As filed with the Securities and Exchange Commission on April 17,
2000
Securities Act
File No. 333-15265
Investment Company
Act File No. 811-7899
SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM
N-1A
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
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Pre-Effective
Amendment No.
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¨
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Post-Effective
Amendment No. 5
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x
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and/or
REGISTRATION
STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
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(Check appropriate
box or boxes)
Merrill Lynch
Index Funds, Inc.
(Exact Name of
Registrant as Specified in Charter)
800 Scudders Mill
Road Plainsboro, New Jersey 08536
(Address of
Principal Executive Offices)
(Registrants
Telephone Number, Including Area Code) (609) 282-2800
TERRY K.
GLENN
800 Scudders Mill
Road,
Plainsboro, New
Jersey 08536
Mailing Address:
P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and Address
of Agent for Service)
Approximate Date
of Proposed Offering: As soon as practicable
after the effective date of the Registration Statement.
Copies
to:
Counsel for the
Fund:
Joel H.
Goldberg, Esq.
SWIDLER BERLIN
SHEREFF FRIEDMAN, LLP
The Chrysler
Building
405 Lexington Avenue
New York, New York 10174
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Michael J.
Hennewinkel, Esq.
FUND ASSET
MANAGEMENT, L.P.
P.O. Box
9011
Princeton, New
Jersey 08543-9011
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It is proposed that this filing will become
effective:
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x
immediately upon filing pursuant to paragraph (b), or
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¨ 60 days
after filing pursuant to paragraph (a)(i), or
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¨ on
(date) pursuant to paragraph (b), or
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¨ on
(date) pursuant to paragraph (a)(i)
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¨ 75 days
after filing pursuant to paragraph (a)(ii)
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¨ on
(date) pursuant to paragraph (a)(ii) of rule 485.
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If appropriate, check the following
box:
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¨ this
post-effective amendment designates a new effective date for a previously
filed post-effective amendment.
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Quantitative
Master Series Trust has also executed this Registration
Statement.
Prospectus
[LOGO] Merrill
Lynch
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Merrill Lynch Index
Funds, Inc.
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April 17, 2000
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This prospectus contains
information you should know before investing, including information about
risks. Please read it before you invest and keep it for future
reference.
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The Securities and
Exchange Commission has not approved or disapproved these Securities or
passed upon the adequacy of this Prospectus. Any representation to the
contrary is a criminal offense.
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Table of Contents
MERRILL LYNCH INDEX FUNDS,
INC.
[GRAPHIC] Key
Facts
In an effort to help you
better understand the many concepts involved in making an investment
decision, we have defined highlighted terms in this prospectus in the
sidebar.
Common Stock
securities
representing shares of ownership of a corporation.
Bonds debt
obligations issued by corporations, governments and other
issuers.
MERRILL LYNCH INDEX FUNDS AT A GLANCE
What is each Funds investment objective?
S&P 500 Index
Fund
The investment
objective of the S&P 500 Index Fund is to match the performance of the
Standard & Poors 500 Composite Stock Price Index (the S
&P 500) as closely as possible before the deduction of Fund
expenses. The S&P 500 is a market-weighted index composed of 500
common stocks issued by large-capitalization U.S. companies in
a wide range of businesses. The stocks included in the index collectively
represent a substantial portion of all common stocks publicly traded in the
U.S.
Small Cap Index
Fund
The investment
objective of the Small Cap Index Fund is to match the performance of the
Russell 2000 Index (the Russell 2000) as closely as possible
before the deduction of Fund expenses. The Russell 2000 is a market-weighted
index composed of approximately 2,000 common stocks issued by
smaller-capitalization U.S. companies in a wide range of
businesses.
Aggregate Bond Index
Fund
The investment
objective of the Aggregate Bond Index Fund is to match the performance of
the Lehman Brothers Aggregate Bond Index (the Aggregate Bond Index
) as closely as possible before the deduction of Fund expenses. The
Aggregate Bond Index is composed primarily of dollar-denominated investment
grade bonds of different types.
International Index
Fund
The investment
objective of the International Index Fund is to match the performance of the
Morgan Stanley Capital International Europe, Asia and Far East GDP Weighted
Index (the EAFE Index) as closely as possible before the
deduction of Fund expenses. The EAFE Index is composed of equity securities
of companies from various industrial sectors whose primary trading markets
are located outside the U.S. Companies included in the EAFE Index are
selected from among the larger capitalization companies in these markets.
The weighting of the
EAFE Index is based on the gross domestic product of each of the countries
in the index.
We cannot guarantee
that the Funds will achieve their objectives.
MERRILL LYNCH INDEX FUNDS,
INC.
[GRAPHIC] Key
Facts
What are each Funds
main investment strategies?
All Funds
Each Fund employs a
passive management approach, attempting to
invest in a portfolio of assets whose performance is expected to match
approximately the performance of that Funds index. Each Fund will be
substantially invested in securities in the applicable index, and will
invest
at least 80% of its assets in securities or other financial instruments in, or
correlated with, the applicable index. A Fund may change its target index if
Fund management believes a different index would better enable the Fund
to match the performance of the market segment represented by the
current index.
Each Fund invests all
of its assets in a series (the Series) of Quantitative Master
Series Trust that has the same goals as the Fund. All investments will be
made at the level of the Series. This structure is sometimes called a
master/feeder structure. Each Funds investment results
will correspond directly to the investment results of the underlying Series
it invests in. For simplicity, this Prospectus uses the term Fund
to include the underlying Series in which a Fund invests.
S&P 500 Index
Fund
The S&P 500 Index
Fund invests in the common stocks represented in the S&P 500 (other than
Merrill Lynch & Co., Inc. (ML & Co.)) in roughly the
same proportions as their weightings in the S&P 500. The Fund may also
invest in derivative instruments linked to the S&P 500. At times the
Fund may not invest in all of the common stocks in the S&P 500 or, in
the same weightings as in the S&P 500. At those times, the Fund chooses
investments so that the market capitalizations, industry weighting and other
fundamental characteristics of the stocks and derivative instruments chosen
are similar to the S&P 500 as a whole. The Fund may also engage in
securities lending.
Small Cap Index
Fund
The Small Cap Index
Fund invests in a statistically selected sample of stocks included in the
Russell 2000 and in derivative instruments linked to the Russell 2000. The
Fund may not invest in all of the common stocks in the Russell 2000, or in
the same weightings as in the Russell 2000. The Fund chooses investments so
that the market capitalizations, industry weightings and other fundamental
characteristics of the stocks and derivative instruments chosen are similar
to the Russell 2000 as a whole. The Fund may also engage in securities
lending.
MERRILL LYNCH INDEX FUNDS,
INC.
Maturity the time at
which the principal amount of a bond is scheduled to be returned to
investors.
Duration the
sensitivity of a bond or bond portfolio to changes in interest
rates.
Aggregate Bond Index
Fund
The Aggregate Bond
Index Fund invests in a statistically selected sample of bonds which are
included in or correlated with the Aggregate Bond Index, and in derivative
instruments linked to the Aggregate Bond Index. The Fund
may not invest in all
of the bonds in the Aggregate Bond Index, or in the same weightings as in
the Aggregate Bond Index. The Fund may invest in bonds not included in the
index, but which are selected to reflect characteristics such as maturity,
duration, or credit quality similar to bonds in the index. This may result
in different levels of interest rate, credit or prepayment risks from the
levels of risks on the Aggregate Bond Index. The Aggregate Bond Index is
composed of a variety of dollar-denominated investment grade bonds,
including bonds issued by the U.S. government and foreign governments and
their agencies, and bonds issued by U.S. or foreign companies, among others.
The Fund may also engage in securities lending.
International Index
Fund
The International
Index Fund invests in a statistically selected sample of equity securities
included in the EAFE Index and in derivative instruments linked to the EAFE
Index. The Fund may not invest in all of the countries, or all of the
companies within a country represented in the EAFE Index, or in the same
weightings as in the EAFE Index. The Fund will choose investments so that
the market capitalizations, industry weightings and other fundamental
characteristics of the stocks and derivative instruments chosen are similar
to the EAFE Index as a whole. The Fund may also engage in securities
lending.
What are the main risks of
investing in the Funds?
As with any mutual
fund, the value of each Funds investments and therefore, the value of
a Funds shares, may fluctuate. If the value of a Funds
investments goes down, you may lose money. Changes in the value of the S
&P 500 Index Funds, Small Cap Index Funds and International
Index Funds equity investments may occur because a stock market is
rising or falling or as the result of specific factors that affect
particular investments.
The Aggregate Bond
Index Funds bond investments are subject to interest rate and credit
risk. Interest rate risk is the risk that when interest rates go up, the
value of debt instruments generally goes down. In general, the market price
of debt securities with longer maturities will go up or down more in
response to changes in interest rates than shorter term securities. Credit
risk is the risk that the issuer will be unable to pay the interest or
principal when
due. The degree of credit risk depends on both the financial condition of the
issuer and the terms of the obligation.
Each Fund may invest
in foreign securities to the extent foreign securities are represented in
the index tracked by that Fund. Currently, the International Index Fund will
invest primarily in foreign securities and the Aggregate Bond Index Fund
will invest a portion of its assets in foreign securities. The Aggregate
Bond Index Fund will invest only in dollar-denominated foreign securities,
while the International Index Fund will invest principally in securities
denominated in foreign currencies. The International Index Funds and
Aggregate Bond Index Funds investments in foreign securities involve
special risks, including the possibility of substantial
volatility due to adverse political, economic or other developments.
Foreign securities may also be less liquid and harder to value than U.S.
securities. In addition, the foreign securities in which the International
Index Fund will invest are subject to significant changes in value due to
exchange rate fluctuations.
The Funds are also
subject to selection risk, which is the risk that a Funds investments,
which may not fully replicate the index, may underperform the securities in
the index. Each Fund will attempt to be fully invested at all times, and
will not hold a significant portion of its assets in cash. The Funds will
generally not attempt to hedge against adverse market movements. Therefore,
a Fund might go down in value more than other mutual funds in the event of a
general market decline. In addition, an index fund has operating and other
expenses while an index does not. As a result, while a Fund will attempt to
track its target index as closely as possible, it will tend to underperform
the index to some degree over time.
Each Fund is a
non-diversified fund, which means that it invests more of its assets in
fewer companies than if it were a diversified fund. By concentrating in a
smaller number of investments, a Funds risk is increased because each
investment has a greater effect on the Funds performance. This hurts a
Funds performance when its investments are unsuccessful, although it
may help a Funds performance when its investments are
successful.
MERRILL LYNCH INDEX FUNDS,
INC.
Who should
invest?
The S&P 500
Index Fund may be an appropriate investment for you if you:
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Want to invest in
large U.S. companies
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Are investing with
long term goals, such as retirement or funding a childs
education
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In seeking to match
the performance of the S&P 500, are willing to accept the risk that
the value of your investment may decline
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Are not looking for
a significant amount of current income
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The Small Cap
Index Fund may be an appropriate investment for you if you:
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Want to invest in
smaller capitalization U.S. companies and can accept the additional risk
and volatility associated with stocks of these companies
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Are investing with
long term goals, such as retirement or funding a childs
education
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In seeking to match
the performance of the Russell 2000, are willing to accept the risk that
the value of your investment may decline
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Are not looking for
a significant amount of current income
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The Aggregate Bond
Index Fund may be an appropriate investment for you if you:
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In seeking to match
the performance of the Aggregate Bond Index, are willing to accept a lower
potential for capital appreciation
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Are looking for an
investment that provides income
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The International
Index Fund may be an appropriate investment for you if you:
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Are looking for
exposure to a variety of foreign markets and can accept the additional
risk and volatility associated with foreign investing
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Are investing with
long term goals, such as retirement or funding a childs
education
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In seeking to match
the performance of the EAFE Index, are willing to accept the risk that the
value of your investment may decline
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Are not looking for
a significant amount of current income
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MERRILL LYNCH INDEX FUNDS,
INC.
[GRAPHIC] Key
Facts
The bar chart and
table shown below provide an indication of the risks of investing in the
Fund. The bar chart shows changes in the Funds performance for Class A
shares for each complete calendar year since the Funds inception. The
table compares the average annual total returns for each class of the Fund
s shares for the periods shown with those of the S&P 500 Index.
How the Fund performed in the past is not necessarily an indication of how
the Fund will perform in the future.
Merrill
Lynch
S&P 500 Index Fund
Class A
Annual Total
Returns
[BAR CHART]
1998 1999
----- -----
28.24% 20.45%
During the period shown in
the bar chart, the highest return for a quarter was 21.37% (quarter ended
December 31, 1998) and the lowest return for a quarter was -10.04% (quarter ended
September 30, 1998).
Average Annual Total
Returns (as of the
calendar year ended)
December 31, 1999 |
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Past
One Year |
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Since
Inception |
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Merrill
Lynch S&P 500 Index Fund Class A |
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20.45% |
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29.20%
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S&P
500 Index* |
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21.04% |
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29.64%
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Merrill
Lynch S&P 500 Index Fund Class D |
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20.16% |
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28.88%
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S&P
500 Index* |
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21.04% |
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29.64%
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*
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The S&P 500
® is the Standard & Poors Composite Index of 500 Stocks, a
widely recognized, unmanaged index of common stock prices. Past
performance is not predictive of future performance.
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Inception date is
April 3, 1997.
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MERRILL LYNCH INDEX FUNDS,
INC.
The bar chart and
table shown below provide an indication of the risks of investing in the
Fund. The bar chart shows changes in the Funds performance for Class A
shares for each complete calendar year since the Funds inception. The
table compares the average annual total returns for each class of the Fund
s shares for the periods shown with those of the Russell 2000 Index.
How the Fund performed in the past is not necessarily an indication of how
the Fund will perform in the future.
Merrill
Lynch
Small Cap Index Fund
Class A
Annual Total
Returns
[BAR CHART]
1998 1999
----- -----
-3.14% 20.79%
During the period shown in
the bar chart, the highest return for a quarter was 18.48% (quarter ended
December 31, 1999) and the lowest return for a quarter was -20.05% (quarter ended
September 30, 1998).
Average Annual Total
Returns (as of the
calendar year ended)
December 31, 1999 |
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Past
One Year |
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Since
Inception |
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Merrill
Lynch Small Cap Index Fund Class A |
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20.79% |
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15.63% |
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Russell
2000 Index* |
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21.26% |
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16.19%
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Merrill
Lynch Small Cap Index Fund Class D |
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20.45% |
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15.33% |
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Russell
2000 Index* |
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21.26% |
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16.19%
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*
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This unmanaged
index is comprised of approximately 2,000 smaller-capitalization common
stocks from various industrial sectors. Past performance is not predictive
of future performance.
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Inception date is
April 9, 1997.
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MERRILL LYNCH INDEX FUNDS,
INC.
[GRAPHIC] Key
Facts
The bar chart and
table shown below provide an indication of the risks of investing in the
Fund. The bar chart shows changes in the Funds performance for Class A
shares for each complete calendar year since the Funds inception. The
table compares the average annual total returns for each class of the Fund
s shares for the periods shown with those of the Lehman Brothers
Aggregate Bond Index. How the Fund performed in the past is not necessarily
an indication of how the Fund will perform in the future.
Merrill
Lynch
Aggregate Bond Index Fund
Class A
Annual Total
Returns
[BAR CHART]
1998 1999
---- -----
8.56% -1.36%
During the period shown in
the bar chart, the highest return for a quarter was 4.21% (quarter ended
September 30, 1998) and the lowest return for a quarter was 1.12%
(quarter ended June 30, 1999).
Average Annual Total
Returns (as of the
calendar year ended)
December 31, 1999 |
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Past
One Year |
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Since
Inception |
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Merrill
Lynch Aggregate Bond Index
Fund Class A |
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1.36% |
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5.97% |
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Lehman
Brothers Aggregate Bond Index* |
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0.82% |
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6.37%
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Merrill
Lynch Aggregate Bond Index
Fund Class D |
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1.50% |
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5.75% |
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Lehman
Brothers Aggregate Bond Index* |
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0.82% |
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6.37%
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*
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This unmanaged
market-weighted index is comprised of US Government and agency securities,
mortgage-backed securities issued by the Government National Mortgage
Association, the Federal Home Loan Mortgage Corporation or the Federal
National Mortgage Association and Investment-grade (rated BBB or better)
corporate bonds. Past performance is not predictive of future
performance.
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Inception date is
April 3, 1997.
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MERRILL LYNCH INDEX FUNDS,
INC.
The bar chart and table shown below provide an indication of the risks of
investing in the Fund. The bar chart shows changes in the Funds
performance for Class A shares for each complete calendar year since the Fund
s inception. The table compares the average annual total returns for
each class of the Funds shares for the periods shown with those of the
Morgan Stanley Capital International (MSCI) EAFE GDP Weighted Index. How the
Fund performed in the past is not necessarily an indication of how the Fund
will perform in the future.
Merrill
Lynch
International Index Fund
Class A
Annual Total
Returns
[BAR CHART]
1998 1999
----- -----
25.65% 31.29%
During the period shown in
the bar chart, the highest return for a quarter was 20.84% (quarter ended
December 31, 1998) and the lowest return for a quarter was -14.69% (quarter ended
September 30, 1998).
Average Annual Total
Returns (as of the
calendar year ended)
December 31, 1999 |
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Past
One Year |
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Since
Inception |
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Merrill
Lynch International Index Fund Class A |
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31.29% |
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23.76% |
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MSCI EAFE
GDP Weighted Index* |
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31.00% |
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22.38%
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Merrill
Lynch International Index Fund Class D |
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30.95% |
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23.46% |
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MSCI EAFE
GDP Weighted Index* |
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31.00% |
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22.38%
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*
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This unmanaged
gross domestic product-weighted index is comprised of equity securities of
companies from various industrial sectors whose primary trading markets
are located outside the United States and which are selected from among
the larger-capitalization companies in such markets. Past performance is
not predictive of future performance.
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Inception date is
April 9, 1997.
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MERRILL LYNCH INDEX FUNDS,
INC.
[GRAPHIC] Key
Facts
UNDERSTANDING
EXPENSES
Fund investors pay various
fees and expenses, either directly or indirectly. Listed below are some of
the main types of expenses, which all mutual funds may charge:
Expenses paid
directly by the shareholder:
Shareholder
Fees these
include sales charges which you may pay when you buy or sell shares of the
Fund.
Expenses paid
indirectly by the shareholder:
Annual Fund
Operating Expenses expenses
that cover the costs of operating the Fund.
Management
Fee a fee paid
to the Investment Adviser for managing the Fund.
Service (Account
Maintenance) Fees fees used
to compensate securities dealers for account maintenance
activities.
The Fund offers two
different classes of shares, Class A and Class D shares. Although your money
will be invested the same way no matter which class of shares you buy, Class
D shares pay an ongoing account maintenance fee while Class A shares do not.
Not everyone is eligible to buy Class A shares. Your Merrill Lynch Financial
Consultant can help you determine whether you are eligible to buy Class A
shares. See How to Buy, Sell, Transfer and Exchange Shares,
below.
The tables show the
different fees and expenses that you may pay if you buy and hold each class
of shares of each Fund. Future expenses may be greater or less than those
indicated below.
