschenlauer, Trustee $0.00 $75,000
Matthew Healey, Trustee (***) $0.00 $75,000
Chairman and Chief Executive
Officer
Michael P. Mallardi, Trustee $0.00 $75,000
- --------------------------------------------------------------------------------
(*) 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 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 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 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 fee paid to Pierpont Group, Inc. by the Fund for the
period December 31, 1998 (commencement of operations) through May 31, 1999 was
$91.
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.
JOHN P. COVINO; Vice President and Assistant Treasurer. Vice President and
Treasury Group Manager of Treasury Servicing and Administration of FDI. Prior to
November 1998, Mr. Covino was employed by Fidelity Investments where he held
multiple positions in its Institutional Brokerage Group. Prior to joining
Fidelity, Mr. Covino was employed by SunGard Brokerage systems where he was
responsible for the technology and development of the accounting product group.
His date of birth is October 8, 1963.
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 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.
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. From August 1995 to April 1997, she was an Assistant Vice
President with Hudson Valley Bank, and from September 1990 to August 1995, she
was a Second Vice President with Chase Manhattan Bank. Her address is 200 Park
Avenue, New York, New York 10166. Her date of birth is August 18, 1968.
GEORGE A. RIO-President and Assistant 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 Fund. Subject to the
supervision of the Fund's 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.
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 $326 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 380
capital market researchers, portfolio managers and traders. The conclusions of
the equity analysts' fundamental research are quantified into a set of projected
returns for individual companies through the use of a dividend discount model.
These returns are projected for two to five years to enable analysts to take a
longer term view. These returns, or normalized earnings, are used to establish
relative values among stocks in each industrial sector. These values may not be
the same as the markets' current valuations of these companies. This provides
the basis for ranking the attractiveness of the companies in an industry
according to five distinct quintiles or rankings. This ranking is one of the
factors considered in determining the stocks purchased and sold in each sector.
The investment advisory services the Advisor provides to the 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 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 Fund is the 90-day U.S.
Treasury Bill.
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 Fund is managed by employees 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 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 Fund has agreed to pay the Advisor a fee, which is computed
daily and may be paid monthly, equal to 1.25% of the Fund's average daily net
assets.
For the period December 31, 1998 (commencement of operations) through
May 31, 1999, the Fund paid to the Advisor $62,113 in advisory fees under the
prior Advisory Agreement described above.
The 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, 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 and will continue thereafter only
if it is approved at least annually (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. 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 Fund; (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 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.
For the period December 31, 1998 (commencement of operations) through May
31, 1999, the Fund paid to FDI $103 in administrative fees.
See "Expenses" below for applicable expense limitations.
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 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 Agreement, 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 Trust's
other series 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 the other investment companies for
which Morgan provides administrative services.
For the period December 31, 1998 (commencement of operations) through
May 31, 1999, the Fund paid to Morgan, as Services Agent, $2,147.
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 for 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 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 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 FDI 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 for these services a fee of 0.10% (expressed as a percentage of the
average daily net asset value 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.
For the period December 31, 1998 (commencement of operations) through
May 31, 1999, the Fund paid Morgan, as shareholder servicing agent, $4,141.
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 Fund under the Services
Agreement, and 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 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 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.
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-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.
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, 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 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 to the extent
necessary to maintain the Fund's total operating expenses at an annual rate of
1.25% of the Fund's average daily assets. This limit does not cover
extraordinary expenses. These reimbursement arrangements will continue at least
through September 30, 2000.
For the period December 31, 1998 (commencement of operations) to May
31, 1999, J.P. Morgan reimbursed the Fund $88,648 pursuant to prior expense
reimbursement arrangements.
PURCHASE OF SHARES
Additional Minimum Balance Information. 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 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 Fund reserves the right to determine the purchase orders that
they will accept.
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
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 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 Fund as described in the Prospectus.
The Fund generally intends to pay redemption proceeds in cash; however, it
reserves the right at its sole discretion to pay redemptions over $250,000
in-kind as a portfolio of representative stocks rather than cash. See below and
"Exchange of Shares."
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 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 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.
If the Trust determines that it would be detrimental to the best
interests 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 has been granted exemptive relief
from the SEC with respect to redemptions in-kind by the Fund. The Fund is
permitted to pay redemptions to greater than 5% shareholders in securities,
rather than in cash, to the extent permitted by the SEC. 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, the Fund will attempt to select securities for in-kind
redemptions that approximate the overall characteristics of the Fund's
portfolio. The 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 the Fund's portfolio securities.
The 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.
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 the 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. The 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
the 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 Fund generally intends to pay
redemption proceeds in cash, however, since it reserves the right at its sole
discretion to pay redemptions over $250,000 in-kind as a portfolio of
representative stocks rather than in cash, the fund reserves the right to deny
an exchange request in excess of that amount. 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
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 gains
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 also may close for purchases and
redemptions at such other times as may be determined by the Board of Trustees to
the extent permitted by applicable law. The days on which net asset value is
determined are the Fund's business days.
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. 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 average
currency exchange rate on the valuation date.
Securities or other assets for which market quotations are not readily
available (including certain restricted and illiquid securities) are valued at
fair value in accordance with procedures established by and under the general
supervision and responsibility of the Trustees. Such procedures include the use
of independent pricing services, which use prices based upon yields or prices of
securities of comparable quality, coupon, maturity and type; indications as to
values from dealers; and general market conditions. Short-term investments which
mature in 60 days or less are valued at amortized cost if their original
maturity was 60 days or less, or by amortizing their value on the 61st day prior
to maturity, if their original maturity when acquired by the Fund was more than
60 days, unless this is determined not to represent fair value by the Trustees.
Trading in securities 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 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.
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. As required by regulations of the SEC, average
annual total return of each class of shares 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, also may 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: (May 31,
1999): Average annual total return, 1 year: N/A; average annual total return, 5
years: N/A; average annual total return, commencement of operations (December
31, 1998) to period end: 1.34%; aggregate total return, 1 year: N/A; aggregate
total return, 5 years: N/A; aggregate total return, commencement of operations
(December 31, 1998) to period end: 1.34%.
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 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 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 Objectives and Policies."
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 Fund
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 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 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.
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.
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 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 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 only may sell
a security to another series of the Trust 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 the Fund, as
well as other clients including other clients, 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 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.
The Fund paid the following approximate brokerage commissions for the
period December 31, 1998 (commencement of operations) through May 31, 1999:
$4,334.
MASSACHUSETTS TRUST
The Trust is a "Massachusetts business trust" of which the Fund is a
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 the
Fund and that every written agreement, obligation, instrument or undertaking
made on behalf of the Fund will contain a provision to the effect that the
shareholders are not personally liable thereunder.
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.
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. To date, the Fund is authorized to issue Institutional Shares and
Select Shares, but only Institutional Shares are currently offered.
Each share represents an equal proportional interest in the Fund with
each other share of the same class. Upon liquidation of the Fund, holders are
entitled to share pro rata in the net assets of the Fund available for
distribution to such shareholders. Shares of the Fund have no preemptive or
conversion rights.
The shareholders of the Trust are entitled to one full or fractional
vote for each dollar or fraction of a dollar invested in shares. Subject to the
1940 Act, the Trustees have the power to alter the number and the terms of
office of the Trustees, to lengthen their own terms, or to make their terms of
unlimited duration, subject to certain removal procedures, and to appoint their
own successors. However, immediately after such appointment, the requisite
majority of the Trustees must have been elected by the shareholders of the
Trust. The voting rights of shareholders are not cumulative. The Trust does not
intend to hold annual meetings of shareholders. The Trustees may call meetings
of shareholders for action by shareholder vote if required by either the 1940
Act or the Trust's Declaration of Trust.
Shareholders of the Trust have the right, upon the declaration in
writing or vote of shareholders whose shares represent two-thirds of the net
asset value of the Trust, to remove a Trustee. The Trustees will call a meeting
of shareholders to vote on removal of a Trustee upon the written request of the
shareholders whose shares represent 10% of the net asset value of the Trust. The
Trustees also are 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 August 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: JPMIM (99.94%).
The address of each owner listed above is c/o JPMIM, 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 following discussion of tax consequences is based on U.S. federal
tax laws in effect on the date of the Statement of Additional Information. These
laws and regulations are subject to change by legislative or administrative
action, possibly on a retroactive basis.
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 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 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 in accordance with the Code's requirements. If the Fund does not
qualify as a regulated investment company, it will be treated for tax purposes
as an ordinary corporation subject to federal income tax.
Under the Code, the Fund will be subject to a 4% excise tax on a
portion of its undistributed taxable income and capital gains if it fails to
meet certain distribution requirements by the end of the calendar year. The Fund
intends to make distributions in a timely manner and accordingly does not expect
to be subject to the excise tax.