Class A
Shares
Shareholder Fees
(fees paid
directly from your
investment)(a): |
|
S&P 500
Index Fund |
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Small Cap
Index Fund |
|
Aggregate
Bond
Index Fund |
|
International
Index Fund |
|
Maximum Sales Charge (Load)
imposed on purchases (as a
percentage of offering price) |
|
None |
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None |
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None |
|
None |
|
Maximum Deferred Sales Charge
(Load) (as a percentage of original
purchase price or redemption
proceeds, whichever is lower) |
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None |
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None |
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None |
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None |
|
Maximum Sales Charge (Load)
imposed on Dividend Reinvestments |
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None |
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None |
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None |
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None |
|
Redemption Fee |
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None |
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None |
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None |
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None |
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Exchange Fee |
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None |
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None |
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None |
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None |
|
Annual
Fund Operating Expenses
(expenses that are deducted from
Fund assets)(b): |
|
|
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Management Fee(c)(g) |
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0.005% |
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0.01% |
|
0.01% |
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0.01% |
|
Distribution and/or Service (12b-1)
Fees(d) |
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None |
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None |
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None |
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None |
|
Other Expenses (including transfer
agency fees)(e) |
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0.13% |
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0.31% |
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0.17% |
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0.34% |
|
Administrative Fees(f)(g) |
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0.245% |
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0.29% |
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0.19% |
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0.34% |
|
Total Annual
Fund Operating
Expenses(g) |
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0.38% |
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0.61% |
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0.37% |
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0.69% |
|
(footnotes on next
page)
MERRILL LYNCH INDEX FUNDS,
INC.
Class D
Shares
Shareholder Fees
(fees paid
directly from your
investment)(a): |
|
S&P 500
Index Fund |
|
Small Cap
Index Fund |
|
Aggregate
Bond
Index Fund |
|
International
Index Fund |
|
Maximum Sales Charge (Load)
imposed on purchases (as a
percentage of offering price) |
|
None |
|
None |
|
None |
|
None |
|
Maximum Deferred Sales Charge
(Load) (as a percentage of original
purchase price or redemption
proceeds, whichever is lower) |
|
None |
|
None |
|
None |
|
None |
|
Maximum Sales Charge (Load)
imposed on Dividend Reinvestments |
|
None |
|
None |
|
None |
|
None |
|
Redemption Fee |
|
None |
|
None |
|
None |
|
None |
|
Exchange Fee |
|
None |
|
None |
|
None |
|
None |
|
Annual
Fund Operating Expenses
(expenses that are deducted from
Fund assets)(b): |
|
|
|
Management Fee(c)(g) |
|
0.005% |
|
0.01% |
|
0.01% |
|
0.01% |
|
Distribution and/or Service
(12b-1) Fees(d) |
|
0.25% |
|
0.25% |
|
0.25% |
|
0.25% |
|
Other Expenses (including transfer
agency fees)(e) |
|
0.13% |
|
0.31% |
|
0.17% |
|
0.35% |
|
Administrative Fees(f)(g) |
|
0.245% |
|
0.29% |
|
0.19% |
|
0.34% |
|
Total Annual Fund Operating
Expenses(g) |
|
0.63% |
|
0.86% |
|
0.62% |
|
0.95% |
|
(a)
|
In addition,
Merrill Lynch may charge clients a processing fee (currently $5.35) when a
client buys or redeems shares.
|
(b)
|
Fees and expenses
include the expenses of both the Fund and the Funds pro rata share
of the expenses of the Series it invests in.
|
(c)
|
Paid by the Series.
The Investment Adviser has entered into a contract that provides that the
management fee for the Series, when combined with the administrative fees
of the Funds, will not exceed 0.25% of the S&P 500 Index Fund, 0.30%
of the Small Cap Index Fund, 0.20% of the Aggregate Bond Index Fund and
0.35% of the International Index Fund. As a result of these contractual
arrangements, effective August 2, 1999 the investment adviser of the
Master S&P 500 Index Series, Master Small Cap Index Series, Master
Aggregate Bond Index Series and Master International (GDP Weighted) Index
Series currently receives management fees of 0.005%, 0.01%, 0.01% and
.01%, respectively.
|
(d)
|
The Funds call the
Service Fee an Account Maintenance Fee. Account Maintenance
Fee is the term used elsewhere in this Prospectus and in all other Fund
Materials.
|
(e)
|
Each Fund pays the
Transfer Agent an annual fee at the annual rate of 0.05% of the Fund
s average daily net assets for its services and is entitled to
reimbursement for out-of-pocket expenses incurred by it under the Transfer
Agency Agreement. For the fiscal year ended December 31, 1999, the S&P
500 Index Fund, the Small Cap Index Fund, the Aggregate Bond Index Fund
and the International Index Fund paid the Transfer Agent fees totaling
$888,805, $28,930, $318,589, and $90,872, respectively. The Investment
Adviser provides accounting services to each Series at its cost. For the
fiscal year ended December 31, 1999, the Master S&P 500 Index Series,
the Master Small Cap Index Series, the Master Aggregate Bond Index Series
and the Master International (GDP Weighted) Index Series reimbursed the
Investment Adviser $374,872, $321, $97,195 and $9,258, respectively, for
accounting services. The Administrator provides account services to each
Fund at its cost. For the fiscal year ended December 31, 1999, the S&P
500 Index Fund, the Small Cap Index Fund and the International Index Fund
reimbursed the Administrator $1,290, $1,290 and $14,723, respectively, for
accounting services. The Aggregate Bond Index Fund did not reimburse the
Administrator for accounting services.
|
(g)
|
In addition to the
contractual arrangements described above, the Investment Adviser has
agreed to voluntarily waive management fees and/or reimburse expenses of
each Fund and/or the corresponding Series in which it invests. The Total
Annual Fund Operating Expenses shown in the table do not reflect any such
voluntary management fees waivers and/or reimbursement of expenses because
they may be discontinued by the
(Footnotes continued from previous page)
|
|
Investment Adviser
at any time without notice. During the fiscal year ended December 31,
1999, the Investment Adviser voluntarily waived management fees totaling
$23,839 and $26,206 for the Master Small Cap Index Series and the Master
International (GDP Weighted) Index Series, respectively. During the fiscal
year ended December 31, 1999, the Administrator waived administration fees
totaling $39,161, $47,563, $103,971 and $43,691 for the S&P 500 Index
Fund, the Small Cap Index Fund, the Aggregate Bond Index Fund and the
International Index Fund, respectively. Total Fund Operating Expenses in
the fee table have been restated to assume the absence of any such
reimbursement of expenses and/or waiver of fees because it may be
discontinued or reduced by the Investment Adviser/Administrator at any
time without notice. After taking into account the fee levels described
above and such waivers and reimbursements, the total expense ratio was
0.38% for Class A shares and 0.63% for Class D shares of the S&P 500
Index Fund; 0.50% for Class A shares and 0.74% for Class D shares of the
Small Cap Index Fund; 0.35% for Class A shares and 0.60% for Class D
shares of the Aggregate Bond Index Fund; and 0.64% for Class A shares and
0.89% for Class D shares of the International Index Fund.
|
Examples:
These examples are
intended to help you compare the cost of investing in the Fund with the cost
of investing in other mutual funds.
These examples assume
that you invest $10,000 in a Fund for the time periods indicated, that your
investment has a 5% return each year, and that each Funds operating
expenses remain the same. This assumption is not meant to indicate you will
receive a 5% annual rate of return. Your annual return may be more or less
than the 5% used in this example. Although your actual costs may be higher
or lower, based on these assumptions your costs would be:
CLASS A
SHARES
|
|
1
Year |
|
3
Years |
|
5
Years |
|
10
Years |
|
S&P 500
Index Fund |
|
$39 |
|
$122 |
|
$213 |
|
$480 |
|
Small Cap Index
Fund |
|
$62 |
|
$195 |
|
$340 |
|
$762 |
|
Aggregate Bond
Index Fund |
|
$38 |
|
$119 |
|
$208 |
|
$468 |
|
International
Index
Fund |
|
$70 |
|
$221 |
|
$384 |
|
$859 |
|
|
CLASS D
SHARES |
|
|
|
1
Year |
|
3
Years |
|
5
Years |
|
10
Years |
|
S&P 500
Index Fund |
|
$64 |
|
$202 |
|
$351 |
|
$786 |
|
Small Cap
Index Fund |
|
$88 |
|
$274 |
|
$477 |
|
$1,061 |
|
Aggregate
Bond
Index Fund |
|
$63 |
|
$199 |
|
$346 |
|
$774 |
|
International
Index
Fund |
|
$97 |
|
$303 |
|
$526 |
|
$1,166 |
|
MERRILL LYNCH INDEX FUNDS,
INC.
[GRAPHIC] Details About the
Funds
|
ABOUT THE PORTFOLIO
MANAGERS
|
|
Eric S. Mitofsky is a
Senior Vice President of the Funds and the Portfolio Manager of the S
&P 500 Index Fund, the International Index Fund and the Small Cap
Index Fund. Mr. Mitofsky has been a First Vice President of Fund Asset
Management since 1997 and was a Vice President from 1992 to
1997.
|
All
Funds
The Funds will not
attempt to buy or sell securities based on Fund managements
economic, financial or market analysis, but will instead employ a
passive investment approach. This means that Fund management
will attempt to invest in a portfolio of assets whose performance is
expected to match approximately the performance of the respective index
before deduction of Fund expenses. A Fund will buy or sell securities only
when Fund management believes it is necessary to do so in order to match
the performance of the respective index. Accordingly, it is anticipated
that a Funds portfolio turnover and trading costs will be lower than
actively managed funds. However, the Funds have operating and
other expenses, while an index does not. Therefore, each Fund will tend to
underperform its target index to some degree over time.
Each Fund will be
substantially invested in securities in the applicable index, and will
normally invest at least 80% of its assets in securities or other
financial instruments which are contained in or correlated with securities
in the applicable index. A Fund may change its target index if Fund
management believes a different index would better enable the Fund to
match the performance of the market segment represented by the current
index and, accordingly, the investment objective of a Fund may be changed
without shareholder approval. In addition to the investment strategies
described below, each Fund may also invest in illiquid securities and
repurchase agreements, and may engage in securities lending.
Each Fund will also
invest in short term money market instruments as cash reserves to maintain
liquidity. These instruments may include obligations of the U.S.
Government, its agencies or instrumentalities, highly rated bonds or
comparable unrated bonds, commercial paper, bank obligations and
repurchase agreements. To the extent a Fund invests in short term money
market instruments, it will generally also invest in options, futures or
other derivatives in order to maintain full exposure to the index. The
Funds will not invest in options, futures, other derivative instruments or
short term money market instruments in order to lessen the Funds
exposure to common stocks as a defensive strategy, but will instead
attempt to remain fully invested at all times.
S&P 500 Index
Fund
The S&P 500 is
composed of 500 common stocks issued by large-capitalization U.S.
companies in a wide range of businesses. The stocks included in the index
collectively represent a substantial portion of all
common stocks publicly traded in the U.S. The S&P 500 is generally
considered broadly representative of the performance of publicly traded
U.S. large capitalization stocks. The S&P 500 is a
market-weighted index, which means that the largest stocks
represented in the index have the most effect on the indexs
performance. Currently, the largest stocks in the S&P 500 have an
effect on the performance of the index that is many times greater than the
effect of the other stocks in the index. The stocks in the S&P 500 are
chosen by the Standard & Poors Rating Group (S&P
), a division of the McGraw-Hill Companies, Inc. S&P chooses
stocks for inclusion in the S&P 500 based on market capitalization,
trading activity and the overall mix of industries represented in the
index, among other factors. S&Ps selection of a stock for the S
&P 500 does not mean that S&P believes the stock to be an
attractive investment.
The Fund may invest
in all 500 stocks in the S&P 500 (other than ML&Co.) in roughly
the same proportions as their weightings in the S&P 500. For example,
if 2% of the S&P 500 is made up of the stock of a particular company,
the Fund will normally invest approximately 2% of its assets in that
company. This strategy is known as full replication. However,
when Fund management believes it would be cost efficient, Fund management
is authorized to deviate from full replication and to instead invest in a
statistically selected sample of the 500 stocks in the S&P 500 which
has aggregate investment characteristics, such as average market
capitalization and industry weightings, similar to the S&P 500 as a
whole, but which involves less transaction cost than would be incurred
through full replication. Fund management may also purchase stocks not
included in the S&P 500 when it believes that it would be a cost
efficient way of approximating the S&P 500s performance to do
so. If Fund management uses these techniques, the Fund may not track the S
&P 500 as closely as it would if it were fully replicating the S&P
500.
The Fund may invest
in derivative instruments, and will normally invest a substantial portion
of its assets in options and futures contracts linked to the performance
of the S&P 500. Derivatives allow the Fund to increase or decrease its
exposure to the S&P 500 quickly and at less cost than buying or
selling stocks. The Fund will invest in options, futures and other
derivative instruments in order to gain market exposure quickly in the
event of subscriptions, to maintain liquidity in the event of redemptions
and to keep trading costs low. In connection with the use of derivative
instruments, the Fund may enter into short sales in order to adjust the
weightings of particular securities represented in a derivative to more
accurately reflect the securities weightings in the target
index.
MERRILL LYNCH INDEX FUNDS,
INC.
|
The Funds are managed by
Fund Asset Management, L.P.
|
|
Small
Capitalizationas of the
most recent update of the Russell 2000 in June 1999, the largest stock
in the index had a market capitalization of approximately $1.35 billion
and the average market capitalization of stocks in the index was
approximately $526 million.
|
Small Cap Index
Fund
The Russell 2000 is
composed of the common stocks of the 1,001st through the 3000th largest
U.S. companies by market capitalization, as determined by the Frank
Russell Company. The stocks represented in the index are issued by
small-capitalization U.S. companies in a wide range of
businesses. The Russell 2000 is a market-weighted index, which means that
the largest stocks represented in the index have the most effect on the
indexs performance. The Russell 2000 is generally considered broadly
representative of the performance of publicly traded U.S.
smaller-capitalization stocks. Frank Russell Companys selection of a
stock for the Russell 2000 does not mean that Frank Russell Company
believes the stock to be an attractive investment.
The Frank Russell
Company updates the Russell 2000 once each year, at which time there may
be substantial changes in the composition of the index (and consequently,
significant turnover in the Fund). Stocks of companies that merge, are
acquired or otherwise cease to exist during the year are not replaced in
the index.
The Fund may not
invest in all of the common stocks in the Russell 2000, or in the same
weightings as in the Russell 2000. Instead, the Fund may invest in a
statistically selected sample of the stocks included in the Russell 2000.
The Fund will choose investments so that the market capitalizations,
industry weightings and other fundamental characteristics of the stocks
and derivative instruments in its portfolio are similar to the Russell
2000 as a whole.
The Fund may invest
in derivative instruments, and will normally invest a substantial portion
of its assets in options and futures contracts linked to the performance
of the Russell 2000. Derivatives allow the Fund to increase or decrease
its exposure to the Russell 2000 quickly and at less cost than buying or
selling stocks. The Fund will invest in options and futures and other
derivative instruments in order to gain market exposure quickly in the
event of subscriptions, to maintain liquidity in the event of redemptions
and to keep trading costs low. In connection with the use of derivative
instruments, the Fund may enter into short sales in order to adjust the
weightings of particular securities represented in a derivative to more
accurately reflect the securities weightings in the target
index.
Aggregate Bond Index
Fund
The Aggregate Bond
Index is a market-weighted index comprised of 6,500 dollar-denominated
investment grade bonds with maturities greater than one
year, as chosen by Lehman Brothers Holding Inc. (Lehman Brothers
). The Aggregate Bond Index includes:
|
|
U.S. government
and government agency securities
|
|
|
securities issued
by supranational entities, such as the World Bank
|
|
|
securities issued
by foreign governments and U.S. and foreign corporations
|
|
|
mortgage-backed
securities
|
Lehman Brothers
selection of a bond for the Aggregate Bond Index does not mean that
Lehman Brothers believes the security to be an attractive
investment.
The Fund may not
invest in all of the bonds in the Aggregate Bond Index, or in the same
weightings as in the Aggregate Bond Index. Instead, the Fund may invest in
a statistically selected sample of bonds included in the Aggregate Bond
Index, or in a statistically selected sample of bonds not included in the
index but correlated with bonds that are in the index, and in derivative
instruments linked to the Aggregate Bond Index. The Fund may invest in
bonds not included in the index, but which are selected to reflect
characteristics such as maturity, duration, or credit quality similar to
bonds in the index as a whole. This may result in different levels of
interest rate, credit or other risks from the levels of risks on the
securities included in the Aggregate Bond Index. The Aggregate Bond Index
Fund may trade securities to the extent necessary to maintain the duration
of certain segments of the portfolio close to the duration of
corresponding segments of the index, and, accordingly, the Aggregate Bond
Index Fund may have a higher portfolio turnover rate than the other
Funds.
Because the
Aggregate Bond Index is composed of investment grade bonds, the Fund will
invest in corporate bonds rated investment grade (rated at least Baa3 by
Moodys Investors Services, Inc. or BBB by S&P), or if unrated,
of comparable quality. The Fund may continue to hold a security that is
downgraded below investment grade.
The Fund will
usually invest a substantial portion of its assets in mortgage backed
securities. Most mortgage-backed securities are issued by
Federal government agencies, such as the Government National Mortgage
Association (Ginnie Mae), the Federal Home Loan Mortgage Corporation
(Freddie Mac) or Fannie Mae. Principal and interest payments on
mortgage-backed securities issued by the Federal government agencies are
guaranteed by either the Federal government or the government agency. Such
securities have very little credit risk. Mortgage-backed securities that
are issued by private corporations rather than Federal agencies have
credit risk as well as prepayment risk and extension risk.
The Fund may also
purchase securities on a when-issued basis, and it may purchase or sell
securities for delayed delivery. This is when the Fund buys or sells
securities with payment and delivery taking place in the future so that
the Fund can lock in a favorable yield and price at the time of entering
into the transaction. The Fund may also enter into dollar rolls in which
the Fund sells securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar securities on
a future date from the same party. During the period between the Fund
s sale of one security and purchase of a similar security, the Fund
does not receive principal and interest on the securities sold. The Fund
may also enter into standby commitment agreements in which the Fund is
committed, for a stated period of time, to buy a stated amount of a fixed
income security which may be issued and sold to the Fund at the option of
the issuer. The price of the security is fixed at the time of the
commitment, and the Fund is paid a commitment fee whether the security is
issued or not.
The Fund may invest
in derivative instruments, and will normally invest a substantial portion
of its assets in options and futures contracts correlated with the
performance of the Aggregate Bond Index. Derivatives may allow the Fund to
increase or decrease its exposure to the Aggregate Bond Index quickly and
at less cost than buying or selling bonds. The Fund may invest in options
and futures and other derivative instruments in order to gain market
exposure quickly in the event of subscriptions, to maintain liquidity in
the event of redemptions and to keep trading costs low. In connection with
the use of derivative instruments, the Fund may enter into short sales in
order to adjust the weightings of particular securities represented in a
derivative to more accurately reflect the securities weightings in
the target index.
International Index
Fund
The EAFE Index is
composed of equity securities of approximately 1,000 companies from
various industrial sectors whose primary trading markets are located
outside the U.S. Companies included in the EAFE Index are selected from
among the larger capitalization companies in these markets. The countries
currently included in the EAFE Index are Australia, Austria, Belgium,
Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy,
Japan, Malaysia, The Netherlands, New Zealand, Norway, Portugal, Singapore,
Spain, Sweden, Switzerland and the United Kingdom. The weighting of the
EAFE Index among these countries is based upon each countrys gross
domestic product and not relative market capitalizations. This means that
the index places greater weight on companies from countries with the
highest gross domestic product and these countries have the most effect on
the indexs performance. Because gross domestic product generally
changes less over time than market capitalization, this results in the
relative country weightings in the EAFE Index changing less over time than
in capitalization-weighted international indices. The stocks in the EAFE
Index are chosen by Morgan Stanley Capital International (Morgan
Stanley). Morgan Stanley chooses stocks for inclusion in the EAFE
Index based on market capitalization, trading activity and the overall mix
of industries represented in the index, among other factors. The EAFE
Index is generally considered broadly representative of the performance of
stocks traded in the international markets. Morgan Stanleys
selection of a stock for the EAFE Index does not mean that Morgan Stanley
believes the stock to be an attractive investment.
The Fund may not
invest in all of the countries, or all of the companies within a country,
represented in the EAFE Index, or in the same weightings as the EAFE
Index. Instead, the International Index Fund may invest in a statistically
selected sample of equity securities included in the EAFE Index and in
derivative instruments correlated with components of the EAFE Index as a
whole.
The Fund may invest
in derivative instruments, and will normally invest a substantial portion
of its assets in options and futures contracts correlated with countries
within the EAFE Index. Derivatives allow the Fund to increase or decrease
its exposure to the EAFE Index quickly and at less cost than buying or
selling stocks. The Fund will invest in options and futures and other
derivative instruments in order to gain market exposure quickly in the
event of subscriptions, to maintain liquidity in the event of redemptions
and to keep trading costs low. In connection with the use of derivative
instruments, the Fund may enter into short sales in order to
adjust the weightings of particular securities represented in a derivative
to more accurately reflect the securities weightings in the target
index.
MERRILL LYNCH INDEX FUNDS,
INC.
20
This section
contains a summary discussion of the principal risks of investing in a
Fund. As with any mutual fund, the value of a Funds investments
and therefore the value of a Funds sharesmay fluctuate.
These changes may occur because the stock market is rising or falling. At
other times, there are specific factors that may affect the value of a
particular investment. If the value of a Funds investments goes
down, you may lose money.
S&P 500 Index Fund,
Small Cap Index Fund and International Index Fund
Stock Market
Risk
Stock market risk is the risk that the stock market in one or more
countries in which a Fund invests will go down in value, including the
possibility that one or more markets will go down sharply and
unpredictably.
Aggregate Bond Index
Fund
Interest Rate
Risk
Interest rate risk is the risk that prices of bonds generally
increase when interest rates decline and decrease when interest rates
increase. Prices of longer term securities generally change more in
response to interest rate changes than prices of shorter term
securities.
Credit
Risk
Credit risk is the risk that the issuer of a security owned by the
Fund will be unable to pay the interest or principal when due. The degree
of credit risk depends on both the financial condition of the issuer and
the terms of the obligation.
Event
Risk
Event risk is the risk that corporate issuers may undergo
restructurings, such as mergers, leveraged buyouts, takeovers, or similar
events, which may be financed by increased debt. As a result of the added
debt, the credit quality and market value of a companys bonds may
decline significantly.
Mortgage-Backed
Securities
Mortgage-backed securities represent the right to receive a portion
of principal and/or interest payments made on a pool of residential or
commercial mortgage loans. When interest rates fall, borrowers may
refinance or otherwise repay principal on their mortgages earlier than
scheduled. When this happens, certain types of mortgage-backed securities
will be paid off more quickly than originally anticipated and the Fund has
to invest the proceeds in securities with lower yields. This risk is
known as
prepayment risk. When interest rates rise, certain types of
mortgage-backed securities will be paid off more slowly than originally
anticipated and the value of these securities will fall. This risk is
known as extension risk.
Because of
prepayment risk and extension risk, mortgage-backed securities react
differently to changes in interest rates than other fixed income
securities. Small movements in interest rates (both increases and
decreases) may quickly and significantly reduce the value of certain
mortgage-backed securities.
Dollar
Rolls
Dollar rolls involve the risk that the market value of the
securities that the Fund is committed to buy may decline below the price
of the securities the Fund has sold. These transactions may involve
leverage. The Fund will engage in dollar rolls to enhance return and not
for the purpose of borrowing.
Standby Commitment
Agreements
Standby commitment agreements involve the risk that the security
will lose value prior to its delivery to the Fund. These agreements also
involve the risk that if the security goes up in value, the counterparty
will decide not to issue the security, in which case the Fund has lost the
investment opportunity for the assets it had set aside to pay for the
security and any gain in the securitys price.
When Issued
Securities, Delayed Delivery Securities and Forward Commitments
When
issued, delayed delivery securities and forward commitments involve the
risk that the security the Fund buys will lose value prior to its
delivery. There also is the risk that the security will not be issued or
that the other party will not meet its obligation. If this occurs, the
Fund loses both the investment opportunity for the assets it has set aside
to pay for the security and any gain in the securitys
price.
Foreign Government
Debt The
Aggregate Bond Index Fund may invest in debt securities issued or
guaranteed by foreign governments or their agencies and instrumentalities.
Investments in these securities subject the Fund to the risk that a
government entity may delay or refuse to pay interest or repay principal
on its debt for various reasons, including cash flow problems,
insufficient foreign currency reserves, political considerations, or the
relative size of its debt position to its economy. If a government entity
defaults, it may ask for more time in which to pay or for further loans.
There is no bankruptcy proceeding by which all or part of debt securities
that a government entity has not repaid may be collected.
MERRILL LYNCH INDEX FUNDS,
INC.
22
International Index
Fund and Aggregate Bond Index Fund
Foreign Market
Risk
Since a Fund may invest in foreign securities, it offers the
potential for more diversification than an investment only in the United
States. This is because stocks traded on foreign markets have often
(though not always) performed differently than stocks in the United
States. However, such investments involve special risks not present in
U.S. investments that can increase the chances that a Fund will lose
money. In particular, investment in foreign securities involves the
following risks, which are generally greater for investments in emerging
markets.
|
|
The economies of
certain foreign markets often do not compare favorably with the economy
of the United States in respect to such issues as growth of gross
national product, reinvestment of capital, resources and balance of
payments position. Certain of these economies may rely heavily on
particular industries or foreign capital. They may be more vulnerable to
adverse diplomatic developments, the imposition of economic sanctions
against a particular country or countries, changes in international
trading patterns, trade barriers, and other protectionist or retaliatory
measures.
|
|
|
Investments in
foreign markets may be adversely affected by governmental actions such
as the imposition of capital controls, nationalization of companies or
industries, expropriation of assets or the imposition of punitive
taxes.
|
|
|
The governments
of certain countries may prohibit or impose substantial restrictions on
foreign investing in their capital markets or in certain industries. Any
of these actions could severely affect security prices. They could also
impair a Funds ability to purchase or sell foreign securities or
transfer its assets or income back into the United States, or otherwise
adversely affect a Funds operations.
|
|
|
Other foreign
market risks include foreign exchange controls, difficulties in pricing
securities, defaults on foreign government securities, difficulties in
enforcing favorable legal judgments in foreign courts and political and
social instability. Legal remedies available to investors in some
foreign countries may be less extensive than those available to
investors in the United States or other foreign countries.
|
MERRILL LYNCH INDEX FUNDS,
INC.
23
[GRAPHIC] Details About the
Funds
|
|
Because there are
generally fewer investors on foreign exchanges and a smaller number of
shares traded each day, it may be difficult for a Fund to buy and sell
securities on those exchanges. In addition, prices of foreign securities
may go up and down more than prices of securities traded in the United
States.
|
|
|
Foreign markets
may have different clearance and settlement procedures. In certain
markets, settlements may be unable to keep pace with the volume of
securities transactions. If this occurs, a Fund may be unable to sell an
investment because of these delays.
|
Governmental
Supervision and Regulation/Accounting Standards
Many foreign governments supervise and regulate stock exchanges,
brokers and the sale of securities less than the United States does. Some
countries may not have laws to protect investors the way that the U.S.
securities laws do. For example, some foreign countries may have no laws
or rules against insider trading. Insider trading occurs when a person
buys or sells a companys securities based on non-public information
about that company. Accounting standards in other countries are not
necessarily the same as in the United States If the accounting standards
in another country do not require as much detail as U.S. accounting
standards, it may be harder for a Funds portfolio manager to
completely and accurately determine a companys financial condition.
Also, brokerage commissions and other costs of buying or selling
securities often are higher in foreign countries than they are in the
United States. This reduces the amount a Fund can earn on its
investments.
International Index
Fund
Currency
Risk
Securities in which the International Index Fund invests are usually
denominated or quoted in currencies other than the U.S. dollar. Changes in
foreign currency exchange rates will affect the value of the securities of
the Fund. Generally, when the U.S. dollar rises in value against a foreign
currency, a security denominated in that currency loses value because the
currency is worth fewer U.S. dollars. Conversely, when the U.S. dollar
decreases in value against a foreign currency, a security denominated in
that currency gains value because the currency is worth more U.S. dollars.
This risk, generally known as currency risk, means that a
strong U.S. dollar will reduce returns for U.S. investors while a weak
U.S. dollar will increase those returns.
MERRILL LYNCH INDEX FUNDS,
INC.
24
Certain Risks of Holding Fund Assets Outside the United States
The
International Index Fund generally holds its foreign securities and cash
in foreign banks and securities depositories. Some foreign banks and
securities depositories may be recently organized or new to the foreign
custody business. In addition, there may be limited or no regulatory
oversight over their operations. Also, the laws of certain countries may
put limits on the Funds ability to recover its assets if a foreign
bank, depository or issuer of a security, or any of their agents, goes
bankrupt. In addition, it is often more expensive for the Fund to buy,
sell, and hold securities in certain foreign markets than in the U.S. The
increased expense of investing in foreign markets reduces the amount the
Fund can earn on its investments and typically results in a higher
operating expense ratio for the Fund than investment companies invested
only in the U.S.
European Economic and
Monetary Union (EMU) A
number of European countries have entered into EMU in an effort to reduce
trade barriers between themselves and eliminate fluctuations in their
currencies. EMU established a single European currency (the euro), which
was introduced on January 1, 1999 and is expected to replace the existing
national currencies of all initial EMU participants by July 1, 2002.
Certain securities (beginning with government and corporate bonds) have
been redenominated in the euro and are traded and make dividend and other
payments only in euros. Like other investment companies and business
organizations, including the companies in which the Funds invest, the
Funds could be adversely affected if the transition to the euro, or EMU as
a whole, does not proceed as planned or if a participating country
withdraws from EMU.
MERRILL LYNCH INDEX FUNDS,
INC.
25
[GRAPHIC] Details About the
Funds
Futures
private contracts involving the obligation of the seller to deliver,
and the buyer to receive, certain assets (or a money payment based on the
change in value of certain assets or an index) at a specified
time.
Forwards
exchange-traded contracts involving the obligation of the seller to
deliver, and the buyer to receive, certain assets (or a money payment
based on the change in value of certain assets or an index) at a specified
time.
Options
exchange-traded or private contracts involving the right of a holder
to deliver (a put) or receive (a call) certain
assets (or a money payment based on the change in value of certain assets
or an index) from another party at a specified price within a specified
time period.
Swaps
private contracts involving the obligation of a party to exchange
specified payments (which may be based on the value of an index or asset)
with another party at specified times.
Indexed
Securities
debt obligations that return a variable amount of principal or
interest based on the value of an index at a specified time.
Small Cap Index
Fund
Small Cap
Securities
Small cap companies may have limited product lines or markets. They
may be less financially secure than larger, more established companies.
They may depend on a small number of key personnel. If a product fails, or
if management changes, or there are other adverse developments, the Fund
s investment in a small cap company may lose substantial
value.
The securities of
small cap companies generally trade in lower volumes and are subject to
greater and less predictable price changes than the securities of larger,
more established companies. Investing in smaller companies requires a long
term view.
Volatility
Stocks of small companies tend to be more volatile than stocks of
larger companies and can be particularly sensitive to expected changes in
interest rates, borrowing costs and earnings.
All
Funds
Selection
Risk
Selection risk is the risk that a Funds investments, which may
not fully replicate the index, may perform differently from the securities
in the target index.
Derivatives
The Fund may use derivative instruments including: futures,
forwards and options, options on futures,
swaps and indexed securities. Derivatives allow a
Fund to increase or decrease its risk exposure more quickly and
efficiently than other types of instruments.
Derivatives are
volatile and involve significant risks, including:
|
Leverage risk
the risk associated with certain types of investments or trading
strategies (such as borrowing money to increase the amount of
investments) that relatively small market movements may result in large
changes in the value of an investment. Certain investments or trading
strategies that involve leverage can result in losses that greatly
exceed the amount originally invested.
|
|
Credit risk
the risk that the counterparty (the party on the other side of the
transaction) on a derivative transaction will be unable to honor its
financial obligation to a Fund.
|
MERRILL LYNCH INDEX FUNDS,
INC.
26
Net Asset
Value the
market value of a Funds total assets after deducting liabilities,
divided by the number of shares outstanding.
|
Currency risk
the risk that changes in the exchange rate between currencies will
adversely affect the value (in U.S. dollar terms) of an
investment.
|
|
Liquidity risk
the risk that certain securities may be difficult or impossible to
sell at the time that the seller would like or at the price that the
seller believes the security is currently worth.
|
The Funds may use
derivatives for anticipatory hedging. Anticipatory hedging is a strategy
in which a Fund uses a derivative to offset the risk that securities in
which the Fund intends to invest will increase in value before the Fund
has an opportunity to purchase the securities. The Funds will use
derivatives for anticipatory hedging in order to gain exposure efficiently
to their underlying indexes in the event the Funds will receive cash
inflows. Derivatives may not always be available or cost efficient. If a
Fund invests in derivatives, the investments may not be effective as a
hedge against price movements.
Borrowing and
Leverage
The Funds may borrow for temporary emergency purposes including to
meet redemptions. Borrowing may exaggerate changes in the net asset
value of Fund shares and in the yield on a Funds portfolio.
Borrowing will cost a Fund interest expense and other fees. The costs of
borrowing may reduce a Funds return. Certain securities that a Fund
buys may create leverage, including, for example, when issued securities,
forward commitments and options.
Illiquid
Securities
Each Fund may invest up to 15% of its net assets in illiquid
securities that it cannot easily resell within seven days at current value
or that have contractual or legal restrictions on resale. If a Fund buys
illiquid securities it may be unable to quickly resell them or may be able
to sell them only at a price below current value.
Restricted
Securities
Restricted securities have contractual or legal restrictions on
their resale. They include private placement securities that a Fund buys
directly from the issuer. Private placement and other restricted
securities may not be listed on an exchange and may have no active trading
market.
Restricted
securities may be illiquid. A Fund may be unable to sell them on short
notice or may be able to sell them only at a price below current value. A
Fund may get only limited information about the issuer, so it may be less
able to predict a loss. In addition, if Fund management receives material
adverse nonpublic information about the issuer, a Fund will not be able to
sell the security.
MERRILL LYNCH INDEX FUNDS,
INC.
27
[GRAPHIC] Details About the
Funds
Rule 144A Securities
Rule 144A securities are restricted securities that can be resold to
qualified institutional buyers but not to the general public. Rule 144A
securities may have an active trading market, but carry the risk that the
active trading market may not continue.
Securities
Lending
Each Fund may lend securities to financial institutions with a value
not exceeding 33 1
/3% of its assets
that provide government securities as collateral. Securities lending
involves the risk that the borrower may fail to return the securities in a
timely manner or at all. As a result, a Fund may lose money and there may
be a delay in recovering the loaned securities. A Fund could also lose
money if it does not recover the securities and the value of the
collateral falls. These events could trigger adverse tax consequences to a
Fund.
Short
Sales
When a Fund makes a short sale, it must borrow the security sold
short and deliver it to the broker-dealer through which it made the short
sale as collateral for its obligation to deliver the security upon
conclusion of the sale. If the price of the security sold short increases
between the time of the short sale and the time the Fund replaces the
borrowed security, the Fund will incur a loss; conversely, if the price
declines, the Fund will realize a gain. Any gain will be decreased, and
any loss increased, by transaction costs. Although the Funds gain is
limited to the price at which it sold the security short, its potential
loss is theoretically unlimited.
STATEMENT OF ADDITIONAL
INFORMATION
If you would like
further information about the Funds, including how they invest, please see
the Statement of Additional Information.
MERRILL LYNCH INDEX FUNDS,
INC.
28
[GRAPHIC] Your
Account
HOW TO BUY, SELL, TRANSFER AND EXCHANGE SHARES
Each Fund offers
two share classes, Class A shares and Class D shares. Each share class of
a Fund represents an ownership interest in the same investment portfolio.
Shares of each class of a Fund are offered without a sales charge or an
ongoing distribution fee. Class D shares of each Fund pay an ongoing
account maintenance fee of 0.25%.
Class A shares are
offered only to certain investors including:
|
|
Participants in
certain Merrill Lynch sponsored programs, including the Merrill Lynch
Mutual Fund Adviser Program.
|
|
|
Certain employer
sponsored retirement plans or savings plans.
|
|
|
Certain
investors, including directors of Merrill Lynch mutual funds and Merrill
Lynch employees.
|
|
|
Certain Merrill
Lynch investment or central asset accounts may be eligible to purchase
Class A shares.
|
|
|
Purchases using
proceeds from sale of certain Merrill Lynch closed-end funds under
certain circumstances.
|
Your Merrill Lynch
Financial Consultant can help you determine whether you are eligible to
buy Class A shares or to participate in any of these programs. If you are
eligible to buy Class A shares, you should buy Class A since Class D
shares are subject to an account maintenance fee, while Class A shares are
not.
Each Funds
shares are distributed by Merrill Lynch Funds Distributor, a division of
Princeton Funds Distributor, Inc.
The chart below
summarizes how to buy, sell, transfer and exchange shares through Merrill
Lynch or other securities dealers. You may also buy shares through the
Transfer Agent. To learn more about buying shares through the Transfer
Agent, call 1-800-MER-FUND. Because the selection of a mutual fund
involves many considerations, your Merrill Lynch Financial Consultant may
help you with this decision.
MERRILL LYNCH INDEX FUNDS,
INC.
[GRAPHIC] Your
Account
If You Want
To |
|
Your
Choices |
|
Information Important
for You to Know |
|
Buy Shares |
|
Determine the amount of
your investment |
|
The minimum initial
investment for a Fund is $1,000 for all accounts
except:
$250 for certain
Merrill Lynch fee-based programs
$100 for
retirement plans |
|
|
|
|
|
(The minimums for initial
investments may be waived under certain
circumstances.) |
|
|
|
Have your Merrill Lynch
Financial Consultant or
securities dealer submit
your purchase order |
|
The price of your shares
is based on the next calculation of net
asset value after your order is placed. Any purchase orders placed
prior to the close of business on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) will be priced at the net asset
value determined that day. |
|
|
|
|
|
Purchase orders placed
after that time will be priced at the net
asset value determined on the next business day. A Fund may reject
any order to buy shares and may suspend the sale of shares at any
time. Merrill Lynch may charge a processing fee to confirm a
purchase. This fee is currently $5.35. |
|
|
|
Or contact the Transfer
Agent |
|
To purchase shares
directly, call the Transfer Agent at 1-800-MER-
FUND and request a purchase application. Mail the completed
purchase application to the Transfer Agent at the address on the
inside back cover of this prospectus. |
|
Add to Your
Investment |
|
Purchase additional
shares |
|
The minimum investment
for additional purchases is generally $50
for all accounts except that retirement plans have a minimum
additional purchase of $1. |
|
|
|
|
|
(The minimums for
additional purchases may be waived under
certain circumstances.) |
|
|
|
Acquire additional shares
through the automatic
dividend reinvestment plan |
|
All dividends are
automatically reinvested without a sales charge. |
|
|
|
Participate in the
automatic
investment plan |
|
You may invest a specific
amount on a periodic basis through
certain Merrill Lynch investment or central asset accounts. |
|
Transfer Shares to
Another Securities
Dealer |
|
Transfer to a
participating
securities dealer |
|
You may transfer your
Fund shares only to another securities dealer
that has entered into an agreement with Merrill Lynch. Certain
shareholder services may not be available for the transferred shares.