For federal income tax purposes, dividends that are declared by the
Fund in October, November or December as of a record date in such month and
actually paid in January of the following year will be treated as if they were
paid on December 31 of the year declared. Therefore, such dividends will
generally be taxable to a shareholder in the year declared rather than the year
paid.
Distributions of net investment income and realized net short-term
capital gain in excess of net long-term capital loss is 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 overdistribution
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. Investors should consult their tax advisors concerning the
treatment of capital gains and losses.
Gains or losses on sales of portfolio securities will be treated as
long-term capital gains or losses if the securities have been held for more than
one year except in certain cases where a put option 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 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 shareholder
with respect to such shares. In addition, no loss will be allowed on the
redemption or exchange of shares of the Fund, if within a period beginning 30
days before the date of such redemption or exchange and ending 30 days after
such date, the shareholder acquires (such as through dividend reinvestment)
securities that are substantially identical to shares of the Fund. Investors are
urged to consult their tax advisors concerning the limitations on the
deductibility of capital losses.
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 Fund 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 Fund 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), the Fund 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. If the 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. 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.
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 from the proceeds of redemptions, exchanges or other
dispositions of Fund shares unless IRS Form W-8 (or any successor form) 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 Funds may be subject to foreign
withholding taxes or other foreign taxes with respect to income (possibly
including, in some cases, capital gains) received from sources within foreign
countries.
State and Local Taxes. The Fund may be subject to state or local taxes
in jurisdictions in which the Fund is deemed to be doing business. In addition,
the treatment of the Fund and its shareholders in those states that 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
Telephone calls to the Fund, 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. Pursuant to
the rules and regulations of the SEC, certain portions have been omitted. The
registration statement, including the exhibits filed therewith, may be examined
at the office of the SEC in Washington, D.C.
Statements contained in this Statement of Additional Information and
the Prospectus concerning the contents of any contract or other document are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the applicable
Registration Statements.
Each such statement is qualified in all respects by such reference.
No dealer, salesman or any other person has been authorized to give any
information or to make any representations, other than those contained in the
Prospectus and this Statement of Additional Information, in connection with the
offer contained therein and, if given or made, such other information or
representations must not be relied upon as having been authorized by any of the
Trust, the Funds or FDI. The Prospectus and this Statement of Additional
Information do not constitute an offer by the 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 will
continue to examine 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 is attempting
to develop business recovery/contingency plans. These plans 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 $93.3 million in 1997, $132.7 million in 1998 and $36.6
million for the first eight months of 1999. Over the next few months, J.P.
Morgan will continue its efforts to prepare its systems for the year 2000. The
total cost to become year-2000 compliant is estimated at $300 million, 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 Fund.
FINANCIAL STATEMENTS
The financial statements and the report thereon of
PricewaterhouseCoopers LLP are incorporated herein by reference to the Fund's
May 31, 1999 annual report filing made with the SEC on September 23, 1999
pursuant to Section 30(b) of the 1940 Act and Rule 30b2-1 thereunder (Accession
Number 0001047469-99-036598). The financial statements are available without
charge upon request by calling J.P. Morgan Funds Services at (800) 766-7722.
<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.
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.
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.
- --------
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.
<PAGE>
J.P. MORGAN SERIES TRUST
J.P. MORGAN INSTITUTIONAL SMARTINDEX FUND
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 1, 1999
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS BUT CONTAINS
ADDITIONAL INFORMATION WHICH SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
PROSPECTUS DATED OCTOBER 1, 1999, 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
DATED MAY 31, 1999. THE PROSPECTUS AND THESE FINANCIAL STATEMENTS, INCLUDING THE
INDEPENDENT ACCOUNTANT'S REPORT ON 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---------------------------------------------16
TRUSTEES AND OFFICERS-----------------------------------------------18
INVESTMENT ADVISOR--------------------------------------------------23
DISTRIBUTOR---------------------------------------------------------25
CO-ADMINISTRATOR----------------------------------------------------26
SERVICES AGENT------------------------------------------------------26
CUSTODIAN AND TRANSFER AGENT----------------------------------------27
SHAREHOLDER SERVICING-----------------------------------------------27
FINANCIAL PROFESSIONALS---------------------------------------------28
INDEPENDENT ACCOUNTANTS---------------------------------------------29
EXPENSES------------------------------------------------------------29
PURCHASE OF SHARES--------------------------------------------------30
REDEMPTION OF SHARES------------------------------------------------31
EXCHANGE OF SHARES--------------------------------------------------32
DIVIDENDS AND DISTRIBUTIONS-----------------------------------------32
NET ASSET VALUE-----------------------------------------------------33
PERFORMANCE DATA----------------------------------------------------34
PORTFOLIO TRANSACTIONS----------------------------------------------35
MASSACHUSETTS TRUST-------------------------------------------------37
DESCRIPTION OF SHARES-----------------------------------------------37
TAXES---------------------------------------------------------------39
ADDITIONAL INFORMATION----------------------------------------------42
FINANCIAL STATEMENTS------------------------------------------------44
APPENDIX 1 - DESCRIPTION OF
SECURITIES RATINGS-------------------------------------------------A-1
<PAGE>
GENERAL
J.P. Morgan Institutional SmartIndex 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"). To date, the Trustees of the Trust
have authorized the issuance of two classes of shares--Institutional Shares and
Select Shares. The Fund currently offers Institutional Shares only.
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 assigned to
them in the Prospectus. The Trust'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").
Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by any 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 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 the Fund.
The Fund is designed for investors seeking a consistently high total
return from a broadly diversified portfolio of approximately 350 equity
securities with risk characteristics similar to the Standard & Poor's 500 Stock
Index ("S&P 500").
The various types of securities in which the Fund may invest are
described below.
Equity Investments
The Fund invests primarily in equity securities consisting of U.S. and,
to a lesser extent, 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 Equity
Securities in which the Fund invests may include exchange-traded,
over-the-counter ("OTC") and unlisted common and preferred stocks. A discussion
of the various types of equity investments that may be purchased by the Fund
appears below. See also "Quality and Diversification Requirements."
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 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 prior to the expiration date.
Foreign Investments
The Fund may invest up to 20% of its 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 Fund's investments in
foreign securities may be adversely affected by changes in political or social
conditions, diplomatic relations, confiscatory taxation, expropriation,
nationalization, limitation on the removal of funds or assets, or imposition of
(or change in) exchange control or tax regulations in those foreign countries.
In addition, changes in government administrations or economic or monetary
policies in the United States or abroad could result in appreciation or
depreciation of portfolio securities and could favorably or unfavorably affect
the Fund's operations. Furthermore, the economies of individual foreign nations
may differ from the U.S. economy, whether favorably or unfavorably, in areas
such as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position; it may
also be more difficult to obtain and enforce a judgment against a foreign
issuer. Any foreign investments made by the Fund must be made in compliance with
U.S. and foreign currency restrictions and tax laws restricting the amounts and
types of foreign investments.
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 (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 voting
rights to the holders of the receipts with respect to the deposited securities.
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 no interest will accrue 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 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, the 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 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 fund obligation)
incur a gain or loss due to market fluctuation. Also, the Fund may be
disadvantaged if the other party to the transaction defaults.
Investment Company Securities. Securities of other investment companies
may be acquired by the Fund to the extent permitted under the Investment Company
Act of 1940, as amended (the "1940 Act"). These limits require that, as
determined immediately after a purchase is made, (i) not more than 5% of the
value of the Fund's total assets will be invested in the securities of any one
investment company, (ii) not more than 10% of the value of the Fund's 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 Securities and Exchange Commission ("SEC") has granted the Fund an
exemptive order permitting it to invest its uninvested cash in any of the
following affiliated money market funds: J.P. Morgan Institutional Prime Money
Market Fund, J.P. Morgan Institutional Tax Exempt Money Market Fund, J.P. Morgan
Institutional Federal Money Market Fund and J.P. Morgan Institutional Treasury
Money Market Fund. The order sets the following conditions: (1) the Portfolio
may invest in one or more of the permitted money market funds up to an aggregate
limit of 25% of its assets; and (2) the Advisor will waive and/or reimburse its
advisory fee from the Portfolio in an amount sufficient to offset any doubling
up of investment advisory and shareholder servicing fees. The Portfolio has
applied for additional exemptive relief from the SEC to permit the Portfolio to
invest in additional affiliated investment companies. If the requested relief is
granted, the Portfolio would then be permitted to invest in non-money market
affiliated funds, subject to certain conditions specified in the applicable
order.
Reverse Repurchase Agreements. The Fund may enter into reverse
repurchase agreements. In a reverse repurchase agreement, the Fund sells a
security and agrees to repurchase the same security at a mutually agreed upon
date and price, reflecting the interest rate effective for the term of the
agreement. For purposes of the 1940 Act, a reverse repurchase agreement may be
deemed to be a borrowing of money by the Fund and, therefore, a form of
leverage. Leverage may cause any gains or losses for the Fund to be magnified.