You may only purchase additional shares of Funds previously
owned before the transfer. All future trading of these assets must
be coordinated by the receiving firm. |
|
|
|
Transfer to a |
|
You must
either: |
|
|
non-participating
securities |
|
Transfer your
shares to an account with the Transfer Agent; or |
|
|
dealer |
|
Sell your
shares. |
|
MERRILL LYNCH INDEX FUNDS,
INC.
30
If You Want
To |
|
Your
Choices |
|
Information Important
for You to Know |
|
Sell Your
Shares |
|
Have your Merrill Lynch
Financial Consultant or
securities dealer submit
your sales order |
|
The price of your shares
is based on the next calculation of net
asset value after your order is placed. For your redemption
request to be priced at the net asset value on the day of your
request, you must submit your request to your dealer prior to
that days close of business on the New York Stock Exchange
(generally 4:00 p.m. Eastern time). Any redemption request
placed after that time will be priced at the net asset value at the
close of business on the next business day. |
|
|
|
|
|
Securities dealers,
including Merrill Lynch, may charge a fee to
process a redemption of shares. Merrill Lynch currently charges a
fee of $5.35. No processing fee is charged if you redeem shares
directly through the Transfer Agent. |
|
|
|
|
|
The Fund may reject an
order to sell shares under certain
circumstances. |
|
|
|
Sell through the Transfer
Agent |
|
You may sell shares held
at the Transfer Agent by writing to the
Transfer Agent at the address on the inside back cover of this
prospectus. All shareholders on the account must sign the letter.
A signature guarantee will generally be required but may be
waived in certain limited circumstances. You can obtain a
signature guarantee from a bank, securities dealer, securities
broker, credit union, savings association, national securities
exchange and registered securities association. A notary public
seal will not be acceptable. If you hold stock certificates, return
the certificates with the letter. The Transfer Agent will normally
mail redemption proceeds within seven days following receipt of
a properly completed request. If you make a redemption request
before the Fund has collected payment for the purchase of
shares, the Fund or the Transfer Agent may delay mailing your
proceeds. This delay will usually not exceed ten days. |
|
|
|
|
|
If you hold share
certificates, they must be delivered to the
Transfer Agent before they can be converted. Check with the
Transfer Agent or your Merrill Lynch Financial Consultant for
details. |
|
Sell Shares
Systematically |
|
Participate in a Fund
s
Systematic Withdrawal
Plan |
|
You can choose to receive
systematic payments from your Fund
account either by check or through direct deposit to your bank
account on a monthly or quarterly basis. If you have a Merrill
Lynch CMA®, CBA® or Retirement Account you can arrange for
systematic redemptions of a fixed dollar amount on a monthly,
bi-monthly, quarterly, semi-annual or annual basis, subject to
certain conditions. Under either method you must have dividends
automatically reinvested. Ask your Merrill Lynch Financial
Consultant for details. |
|
|
MERRILL LYNCH INDEX FUNDS,
INC.
[GRAPHIC] Your
Account
If You Want
To |
|
Your
Choices |
|
Information Important
for You to Know |
|
Exchange Your
Shares |
|
Select the fund into which
you want to exchange. Be
sure to read that funds
prospectus |
|
If you are a participant
of certain Merrill Lynch fee-based
programs or certain retirement plans, you can exchange your
shares of a Fund for shares of many other Merrill Lynch mutual
funds. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Because of the high
cost of maintaining smaller shareholder accounts, the Funds may redeem the
shares in your account if the net asset value of your account falls below
$500 due to redemptions you have made. You will be notified that the value
of your account is less than $500 before the Funds make an involuntary
redemption. You will then have 60 days to make an additional investment to
bring the value of your account to at least $500 before the Funds take any
action. This involuntary redemption does not apply to retirement plans or
Uniform Gifts or Transfers to Minors Act accounts.
Each Fund reserves
the right to refuse any purchase request that could detract from efficient
management of the Fund. Some investors try to profit from market
timing, which may impose unusual and unwarranted trading costs on
a Fund and its long-term shareholders. Each Fund may therefore refuse
purchase requests because of the size of the investment relative to the
Fund, the timing of the purchase request or a history of excessive trading
by the investor or a group of investors.
Market
Timing
a short term trading strategy that seeks to switch money into
investments when they are likely to rise and then rapidly switch out. As
money is shifted in and out, a fund incurs expenses for buying and selling
securities that are passed onto other shareholders.
MERRILL LYNCH INDEX FUNDS,
INC.
HOW SHARES ARE
PRICED
When you buy shares, you pay the net asset value. This is the offering
price. Shares are also redeemed at their net asset value. Each Fund
calculates its net asset value (generally by using market quotations) each
day the New York Stock Exchange is open, after the close of business on
the Exchange, based on prices at the time of closing. The Exchange
generally closes at 4:00 p.m. Eastern time. The net asset value used in
determining your price is the next one calculated after your purchase or
redemption order is placed. Foreign securities owned by a Fund may trade
on weekends or other days when the Fund does not price its shares. As a
result, the Funds net asset value may change on days when you will
not be able to purchase or redeem the Funds shares. If an event
occurs after the close of a foreign exchange that is likely to
significantly affect the Funds net asset value, fair value
pricing may be used. This means that the Fund may value its foreign
holdings at prices other than their last closing prices, and the Fund
s net asset value will reflect this.
Generally, Class A
shares will have a higher net asset value than Class D shares because
Class A has lower expenses. Also dividends paid on Class A shares will
generally be higher than dividends paid on Class D shares because Class A
shares have lower expenses.
PARTICIPATION IN MERRILL LYNCH FEE-BASED PROGRAMS
If you participate
in certain fee-based programs offered by Merrill Lynch, you may be able to
buy Class A shares or exchange other share classes for Class A shares of a
Fund.
You generally
cannot transfer shares held through a fee-based program into another
account. Instead, you will have to redeem your shares held through the
program and purchase shares of another class, which may be subject to
distribution and account maintenance fees. This may be a taxable event and
you will pay any applicable sales charges.
If you leave one of
these programs, your shares may be redeemed or automatically exchanged
into Class D shares of a Fund or into a money market fund. Any redemption
or exchange will be at net asset value.
However, if you participate in the program for less than a specified period,
you may be charged a fee in accordance with the terms of the
program.
Details about these
features and the relevant charges are included in the client agreement for
each fee-based program and are available from your Merrill Lynch Financial
Consultant.
DIVIDENDS AND
TAXES
The S&P 500
Index Fund, Small Cap Index Fund and International Index Fund will
distribute net investment income at least annually. The Aggregate Bond
Index Fund will distribute net investment income on a monthly basis. The
Funds will distribute any net realized long or short term capital gains at
least annually. The Funds may also pay a special distribution at the end
of the calendar year to comply with Federal tax requirements. If your
account is with Merrill Lynch and you would like to receive
dividends in cash, contact your Merrill Lynch Financial
Consultant. If your account is with the Transfer Agent and you would like
to receive dividends in cash, contact the Transfer Agent.
You will pay tax on
dividends from a Fund whether you receive them in cash or additional
shares. If you redeem Fund shares or exchange them for shares of another
fund, any gain on the transaction may be subject to tax. The Funds intend
to pay dividends that will either be taxed as ordinary income or capital
gains. Capital gain dividends received by individuals are generally taxed
at different rates than ordinary income dividends.
If you are neither
a lawful permanent resident nor a citizen of the U.S. or if you are a
foreign entity, the Funds ordinary income dividends (which include
distributions of net short term capital gains) will generally be subject
to a 30% U.S. withholding tax, unless a lower treaty rate
applies.
Dividends and
interest received by the International Index Fund and the Aggregate Bond
Index Fund may give rise to withholding and other taxes imposed by foreign
countries. Tax conventions between certain countries and the United States
may reduce or eliminate such taxes. The International Index Fund expects
to make an election that will generally require shareholders to include in
income their share of foreign withholding taxes paid by the Fund.
Shareholders may be entitled to treat these taxes as taxes paid by them, and
therefore, deduct such taxes in computing their taxable income or, in some
cases, to use them as foreign tax credits against the U.S. income taxes
otherwise owed.
By law, a Fund must
withhold 31% of your distributions and proceeds if you have not provided a
taxpayer identification number or social security number or if the number
you have provided is incorrect.
This section
summarizes some of the consequences under current Federal tax law of an
investment in a Fund. It is not a substitute for personal tax
advice.
Consult your
personal tax advisor about the potential tax consequences of an investment
in a Fund under all applicable tax laws.
MERRILL LYNCH INDEX FUNDS,
INC.
[GRAPHIC] Management of the
Funds
The Funds do not have an investment adviser since each Funds assets
are invested in its corresponding Series. Effective August 2, 1999, Fund
Asset Management, L.P. replaced Merrill Lynch Asset Management, L.P. as
the investment adviser of the Series. Fund Asset Management, L.P. is an
affiliate of Merrill Lynch Asset Management, L.P. which shares
substantially the same investment personnel, including the personnel
responsible for providing management services to the Series. Fund Asset
Management, L.P. manages the underlying Series investments and their
business operations under the overall supervision of the Board of Trustees
of Quantitative Master Series Trust. The Investment Adviser has the
responsibility for making all investment decisions for the
Series.
The Funds have
hired Merrill Lynch Asset Management, L.P. as Administrator of the Funds
to provide administrative services.
The tables below
shows the fees earned by the Investment Adviser and its affiliate for
management services to the underlying Series and the fees earned by the
Administrator December 31, 1999.
Series
|
|
Actual
Current
Fee
Rate*
|
|
Contractual
Fee Rate**
|
|
Fee Rate for the
fiscal year ended
(reflects voluntary waiver,
where applicable)
|
Master S&P
500 |
|
|
|
|
|
|
|
Index Series |
|
.03% |
|
0.005 |
% |
|
0.03% |
Master Small
Cap |
|
|
|
|
|
|
|
Index Series |
|
.05% |
|
.01 |
% |
|
0.03% |
Master
Aggregate |
|
|
|
|
|
|
|
Bond Index Series |
|
.04% |
|
.01 |
% |
|
0.04% |
Master
International |
|
|
|
|
|
|
|
(GDP Weighted) |
|
|
|
|
|
|
|
Index Series |
|
.07% |
|
.01 |
% |
|
0.06% |
MERRILL LYNCH INDEX FUNDS,
INC.
36
Fund
|
|
Actual
Current
Fee
Rate*
|
|
Contractual
Fee
Rate***
|
|
Fee Rate for the
fiscal year ended
December 31, 1999
(reflects voluntary
waiver, where
applicable)
|
|
|
|
|
|
S&P 500 Index
Fund |
|
0.22% |
|
0.245% |
|
.21% |
Small Cap Index
Fund |
|
0.25% |
|
0.29% |
|
.17% |
Aggregate Bond
Index |
|
|
|
|
|
|
Fund |
|
0.16% |
|
0.19% |
|
.13% |
International Index
Fund |
|
0.27% |
|
0.34% |
|
.24% |
*
|
The Investment
Adviser has entered into a contract that provides that the management
fee for the Series, when combined with the administrative fees of the
Funds, will not exceed 0.25% of the S&P 500 Index Fund, 0.30% of the
Small Cap Index Fund, 0.20% of the Aggregate Bond Index Fund and 0.35%
of the International Index Fund. As a result of this contractual
arrangement, the Investment Adviser of the Master S&P 500 Index
Series, Master Small Cap Index Series, Master Aggregate Bond Index
Series and Master International (GDP Weighted) Index Series currently
receives management fees of 0.005%, 0.01%, 0.01% and 0.01%,
respectively.
|
**
|
Excluding fee
waivers.
|
***
|
Excluding fee
waivers. Prior to August 2, 1999 the administrative fees of the Funds
were the following amounts: S&P 500 Index Fund: 0.20%; Small Cap
Index Fund: 0.22%; Aggregate Bond Index Fund: 0.14%; International Index
Fund: 0.24%.
|
Fund Asset
Management was organized as an investment adviser in 1977 and offers
investment advisory services to more than 50 registered investment
companies. Fund Asset Management is part of the Asset Management Group of
ML&Co., which had approximately $559 billion in investment company and
other portfolio assets under management as of February 2000. This amount
includes assets managed for Merrill Lynch affiliates.
A Note About Year
2000
As the year 2000
began, there were few problems caused by the inability of certain computer
systems to tell the difference between the year 2000 and the year 1900
(commonly known as the Year 2000 Problem). It is still
possible that some computer systems could malfunction in the future
because of the Year 2000 Problem or as a result of actions taken to
address the Year 2000
Problem. Fund management does not anticipate that its services or those of
the Funds other service providers will be adversely affected, but
Fund management will continue to monitor the situation. If malfunctions
related to the Year 2000 Problem do arise, the Funds and their investments
could be negatively affected.
MERRILL LYNCH INDEX FUNDS,
INC.
38
MASTER/FEEDER
STRUCTURE
Unlike many other mutual funds, which directly buy and manage their own
portfolio securities, the Funds seek to achieve their investment
objectives by investing all their assets in the corresponding Series of
the Quantitative Master Series Trust. Investors in each Fund will acquire
an indirect interest in the respective underlying Series.
Other feeder
funds may also invest in the master Series. This
structure may enable the Funds to reduce costs through economies of scale.
A larger investment portfolio may also reduce certain transaction costs to
the extent that contributions to and redemptions from the master from
different feeders may offset each other and produce a lower net cash
flow.
A Fund may withdraw
from the Series at any time and may invest all of its assets in another
pooled investment vehicle or retain an investment adviser to manage the
Funds assets directly.
Smaller feeder
funds may be harmed by the actions of larger feeder funds. For example, a
larger feeder fund could have more voting power than a Fund over the
operations of the Series.
Whenever the Series
holds a vote of its feeder funds, a Fund will pass the vote through to its
own shareholders.
MERRILL LYNCH INDEX FUNDS,
INC.
39
[GRAPHIC] Management of the
Fund
The Financial Highlights table is intended to help you understand the Funds
financial performance for the period April 3, 1997 to December 31,
1999, with respect to the S&P 500 Index Fund and the Aggregate Bond
Index Fund and for the period April 9, 1997 to December 31, 1999, with
respect to the Small Cap Index Fund and the International Index Fund.
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 on an investment in a Fund (assuming reinvestment of all
dividends). This information has been audited by Deloitte & Touche
LLP, whose reports,
along with the Funds financial statements, are included in the Funds
annual reports to shareholders, which are available upon
request.
S&P 500 Index
Fund
|
|
Class
A
|
|
Class
D
|
Increase (Decrease) in
Net Asset Value |
|
For the
Year Ended
December 31, |
|
For the
Period
April 3,
1997 to
December 31,
1997 |
|
For the
Year Ended
December 31, |
|
For the
Period
April 3,
1997 to
December 31,
1997 |
|
1999 |
|
1998 |
|
|
1999 |
|
1998 |
|
Per Share
Operating
Performance: |
|
Net asset
value, beginning of period |
|
$
15.30 |
|
|
$
12.55 |
|
|
$
10.00 |
|
|
$
15.28 |
|
|
$
12.54 |
|
|
$
10.00 |
|
|
Investment
incomenet |
|
.18 |
|
|
.18 |
|
|
.11 |
|
|
.13 |
|
|
.11 |
|
|
.11 |
|
|
Realized and
unrealized gain on
investments from the Seriesnet |
|
2.92 |
|
|
3.33 |
|
|
2.97 |
|
|
2.94 |
|
|
3.37 |
|
|
2.95 |
|
|
Total from
investment operations |
|
3.10 |
|
|
3.51 |
|
|
3.08 |
|
|
3.07 |
|
|
3.48 |
|
|
3.06 |
|
|
Less
dividends and distributions: |
Investment incomenet |
|
(.17 |
) |
|
(.16 |
) |
|
(.11 |
) |
|
(.14 |
) |
|
(.14 |
) |
|
(.10 |
) |
Realized gain on investments from the Series
net |
|
|
|
|
(.60 |
) |
|
(.42 |
) |
|
|
|
|
(.60 |
) |
|
(.42 |
) |
In excess of realized gain on investments from the Series
net |
|
(.21 |
) |
|
|
|
|
|
|
|
(.21 |
) |
|
|
|
|
|
|
|
Total
dividends and distributions |
|
(.38 |
) |
|
(.76 |
) |
|
(.53 |
)
|
|
(.35 |
) |
|
(.74 |
) |
|
(.52 |
)
|
|
Net asset
value, end of period |
|
$
18.02 |
|
|
$
15.30 |
|
|
$
12.55 |
|
|
$
18.00 |
|
|
$
15.28 |
|
|
$
12.54 |
|
|
Total
Investment Return: |
|
Based on net
asset value per share |
|
20.45 |
% |
|
28.24 |
% |
|
30.80 |
% |
|
20.16 |
% |
|
27.95 |
% |
|
30.53 |
% |
|
Ratios to
Average Net Assets: |
|
Expenses, net
of reimbursement# |
|
.38 |
% |
|
.39 |
% |
|
.40 |
%* |
|
.63 |
% |
|
.64 |
% |
|
.65 |
%*
|
|
Expenses# |
|
.38 |
% |
|
.40 |
% |
|
.57 |
%* |
|
.63 |
% |
|
.65 |
% |
|
.82 |
%* |
|
Investment
incomenet |
|
1.03 |
% |
|
1.27 |
% |
|
1.71 |
%* |
|
.77 |
% |
|
1.00 |
% |
|
1.47 |
%* |
|
Supplemental Data: |
|
Net assets,
end of period (in thousands) |
|
$848,591 |
|
|
$682,669 |
|
|
$445,016 |
|
|
$840,918 |
|
|
$435,256 |
|
|
$157,567 |
|
|
Portfolio
turnover of the underlying Series |
|
29.91 |
% |
|
25.97 |
% |
|
24.31 |
% |
|
29.91 |
% |
|
25.97 |
% |
|
24.31 |
% |
|
|
Commencement of
operations.
|
|
Aggregate total
investment return.
|
#
|
Includes the Fund
s share of the Series allocated expenses.
|
MERRILL LYNCH INDEX FUNDS,
INC.