The Fund will invest the proceeds of borrowings under reverse repurchase
agreements. In addition, the Fund will enter into a reverse repurchase agreement
only when the expected return to be earned from the investment of the proceeds
is greater than the interest expense of the transaction. The Fund may not enter
into reverse repurchase agreements exceeding in the aggregate one-third of the
market value of its total assets less liabilities (other than reverse repurchase
agreements and other borrowings). See "Investment Restrictions."
Loans of Portfolio Securities. The Fund is permitted to lend its
securities in an amount up to 33-1/3% of the value of the Fund's net 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 that occurs during the term of the loan inures to the Fund
and its respective shareholders. The Fund may pay reasonable finders' and
custodial fees in connection with a loan. In addition, the Fund will consider
all facts and circumstances before entering into such an agreement, 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 Fund's 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 its 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 certain 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 Fund. 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.
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 1933 Act, before it may be sold, the 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, the Fund might obtain a less
favorable price than prevailed when it decided to sell.
Money Market Instruments
Although the Fund intends, under normal circumstances and to the extent
practicable, to be fully invested in equity securities, the Fund 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 Fund appears below. 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
credit of the issuing agency.
Bank Obligations. Unless otherwise noted below, the Fund may invest in
negotiable certificates of deposit, time deposits and bankers' acceptances of
(i) banks, savings and loan associations and savings banks which have more than
$2 billion in total assets and are organized under the laws of the United States
or any state, (ii) foreign branches of these banks or of foreign banks of
equivalent size (Euros) and (iii) U.S. branches of foreign banks of equivalent
size (Yankees). The Fund will not invest in obligations for which the Advisor,
or any of its affiliated persons, is the ultimate obligor or accepting bank. The
Fund may also invest in 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. 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 Guaranty Trust Company of New York
("Morgan"), an affiliate of the Advisor 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 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
Trust'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 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 the Fund to the seller. The period of these
repurchase agreements will usually be short, from overnight to one week, and at
no time will the Fund invest in repurchase agreements for more than thirteen
months. The securities which are subject to repurchase agreements, however, may
have maturity dates in excess of thirteen months from the effective date of the
repurchase agreement. The Fund will always receive securities as collateral
whose market value is, and during the entire term of the agreement remains, at
least equal to 100% of the dollar amount invested by the Fund in each agreement
plus accrued interest, and the Fund will make payment for such securities only
upon physical delivery or upon evidence of book entry transfer to the account of
the custodian. If the seller defaults, the Fund might incur a loss if the value
of the collateral securing the repurchase agreement declines and might incur
disposition costs in connection with liquidating the collateral. In addition, if
bankruptcy proceedings are commenced with respect to the seller of the security,
realization upon disposal of the collateral by the Fund may be delayed or
limited.
Quality and Diversification Requirements
The Fund intends to meet the diversification requirements of the 1940
Act. Current 1940 Act diversification requirements require that with respect to
75% of the assets of the Fund: (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 the 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 Fund 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 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 Investors Service, Inc.
("Moody's") or Standard & Poor's Ratings Group ("S&P"), the issuer's parent
corporation, if any, must have outstanding commercial paper rated Prime-1 by
Moody's or A-1 by S&P, 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 S&P, 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
The Fund may use futures contracts and options for hedging and risk
management purposes, although it currently intends only to use futures contracts
and only for the purpose of "equitizing" cash as described below.
The Fund may not use futures contracts and options for speculation.
The Fund intends to use futures contracts 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.
The Fund may use options and futures contracts to manage its exposure
to changing 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, 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 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 limiting its exposure to losses. The 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.
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.
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 also may close out a put option position
by entering into an offsetting transaction, if a liquid market exists. 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 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 the 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. 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, 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 also will 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. 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 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 the
Fund may not be able to close out an option position into which it has
previously entered. When the Fund purchases an OTC option (as defined below), 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 Board of Trustees. While exchange traded options are obligations of the
Options Clearing Corporation, in the case of OTC options, the Fund relies on the
dealer from which it purchased the option to perform if the option is exercised.
Thus, when the Fund purchases an OTC option, it relies on the dealer from which
it purchased the option to make or take delivery of the underlying securities.
Failure by the dealer to do so would result in the loss of the premium paid by
the Fund as well as the 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 put and call
options, including put and call options on futures contracts. In addition, the
Fund 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 futures
contracts sold by the 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
interpretations of the Securities and Exchange Commission ("SEC") thereunder.
Combined Positions. The Fund is permitted to purchase and write options
in combination with other series of the Trust, or in combination with futures or
forward contracts, to adjust the risk and return characteristics of the overall
position. For example, the Fund may purchase a put option and write a call
option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call option
at one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial price
increase. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
Correlation of Price Changes. Because there are a limited number of
types of exchange traded options and futures contracts, it is likely that the
standardized options and futures contracts available will not match the Fund's
current or anticipated investments exactly. The Fund may invest in options and
futures contracts based on securities with different issuers, maturities, or
other characteristics from the securities in which it typically invests, which
involves a risk that the options or futures position will not track the
performance of the Fund's other investments.
Options and futures contracts prices also can 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 also may 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 also could 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. Although
the Fund will not be commodity pools, certain derivatives subject the Fund to
the rules of the Commodity Futures Trading Commission which limit the extent to
which the Fund can invest in such derivatives. The Fund may invest in futures
contracts and options with respect thereto for hedging purposes without limit.
However, the Fund may not invest in such contracts and options for other
purposes if the sum of the amount of initial margin deposits and premiums paid
for unexpired options with respect to such contracts, other than for bona fide
hedging purposes, exceeds 5% of the liquidation value of the Fund's assets,
after taking into account unrealized profits and unrealized losses on such
contracts and options; provided, however, that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount may be excluded in
calculating the 5% limitation.
In addition, the Fund will comply with guidelines established by the
SEC with respect to coverage of options and futures contracts by mutual funds,
and if the guidelines so require, will set aside appropriate liquid assets in a
segregated custodial account in the amount prescribed. Securities held in a
segregated account cannot be sold while the futures contract or option is
outstanding, unless they are replaced with other suitable assets. As a result,
there is a possibility that segregation of a large percentage of the Fund's
assets could impede portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
Swaps and Related Swap Products
The Fund may engage in swap transactions, including, but not limited
to, interest rate, currency, 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 matters 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 the 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 specified interest rate falls
outside an agreed upon range over a specified period of time or at specified
dates. The purchase 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., three 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 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 typically are 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 derivative 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 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 using 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 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 the 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 the Fund
may engage in such transactions.
Portfolio Turnover
For the period December 31, 1998 (commencement of operations) through
May 31, 1999, the Fund's portfolio turnover rate was 19%. 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 set forth below have been adopted by the
Trust with respect to 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 purchasing securities to the market value of the Fund's assets.
The Fund:
1. May not make any investments inconsistent with the Fund's classification as a
diversified investment company under the 1940 Act; 2. 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;
3. May not issue senior securities, except as permitted under the 1940 Act 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 the
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, the 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 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
8. 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 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 acquire securities of other investment companies, except
as permitted by the 1940 Act or any order pursuant thereto; and
(iii) 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.
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 the 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; Former 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 1992. 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 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.
AGGREGATE TRUSTEE TOTAL TRUSTEE COMPENSATION
COMPENSATION PAID ACCRUED BY THE MASTER
NAME OF TRUSTEE AND TITLE BY THE TRUST DURING PORTFOLIOS(*), J.P. MORGAN
1998 INSTITUTIONAL FUNDS, J.P.
MORGAN FUNDS AND THE TRUST
DURING 1998(**)
- ---------------------------- --------------------- --------------------------
Frederick S. Addy, Trustee $0.00 $75,000
William G. Burns, Trustee $0.00 $75,000
Arthur C. Eschenlauer, Trustee $0.00 $75,000
Matthew Healey, Trustee (***) $0.00 $75,000
Chairman and Chief Executive
Officer
Michael P. Mallardi, Trustee $0.00 $75,000
- ----------------------------- --------------------- --------------------------
(*) 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 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 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 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 fee paid to Pierpont Group, Inc. by the Fund for the
period December 31, 1998 (commencement of operations) through May 31, 1999 was
$47.
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.
JOHN P. COVINO; Vice President and Assistant Treasurer. Vice President and
Treasury Group Manager of Treasury Servicing and Administration of FDI. Prior to
November 1998, Mr. Covino was employed by Fidelity Investments where he held
multiple positions in its Institutional Brokerage Group. Prior to joining
Fidelity, Mr. Covino was employed by SunGard Brokerage systems where he was
responsible for the technology and development of the accounting product group.
His date of birth is October 8, 1963.
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 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.
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. From August 1995 to April 1997, she was an
Assistant Vice President with Hudson Valley Bank, and from September 1990 to
August 1995, she was a Second Vice President with Chase Manhattan Bank. Her
address is 200 Park Avenue, New York, New York 10166. Her date of birth is
August 18, 1968.
GEORGE A. RIO-President and Assistant 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 Fund. Subject to the
supervision of the Fund's 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.
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 $326 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 380
capital market researchers, portfolio managers and traders. The conclusions of
the equity analysts' fundamental research are quantified into a set of projected
returns for individual companies through the use of a dividend discount model.
These returns are projected for two to five years to enable analysts to take a
longer term view. These returns, or normalized earnings, are used to establish
relative values among stocks in each industrial sector. These values may not be
the same as the markets' current valuations of these companies. This provides
the basis for ranking the attractiveness of the companies in an industry
according to five distinct quintiles or rankings. This ranking is one of the
factors considered in determining the stocks purchased and sold in each sector.
The investment advisory services the Advisor provides to the 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 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 Fund is 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 Fund is managed by employees 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 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 Fund has agreed to pay the Advisor a fee, which is computed
daily and may be paid monthly, equal to 0.25% of the Fund's average daily net
assets.
For the period December 31, 1998 (commencement of operations) through
May 31, 1999, the Fund paid the Advisor $5,442 in advisory fees.
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, 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 and will continue thereafter only
if it is approved at least annually (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. 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 Fund; (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 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.
For the period December 31, 1998 (commencement of operations) through May
31, 1999, the Fund paid to FDI $61 in administrative fees.
See "Expenses" below for applicable expense limitations.
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 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 Agreement, 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 Trust's
other series 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 the other investment companies for
which Morgan provides administrative services.
For the period December 31, 1998 (commencement of operations) through
May 31, 1999, the Fund paid to Morgan, as Services Agent, $1,264.
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 for 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 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 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 FDI 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 for these services a fee of 0.10% (expressed as a percentage of the
average daily net asset value 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.
For the period December 31, 1998 (commencement of operations) through
May 31, 1999, the Fund paid to Morgan, as Shareholder Servicing Agent, $2,185.
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 Fund under the Services
Agreement, and 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 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 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.
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-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.
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, 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 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 as described in
the Prospectus until September 30, 2000 to the extent necessary to maintain the
Fund's total operating expenses at the annual rate of 0.35% of the Fund's
average daily assets. This limit does not cover extraordinary expenses. This
reimbursement arrangement can be changed or terminated at any time at the option
of J.P. Morgan.
For the period December 31, 1998 (commencement of operations) to May
31, 1999, J.P. Morgan reimbursed the Fund $111,162 under the expense
reimbursement arrangement described above.
PURCHASE OF SHARES
Additional Minimum Balance Information. 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 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 Fund reserves the right to determine the purchase orders that
they will accept.
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
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 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 Fund as described in the Prospectus.
The Fund generally intends to pay redemption proceeds in cash; however, it
reserves the right at its sole discretion to pay redemptions over $250,000
in-kind as a portfolio of representative stocks rather than cash. See below and
"Exchange of Shares."
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 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 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.
If the Trust determines that it would be detrimental to the best
interests 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.
In general, the Fund will attempt to select securities for in-kind
redemptions that approximate the overall characteristics of the Fund's
portfolio. The 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 the Fund's portfolio securities.
The 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.
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 the 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. The 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
the 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. 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
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 gains
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 also may close for purchases and
redemptions at such other times as may be determined by the Board of Trustees to
the extent permitted by applicable law. The days on which net asset value is
determined are the Fund's business days.
The value of investments listed on a domestic or foreign securities
exchange, including National Association of Securities Dealers Automated
Quotations ("NASDAQ"), other than options on stock indexes, is based on the last
sale prices on the exchange on which the security is principally traded (the
"primary exchange"). If there has been no sale on the primary exchange on the
valuation date, and the spread between bid and asked quotations on the primary
exchange is less than or equal to 10% of the bid price for the security, the
security shall be valued at the average of the closing bid and asked quotations
on the primary exchange. Under all other circumstances (e.g. there is no last
sale on the primary exchange, there are no bid and asked quotations on the
primary exchange, or the spread between bid and asked quotations is greater than
10% of the bid price), the value of the security shall be the last sale price on
the primary exchange up to ten days prior to the valuation date unless, in the
judgment of the portfolio manager, material events or conditions since such last
sale necessitate fair valuation of the security. 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. Options
and futures traded on foreign exchanges are valued at the last sale price
available prior to the calculation of the Fund's net asset value. 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 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 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.
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. As required by regulations of the SEC, average
annual total return of each class of shares 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, also may 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: (May 31,
1999): Average annual total return, 1 year: N/A; average annual total return, 5
years: N/A; average annual total return, commencement of operations (December
31, 1998) to period end: 7.27%; aggregate total return, 1 year: N/A; aggregate
total return, 5 years: N/A; aggregate total return, commencement of operations
(December 31, 1998) to period end: 7.27%.
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 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 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 Objectives and Policies."
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 Fund
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 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 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.
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.
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 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 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 only may sell
a security to another series of the Trust 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 the Fund, as
well as other clients including other clients, 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 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.
The Fund paid the following approximate brokerage commissions for the
period December 31, 1998 (commencement of operations) through May 31, 1999:
$889.
MASSACHUSETTS TRUST
The Trust is a "Massachusetts business trust" of which the Fund is a
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 the
Fund and that every written agreement, obligation, instrument or undertaking
made on behalf of the Fund will contain a provision to the effect that the
shareholders are not personally liable thereunder.
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.
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. To date, the Fund is authorized to issue Institutional Shares and
Select Shares, but only Institutional Shares are currently offered.
Each share represents an equal proportional interest in the Fund with
each other share of the same class. Upon liquidation of the Fund, holders are
entitled to share pro rata in the net assets of the Fund available for
distribution to such shareholders. Shares of the Fund have no preemptive or
conversion rights.
The shareholders of the Trust are entitled to one full or fractional
vote for each dollar or fraction of a dollar invested in shares. Subject to the
1940 Act, the Trustees have the power to alter the number and the terms of
office of the Trustees, to lengthen their own terms, or to make their terms of
unlimited duration, subject to certain removal procedures, and to appoint their
own successors. However, immediately after such appointment, the requisite
majority of the Trustees must have been elected by the shareholders of the
Trust. The voting rights of shareholders are not cumulative. The Trust does not
intend to hold annual meetings of shareholders. The Trustees may call meetings
of shareholders for action by shareholder vote if required by either the 1940
Act or the Trust's Declaration of Trust.
Shareholders of the Trust have the right, upon the declaration in
writing or vote of shareholders whose shares represent two-thirds of the net
asset value of the Trust, to remove a Trustee. The Trustees will call a meeting
of shareholders to vote on removal of a Trustee upon the written request of the
shareholders whose shares represent 10% of the net asset value of the Trust. The
Trustees also are required, under certain circumstances, to assist shareholders
in communicating with other shareholders.
As of August 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: Collins & Aikman Corp. (26.80%).; Board of Trustees of the Retail Drug
Employees Pension Trust: (19.49%); Post & Co. (13.77%); Wendel & Co. #187166
(11.98%); Center Theater Group Endowment Fund Inc. (8.03%); Wendel & Co. #186784
(6.47%).
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 Statement of Additional Information. These
laws and regulations are subject to change by legislative or administrative
action possibly on a retroactive basis.
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 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 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 in accordance with the Code's requirements. If the Fund does not
qualify as a regulated investment company, it will be treated for tax purposes
as an ordinary corporation subject to federal income tax.
Under the Code, the Fund will be subject to a 4% excise tax on a
portion of its undistributed taxable income and capital gains if it fails to
meet certain distribution requirements by the end of the calendar year. The Fund
intends to make distributions in a timely manner and accordingly does not expect
to be subject to the excise tax.
For federal income tax purposes, dividends that are declared by the
Fund in October, November or December as of a record date in such month and
actually paid in January of the following year will be treated as if they were
paid on December 31 of the year declared. Therefore, such dividends will
generally be taxable to a shareholder in the year declared rather than the year
paid.
Distributions of net investment income and realized net short-term
capital gain in excess of net long-term capital loss is 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 overdistribution
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. Investors should consult their tax advisors concerning the
treatment of capital gains and losses.
Gains or losses on sales of portfolio securities will be treated as
long-term capital gains or losses if the securities have been held for more than
one year except in certain cases where a put option 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 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 shareholder
with respect to such shares. In addition, no loss will be allowed on the
redemption or exchange of shares of the Fund, if within a period beginning 30
days before the date of such redemption or exchange and ending 30 days after
such date, the shareholder acquires (such as through dividend reinvestment)
securities that are substantially identical to shares of the Fund. Investors are
urged to consult their tax advisors concerning the limitations on the
deductibility of capital losses.