FINANCIAL HIGHLIGHTS
(continued)
Small Cap Index
Fund
|
|
Class
A
|
|
Class
D
|
Increase (Decrease) in
Net Asset Value |
|
For the
Year Ended
December 31, |
|
For the Period
April 9,
1997 to
December 31,
1997 |
|
For the
Year Ended
December 31, |
|
For the Period
April 9,
1997 to
December 31,
1997 |
|
1999 |
|
1998 |
|
|
1999 |
|
1998 |
|
Per Share
Operating
Performance: |
|
Net asset
value, beginning of period |
|
$
10.27 |
|
|
$
12.28 |
|
|
$
10.00 |
|
|
$
10.27 |
|
|
$
12.28 |
|
|
$
10.00 |
|
|
Investment
incomenet |
|
.15 |
|
|
.13 |
|
|
.10 |
|
|
.12 |
|
|
.11 |
|
|
.09 |
|
|
Realized and
unrealized gain (loss) on investments from the
Seriesnet |
|
1.94 |
|
|
(.59 |
) |
|
2.60 |
|
|
1.94 |
|
|
(.60 |
) |
|
2.60 |
|
|
Total from
investment operations |
|
2.09 |
|
|
(.46 |
) |
|
2.70 |
|
|
2.06 |
|
|
(.49 |
) |
|
2.69 |
|
|
Less
dividends and distributions: |
Investment incomenet |
|
(.14 |
) |
|
(.13 |
) |
|
(.10 |
) |
|
(.12 |
) |
|
(.11 |
) |
|
(.09 |
) |
In excess of investment incomenet |
|
|
|
|
(.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain on investments from the Series
net |
|
(.44 |
) |
|
(1.41 |
) |
|
(.32 |
) |
|
(.44 |
) |
|
(1.41 |
) |
|
(.32 |
) |
|
Total
dividends and distributions |
|
(.58) |
|
|
(1.55 |
) |
|
(.42 |
)
|
|
(.56 |
) |
|
(1.52 |
) |
|
(.41 |
)
|
|
Net asset
value, end of period |
|
$
11.78 |
|
|
$
10.27 |
|
|
$
12.28 |
|
|
$
11.77 |
|
|
$
10.27 |
|
|
$
12.28 |
|
|
Total
Investment Return: |
|
Based on net
asset value per share |
|
20.79 |
% |
|
(3.14 |
%) |
|
27.04 |
%
|
|
20.45 |
% |
|
(3.41 |
%) |
|
26.87 |
%
|
|
Ratios to
Average Net Assets: |
|
Expenses, net
of reimbursement# |
|
.50 |
% |
|
.50 |
% |
|
.52 |
%* |
|
.74 |
% |
|
.75 |
% |
|
.77 |
%* |
|
Expenses# |
|
.61 |
% |
|
.84 |
% |
|
1.00 |
%* |
|
.86 |
% |
|
1.09 |
% |
|
1.25 |
%* |
|
Investment
incomenet |
|
1.50 |
% |
|
1.14 |
% |
|
1.45 |
%* |
|
1.24 |
% |
|
.88 |
% |
|
1.20 |
%* |
|
Supplemental Data: |
|
Net assets,
end of period (in thousands) |
|
$30,911 |
|
|
$18,122 |
|
|
$26,478 |
|
|
$45,640 |
|
|
$30,941 |
|
|
$38,778 |
|
|
Portfolio
turnover of the underlying Series |
|
51.20 |
% |
|
48.16 |
% |
|
16.45 |
% |
|
51.20 |
% |
|
48.16 |
% |
|
16.45 |
% |
|
|
Commencement of
operations.
|
|
Amount is less
than $.01 per share.
|
|
Aggregate total
investment return.
|
#
|
Includes the Fund
s share of the Series allocated expenses.
|
MERRILL LYNCH INDEX FUNDS,
INC.
[GRAPHIC] Management of the
Funds
FINANCIAL HIGHLIGHTS
(continued)
Aggregate Bond Index
Fund
|
|
Class
A
|
|
Class
D
|
Increase (Decrease) in
Net Asset Value |
|
For the
Year Ended
December 31, |
|
For the Period
April 3,
1997 to
December 31,
1997 |
|
For the
Year Ended
December 31, |
|
For the Period
April 3,
1997 to
December 31,
1997 |
|
1999 |
|
1998 |
|
|
1999 |
|
1998 |
|
Per Share
Operating Performance: |
|
Net asset
value, beginning of period |
|
$
10.61 |
|
|
$
10.42 |
|
|
$
10.00 |
|
|
$
10.61 |
|
|
$
10.42 |
|
|
$
10.00 |
|
|
Investment
incomenet |
|
.62 |
|
|
.64 |
|
|
.48 |
|
|
.58 |
|
|
.61 |
|
|
.46 |
|
|
Realized and
unrealized gain (loss) on
investments from the Seriesnet |
|
(.76 |
) |
|
.23 |
|
|
.45 |
|
|
(.75 |
) |
|
.23 |
|
|
.45 |
|
|
Total from
investment operations |
|
(.14 |
) |
|
.87 |
|
|
.93 |
|
|
(.17 |
) |
|
.84 |
|
|
.91 |
|
|
Less
dividends and distributions: |
Investment incomenet |
|
(.62 |
) |
|
(.64 |
) |
|
(.48 |
) |
|
(.58 |
) |
|
(.61 |
) |
|
(.46 |
) |
Realized gain on investments from the Series
net |
|
|
|
|
(.04 |
) |
|
(.03 |
) |
|
|
|
|
(.04 |
) |
|
(.03 |
) |
In excess of realized gain on investments from the Series
net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
dividends and distributions |
|
(.62 |
) |
|
(.68 |
) |
|
(.51 |
)
|
|
(.58 |
) |
|
(.65 |
) |
|
(.49 |
)
|
|
Net asset
value, end of period |
|
$
9.85 |
|
|
$
10.61 |
|
|
$
10.42 |
|
|
$
9.86 |
|
|
$
10.61 |
|
|
$
10.42 |
|
|
Total
Investment Return: |
|
Based on net
asset value per share |
|
(1.36 |
%) |
|
8.56 |
% |
|
9.49 |
%
|
|
(1.50 |
%) |
|
8.29 |
% |
|
9.29 |
%
|
|
Ratios to
Average Net Assets: |
|
Expenses, net
of reimbursement# |
|
.35 |
% |
|
.35 |
% |
|
.35 |
%* |
|
.60 |
% |
|
.60 |
% |
|
.60 |
%* |
|
Expenses# |
|
.37 |
% |
|
.40 |
% |
|
.52 |
%* |
|
.62 |
% |
|
.65 |
% |
|
.77 |
%* |
|
Investment
incomenet |
|
6.06 |
% |
|
5.99 |
% |
|
6.22 |
%* |
|
5.81 |
% |
|
5.75 |
% |
|
5.98 |
%* |
|
Supplemental Data: |
|
Net assets,
end of period (in thousands) |
|
$324,254 |
|
|
$351,786 |
|
|
$251,140 |
|
|
$79,743 |
|
|
$81,603 |
|
|
$56,134 |
|
|
Portfolio
turnover of the underlying Series |
|
61.82 |
% |
|
27.89 |
% |
|
86.58 |
% |
|
61.82 |
% |
|
27.89 |
% |
|
86.58 |
% |
|
|
Commencement of
operations.
|
|
Amount is less
than $.01 per share.
|
|
Aggregate total
investment return.
|
#
|
Includes the Fund
s share of the Series allocated expenses.
|
MERRILL LYNCH INDEX FUNDS,
INC.
FINANCIAL HIGHLIGHTS
(concluded)
International Index
Fund
|
|
Class
A
|
|
Class
D
|
Increase (Decrease) in
Net Asset Value |
|
For the
Year Ended
December 31,## |
|
For the Period
April 9,
1997 to
December 31,
1997 |
|
For the
Year Ended
December 31,## |
|
For the Period
April 9,
1997 to
December 31,
1997 |
|
1999 |
|
1998 |
|
|
1999 |
|
1998 |
|
Per Share
Operating Performance: |
|
Net asset
value, beginning of period |
|
$
12.04 |
|
|
$
10.56 |
|
|
$
10.00 |
|
|
$
12.05 |
|
|
$
10.56 |
|
|
$
10.00 |
|
|
Investment
incomenet |
|
.13 |
|
|
.15 |
|
|
.10 |
|
|
.08 |
|
|
.13 |
|
|
.15 |
|
|
Realized and
unrealized gain on
investments and foreign currency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
transactions
from the Seriesnet |
|
3.59 |
|
|
2.52 |
|
|
.75 |
|
|
3.61 |
|
|
2.51 |
|
|
.67 |
|
|
Total from
investment operations |
|
3.72 |
|
|
2.67 |
|
|
.85 |
|
|
3.69 |
|
|
2.64 |
|
|
.82 |
|
|
Less
dividends and distributions: |
Investment incomenet |
|
(.09 |
) |
|
(.12 |
) |
|
(.12 |
) |
|
(.07 |
) |
|
(.09 |
) |
|
(.10 |
) |
In excess of investment incomenet |
|
|
|
|
(.04 |
) |
|
(.02 |
) |
|
|
|
|
(.03 |
) |
|
(.01 |
) |
Realized gain on investments from the Seriesnet |
|
(.54 |
) |
|
(1.03 |
) |
|
(.15 |
)
|
|
(.54 |
) |
|
(1.03 |
) |
|
(.15 |
)
|
|
Total
dividends and distributions |
|
(.63 |
) |
|
(1.19 |
) |
|
(.29 |
) |
|
(.61 |
) |
|
(1.15 |
) |
|
(.26 |
) |
|
Net asset
value, end of period |
|
$
15.13 |
|
|
$
12.04 |
|
|
$
10.56 |
|
|
$
15.13 |
|
|
$
12.05 |
|
|
$
10.56 |
|
|
Total
Investment Return: |
|
Based on net
asset value per share |
|
31.29 |
% |
|
25.65 |
% |
|
8.45 |
% |
|
30.95 |
% |
|
25.40 |
% |
|
8.22 |
% |
|
Ratios to
Average Net Assets: |
|
Expenses, net
of reimbursement# |
|
.64 |
% |
|
.64 |
% |
|
.86 |
%* |
|
.89 |
% |
|
.89 |
% |
|
1.11 |
%* |
|
Expenses# |
|
.69 |
% |
|
.76 |
% |
|
1.10 |
%* |
|
.95 |
% |
|
1.02 |
% |
|
1.35 |
%* |
|
Investment
incomenet |
|
1.05 |
% |
|
1.26 |
% |
|
1.64 |
%* |
|
.65 |
% |
|
1.14 |
% |
|
1.67 |
%* |
|
Supplemental Data: |
|
Net assets,
end of period (in thousands) |
|
$104,427 |
|
|
$118,692 |
|
|
$115,190 |
|
|
$30,480 |
|
|
$14,802 |
|
|
$20,536 |
|
|
Portfolio
turnover of the underlying Series |
|
6.43 |
% |
|
34.63 |
% |
|
14.79 |
% |
|
6.43 |
% |
|
34.63 |
% |
|
14.79 |
% |
|
|
Commencement of
operations.
|
|
Aggregate total
investment return.
|
#
|
Includes the Fund
s share of the Series allocated expenses.
|
##
|
Based on average
shares outstanding.
|
MERRILL LYNCH INDEX FUNDS,
INC.
[This page intentionally
left blank]
MERRILL LYNCH INDEX FUNDS,
INC.
[This page intentionally
left blank]
MERRILL LYNCH INDEX FUNDS,
INC.
[This page intentionally
left blank]
MERRILL LYNCH INDEX FUNDS,
INC.
The Management
Team
Funds
Merrill Lynch
Index Funds, Inc.
Quantitative
Master Series Trust
P.O. Box
9011
Princeton, New
Jersey 08543-9011
Investment
Adviser
Fund Asset
Management, L.P.
Administrative
Office:
800 Scudders Mill
Road
Plainsboro, NJ
08536
Mailing
Address:
P.O. Box
9011
Princeton, New
Jersey 08543-9011
Administrator
Merrill Lynch
Asset Management, L.P.
P.O. Box
9011
Princeton, New
Jersey 08543-9011
Transfer
Agent
Financial Data
Services, Inc.
Administrative
Office:
4800 Deer Lake
Drive East
32246-6484
Mailing
Address:
P.O. Box
45289
Jacksonville,
Florida 32232-5289
Independent
Auditors
Deloitte &
Touche LLP
Princeton
Forrestal Village
116-300 Village
Boulevard
Princeton, New
Jersey 08540-6400
|
|
Distributor
Merrill Lynch
Funds Distributor,
a division of
Princeton Funds Distributor, Inc.
P.O. Box
9081
Princeton, New
Jersey 08543-9081
Custodian for
Master International
(GDP Weighted) Index Series
State Street Bank
and Trust Company
One Heritage
Drive P2N
North Quincy,
Massachusetts 02171
Custodian for
Master S&P 500 Index Series, Master Small Cap Index Series and
Master Aggregate Bond Index Series
Merrill Lynch
Trust Company
800 Scudders Mill
Road
Plainsboro, New
Jersey 08536
Counsel
Swidler Berlin
Shereff Friedman, LLP
The Chrysler
Building
405 Lexington
Avenue
New York, New
York 10174
|
|
MERRILL LYNCH INDEX
FUNDS, INC.
[GRAPHIC] For More
Information
|
Additional information
about the Funds investments is available in the Funds annual
and semi-annual reports to shareholders. In the Funds annual
report you will find a discussion of the market conditions and
investment strategies that significantly affected the Funds
performance during its last fiscal year. You may obtain these reports at
no cost by calling 1-800-MER-FUND.
|
|
A Fund will send you one
copy of each shareholder report and certain other mailings, regardless
of the number of Fund accounts you have. To receive separate shareholder
reports for each account, call your Merrill Lynch Financial Consultant
or write to the Transfer Agent at its mailing address. Include your
name, address, tax identification number and Merrill Lynch brokerage or
mutual fund account number. If you have any questions, please call your
Merrill Lynch Financial Consultant or the Transfer Agent at
1-800-MER-FUND.
|
|
Statement of Additional Information
|
|
The Funds Statement
of Additional Information contains further information
|
about the Funds and is
incorporated by reference (legally considered to be part of this
prospectus). You may request a free copy by writing the Funds at Financial
Data Services, Inc., P.O. Box 45289, Jacksonville, Florida 32232-5289 or
by calling 1-800-MER-FUND.
Contact your Merrill Lynch
Financial Consultant or the Funds at the telephone number or address
indicated above, if you have any questions.
Information about the Funds
(including the Statement of Additional Information) can be reviewed and
copied at the SECs Public Reference Room in Washington, D.C. Call
1-202-942-8090 for information on the operation of the Public Reference
Room. This information is also available on the EDGAR Database on the SEC
s Internet site at http://www.sec.gov and copies may be obtained
upon payment of a duplicating fee by electronic request at the following
e-mail address: [email protected], or by writing the Public Reference
Section of the SEC, Washington, D.C. 20549-0102.
You should rely only on
the information contained in this Prospectus. No one is authorized to
provide you with information that is different from the information
contained in this Prospectus.
Investment Company Act file
#811-7899
Code
#19003-0400
©
Fund Asset Management, L.P.
Prospectus
April 17, 2000
STATEMENT OF
ADDITIONAL INFORMATION
Merrill Lynch
Index Funds, Inc.
P.O. Box 9011,
Princeton, New Jersey 08543-9011 Phone No. (609)
282-2800
Merrill Lynch Index Funds, Inc. (the
Corporation) currently consists of four portfolios or series:
Merrill Lynch S&P 500 Index Fund (S&P 500 Index Fund),
Merrill Lynch Small Cap Index Fund (Small Cap Index Fund),
Merrill Lynch Aggregate Bond Index Fund (Aggregate Bond Index Fund
) and Merrill Lynch International Index Fund (International
Index Fund) (collectively, the Funds, and each, a
Fund). Each Fund is a non-diversified mutual fund whose
investment objective is to provide investment results that, before
expenses, seek to replicate the total return (i.e., the combination of
capital changes and income) of a specified securities index. Each Fund
seeks to achieve its objective by investing all of its assets in the
series (collectively, the Series, and each, a Series
) of Quantitative Master Series Trust (the Trust) that
has the same investment objective as the Fund. Each Funds investment
experience will correspond directly to the investment experience of the
respective Series in which it invests. There can be no assurance that the
investment objectives of the Funds will be achieved.
Each Fund offers two classes of shares,
Class A shares and Class D shares. Class A shares of each Fund are offered
at a price equal to the next determined net asset value per share without
the imposition of any front-end or deferred sales charge, and are not
subject to any ongoing account maintenance or distribution fee.
Distribution of Class A shares of each Fund is limited to certain eligible
investors. Class D shares of each Fund are offered at a price equal to the
next determined net asset value per share without the imposition of any
front-end or deferred sales charge and are not subject to any ongoing
distribution fee, but are subject to an ongoing account maintenance fee at
an annual rate of 0.25% of average daily net assets. The Funds
distributor is Merrill Lynch Funds Distributor, a division of Princeton
Funds Distributor, Inc.
This Statement of Additional Information of
the Funds is not a prospectus and should be read in conjunction with the
Prospectus of the Funds, dated April 17, 2000 (the Prospectus
), which has been filed with the Securities and Exchange Commission
(the Commission) and can be obtained, without charge, by
calling (800) MER-FUND or by writing the Funds at the above address. The
Prospectus is incorporated by reference into this Statement of Additional
Information, and this Statement of Additional Information has been
incorporated by reference into the Prospectus. The Funds and Series
audited financial statements are incorporated into this Statement
of Additional Information by reference to their 1999 annual reports to
shareholders. You may request a copy of the annual reports at no charge by
calling (800) 456-4587 ext. 789 between 8:00 a.m. and 8:00 p.m. on any
business day.
Fund Asset
Management Investment Adviser
Merrill Lynch
Funds Distributor Distributor
The date of this
Statement of Additional Information is April 17, 2000.
TABLE OF
CONTENTS
INVESTMENT OBJECTIVES AND POLICIES
The Corporation currently consists of four
series: S&P 500 Index Fund, Small Cap Index Fund, Aggregate Bond Index
Fund and International Index Fund. Each Fund is classified as a
non-diversified mutual fund under the Investment Company Act of 1940, as
amended (the Investment Company Act) whose investment
objective is to provide investment results that, before expenses, seek to
replicate the total return (i.e., the combination of capital
changes and income) of a specified securities index.
Each Fund seeks to achieve its objective by
investing all of its assets in the series of the Trust that has the same
investment objective as the Fund. Each Funds investment experience
and results will correspond directly to the investment experience of the
respective Series in which it invests. Thus, all investments are made at
the level of the Series. For simplicity, however, with respect to
investment objective, policies and restrictions, this Statement of
Additional Information, like the Prospectus, uses the term Fund
to include the underlying Series in which a Fund invests. Reference
is made to the discussion under How the Funds Invest in the
Prospectus for information with respect to each Funds and each Series
investment objectives and policies. There can be no assurance that
the investment objectives of the Funds will be achieved.
The Funds investment objectives are
not fundamental policies and may be changed by the Board of Directors of
the Corporation (the Directors), without shareholder approval.
The Directors may also change the target index of a Fund if they
consider that a different index would facilitate the management of the
Fund in a manner which better enables the Fund to seek to replicate the
total return of the market segment represented by the current
index.
The investment objective of the S&P 500
Index Fund is to match the performance of the Standard & Poor
s® 500 Composite Stock Price Index (the S&P 500)
as closely as possible before the deduction of Fund expenses. There can be
no assurance that the investment objective of the Fund will be
achieved.
The Fund seeks to achieve its investment
objective by investing all of its assets in the Master S&P 500 Index
Series of the Trust (S&P 500 Index Series), which has the
same investment objective as the Fund. The following is a description of
the investment policies of the S&P 500 Index Fund.
In seeking to replicate the total return of
the S&P 500, Fund Asset Management, L.P. (the Investment Adviser
) generally will allocate the S&P 500 Index Funds
investments among common stocks in approximately the same weightings as
the S&P 500. In addition, the Investment Adviser may use options and
futures contracts and other types of financial instruments relating to all
or a portion of the S&P 500. At times the Fund may not invest in all
of the common stocks in the S&P 500, or in the same weightings as in
the S&P 500. At those times, the Fund chooses investments so that the
market capitalizations, industry weighting and other fundamental
characteristics of the stocks and derivative instruments chosen are
similar to the S&P 500 as a whole. The S&P 500 Index Fund may also
engage in securities lending. See Other Investment Policies,
Practices and Risk Factors.
The S&P 500 is composed of the common
stocks of 500 large capitalization companies from various industrial
sectors, most of which are listed on the New York Stock Exchange Inc. A
companys stock market capitalization is the total market value of
its outstanding shares. The S&P 500 represents a significant portion
of the market value of all common stocks publicly traded in the United
States.
The investment objective of the Small Cap
Index Fund is to match the performance of the Russell 2000®
Index (the Russell 2000) as closely as possible before the
deduction of Fund expenses. There can be no assurance that the investment
objective of the Fund will be achieved.
The Fund seeks to achieve its investment
objective by investing all of its assets in the Master Small Cap Index
Series of the Trust (Small Cap Index Series), which has the
same investment objective as the Fund. The following is a description of
the investment policies of the Small Cap Index Fund.
In seeking to replicate the total return of
the Russell 2000, the Investment Adviser may not allocate the Small Cap
Index Funds investments among all of the common stocks in the
Russell 2000, or in the same weightings as the Russell 2000. Instead, the
Small Cap Index Fund may invest in a statistically selected sample of the
stocks included in the Russell 2000 and other types of financial
instruments. The Investment Adviser may use options and futures contracts
and other types of financial instruments relating to all or a portion of
the Russell 2000. The investments to be included in the Small Cap Index
Fund will be selected so that the market capitalizations, industry
weightings and other fundamental characteristics of the stocks, and of the
stocks underlying or otherwise related to the foregoing financial
instruments, closely approximate those same factors in the Russell 2000,
with the objective of reducing the selected investment portfolios
deviation from the performance of the Russell 2000 (this deviation is
referred to as tracking error). The Small Cap Index Fund may
also engage in securities lending. See Other Investment Policies,
Practices and Risk Factors.
The Russell 2000 is composed of
approximately 2,000 smaller-capitalization common stocks from various
industrial sectors. A companys stock market capitalization is the
total market value of its outstanding shares.
Aggregate Bond Index Fund
The investment objective of the Aggregate
Bond Index Fund is to match the performance of the Lehman Brothers
Aggregate Bond Index (the Aggregate Bond Index) as closely as
possible before the deduction of Fund expenses. There can be no assurance
that the investment objective of the Fund will be achieved.
The Fund seeks to achieve its investment
objective by investing all of its assets in the Master Aggregate Bond
Index Series of the Trust (Aggregate Bond Index Series), which
has the same investment objective as the Fund. The following is a
description of the investment policies of the Aggregate Bond Index
Fund.
In seeking to replicate the total return of
the Aggregate Bond Index, the Investment Adviser may not allocate the
Aggregate Bond Index Funds investments among all of the bonds in the
Aggregate Bond Index, or in the same weightings as the Aggregate Bond
Index. Instead, the Aggregate Bond Index Fund may invest in a
statistically selected sample of bonds included in the Aggregate Bond
Index, or in a statistically selected sample of bonds not included in the
index but correlated with bonds that are in the index, and in derivative
instruments linked to the Aggregate Bond Index. The Investment Adviser may
use options and futures contracts and other types of financial instruments
relating to all or a portion of the Aggregate Bond Index. The Fund may
invest in bonds not included in the index, but which are selected to
reflect characteristics such as maturity, duration or credit quality
similar to bonds in the index. The investments to be included in the
Aggregate Bond Index Fund will be selected with the objective of reducing
the selected investment portfolios deviation from the performance of
the Aggregate Bond Index (tracking error). Selection of bonds other than
those included in the Aggregate Bond Index, or in different weightings
from the Index, may result in levels of interest rate, credit or
prepayment risks that differ from the levels of risks on the securities
composing the Aggregate Bond Index. See Risk Factors
Investments in Fixed-Income Securities. The Aggregate Bond
Index Fund may also engage in securities lending. See Other
Investment Policies, Practices and Risk Factors.
The Aggregate Bond Index is composed
primarily of dollar-denominated investment grade bonds in the following
classes: U.S. Treasury and agency securities, U.S. corporate bonds,
foreign corporate bonds, foreign sovereign debt (debt securities issued or
guaranteed by foreign governments and governmental agencies),
supranational debt (debt securities issued by entities, such as the World
Bank, constituted by the governments of several countries to promote
economic development) and mortgage-backed securities with maturities
greater than one year. Corporate bonds contained in the Aggregate Bond
Index represent issuers from various industrial sectors.
The Aggregate Bond Index Fund may invest in
U.S. Treasury bills, notes and bonds and other full faith and credit
obligations of the U.S. Government. The Aggregate Bond Index Fund
may also invest in U.S. Government agency securities, which are debt
obligations issued or guaranteed by agencies or instrumentalities of the
U.S. Government. Agency securities may not be backed by the
full faith and credit of the U.S. Government. U.S. Government
agencies may include the Federal Farm Credit Bank, the Resolution Trust
Corporation and the Government National Mortgage Association. Agency
obligations are not explicitly guaranteed by the U.S. Government
and so are perceived as somewhat riskier than comparable Treasury
bonds.
Because the Aggregate Bond Index is composed
of investment grade bonds, the Aggregate Bond Index Fund will invest in
corporate bonds rated investment gradei.e., those rated at
least Baa3 by Moodys Investors Service, Inc. (Moodys
) or BBBby Standard & Poors Ratings Group (S
&P), the equivalent by another nationally recognized statistical
rating organization (NRSRO) or, if unrated, of equal quality
in the opinion of the Investment Adviser. Corporate bonds ranked in the
fourth highest rating category, while considered investment grade,
have more speculative characteristics and are more likely to be
downgraded than securities rated in the three highest ratings categories.
In the event that the rating of a security in the Aggregate Bond Index
Fund is lowered below Baa or BBB, the Aggregate Bond Index Fund may
continue to hold the security. Such securities rated below investment
grade are considered to be speculative with respect to the issuers
capacity to pay interest and repay principal in accordance with the terms
of the obligation. Descriptions of the ratings of bonds are contained in
the Appendix.
The Aggregate Bond Index Fund may also
invest in other instruments that pass through payments on such
obligations, such as collateralized mortgage obligations (CMOs
).
The investment objective of the
International Index Fund is to match the performance of the Morgan
Stanley Capital International EAFE® GDP Weighted Index (the EAFE
Index) as closely as possible before the deduction of Fund expenses.
There can be no assurance that the investment objective of the Fund will
be achieved.
The Fund seeks to achieve its investment
objective by investing all of its assets in the Master International (GDP
Weighted) Index Series of the Trust (International (GDP Weighted)
Index Series), which has the same investment objective as the Fund.
The following is a description of the investment policies of the
International Index Fund.
In seeking to replicate the total return of
the EAFE Index, the Investment Adviser may not allocate the International
Index Funds investments among all of the countries, or all of the
companies within a country, represented in the EAFE Index, or in the same
weightings as the EAFE Index. Instead, the International Index Fund may
invest in a statistically selected sample of the equity securities
included in the EAFE Index and in derivative instruments linked to the
EAFE Index. In addition, the Investment Adviser may use options and
futures contracts and other types of financial instruments relating to all
or a portion of the EAFE Index. The investments to be included in the
International Index Fund will be selected so that the market
capitalizations, industry weightings and other fundamental characteristics
of the stocks, and of the stocks underlying or otherwise related to the
foregoing financial instruments, closely approximate those same factors in
the EAFE Index, with the objective of reducing the selected investment
portfolios deviation from the performance of the EAFE Index
(tracking error). The International Index Fund may also engage in
securities lending. See Other Investment Policies, Practices and
Risk Factors.
The EAFE Index is composed of equity
securities of approximately 1,000 companies from various industrial
sectors whose primary trading markets are located outside the United
States and which are selected from among the larger capitalization
companies in such markets. A companys stock market capitalization is
the total market value of its outstanding shares. The countries currently
included in the EAFE Index are Australia, Austria, Belgium, Denmark,
Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Malaysia, The
Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden,
Switzerland and the United Kingdom. The weighting of the EAFE Index among
these countries is based upon gross domestic product (GDP). (Market
capitalization is the basis for country weightings in another version of
the EAFE Index. Using the GDP weighting tends to decrease the relative
weighting of Japan and the United Kingdom while increasing the weighting
of certain European countries, generally resulting in a more diversified
EAFE Index.)
About Indexing and Management of the Funds
About Indexing.
The Funds are not managed according to traditional methods of
active investment management, which involve the buying and
selling of securities based upon economic, financial, and market analyses
and investment judgment. Instead, each Fund, utilizing essentially a
passive or indexing investment approach, seeks to
replicate, before each Funds expenses (which can be expected to
reduce the total return of the Fund), the total return of its respective
index.
Indexing and Managing the Funds.
Each Fund will be substantially invested in
securities in the applicable index, and will invest at least 80% of its
assets in securities or other financial instruments which are contained in
or correlate with securities in the applicable index (equity securities,
in the case of the S&P 500 Index Fund, Small Cap Index Fund and
International Index Fund (the Equity Funds), and fixed-income
securities, in the case of the Aggregate Bond Index Fund (the
Fixed-Income Fund)).
Because each Fund seeks to replicate the
total return of its respective index, generally the Investment Adviser
will not attempt to judge the merits of any particular security as an
investment but will seek only to replicate the total return of the
securities in the relevant index. However, the Investment Adviser may omit
or remove a security which is included in an index from the portfolio of a
Fund if, following objective criteria, the Investment Adviser judges the
security to be insufficiently liquid or believes the merit of the
investment has been substantially impaired by extraordinary events or
financial conditions.
The Investment Adviser may acquire certain
financial instruments based upon individual securities or based upon or
consisting of one or more baskets of securities (which basket may be based
upon a target index). Certain of these instruments may represent an
indirect ownership interest in such securities or baskets. Others may
provide for the payment to a Fund or by a Fund of amounts based upon the
performance (positive, negative or both) of a particular security or
basket. The Investment Adviser will select such instruments when it
believes that the use of the instrument will correlate substantially with
the expected total return of a target security or index. In connection
with the use of such instruments, the Investment Adviser may enter into
short sales in an effort to adjust the weightings of particular securities
represented in the basket to more accurately reflect such securities
weightings in the target index.
Each Funds ability to replicate the
total return of its respective index may be affected by, among other
things, transaction costs, administration and other expenses incurred by
the Fund, taxes (including foreign withholding taxes, which will affect
the International Index Fund and the Aggregate Bond Index Fund due to
foreign tax withholding practices), changes in either the composition of
the index or the assets of a Fund, and the timing and amount of Series
investor contributions and withdrawals, if any. In addition, each Fund
s total return will be affected by incremental operating costs
(e.g., transfer agency, accounting) that will be borne by the Fund.
Under normal circumstances, it is anticipated that each Funds total
return over periods of one year and longer will, on a gross basis and
before taking into account expenses (incurred at either the Series or the
Fund level) be within 10 basis points (a basis point is one one-hundredth
of one percent (0.01%)) for the S&P 500 Index Fund, 100 basis points
for the Small Cap Index Fund, 150 basis points for the International Index
Fund, and 50 basis points for the Aggregate Bond Index Fund, of the total
return of the applicable indices. There can be no assurance, however, that
these levels of correlation will be achieved. In the event that this
correlation is not achieved over time, the Trustees of the Trust (the
Trustees) and the Directors will consider alternative
strategies for the Series and the Funds, respectively. Information
regarding correlation of a Funds performance to that of a target
index may be found in the Funds annual report.
Other Investment Policies, Practices and Risk Factors
Cash Management.
Generally, the Investment Adviser will employ futures and
options on futures to provide liquidity necessary to meet anticipated
redemptions or for day-to-day operating purposes. However, if considered
appropriate in the opinion of the Investment Adviser, a portion of a Fund
s assets may be invested in certain types of instruments with
remaining maturities of 397 days or less for liquidity purposes. Such
instruments would consist of: (i) obligations of the U.S. Government, its
agencies, instrumentalities, authorities or political subdivisions (
U.S. Government Securities); (ii) other fixed-income
securities rated Aa or higher by Moodys or AA or higher by S&P
or, if unrated, of comparable quality in the opinion of the Investment
Adviser; (iii) commercial paper; (iv) bank obligations, including
negotiable certificates of deposit, time deposits and bankers
acceptances; and (v) repurchase agreements. At the time the Fund invests
in commercial paper, bank obligations or repurchase agreements, the issuer
or the issuers parent must have outstanding debt rated Aa or higher
by Moodys or AA or higher by S&P or outstanding commercial
paper, bank obligations or other short-term obligations rated Prime-1 by
Moodys or A-1 by S&P; or, if no such ratings are available, the
instrument must be of comparable quality in the opinion of the Investment
Adviser.
Dollar Rolls.
The Aggregate Bond Index Fund may enter into dollar rolls, in
which the Aggregate Bond Index Fund will sell securities for delivery in
the current month and simultaneously contract to repurchase substantially
similar (the same type and coupon) securities on a specified future date
from the same party. During the roll period, the Aggregate Bond Index Fund
forgoes principal and interest paid on the securities sold. The Aggregate
Bond Index Fund is compensated by the difference between the current sales
price and the forward price for the future purchase (often referred to as
the drop) as well as by the interest earned on the cash
proceeds of the initial sale.
Dollar rolls involve the risk that the
market value of the securities subject to the Aggregate Bond Index Fund
s forward purchase commitment may decline below the price of the
securities the Aggregate Bond Index Fund has sold. In the event the buyer
of the securities files for bankruptcy or becomes insolvent, the Aggregate
Bond Index Funds use of the proceeds of the current sale portion of
the transaction may be restricted pending a determination by the other
party, or its trustee or receiver, whether to enforce the Aggregate Bond
Index Funds obligation to purchase the similar securities in the
forward transaction. Dollar rolls are speculative techniques which can be
deemed to involve leverage. The Aggregate Bond Index Fund will establish a
segregated account with its custodian in which it will maintain liquid
securities in an aggregate amount equal to the amount of the forward
commitment. The Aggregate Bond Index Fund will engage in dollar roll
transactions to enhance return and not for the purpose of borrowing. Each
dollar roll transaction is accounted for as a sale of a portfolio security
and a subsequent purchase of a substantially similar security in the
forward market.
Short Sales.
In connection with the use of certain instruments based upon or
consisting of one or more baskets of securities, the Investment Adviser
may sell a security a Fund does not own, or in an amount greater than the
Fund owns (i.e., make short sales). Such transactions will be used
only in an effort to adjust the weightings of particular securities
represented in the basket to reflect such securities weightings in
the target index. Generally, to complete a short sale transaction, a Fund
will borrow the security to make delivery to the buyer. The Fund is then
obligated to replace the security borrowed. The price at the time of
replacement may be more or less than the price at which the security was
sold by the Fund. If the price of a security sold short goes up between
the time of the short sale and the time a Fund must deliver the security
to the lender, the Fund will incur a loss; conversely, if the price
declines, the Fund will realize a gain. Any gain will be decreased, and
any loss increased, by transaction costs. Although a Funds gain is
limited to the price at which it sold the security short, its potential
loss is theoretically unlimited. If a Fund makes short sales of securities
that increase in value, it may underperform similar mutual funds that do
not make short sales of securities they do not own. Until the security is
replaced, the Fund is required to pay to the lender any interest which
accrues during the period of the loan. To borrow the security, the Fund
may be required to pay a premium which would increase the cost of the
security sold. The proceeds of the short sale will be retained by the
broker to the extent necessary to meet margin requirements until the short
position is closed out. Until the Fund replaces the borrowed security, it
will (a) maintain in a segregated account with its custodian cash or
liquid securities at such a level that the amount deposited in the account
plus the amount deposited with the broker as collateral will equal the
current market value of the security sold short or (b) otherwise cover its
short position.
Cash Flows; Expenses.
The ability of each Fund to satisfy its investment objective
depends to some extent on the Investment Advisers ability to manage
cash flow (primarily from purchases and redemptions and distributions from
the Funds investments). The Investment Adviser will make investment
changes to a Funds portfolio to accommodate cash flow while
continuing to seek to replicate the total return of the Series
target index. Investors should also be aware that the investment
performance of each index is a hypothetical number which does not take
into account brokerage commissions and other transaction costs, custody
and other costs of investing, and any incremental operating costs
(e.g., transfer agency, accounting) that will be borne by the
Funds. Finally, since each Fund seeks to replicate the total return of its
target index, the Investment Adviser generally will not attempt to judge
the merits of any particular security as an investment.
Investment in Fixed-Income Securities.
Because the Aggregate Bond Index Fund will
invest in fixed-income securities, it will be subject to the general risks
inherent in such securities, primarily interest rate risk, credit risk and
prepayment risk.
Interest rate risk is the potential for
fluctuations in bond prices due to changing interest rates. As a rule bond
prices vary inversely with interest rates. If interest rates rise, bond
prices generally decline; if interest rates fall, bond prices generally
rise. In addition, for a given change in interest rates, longer-maturity
bonds generally fluctuate more in price than shorter-maturity bonds. To
compensate investors for these larger fluctuations, longer-maturity bonds
usually offer higher yields than shorter-maturity bonds, other factors,
including credit quality, being equal. These basic principles of bond
prices also apply to U.S. Government Securities. A security backed by the
full faith and credit of the U.S. Government is guaranteed
only as to its stated interest rate and face value at maturity, not its
current market price. Just like other fixed-income securities,
government-guaranteed securities will fluctuate in value when interest
rates change.
Credit risk is the possibility that an
issuer of securities held by the Aggregate Bond Index Fund will be unable
to make payments of either interest or principal or will be perceived to
have a diminished capacity to make such payments in the future. The credit
risk of the Aggregate Bond Index Fund is a function of the diversification
and credit quality of its underlying securities.
The Aggregate Bond Index Fund may also be
exposed to event risk, which includes the possibility that fixed-income
securities held by the Aggregate Bond Index Fund may suffer a substantial
decline in credit quality and market value due to issuer restructurings.
Certain restructurings such as mergers, leveraged buyouts, takeovers or
similar events, are often financed by a significant expansion of corporate
debt. As a result of the added debt burden, the credit quality and market
value of a firms existing debt securities may decline significantly.
Other types of restructurings (such as corporate spinoffs or
privatizations of governmental or agency borrowers or the termination of
express or implied governmental credit support) may also result in
decreased credit quality of a particular issuer.
Prepayment risk is the possibility that the
principal of the mortgage loans underlying mortgage-backed securities may
be prepaid at any time. As a general rule, prepayments increase during a
period of falling interest rates and decrease during a period of rising
interest rates. As a result of prepayments, in periods of declining
interest rates the Aggregate Bond Index Fund may be required to reinvest
its assets in securities with lower interest rates. In periods of
increasing interest rates, certain types of mortgage-backed securities may
be paid off more slowly, with the effect that the mortgage-backed
securities held by the Aggregate Bond Index Fund may exhibit price
characteristics of longer-term debt securities.
Extension risk is the possibility that the
principal of the mortgage loans underlying mortgage-backed securities may
be repaid more slowly than anticipated. As a general rule, extensions
increase during a period of rising interest rates, and decrease during a
period of falling interest rates. As a result, during periods of rising
interest rates the average maturity of the Aggregate Bond Index Fund
s portfolio may increase, thus increasing the Funds exposure
to interest rate risk.
The corporate substitution strategy used by
the Aggregate Bond Index Fund (discussed above) may increase or decrease
the Aggregate Bond Index Funds exposure to the foregoing risks
relative to those of the Aggregate Bond Index.
Sovereign Debt.