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 Fund 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 Fund 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), the Fund 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 a 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 the Fund in a PFIC. If the 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. 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.
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 from the proceeds of redemptions, exchanges or other
dispositions of Fund shares unless IRS Form W-8 (or any successor form) 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 Funds may be subject to foreign
withholding taxes or other foreign taxes with respect to income (possibly
including, in some cases, capital gains) received from sources within foreign
countries.
State and Local Taxes. The Fund may be subject to state or local taxes
in jurisdictions in which the Fund is deemed to be doing business. In addition,
the treatment of the Fund and its shareholders in those states that 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
Telephone calls to the Fund, 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. Pursuant to
the rules and regulations of the SEC, certain portions have been omitted. The
registration statement, including the exhibits filed therewith, may be examined
at the office of the SEC in Washington, D.C.
Statements contained in this Statement of Additional Information and
the Prospectus concerning the contents of any contract or other document are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the applicable
Registration Statements.
Each such statement is qualified in all respects by such reference.
No dealer, salesman or any other person has been authorized to give any
information or to make any representations, other than those contained in the
Prospectus and this Statement of Additional Information, in connection with the
offer contained therein and, if given or made, such other information or
representations must not be relied upon as having been authorized by any of the
Trust, the Funds or FDI. The Prospectus and this Statement of Additional
Information do not constitute an offer by the 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 will continue to examine 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 is attempting
to develop business recovery/contingency plans. These plans 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 $93.3 million in 1997, $132.7 million in 1998 and $36.6
million for the first eight months of 1999. Over the next few months, J.P.
Morgan will continue its efforts to prepare its systems for the year 2000. The
total cost to become year-2000 compliant is estimated at $300 million, 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 Fund.
FINANCIAL STATEMENTS
The financial statements and the report thereon of
PricewaterhouseCoopers LLP are incorporated herein by reference to the Fund's
May 31, 1999 annual report filing made with the SEC on August 12, 1999 pursuant
to Section 30(b) of the 1940 Act and Rule 30b2-1 thereunder (Accession Number
0001047469-99-031146). The financial statements are available without charge
upon request by calling J.P. Morgan Funds Services at (800) 766-7722.
<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.
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.
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.
- --------
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.
<PAGE>
J.P. MORGAN SERIES TRUST
J.P. MORGAN TAX AWARE DISCIPLINED EQUITY FUND
J.P. MORGAN TAX AWARE U.S. EQUITY FUND
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 1, 1999
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS BUT CONTAINS
ADDITIONAL INFORMATION WHICH SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS
DATED OCTOBER 1, 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 AND
APRIL 30, 1999. THE PROSPECTUSES AND THESE FINANCIAL STATEMENTS, INCLUDING THE
INDEPENDENT ACCOUNTANTS' REPORT IN THE ANNUAL FINANCIAL STATEMENTS DATED OCTOBER
31, 1998, 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................... 16
Investment Advisor...................... 20
Distributor............................. 22
Co-Administrator........................ 23
Services Agent.......................... 23
Custodian and Transfer Agent............ 24
Shareholder Servicing................... 24
Financial Professionals................. 25
Independent Accountants................. 26
Expenses................................ 26
Purchase of Shares...................... 27
Redemption of Shares.................... 28
Exchange of Shares.................... 29
Dividends and Distributions............. 29
Net Asset Value......................... 30
Performance Data........................ 31
Portfolio Transactions.................. 32
Massachusetts Trust..................... 34
Description of Shares................... 34
Taxes................................... 35
Additional Information.................. 39
Financial Statements.................... 40
Appendix A - Description of Securities.. A-1
<PAGE>
GENERAL
Each of J.P. Morgan Tax Aware Disciplined Equity Fund (the "Disciplined
Equity Fund") and J.P. Morgan Tax Aware U.S. Equity Fund (the " U.S. Equity
Fund", and together with the Disciplined Equity Fund, the "Funds") is a series
of J.P. Morgan Series Trust, an open-end management investment company organized
as a Massachusetts business trust (the "Trust"). The Trustees of the Trust have
authorized the issuance and sale of shares of one class of the Disciplined
Equity Fund (Institutional Shares) and one class of the U.S. Equity Fund (Select
Shares).
This Statement of Additional Information describes the financial
history, investment objectives and policies, management and operation of each of
the Funds and 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 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.
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.
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.
Investment Company Securities. Securities of other investment companies
may be acquired by each Fund to the extent permitted under the Investment
Company Act of 1940, as amended ("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 Securities and Exchange Commission ("SEC") has granted each Fund an
exemptive order permitting it to invest its uninvested cash in any of the
following affiliated money market funds: J.P. Morgan Institutional Prime Money
Market Fund, J.P. Morgan Institutional Tax Exempt Money Market Fund, J.P. Morgan
Institutional Federal Money Market Fund and J.P. Morgan Institutional Treasury
Money Market Fund. The order sets the following conditions: (1) the Fund may
invest in one or more of the permitted money market funds up to an aggregate
limit of 25% of its assets; and (2) the Advisor will waive and/or reimburse its
advisory fee from the Fund in an amount sufficient to offset any doubling up of
investment advisory and shareholder servicing fees. The Funds have applied for
additional exemptive relief from the SEC to permit the Funds to invest in
additional affiliated investment companies. If the requested relief is granted,
the Funds would then be permitted to invest in non-money market affiliated
funds, subject to certain conditions specified in the applicable order.
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.
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
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 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 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
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 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.)
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. Although
the Funds will not be commodity pools, certain derivatives subject the Funds to
the rules of the Commodity Futures Trading Commission which limit the extent to
which the Funds can invest in such derivatives. The Funds may invest in futures
contracts and options with respect thereto for hedging purposes without limit.
However, the Funds may not invest in such contracts and options for other
purposes if the sum of the amount of initial margin deposits and premiums paid
for unexpired options with respect to such contracts, other than for bona fide
hedging purposes, exceeds 5% of the liquidation value of the Fund's assets,
after taking into account unrealized profits and unrealized losses on such
contracts and options; provided, however, that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount may be excluded in
calculating the 5% limitation.
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. For the semi-annual
period ended April 30, 1999 (unaudited):
19%
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. For the semi-annual period
ended April 30, 1999 (unaudited): 20%
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 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; Former 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), 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.
- --------------------------------- ------------------- --------------------------
TOTAL TRUSTEE COMPENSATION
ACCRUED BY THE MASTER
PORTFOLIOS (*), J.P.
MORGAN INSTITUTIONAL
AGGREGATE TRUSTEE FUNDS, J.P. MORGAN FUNDS
COMPENSATION AND THE TRUST DURING
PAID BY THE TRUST 1998(**) ____
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
- --------------------------------- ------------------- --------------------------
(*) 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 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. For the semi-annual
period ended April 30, 1999 (unaudited):
$1,443.
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. For the semi-annual period ended April 30,
1999 (unaudited):
$1,034.
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.
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.
JOHN P. COVINO; Vice President and Assistant Treasurer. Vice President and
Treasury Group Manager of Treasury Servicing and Administration of FDI. Prior to
November 1998, Mr. Covino was employed by Fidelity Investments where he held
multiple positions in their Institutional Brokerage Group. Prior to joining
Fidelity, Mr. Covino was employed by SunGard Brokerage systems where he was
responsible for the technology and development of the accounting product group.
His date of birth is October 8, 1963.
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.
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 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 $326 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 380
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 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. For the semi-annual
period ended April 30, 1999 (unaudited): $255,074.
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. For the semi-annual period ended April
30, 1999 (unaudited): $227,555.
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
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. For the semi-annual period
ended April 30, 1999 (unaudited): $698.
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. For the semi-annual period
ended April 30, 1999 (unaudited): $489.
SERVICES AGENT
The Trust, on behalf of each Fund, has entered into an Administrative
Services Agreement (the "Services Agreement") with Morgan pursuant to which
Morgan is responsible for certain administrative and related services provided
to each Fund. The Services Agreement may be terminated at any time, without
penalty, by the Trustees or Morgan, in each case on not more than 60 days' nor
less than 30 days' written notice to the other party.
Under the Services Agreement, Morgan provides certain administrative
and related services to each Fund, including services related to tax compliance,
preparation of financial statements, calculation of performance data, oversight
of service providers and certain regulatory and Board of Trustee matters.
Under the Services Agreement, each Fund has agreed to pay Morgan fees
equal to its allocable share of an annual complex-wide charge. This charge is
calculated daily based on the aggregate net assets of the Funds and the Master
Portfolios in accordance with the following annual schedule: 0.09% of the first
$7 billion of their aggregate average daily net assets, and 0.04% of their
aggregate average daily net assets in excess of $7 billion, less the
complex-wide fees payable to FDI. The portion of this charge payable by each
Fund is determined by the proportionate share that its net assets bear to the
total net assets of the Trust and the other investment companies provided
administrative services by Morgan.