The Aggregate Bond Index Fund may invest a portion of its assets
in debt obligations (sovereign debt) issued or guaranteed by
foreign governments (including foreign states, provinces and
municipalities) of countries or their agencies and instrumentalities (
governmental entities). Investment in sovereign debt involves
a high degree of risk that the governmental entity that controls the
repayment of sovereign debt may not be able or willing to repay the
principal and/or interest when due in accordance with the terms of such
debt. A governmental entitys willingness or ability to repay
principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, the extent of its foreign
reserves, the availability of sufficient foreign exchange on the date a
payment is due, the relative size of the debt service burden to the
economy as a whole and the political constraints to which a governmental
entity may be subject. In certain countries, governmental entities may
also be dependent on expected disbursements from foreign governments,
multilateral agencies and others abroad to reduce principal and interest
arrearages on their debt. The commitment on the part of these governments,
agencies and others to make such disbursements may be conditioned on a
governmental entitys implementation of economic reforms and/or
economic performance and the timely service
of such debtors obligations. Failure to implement such reforms,
achieve such levels of economic performance or repay principal or interest
when due may result in the cancellation of such third parties
commitments to lend funds to the governmental entity, which may further
impair such debtors ability or willingness to timely service its
debts. Consequently, governmental entities may default on their sovereign
debt.
Holders of sovereign debt, including the
Aggregate Bond Index Fund, may be requested to participate in the
rescheduling of such debt and to extend further loans to governmental
entities. There may be no bankruptcy proceeding by which sovereign debt on
which a governmental entity has defaulted may be collected in whole or in
part.
Foreign Market Risk.
Since the Funds may invest in foreign securities, they offer the
potential for more diversification than an investment only in the United
States. This is because securities traded on foreign markets have often
(though not always) performed differently than securities in the United
States. However, such investments involve special risks not present in
U.S. investments that can increase the chances that the Funds will lose
money. In particular, the Funds are subject to the risk that because there
are generally fewer investors on foreign exchanges and a smaller number of
shares traded each day, it may make it difficult for the Funds to buy and
sell securities on those exchanges. In addition, prices of foreign
securities may fluctuate more than prices of securities traded in the
United States.
Foreign Economy Risk.
The economies of certain foreign markets often do not compare
favorably with that of the United States with respect to such issues as
growth of gross national product, reinvestment of capital, resources, and
balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to
diplomatic developments, the imposition of economic sanctions against a
particular country or countries, changes in international trading
patterns, trade barriers, and other protectionist or retaliatory measures.
Investments in foreign markets may also be adversely affected by
governmental actions such as the imposition of capital controls,
nationalization of companies or industries, expropriation of assets, or
the imposition of punitive taxes. In addition, the governments of certain
countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries. Any of these
actions could severely affect security prices, impair a Funds
ability to purchase or sell foreign securities or transfer a Funds
assets or income back into the United States, or otherwise adversely
affect a Funds operations. Other foreign market risks include
foreign exchange controls, difficulties in pricing securities, defaults on
foreign government securities, difficulties in enforcing favorable legal
judgments in foreign courts, and political and social instability. Legal
remedies available to investors in certain foreign countries may be less
extensive than those available to investors in the United States or other
foreign countries.
Currency Risk and Exchange Risk.
Securities in which the International Index Fund
invests may be denominated or quoted in currencies other than the U.S.
dollar. Changes in foreign currency exchange rates will affect the value
of the Funds portfolio. Generally, when the U.S. dollar rises in
value against a foreign currency, a security denominated in that currency
loses value because the currency is worth fewer U.S. dollars. Conversely,
when the U.S. dollar decreases in value against a foreign currency, a
security denominated in that currency gains value because the currency is
worth more U.S. dollars. This risk, generally known as currency risk,
means that a stronger U.S. dollar will reduce returns for U.S.
investors while a weak U.S. dollar will increase those
returns.
Governmental Supervision and
Regulation/Accounting Standards. Many foreign
governments supervise and regulate stock exchanges, brokers and the sale
of securities less than the United States does. Some countries may not
have laws to protect investors the way that the U.S. securities laws do.
For example, some foreign countries may have no laws or rules against
insider trading. Insider trading occurs when a person buys or sells a
companys securities based on non-public information about that
company. Accounting standards in other countries are not necessarily the
same as in the United States. If the accounting standards in another
country do not require as much detail as U.S. accounting standards, it may
be harder for Fund management to completely and accurately determine a
companys financial condition. Also, brokerage commissions and other
costs of buying or selling securities often are higher in foreign
countries than they are in the United States. This reduces the amount the
Fund can earn on its investments.
Certain Risks of Holding
Fund Assets Outside the United States. The
Funds generally hold their foreign securities and cash in foreign banks
and securities depositories. Some foreign banks and securities
depositories may be recently organized or new to the foreign custody
business. In addition, there may be limited or no regulatory oversight
over their operations. Also, the laws of certain countries may put limits
on a Funds ability to recover its assets if a foreign bank or
depository or issuer of a security or any or their agents goes bankrupt.
In addition, it is often more expensive for a Fund to buy, sell, and hold
securities in certain foreign markets than in the U.S. The increased
expense of investing in foreign markets reduces the amount a Fund can earn
on its investments and typically results in a higher operating expense
ratio for the Fund than investment companies invested only in the
U.S.
Settlement Risk.
Settlement and clearance procedures in certain foreign markets
differ significantly from those in the United States. Foreign settlement
procedures and trade regulations also may involve certain risks (such as
delays in payment for or delivery of securities) not typically generated
by the settlement of U.S. investments. Communications between the United
States and emerging market countries may be unreliable, increasing the
risk of delayed settlements or losses of security certificates.
Settlements in certain foreign countries at times have not kept pace with
the number of securities transactions; these problems may make it
difficult for a Fund to carry out transactions. If a Fund cannot settle or
is delayed in settling a purchase of securities, it may miss attractive
investment opportunities and certain of its assets may be uninvested with
no return earned thereon for some period. If a Fund cannot settle or is
delayed in settling a sale of securities, it may lose money if the value
of the security then declines or, if it has contracted to sell the
security to another party, the Fund could be liable to that party for any
losses incurred.
Dividends or interest on, or proceeds from
the sale of, foreign securities may be subject to foreign withholding
taxes.
European Economic and Monetary Union.
For a number of years, certain European
countries have been seeking economic unification that would, among other
things, reduce barriers between countries, increase competition among
companies, reduce government subsidies in certain industries, and reduce
or eliminate currency fluctuations among these European countries. The
Treaty on European Union (the Maastricht Treaty) set out a
framework for the European Economic and Monetary Union (EMU)
among the countries that comprise the European Union (EU). EMU
established a single common European currency (the euro) that
was introduced on January 1, 1999 and is expected to replace the existing
national currencies of all EMU participants by July 1, 2002. Certain
securities issued in participating EU countries (beginning with government
and corporate bonds) have been redenominated in the euro, and are listed,
traded, and make dividend and other payments only in euros.
No assurance can be given that EMU will take
full effect, that all of the changes planned for the EU can be
successfully implemented, or that these changes will result in the
economic and monetary unity and stability intended. There is a possibility
that EMU will not be completed, or will be completed but then partially or
completely unwound. Because any participating country may opt out of EMU
within the first three years, it is also possible that a significant
participant could choose to abandon EMU, which could diminish its
credibility and influence. Any of these occurrences could have adverse
effects on the markets of both participating and non-participating
countries, including sharp appreciation or depreciation of participants
national currencies and a significant increase in exchange rate
volatility, a resurgence in economic protectionism, an undermining of
confidence in the European markets, an undermining of European economic
stability, the collapse or slowdown of the drive toward European economic
unity, and/or reversion of the attempts to lower government debt and
inflation rates that were introduced in anticipation of EMU. Also,
withdrawal from EMU by an initial participant could cause disruption of
the financial markets as securities redenominated in euros are transferred
back into that countrys national currency, particularly if the
withdrawing country is a major economic power. Such developments could
have an adverse impact on the Funds investments in Europe generally
or in specific countries participating in EMU. Gains or losses resulting
from euro conversions may be taxable to Fund shareholders under foreign
or, in certain limited circumstances, U.S. tax laws.
When Issued Securities, Delayed
Delivery and Forward Commitments. The Aggregate
Bond Index Fund may purchase or sell securities that it is entitled to
receive on a when issued basis. The Aggregate Bond Index Fund may also
purchase or sell securities on a delayed delivery basis. The Aggregate
Bond Index Fund may also
purchase or sell securities through a forward commitment. These transactions
involve the purchase or sale of securities by the Fund at an established
price with payment and delivery taking place in the future. The Aggregate
Bond Index Fund enters into these transactions to obtain what is
considered an advantageous price to the Fund at the time of entering into
the transaction. The Aggregate Bond Index Fund has not established any
limit on the percentage of its assets that may be committed in connection
with these transactions. When the Aggregate Bond Index Fund purchases
securities in these transactions, the Fund segregates liquid securities in
an amount equal to the amount of its purchase commitments.
There can be no assurance that a security
purchased on a when issued basis will be issued or that a security
purchased or sold through a forward commitment will be delivered. The
value of securities in these transactions on the delivery date may be more
or less than the Funds purchase price. The Aggregate Bond Index Fund
may bear the risk of a decline in the value of the security in these
transactions and may not benefit from an appreciation in the value of the
security during the commitment period.
Illiquid or Restricted Securities.
Each Fund may invest up to 15% of its net
assets in securities that lack an established secondary trading market or
otherwise are considered illiquid. Liquidity of a security relates to the
ability to dispose easily of the security and the price to be obtained
upon disposition of the security, which may be less than would be obtained
for a comparable more liquid security. Illiquid securities may trade at a
discount from comparable, more liquid investments. Investment of a Fund
s assets in illiquid securities may restrict the ability of a Fund
to dispose of its investments in a timely fashion and for a fair price as
well as its ability to take advantage of market opportunities. The risks
associated with illiquidity will be particularly acute where a Funds
operations require cash, such as when the Fund redeems shares or pays
dividends, and could result in the Fund borrowing to meet short term cash
requirements or incurring capital losses on the sale of illiquid
investments.
Each Fund may invest in securities that are
not registered (restricted securities) under the Securities
Act of 1933, as amended (the Securities Act). Restricted
securities may be sold in private placement transactions between the
issuers and their purchasers and may be neither listed on an exchange nor
traded in other established markets. In many cases, privately placed
securities may not be freely transferable under the laws of the applicable
jurisdiction or due to contractual restrictions on resale. As a result of
the absence of a public trading market, privately placed securities may be
less liquid and more difficult to value than publicly traded securities.
To the extent that privately placed securities may be resold in privately
negotiated transactions, the prices realized from the sales, due to
illiquidity, could be less than those originally paid by a Fund or less
than their fair market value. In addition, issuers whose securities are
not publicly traded may not be subject to the disclosure and other
investor protection requirements that may be applicable if their
securities were publicly traded. If any privately placed securities held
by a Fund are required to be registered under the securities laws of one
or more jurisdictions before being resold, the Fund may be required to
bear the expenses of registration. Certain of a Funds investments in
private placements may consist of direct investments and may include
investments in smaller, less-seasoned issuers, which may involve greater
risks. These issuers may have limited product lines, markets or financial
resources, or they may be dependent on a limited management group. In
making investments in such securities, a Fund may obtain access to
material non-public information which may restrict the Funds ability
to conduct portfolio transactions in such securities.
144A Securities.
Each Fund may purchase restricted securities that can be offered
and sold to qualified institutional buyers under Rule 144A
under the Securities Act. The Board of Directors has determined to treat
as liquid Rule 144A securities that are either freely tradable in their
primary markets offshore or have been determined to be liquid in
accordance with the policies and procedures adopted by the corporation
s Board. The Board of Directors has adopted guidelines and delegated
to the Investment Adviser the daily function of determining and monitoring
liquidity of restricted securities. The Board of Directors, however, will
retain sufficient oversight and be ultimately responsible for the
determinations. Since it is not possible to predict with assurance exactly
how this market for restricted securities sold and offered under Rule 144A
will continue to develop, the Board of Directors will carefully monitor
the Funds investments in these securities. This investment practice
could have the effect of increasing the level of illiquidity in the Fund
to the extent that qualified institutional buyers become for a time
uninterested in purchasing these securities.
Standby Commitment
Agreements. The Aggregate Bond Index Fund may
enter into standby commitment agreements. These agreements commit the
Aggregate Bond Index Fund, for a stated period of time, to purchase a
stated amount of securities which may be issued and sold to the Fund at
the option of the issuer. The price of the security is fixed at the time
of the commitment. At the time of entering into the agreement the
Aggregate Bond Index Fund is paid a commitment fee, regardless of whether
or not the security is ultimately issued. The Aggregate Bond Index Fund
will enter into such agreements for the purpose of investing in the
security underlying the commitment at a yield and price that is considered
advantageous to the Fund. The Aggregate Bond Index Fund will not enter
into a standby commitment with a remaining term in excess of 90 days and
will limit its investment in such commitments so that the aggregate
purchase price of securities subject to such commitments, together with
the value of portfolios securities subject to legal restrictions on resale
that affect their marketability, will not exceed 15% of its net assets
taken at the time of the commitment. The Aggregate Bond Index Fund
segregates liquid securities in an aggregate amount equal to the purchase
price of the securities underlying the commitment.
There can be no assurance that the
securities subject to a standby commitment will be issued, and the value
of the security, if issued, on the delivery date may be more or less than
its purchase price. Since the issuance of the security underlying the
commitment is at the option of the issuer, the Aggregate Bond Index Fund
may bear the risk of a decline in the value of such security and may not
benefit from an appreciation in the value of the security during the
commitment period.
The purchase of a security subject to a
standby commitment agreement and the related commitment fee will be
recorded on the date on which the security can reasonably be expected to
be issued, and the value of the security will thereafter be reflected in
the calculation of the Aggregate Bond Index Funds net asset value.
The cost basis of the security will be adjusted by the amount of the
commitment fee. In the event the security is not issued, the commitment
fee will be recorded as income on the expiration date of the standby
commitment.
Repurchase Agreements.
Each Fund may invest in securities pursuant to repurchase
agreements. Repurchase agreements may be entered into only with a member
bank of the Federal Reserve System, primary dealers in U.S. Government
securities, or an affiliate thereof, or with other entities which the
Investment Adviser otherwise deems to be credit worthy. Under such
agreements, the counterparty agrees, upon entering into the contract, to
repurchase the security at a mutually agreed upon time and price, thereby
determining the yield during the term of the agreement. This insulates the
Fund from fluctuations in the market value of the underlying security
during such period. A Fund may not invest more than 15% of its net assets
in repurchase agreements maturing in more than seven days (together with
other illiquid securities). Repurchase agreements may be construed to be
collateralized loans by the purchaser to the seller secured by the
securities transferred to the purchaser. A Fund will require the seller to
provide additional collateral if the market value of the securities falls
below the repurchase price at any time during the term of the repurchase
agreement. In the event of default by the seller under a repurchase
agreement construed to be a collateralized loan, the underlying securities
are not owned by the Fund but only constitute collateral for the seller
s obligation to pay the repurchase price. Therefore, a Fund may
suffer time delays and incur costs or possible losses in connection with
the disposition of the collateral. In the event of a default under such a
repurchase agreement, instead of the contractual fixed rate of return, the
rate of return to the Fund shall be dependent upon intervening
fluctuations of the market value of such security and the accrued interest
on the security. In such event, the Fund would have rights against the
seller for breach of contract with respect to any losses arising from
market fluctuations following the failure of the seller to
perform.
Securities Lending.
Each Fund may lend securities with a value not exceeding
33 1
/3% of its total
assets to banks, brokers and other financial institutions. In return, a
Fund receives collateral in cash or securities issued or guaranteed by the
U.S. Government which will be maintained at all times in an amount equal
to at least 100% of the current market value of the loaned securities.
This limitation is a fundamental policy and it may not be changed without
the approval of the holders of a majority of a Funds outstanding
voting securities as defined in the Investment Company Act. During the
period of such a loan, a Fund typically receives the income on both the
loaned securities and the collateral and thereby increases its yield. In
certain circumstances, the Fund may receive a flat fee for its loans. Such
loans are terminable at any time and the borrower, after notice, is
required to return borrowed securities within five business days. A Fund
may pay reasonable finders, administrative and custodial fees in
connection with its loans. In the event that the borrower defaults on its
obligation to return borrowed securities because of insolvency or for any
other reason, a Fund could experience delays and costs in gaining
access to the collateral and could suffer a loss to the extent the value of
the collateral falls below the market value of the borrowed
securities.
Borrowing and Leverage.
The use of leverage by a Fund creates an opportunity for
greater total return, but, at the same time, creates special risks. For
example, leveraging may exaggerate changes in the net asset value of Fund
shares and in the yield on the Funds portfolio. Although the
principal of such borrowings will be fixed, a Funds assets may
change in value during the time the borrowings are outstanding. Borrowings
will create interest expenses for the Fund which can exceed the income
from the assets purchased with the borrowings. To the extent the income or
capital appreciation derived from securities purchased with borrowed funds
exceeds the interest a Fund will have to pay on the borrowings, the Fund
s return will be greater than if leverage had not been used.
Conversely, if the income or capital appreciation from the securities
purchased with such borrowed funds is not sufficient to cover the cost of
borrowing, the return to a Fund will be less than if leverage had not been
used, and therefore the amount available for distribution to shareholders
as dividends and other distributions will be reduced. In the latter case,
the Investment Adviser in its best judgment nevertheless may determine to
maintain a Funds leveraged position if it expects that the benefits
to the Funds shareholders of maintaining the leveraged position will
outweigh the current reduced return.
Certain types of borrowings by a Fund may
result in the Fund being subject to covenants in credit agreements
relating to asset coverage, portfolio composition requirements and other
matters. It is not anticipated that observance of such covenants would
impede the Investment Adviser from managing a Funds portfolio in
accordance with the Funds investment objectives and policies.
However, a breach of any such covenants not cured within the specified
cure period may result in acceleration of outstanding indebtedness and
require a Fund to dispose of portfolio investments at a time when it may
be disadvantageous to do so.
A Fund at times may borrow from affiliates
of the Investment Adviser, provided that the terms of such borrowings are
no less favorable than those available from comparable sources of funds in
the marketplace. As discussed under Management and Advisory
Arrangements, the fee paid to the Investment Adviser will be
calculated on the basis of a Funds assets including proceeds from
borrowings.
Securities of Smaller Companies.
An investment in the Small Cap Index Fund involves
greater risk than is customarily associated with funds that invest in more
established companies. The securities of smaller companies may be subject
to more abrupt or erratic market movements than larger, more established
companies or the market average in general. These companies may have
limited product lines, markets or financial resources, or they may be
dependent on a limited management group. Because of these factors, the
Small Cap Index Fund believes that its shares may be suitable for
investment by persons who can invest without concern for current income
and who are in a financial position to assume above-average investment
risk in search of above-average long-term reward. It is not intended as a
complete investment program but is designed for those long-term investors
who are prepared to experience above-average fluctuations in net asset
value.
While the issuers in which the Small Cap
Index Fund will primarily invest may offer greater opportunities for
capital appreciation than large cap issuers, investments in smaller
companies may involve greater risks and thus may be considered
speculative. Full development of these companies and trends frequently
takes time and, for this reason, the Small Cap Index Fund should be
considered as a long-term investment and not as a vehicle for seeking
short-term profits.
The securities in which the Small Cap Index
Fund invests will often be traded only in the over-the-counter market or
on a regional securities exchange and may not be traded every day or in
the volume typical of trading on a national securities exchange. As a
result, the disposition by the Small Cap Index Fund of portfolio
securities to meet redemptions or otherwise may require the Small Cap
Index Fund to sell these securities at a discount from market
prices.
Equity securities of specific small cap
issuers may present different opportunities for long-term capital
appreciation during varying portions of economic or securities markets
cycles, as well as during varying stages of their business development.
The market valuation of small cap issuers tends to fluctuate during
economic or market cycles, presenting attractive investment opportunities
at various points during these cycles.