The table below sets forth for each Fund listed the fees paid to Morgan
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. For the semi-annual
period ended April 30, 1999 (unaudited): $38,309.
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. For the semi-annual
period ended April 30, 1999 (unaudited): $26,663.
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
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. For the semi-annual
period ended April 30, 1999 (unaudited): $72,878.
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. For the semi-annual period ended
April 30, 1999 (unaudited): $126,419.
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 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 as described in
the prospectus to the extent necessary to maintain each Fund's total operating
expenses at the following annual rates of each 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 after September 30, 2000, at the option of J.P.
Morgan.
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. For the semi-annual
period ended April 30, 1999 (unaudited): $84,573.
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. For the semi-annual period ended
April 30, 1999 (unaudited): $44,934.
PURCHASE OF SHARES
Additional Minimum Balance Information. For investors who purchased shares
of the Disciplined Equity Fund prior to January 2, 1998, the minimum account
balance will remain $100,000 and the minimum subsequent investment remains
$5,000.
If your account balance falls below the minimum for 30 days as a result of
selling shares (and not because of performance), the Fund reserves the right to
request that you buy more shares or close your account. If your account balance
is still below the minimum 60 days after notification, the Fund reserves the
right to close out your account and send the proceeds to the address of record.
Method of Purchase. Investors may open accounts with a Fund only
through the Distributor. All purchase transactions in Fund accounts are
processed by Morgan as shareholder servicing agent and each Fund is authorized
to accept any instructions relating to a Fund account from Morgan as shareholder
servicing agent for the customer. All purchase orders must be accepted by the
Distributor. Prospective investors who are not already customers of Morgan may
apply to become customers of Morgan for the sole purpose of Fund transactions.
There are no charges associated with becoming a Morgan customer for this
purpose. Morgan reserves the right to determine the customers that it will
accept, and the Funds reserve the right to determine the purchase orders that
they will accept.
References in the Prospectuses and this Statement of Additional
Information to customers of J.P. Morgan or a financial professional include
customers of their affiliates and references to transactions by customers with
J.P. Morgan or a financial professional include transactions with their
affiliates. Only Fund investors who are using the services of a financial
institution acting as shareholder servicing agent pursuant to an agreement with
the Trust on behalf of a Fund may make transactions in shares of a Fund.
Each Fund may, at its own option, accept securities in payment for
shares. The securities so delivered are valued by the method described under
"Net Asset Value" as of the day a Fund receives the securities. This is a
taxable transaction to the shareholder. Securities may be accepted in payment
for shares only if they are, in the judgment of the Advisor, appropriate
investments for a Fund. In addition, securities accepted in payment for shares
must: (i) meet the investment objective and policies of the acquiring Fund; (ii)
be acquired by the applicable Fund for investment and not for resale; (iii) be
liquid securities which are not restricted as to transfer; and (iv) if stock,
have a value which is readily ascertainable as evidenced by a listing on a stock
exchange, OTC market or by readily available market quotations from a dealer in
such securities. Each Fund reserves the right to accept or reject at its own
option any and all securities offered in payment for its shares.
Prospective investors may purchase shares with the assistance of a
Financial Professional and the Financial Professional may charge the investor a
fee for this service and other services it provides to its customers. J.P.
Morgan may pay fees to financial professionals for services in connection with
fund investments. See "Financial Professionals" above.
REDEMPTION OF SHARES
Investors may redeem shares of the Funds as described in the
Prospectus. The Funds generally intend to pay redemption proceeds in cash;
however, they reserve the right at their sole discretion to pay redemptions over
$250,000 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 has been granted exemptive relief
from the SEC with respect to redemptions in-kind by the Funds. Each Fund is
permitted to pay redemptions to greater than 5% shareholders in securities,
rather than in cash, to the extent permitted by the SEC. 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.
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 $250,000 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
under "Dividends and Distributions" in the Prospectus.
A Fund's dividends and distributions are paid in additional shares
unless the shareholder elects to have them paid in cash. The tax effects of
dividends and distributions are the same whether they are paid in shares or
cash. Cash dividends and distributions either (1) are credited to the
shareholder's account at J.P. Morgan or at his financial professional or (2) in
the case of certain J.P. Morgan clients, are paid by a check mailed in
accordance with the client's instructions.
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
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 or foreign securities
exchange, including National Association of Securities Dealers Automated
Quotations ("NASDAQ"), other than options on stock indexes, is based on the last
sale prices on the exchange on which the security is principally traded (the
"primary exchange"). If there has been no sale on the primary exchange on the
valuation date, and the spread between bid and asked quotations on the primary
exchange is less than or equal to 10% of the bid price for the security, the
security shall be valued at the average of the closing bid and asked quotations
on the primary exchange. Under all other circumstances (e.g. there is no last
sale on the primary exchange, there are no bid and asked quotations on the
primary exchange, or the spread between bid and asked quotations is greater than
10% of the bid price), the value of the security shall be the last sale price on
the primary exchange up to ten days prior to the valuation date unless, in the
judgment of the portfolio manager, material events or conditions since such last
sale necessitate fair valuation of the security. 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. Options
and futures traded on foreign exchanges are valued at the last sale price
available prior to the calculation of the Fund's net asset value. 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 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 Funds may quote performance in terms of actual
distributions, total return or capital appreciation for the various Fund classes
in reports, sales literature and advertisements published by the Trust. Current
performance information may be obtained by calling Morgan at (800) 766-7722 for
J.P. Morgan Tax Aware Disciplined Equity Fund: Institutional Shares and (800)
521-5411 for J.P. Morgan Tax Aware U.S. Equity Fund: Select Shares.
The classes of shares of each Fund may bear different shareholder
servicing fees and other expenses, which may cause the performance of a class to
differ from the performance of another class. Performance quotations will be
computed separately for each class of a Fund's shares. Any fees charged by an
institution directly to its customers' accounts in connection with investments
in the Funds will not be included in calculations of total return.
Total Return Quotations. As required by regulations of the SEC, average
annual total return of each Fund's class of shares for a period is computed by
assuming a hypothetical initial payment of $1,000. It is then assumed that all
of the dividends and distributions by the Fund over the period are reinvested.
It is then assumed that at the end of the period, the entire amount is redeemed.
The average annual total return is then calculated by determining the annual
rate required for the initial payment to grow to the amount which would have
been received upon redemption.
Aggregate total returns, reflecting the cumulative percentage change
over a measuring period, may also be calculated.
Below is set forth historical return information for the Funds for the
periods indicated:
Tax Aware Disciplined Equity Fund (4/30/99): Average annual total return, 1
year: 24.38%; average annual total return, 5 years: N/A; average annual total
return, commencement of operations (January 30, 1997) to period end: 31.53%;
aggregate total return, 1 year: 24.38%; aggregate total return, 5 years: N/A;
aggregate total return, commencement of operations (January 30, 1997) to period
end: 85.09%.
Tax Aware U.S. Equity Fund (4/30/99): Average annual total return, 1 year:
23.72%; average annual total return, 5 years: N/A; average annual total return,
commencement of operations (December 18, 1996) to period end: 30.90%; aggregate
total return, 1 year: 23.72%; aggregate total return, 5 years: N/A; aggregate
total return, commencement of operations (December 18, 1996) to period end:
89.20%.
General. Performance will vary from time to time depending upon market
conditions, the composition of the portfolio, and operating expenses.
Consequently, any given performance quotation should not be considered
representative of a Fund's performance for any specified period in the future.
In addition, because performance will fluctuate, it may not provide a basis for
comparing an investment in a Fund with certain bank deposits or other
investments that pay a fixed yield or return for a stated period of time.
Comparative performance information may be used from time to time in
advertising the Funds' shares, including appropriate market indices including
the benchmarks indicated under "Investment Advisor" above or data from Lipper
Analytical Services, Inc., Micropal, Inc., Ibbotson Associates, Morningstar
Inc., the Dow Jones Industrial Average and other industry publications.
From time to time, the Funds may, in addition to any other permissible
information, include the following types of information in advertisements,
supplemental sales literature and reports to shareholders: (1) discussions of
general economic or financial principles (such as the effects of compounding and
the benefits of dollar-cost averaging); (2) discussions of general economic
trends; (3) presentations of statistical data to supplement such discussions;
(4) descriptions of past or anticipated portfolio holdings for one or more of
the Funds; (5) descriptions of investment strategies for one or more of the
Funds; (6) descriptions or comparisons of various savings and investment
products (including, but not limited to, qualified retirement plans and
individual stocks and bonds), which may or may not include the Funds; (7)
comparisons of investment products (including the Funds) with relevant markets
or industry indices or other appropriate benchmarks; (8) discussions of Fund
rankings or ratings by recognized rating organizations; and (9) discussions of
various statistical methods quantifying a Fund's volatility relative to its
benchmark or to past performance, including risk adjusted measures. The Funds
may also include calculations, such as hypothetical compounding examples, which
describe hypothetical investment results in such communications. Such
performance examples will be based on an express set of assumptions and are not
indicative of the performance of any of the Funds.
PORTFOLIO TRANSACTIONS
The Advisor places orders for all Funds for all purchases and sales of
portfolio securities, enters into repurchase agreements and may enter into
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. For the semi-annual
period ended April 30, 1999 (unaudited): $67,442.
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. For the semi-annual period ended
April 30, 1999 (unaudited): $30,499.
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 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 of the Trust. The
Trustees are also required, under certain circumstances, to assist shareholders
in communicating with other shareholders.
As of August 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 (16.03%);
Tax Aware Disciplined Equity Fund - Charles Schwab & Co. Inc. Special
Custody Account for the benefit of Customers (26.35%); Morgan Texas agent for
American Contractors Ins. Group (7.08%).
The address of each owner listed above is c/o JPMIM, 522 Fifth Avenue,
New York, New York 10036. As of the date of this Statement of Additional
Information the officers and Trustees as a group owned less than 1% of the
beneficial shares of each Fund.
TAXES
The following discussion of tax consequences is based on U.S. federal
tax laws in effect on the date of this Statement of Additional Information.
These laws and regulations are subject to change by legislative or
administrative action, possibly on a retroactive basis.
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. If a Fund does not
qualify as a regulated investment company, it will be treated for tax purposes
as an ordinary corporation subject to federal income tax.
Under the Code, a Fund will be subject to a 4% excise tax on a portion
of its undistributed taxable income and capital gains if it fails to meet
certain distribution requirements by the end of the calendar year. Each Fund
intends to make distributions in a timely manner and accordingly does not expect
to be subject to the excise tax.
For federal income tax purposes, dividends that are declared by a Fund
in October, November or December as of a record date in such month and actually
paid in January of the following year will be treated as if they were paid on
December 31 of the year declared. Therefore, such dividends will generally be
taxable to a shareholder in the year declared rather than the year paid.
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 option 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 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 disposition of foreign
currency, or 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 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 (or any successor form) 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.
Foreign Taxes. It is expected that the Funds may be subject to foreign
withholding taxes or other foreign taxes with respect to income (possibly
including, in some cases, capital gains) received from sources within foreign
countries.
State and Local Taxes. Each Fund may be subject to state or local taxes
in jurisdictions in which a Fund is deemed to be doing business. In addition,
the treatment of a Fund and its shareholders in those states which have income
tax laws might differ from treatment under the federal income tax laws.
Shareholders should consult their own tax advisors with respect to any state or
local taxes.
Other Taxation. The Trust is organized as a Massachusetts business
Trust and, under current law, neither the Trust nor any Fund is liable for any
income or franchise tax in The Commonwealth of Massachusetts, provided that each
Fund continues to qualify as a regulated investment company under Subchapter M
of the Code.
ADDITIONAL INFORMATION
Telephone calls to the Funds, J.P. Morgan or State Street may be tape
recorded. With respect to the securities offered hereby, this Statement of
Additional Information and the Prospectus do not contain all the information
included in the Trust's registration statement filed with the SEC under the 1933
Act and the Trust's registration statement filed under the 1940 Act. Pursuant to
the rules and regulations of the SEC, certain portions have been omitted. The
registration statement including the exhibits filed therewith may be examined at
the office of the SEC in Washington, D.C.
Statements contained in this Statement of Additional Information and
the Prospectus concerning the contents of any contract or other document are not
necessarily complete, and in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the applicable
Registration Statements. Each such statement is qualified in all respects by
such reference.
No dealer, salesman or any other person has been authorized to give any
information or to make any representations, other than those contained in the
Prospectus and this Statement of Additional Information, in connection with the
offer contained therein and, if given or made, such other information or
representations must not be relied upon as having been authorized by any of the
Trust, the Funds or FDI. The Prospectus and this Statement of Additional
Information do not constitute an offer by any Fund or by FDI to sell or solicit
any offer to buy any of the securities offered hereby in any jurisdiction to any
person to whom it is unlawful for the Fund or FDI to make such offer in such
jurisdictions.
The Year 2000 Initiative. With the new millennium rapidly approaching,
organizations are examining their computer systems to ensure they are year 2000
compliant. The issue, in simple terms, is that many existing computer systems
use only two numbers to identify a year in the date field with the assumption
that the first two digits are always 19. As the century is implied in the date,
on January 1, 2000, computers that are not year 2000 compliant will assume the
year is 1900. Systems that calculate, compare, or sort using the incorrect date
will cause 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 is attempting
to develop business recovery/contingency plans. These plans 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 $93.3 million in 1997, $132.7 million in 1998 and $36.6
million for the first eight months of 1999. Over the next few months, J.P.
Morgan will continue its efforts to prepare its systems for the year 2000. The
total cost to become year-2000 compliant is estimated at $300 million, 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 Fund.
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. Any of the following financial reports
are available without charge upon request by calling J.P. Morgan Fund Services
at (800) 766-7722 for Tax Aware Disciplined Equity Fund: Institutional Shares
and (800) 521-5411 for Tax Aware U.S. Equity Fund: Select Shares.
- ----------------------------- ------------------------- ------------------------
Date of Annual Report; Date of Semi-Annual
Name of Fund Date Annual Report Filed; Report; Date Annual
and Accession Number Report Filed; and
Accession Number
- ----------------------------- ------------------------- ------------------------
- -----------------------------
Tax Aware Disciplined Equity 10/31/98; 01/06/99; 4/30/99; 7/1/99;
Fund 0001047469-99-000252 0001047469-99-026146
- -----------------------------
- ----------------------------- ------------------------- ------------------------
Tax Aware U.S. Equity Fund 10/31/98; 01/06/99; 4/30/99; 7/1/99;
0001047469-99-000253 0001047469-99-026147
- ----------------------------- ------------------------- ------------------------
<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.
<PAGE>
PART C
ITEM 23. EXHIBITS.
(a) Declaration of Trust.(1)
(a)1 Amendment No. 1 to Declaration of Trust, Amended and Restated
Establishment and Designation of Series and Classes of Shares of Beneficial
Interest.(2)
(a)2 Amendment No. 2 to Declaration of Trust, Second Amended and Restated
Establishment and Designation of Series and Classes of Shares of Beneficial
Interest.(4)
(a)3 Amendment No. 3 to Declaration of Trust, Third Amended and Restated
Establishment and Designation of Series and Classes of Shares of Beneficial
Interest.(6)
(a)4 Amendment No. 4 to Declaration of Trust, Fourth Amended and Restated
Establishment and Designation of Series and Classes of Shares of Beneficial
Interest.(8)
(a)5 Amendment No. 5 to Declaration of Trust, Fifth Amended and Restated
Establishment and Designation of Series and Classes of Shares of Beneficial
Interest.(10)
(b) Restated By-Laws.(2)
(d) Amended Investment Advisory Agreement between Registrant and J.P.
Morgan Investment Management Inc. ("JPMIM").(9)
(e) Form of Distribution Agreement between Registrant and Funds
Distributor, Inc. ("FDI").(2)
(g) Form of Custodian Contract between Registrant and State Street Bank and
Trust Company ("State Street").(2)
(h)1 Form of Co-Administration Agreement between Registrant and FDI.(2)
(h)2 Form of Administrative Services Agreement between Registrant and
Morgan Guaranty Trust Company of New York ("Morgan").(2)
(h)3 Form of Transfer Agency and Service Agreement between Registrant and
State Street.(2)
(h)4 Form of Restated Shareholder Servicing Agreement between Registrant
and Morgan.(9)
(j) Consent of independent accountants.(filed herewith)
(l) Purchase agreement with respect to Registrant's initial shares.(2)
(n) Financial Data Schedules (not applicable)
(o)1 18f-3 Plan for J.P. Morgan California Bond Fund.(3)
(o)2 18f-3 Plan for J.P. Morgan Global 50 Fund. (7)
(o)3 18f-3 Plan for J.P. Morgan Tax Aware Enhanced Income Fund (11)
-------------------
(1) Incorporated herein from Registrant's registration statement on
Form N-1A as filed on August 29, 1996 (Accession No.
0000912057-96-019242).
(2) Incorporated herein from Registrant's registration statement on
Form N-1A as filed on November 8, 1996 (Accession No.
0001016964-96-000034).
(3) Incorporated herein from Registrant's registration statement on
Form N-1A as filed on February 10, 1997 (Accession No.
0001016964-97-000014).
(4) Incorporated herein from Registrant's registration statement on
Form N-1A as filed on June 19, 1997 (Accession No.
0001016964-97-000117).
(5) Incorporated herein from Registrant's registration statement on
Form N-1A as filed on October 21, 1997 (Accession No.
0001042058-97-000005).
(6) Incorporated herein from Registrant's registration statement on
Form N-1A as filed on January 2, 1998 (Accession
No.0001041455-98-000012).
(7) Incorporated herein from Registrant's registration statement on
Form N-1A as filed on March 2, 1998 (Accession No.
0001042058-98-000030).
(8) Incorporated herein from Registrant's registration statement on
Form N-1A as filed on July 28, 1998 (Accession No.
0001041455-98-000039).
(9) Incorporated herein from Registrant's registration statement on
Form N-1A as filed on August 25, 1998 (Accession No.
0001041455-98-000054).
(10) Incorporated herein from Registrant's registration statement on Form
N-1A as filed on December 30, 1998(Accession No. 0001041455-98-000054).
(11) Incorporated herein from Registrant's registration statement on
Form N-1A as filed on February 1, 1999 (Accession No.
0000899681-99-000024).
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND.
Not applicable.
ITEM 25. INDEMNIFICATION.
Reference is made to Section 5.3 of Registrant's Declaration of Trust and
Section 5 of Registrant's Distribution Agreement.
Registrant, its Trustees and officers are insured against certain expenses in
connection with the defense of claims, demands, actions, suits, or proceedings,
and certain liabilities that might be imposed as a result of such actions, suits
or proceedings.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended (the "1933 Act"), may be permitted to directors, trustees,
officers and controlling persons of the Registrant and the principal underwriter
pursuant to the foregoing provisions or otherwise, the Registrant has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the 1933 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, trustee,
officer, or controlling person of the Registrant and the principal underwriter
in connection with the successful defense of any action, suite or proceeding) is
asserted against the Registrant by such director, trustee, officer or
controlling person or principal underwriter in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
JPMIM is a registered investment adviser under the Investment Advisers
Act of 1940, as amended, and is a wholly owned subsidiary of J.P. Morgan & Co.
Incorporated. JPMIM manages employee benefit funds of corporations, labor unions
and state and local governments and the accounts of other institutional
investors, including investment companies.
To the knowledge of the Registrant, none of the directors, except those
set forth below, or executive officers of JPMIM, is or has been during the past
two fiscal years engaged in any other business, profession, vocation or
employment of a substantial nature, except that certain officers and directors
of JPMIM also hold various positions with, and engage in business for, J.P.
Morgan & Co. Incorporated, which owns all the outstanding stock of JPMIM.
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) Funds Distributor, Inc. (the "Distributor") is the principal
underwriter of the Registrant's shares.
Funds Distributor, Inc. acts as principal underwriter for the following
investment companies other than the Registrant:
American Century California Tax-Free and Municipal Funds
American Century Capital Portfolios, Inc.
American Century Government Income Trust
American Century International Bond Funds
American Century Investment Trust
American Century Municipal Trust
American Century Mutual Funds, Inc.
American Century Premium Reserves, Inc.
American Century Quantitative Equity Funds
American Century Strategic Asset Allocations, Inc.
American Century Target Maturities Trust
American Century Variable Portfolios, Inc.
American Century World Mutual Funds, Inc.
BJB Investment Funds
The Brinson Funds
Dresdner RCM Capital Funds, Inc.
Dresdner RCM Equity Funds, Inc.
Founders Funds, Inc.
Harris Insight Funds Trust
HT Insight Funds, Inc. d/b/a Harris Insight Funds
J.P. Morgan Funds
J.P. Morgan Institutional Funds
J.P. Morgan Series Trust II
LaSalle Partners Funds, Inc.
Monetta Fund, Inc.
Monetta Trust
The Montgomery Funds
The Montgomery Funds II
The Munder Framlington Funds Trust
The Munder Funds Trust
The Munder Funds, Inc.
Orbitex Group of Funds
St. Clair Funds, Inc.
The Skyline Funds
Waterhouse Investors Family of Funds, Inc.
WEBS Index Fund, Inc.
Funds Distributor, Inc. does not act as depositor or investment adviser to
any of the investment companies.
Funds Distributor, Inc. is registered with the Securities and Exchange
Commission as a broker-dealer and is a member of the National Association of
Securities Dealers. Funds Distributor, Inc. is located at 60 State Street, Suite
1300, Boston, Massachusetts 02109. Funds Distributor, Inc. is an indirect
wholly-owned subsidiary of Boston Institutional Group, Inc., a holding company
all of whose outstanding shares are owned by key employees.
(b)
The following is a list of the executive officers, directors and partners of
Funds Distributor, Inc.:
Director, President and Chief Executive Officer: Marie E. Connolly
Executive Vice President: George Rio
Executive Vice President: Donald R. Roberson
Executive Vice President: William S. Nichols
Director, Senior Vice President, Treasurer and
Chief Financial Officer: Joseph F. Tower, III
Senior Vice President, General Counsel, Chief
Compliance Officer, Secretary and Clerk Margaret M. Chambers
Senior Vice President: Paula R. David
Senior Vice President: Judith K. Benson
Senior Vice President: Gary S. MacDonald
Director, Chairman of the Board, Executive
Vice President William J. Nutt
(c) Not applicable
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended (the "1940
Act"), and the Rules thereunder will be maintained at the offices of:
Morgan Guaranty Trust Company of New York and J.P. Morgan Investment
Management Inc.: 60 Wall Street, New York, New York 10260-0060, 9 West 57th
Street, New York, New York 10019 or 522 Fifth Avenue, New York, New York 10036
(records relating to its functions as investment advisor, shareholder servicing
agent and administrative services agent).
State Street Bank and Trust Company: 1776 Heritage Drive, North Quincy,
Massachusetts 02171 (records relating to its functions as custodian, transfer
agent and dividend disbursing agent).
Funds Distributor, Inc.: 60 State Street, Suite 1300, Boston, Massachusetts
02109 (records relating to its functions as distributor and co-administrator).
Pierpont Group, Inc.: 461 Fifth Avenue, New York, New York 10017 (records
relating to its assisting the Trustees in carrying out their duties in
supervising the Registrant's affairs).
ITEM 29. MANAGEMENT SERVICES.
Not applicable.
ITEM 30. UNDERTAKINGS.
(a) If the information called for by Item 5A of Form N-1A is
contained in the latest annual report to shareholders, the
Registrant shall furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
(b) The Registrant undertakes to comply with Section 16(c) of the
1940 Act as though such provisions of the 1940 Act were
applicable to the Registrant, except that the request referred to
in the second full paragraph thereof may only be made by
shareholders who hold in the aggregate at least 10% of the
outstanding shares of the Registrant, regardless of the net asset
value of shares held by such requesting shareholders.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereto duly authorized, in the
City of New York and State of New York on the 28th day of September, 1999.
J.P. MORGAN SERIES TRUST
By /s/ Stephanie D. Pierce
---------------------------------------
Stephanie D. Pierce
Vice President and Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed below by the following persons in the capacities
indicated on September 28, 1999.
George A. Rio*
- ------------------------------
George A. Rio
President and Treasurer
Officer of the Portfolios
Matthew Healey*
- -----------------------------
Matthew Healey
Trustee, Chairman and Chief Executive Officer (Principal Executive Officer)
Frederick S. Addy*
- ------------------------------
Frederick S. Addy
Trustee
William G. Burns*
- ------------------------------
William G. Burns
Trustee
Arthur C. Eschenlauer*
- ------------------------------
Arthur C. Eschenlauer
Trustee
Michael P. Mallardi*
- ------------------------------
Michael P. Mallardi
Trustee
*By /s/ Stephanie D. Pierce
----------------------------
Stephanie D. Pierce
as attorney-in-fact pursuant to a power of attorney.
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
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EX-99.(j) Consent of Independent Accountants
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 20 to the registration statement on Form N-1A (the "Registration
Statement") of our reports dated July 14, 1999, relating to the financial
statements and financial highlights of J.P. Morgan Institutional Market Neutral
Fund, J.P. Morgan Institutional SmartIndex Fund and J.P. Morgan Institutional
Large Cap Growth Fund appearing in the May 31, 1999 Annual Reports, which are
also incorporated by reference into the Registration Statement.
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of the Registration
Statement of our reports dated December 17, 1998, relating to the financial
statements and financial highlights of J.P. Morgan Tax Aware U.S. Equity Fund
and J.P. Morgan Institutional Tax Aware Disciplined Equity Fund appearing in the
October 31, 1998 Annual Reports, which are also incorporated by reference into
the Registration Statement.
We also consent to the references to us under the headings "Financial
Highlights" in the Prospectus and "Independent Accountants" and "Financial
Statements" in the Statement of Additional Information.
/s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP 1177 Avenue of the
Americas New York, New York 10036 September 24, 1999