Smaller companies, due to the size and kinds
of markets that they serve, may be less susceptible than large companies
to intervention from the Federal government by means of price controls,
regulations or litigation.
Mortgage-Backed Securities.
The Aggregate Bond Index Fund may invest in
mortgage-backed securities. Mortgaged-backed securities are
pass-through securities, meaning that principal and interest
payments made by the borrower on the underlying mortgages are passed
through to the Aggregate Bond Index Fund. The value of mortgage-backed
securities, like that of traditional fixed-income securities, typically
increases when interest rates fall and decreases when interest rates rise.
However, mortgage-backed securities differ from traditional fixed-income
securities because of their potential for prepayment without penalty. The
price paid by the Aggregate Bond Index Fund for its mortgage-backed
securities, the yield the Aggregate Bond Index Fund expects to receive
from such securities and the average life of the securities are based on a
number of factors, including the anticipated rate of prepayment of the
underlying mortgages. In a period of declining interest rates, borrowers
may prepay the underlying mortgages more quickly than anticipated, thereby
reducing the yield to maturity and the average life of the mortgage-backed
securities. Moreover, when the Aggregate Bond Index Fund reinvests the
proceeds of a prepayment in these circumstances, it will likely receive a
rate of interest that is lower than the rate on the security that was
prepaid.
To the extent that the Aggregate Bond Index
Fund purchases mortgage-backed securities at a premium, mortgage
foreclosures and principal prepayments may result in a loss to the extent
of the premium paid. If the Aggregate Bond Index Fund buys such securities
at a discount, both scheduled payments of principal and unscheduled
prepayments will increase current and total returns and will accelerate
the recognition of income which, when distributed to shareholders, will be
taxable as ordinary income. In a period of rising interest rates,
prepayments of the underlying mortgages may occur at a slower than
expected rate, creating maturity extension risk. This particular risk may
effectively change a security that was considered short- or
intermediate-term at the time of purchase into a long-term security. Since
long-term securities generally fluctuate more widely in response to
changes in interest rates than short-term securities, maturity extension
risk could increase the inherent volatility of the Aggregate Bond Index
Fund. See Investments in Fixed-Income Securities and
Illiquid Securities above.
Portfolio Strategies Involving Options, Futures, Swaps, Indexed Instruments
and Foreign Exchange Transactions
Each Fund will also utilize options,
futures, options on futures, swaps and other indexed instruments. Futures
and options on futures may be employed to provide liquidity. Futures,
options on futures, swaps and other indexed instruments may be employed as
a proxy for a direct investment in securities underlying the Funds
index. In addition, the International Index Fund may engage in futures
contracts on foreign currencies in connection with certain foreign
securities transactions.
The Investment Adviser will choose among the
foregoing instruments based on its judgment of how best to meet each Fund
s goal. In connection therewith, the Investment Adviser will assess
such factors as current and anticipated securities prices, relative
liquidity and price levels in the options, futures and swap markets
compared to the securities markets, and the Funds cash flow and cash
management needs.
Indexed Securities.
The Funds may invest in securities the potential return of which is
based on the change in particular measurements of value or rate (an
index). As an illustration, a Fund may invest in a debt
security that pays interest and returns principal based on the change in
the value of a securities index or a basket of securities. If a Series
invests in such securities, it may be subject to reduced or eliminated
interest payments or loss of principal in the event of an adverse movement
in the relevant index.
|
Options on
Securities and Securities Indices
|
Purchasing Put Options.
Each Fund may purchase put options on securities held in
its portfolio or on securities or interest rate indices which are
correlated with securities held in its portfolio. When a Fund purchases a
put option, in consideration for an up front payment (the option
premium) the Fund acquires a right to sell to another party
specified securities owned by the Fund at a specified price (the
exercise price) on or before a
specified date (the expiration date), in the case of an option
on securities, or to receive from another party a payment based on the
amount a specified securities index declines below a specified level on or
before the expiration date, in the case of an option on a securities
index. The purchase of a put option limits the Funds risk of loss in
the event of a decline in the market value of the portfolio holdings
underlying the put option prior to the options expiration date. If
the market value of the portfolio holdings associated with the put option
increases rather than decreases, however, the Fund will lose the option
premium and will consequently realize a lower return on the portfolio
holdings than would have been realized without the purchase of the put.
Purchasing a put option may involve correlation risk, and may also involve
liquidity and credit risk.
Purchasing call options.
Each Fund may also purchase call options on securities it
intends to purchase or securities, or interest rate indices which are
correlated with the types of securities it intends to purchase. When a
Fund purchases a call option, in consideration for the option premium the
Fund acquires the right to purchase from another party specified
securities at the exercise price on or before the expiration date, in the
case of an option on securities, or to receive from another party a
payment based on the amount a specified securities index increases beyond
a specified level on or before the expiration date, in the case of an
option on a securities index. The purchase of a call option may protect
the Fund from having to pay more for a security as a consequence of
increases in the market value for the security during a period when the
Fund is contemplating its purchase (an anticipatory hedge). In
the event a Fund determines not to purchase a security underlying a call
option, however, the Fund may lose the entire option premium. Purchasing a
call option involves correlation risk, and may also involve liquidity and
credit risk.
Each Fund is also authorized to purchase put
or call options in connection with closing out put or call options it has
previously sold.
Writing Call Options.
Each Fund may write (i.e., sell) call options on
securities held in its portfolio or securities indices the performance of
which correlates with securities held in its portfolio. When a Fund writes
a call option, in return for an option premium, the Fund gives another
party the right to buy specified securities owned by the Fund at the
exercise price on or before the expiration date, in the case of an option
on securities, or agrees to pay to another party an amount based on any
gain in a specified securities index beyond a specified level on or before
the expiration date, in the case of an option on a securities index. In
the event the party to which a Fund has written an option fails to
exercise its rights under the option because the value of the underlying
securities is less than the exercise price, the Fund will partially offset
any decline in the value of the underlying securities through the receipt
of the option premium. By writing a call option, however, a Fund limits
its ability to sell the underlying securities, and gives up the
opportunity to profit from any increase in the value of the underlying
securities beyond the exercise price, while the option remains
outstanding. Writing a call option may involve correlation
risk.
Writing Put Options.
Each Fund may also write put options on securities or securities
indices. When a Fund writes a put option, in return for an option premium
the Fund gives another party the right to sell to the Fund a specified
security at the exercise price on or before the expiration date, in the
case of an option on a security, or agrees to pay to another party an
amount based on any decline in a specified securities index below a
specified level on or before the expiration date, in the case of an option
on a securities index. The Fund may write put options to earn income,
through the receipt of option premiums. In the event the party to which
the Fund has written an option fails to exercise its rights under the
option because the value of the underlying securities is greater than the
exercise price, the Fund will profit by the amount of the option premium.
By writing a put option, however, a Fund will be obligated to purchase the
underlying security at a price that may be higher than the market value of
the security, or make a cash payment reflecting any decline in the index,
in the case of an option on an index. Accordingly, when the Fund writes a
put option it is exposed to a risk of loss in the event the value of the
underlying securities falls below the exercise price, which loss
potentially may substantially exceed the amount of option premium received
by the Fund for writing the put option. A Fund will write a put option on
a security or a securities index only if the Fund would be willing to
purchase the security at the exercise price for investment purposes (in
the case of an option on a security) or is writing the put in connection
with trading strategies involving combinations of optionsfor
example, the sale and purchase of options with identical expiration dates
on the same security or index but different exercise prices (a technique
called a spread). Writing a put option may involve substantial
leverage risk.
Each Fund is also authorized to sell call or
put options in connection with closing out call or put options it has
previously purchased.
Other than with respect to closing
transactions, a Fund will only write call or put options that are
covered. A call or put option will be considered covered if a
Fund has segregated assets with respect to such option in the manner
described in Risk Factors in Derivatives below. A call option
will also be considered covered if a Fund owns the securities it would be
required to deliver upon exercise of the option (or, in the case of an
option on a securities index, securities which substantially correlate
with the performance of such index) or owns a call option, warrant or
convertible instrument which is immediately exercisable for, or
convertible into, such security.
Types of Options.
Each Fund may engage in transactions in options on securities or
securities indices on exchanges and in the over-the-counter (OTC
) markets. In general, exchange-traded options have standardized
exercise prices and expiration dates and require the parties to post
margin against their obligations, and the performance of the parties
obligations in connection with such options is guaranteed by the exchange
or a related clearing corporation. OTC options have more flexible terms
negotiated between the buyer and seller, but generally do not require the
parties to post margin and are subject to greater risk of counterparty
default. See Additional Risk Factors of OTC Transactions;
Limitations on the Use of OTC Derivatives below.
Futures. Each
Fund may engage in transactions in futures and options thereon. Futures
are standardized, exchange-traded contracts which obligate a purchaser to
take delivery, and a seller to make delivery, of a specific amount of an
asset at a specified future date at a specified price. No price is paid
upon entering into a futures contract. Rather, upon purchasing or selling
a futures contract the Fund is required to deposit collateral (margin
) equal to a percentage (generally less than 10%) of the contract
value. Each day thereafter until the futures position is closed, the Fund
will pay additional margin representing any loss experienced as a result
of the futures position the prior day or be entitled to a payment
representing any profit experienced as a result of the futures position
the prior day. Futures involve substantial risk.
The purchase of a futures contract may
protect a Fund from having to pay more for securities as a consequence of
increases in the market value for such securities during a period when the
Fund was holding cash equivalents. In the event that such securities
decline in value or a Fund determines not to complete an anticipatory
hedge transaction relating to a futures contract, however, a Fund may
realize a loss relating to the futures position.
Each Fund will limit transactions in futures
and options on futures to financial futures contracts (i.e.,
contracts for which the underlying asset is a securities or interest rate
index) purchased or sold for anticipatory hedging purposes. Each Fund will
further limit transactions in futures and options on futures to the extent
necessary to prevent a Fund from being deemed a commodity pool
under regulations of the Commodity Futures Trading Commission.
Foreign Exchange Transactions.
The International Index Fund may engage in spot and
forward foreign exchange transactions and currency swaps, purchase and
sell options on currencies and purchase and sell currency futures and
related options thereon for purposes of settling transactions.
Swaps. Each
Fund is authorized to enter into equity swap agreements, which are OTC
contracts in which one party agrees to make periodic payments based on the
change in market value of a specified equity security, basket of equity
securities or equity index in return for periodic payments based on a
fixed or variable interest rate or the change in market value of a
different equity security, basket of securities or equity index. Swap
agreements may also be used to obtain exposure to a security or market
without owning or taking physical custody of securities in circumstances
in which direct investment is restricted by local law or is otherwise
impractical.
A Fund will enter into an equity swap
transaction only if, immediately following the time the Fund enters into
the transaction, the aggregate notional principal amount of equity swap
transactions to which the Fund is a party would not exceed 5% of the Fund
s net assets. Swap agreements entail the risk that a party will
default on its payment obligations to the Fund thereunder. Each Fund will
seek to lessen the risk to some extent by entering into a transaction only
if the counterparty meets the current credit requirement for OTC option
counterparties. Swap agreements also bear the risk that a Fund will not be
able to meet its obligations to the counterparty. Each Fund, however, will
deposit in a segregated account with its custodian, liquid securities or
cash or cash equivalents
or other assets permitted to be so segregated by the Commission in an amount
equal to or greater than the market value of the liabilities under the
swap agreement or the amount it would cost the Fund initially to make an
equivalent direct investment, plus or minus any amount the Fund is
obligated to pay or is to receive under the swap agreement.
Risk Factors in Derivatives
The Funds may use instruments referred to as
derivatives. Derivatives are financial instruments the value of which is
derived from another security, a commodity (such as gold or oil) or an
index (a measure of value or rates, such as the Standard & Poors
500 Index or the prime lending rate). Derivatives allows each Fund to
increase or decrease the level of risk to which the Fund is exposed more
quickly and efficiently than transactions in other types of
instruments.
The Funds intend to enter into transactions
involving derivatives only if there appears to be a liquid secondary
market for such instruments or, in the case of illiquid instruments traded
in OTC transactions, such instruments satisfy the criteria set forth below
under Additional Risk Factors of OTC Transactions; Limitations on
the Use of OTC Derivatives. However, there can be no assurance that,
at any specific time, either a liquid secondary market will exist for a
derivative or a Fund will otherwise be able to sell such instrument at an
acceptable price. It may therefore not be possible to close a position in
a derivative without incurring substantial losses, if at all.
Derivatives are volatile and involve
significant risks, including:
|
Credit riskthe risk that the
counterparty on a derivative transaction will be unable to honor its
financial obligation to the Funds.
|
|
Leverage riskthe risk associated
with certain types of investments or trading strategies (such as
borrowing money to increase the amount of investments) that relatively
small market movements may result in large changes in the value of an
investment. Certain investments or trading strategies that involve
leverage can result in losses that greatly exceed the amount originally
invested.
|
|
Liquidity riskthe risk that certain
securities may be difficult or impossible to sell at the time that the
seller would like or at the price that the seller believes the security
is currently worth.
|
Use of derivatives for hedging purposes
involves correlation risk. If the value of the derivative moves more or
less than the value of the hedged instruments the Funds will experience a
gain or loss which will not be completely offset by movements in the value
of the hedged instruments.
Certain transactions in derivatives (such as
futures transactions or sales of put options) involve substantial leverage
risk and may expose a Fund to potential losses, which exceed the amount
originally invested by the Fund. When a Fund engages in such a
transaction, the Fund will deposit in a segregated account at its
custodian liquid securities with a value at least equal to the Funds
exposure, on a market-to-market basis, to the transaction (as calculated
pursuant to requirements of the Securities and Exchange Commission). Such
segregation will ensure that the Fund has assets available to satisfy its
obligations with respect to the transaction, but will not limit the Fund
s exposure to loss.
|
Additional
Risk Factors of OTC Transactions; Limitations on the Use of OTC
Derivatives
|
Certain derivatives traded in OTC markets,
including indexed securities, swaps and OTC options, involve substantial
liquidity risk. The absence of liquidity may make it difficult or
impossible for a Fund to sell such instruments promptly at an acceptable
price. The absence of liquidity may also make it more difficult for a Fund
to ascertain a market value for such instruments. A Fund will therefore
acquire illiquid OTC instruments (i) if the agreement pursuant to which
the instrument is purchased contains a formula price at which the
instrument may be terminated or sold, or (ii) for which the Manager
anticipates the Fund can receive on each business day at least two
independent bids or offers, unless a quotation from only one dealer is
available, in which case that dealers quotation may be
used.
Because derivatives traded in OTC markets
are not guaranteed by an exchange or clearing corporation and generally do
not require payment of margin, to the extent that a Fund has unrealized
gains in such instruments or has deposited collateral with its
counterparty, the Fund is at risk that its counterparty will become
bankrupt or otherwise fail to honor its obligations. The Fund will attempt
to minimize the risk that a counterparty will become bankrupt or otherwise
fail to honor its obligations by engaging in transactions in derivatives
traded in OTC markets only with financial institutions which have
substantial capital or which have provided the Fund with a third-party
guaranty or other credit enhancement.
Additional Limitations on the Use of
Derivatives
The Funds may not use any derivative to gain
exposure to an asset or class of assets that it would be prohibited by its
investment restrictions from purchasing directly.
Additional Information Concerning the Indices
S&P 500.
Standard & Poors®, S&P®
, S&P 500®, Standard & Poors 500
, and 500 are trademarks of The McGraw-Hill Companies,
Inc. and have been licensed for use by the Corporation and the Trust. The S
&P 500 Index Fund and the S&P 500 Index Series are not sponsored,
endorsed, sold or promoted by Standard & Poors, a division of
the McGraw Hill Companies, Inc. (Standard & Poors).
Standard & Poors makes no representation regarding the
advisability of investing in the Fund or the Series. Standard & Poor
s makes no representation or warranty, express or implied, to the
owners of shares of the Fund or the Series or any member of the public
regarding the advisability of investing in securities generally or in the
Fund or the Series particularly or the ability of the S&P 500 to track
general stock market performance. Standard & Poors only
relationship to the Fund and the Series is the licensing of certain
trademarks and trade names of Standard & Poors and of the S
&P 500 which is determined, composed and calculated by Standard &
Poors without regard to the Fund and the Series. Standard & Poor
s has no obligation to take the needs of the Fund and the Series or
the owners of shares of the Fund and the Series into consideration in
determining, composing or calculating the S&P 500. Standard & Poor
s is not responsible for and has not participated in the
determination of the prices and amount of the Fund and the Series or the
timing of the issuance of sale of shares of the Fund and the Series or in
the determination or calculation of the equation by which the Fund and the
Series is to be converted into cash. Standard & Poors has no
obligation or liability in connection with the administration, marketing
or trading of the Fund and the Series.
Standard & Poors does not
guarantee the accuracy and/or the completeness of the S&P 500 Index or
any data included therein, and Standard & Poors shall have no
liability for any errors, omissions, or interruptions therein. Standard
& Poors makes no warranty, express or implied, as to results to
be obtained by the Fund, the Series, owners of shares of the Fund and the
Series, or any other person or entity from the use of the S&P 500
Index or any data included therein. Standard & Poors makes no
express or implied warranties and expressly disclaims all warranties of
merchantability or fitness for a particular purpose or use with respect to
the S&P 500 Index or any data included therein. Without limiting any
of the foregoing, in no event shall Standard & Poors have any
liability for any special, punitive, indirect, or consequential damages
(including lost profits), even if notified of the possibility of such
damages.
Russell 2000.
The Small Cap Index Fund and the Small Cap Index Series are not
promoted, sponsored or endorsed by, nor in any way affiliated with Frank
Russell Company. Frank Russell Company is not responsible for and has not
reviewed the Small Cap Index Fund or the Small Cap Index Series nor any
associated literature or publications and Frank Russell Company makes no
representation or warranty, express or implied, as to their accuracy, or
completeness, or otherwise.
Frank Russell Company reserves the right, at
any time and without notice, to alter, amend, terminate or in any way
change the Russell 2000. Frank Russell Company has no obligation to take
the needs of any particular fund or its participants or any other product
or person into consideration in determining, composing or calculating the
Index.
Frank Russell Companys publication of
the Russell 2000 in no way suggests or implies an opinion by Frank Russell
Company as to the attractiveness or appropriateness of investment in any
or all securities upon which the
Russell 2000 is based. Frank Russell Company makes no representation,
warranty, or guarantee as to the accuracy, completeness, reliability, or
otherwise of the Russell 2000 or any data included in the Russell 2000.
Frank Russell Company makes no representation or warranty regarding the
use, or the results of use, of the Russell 2000 or any data included
therein, or any security (or combination thereof) comprising the Russell
2000. Frank Russell Company makes no other express or implied warranty,
and expressly disclaims any warranty, or any kind, including, without
means of limitation, any warranty of merchantability or fitness for a
particular purpose with respect to the Russell 2000 or any data or any
security (or combination thereof) included therein.
EAFE Index.
The EAFE Index is the exclusive property of Morgan Stanley
Capital International, Inc. (Morgan Stanley). The EAFE Index
is a service mark of Morgan Stanley Group Inc. and has been licensed for
use by the Investment Adviser and its affiliates.
The International Index Fund and the
International (GDP Weighted) Index Series are not sponsored, endorsed,
sold or promoted by Morgan Stanley. Morgan Stanley makes no representation
or warranty, express or implied, to the owners of shares of the
International Index Fund and the International (GDP Weighted) Index Series
or any member of the public regarding the advisability of investing in
securities generally or in the International Index Fund and the
International (GDP Weighted) Index Series particularly or the ability of
the EAFE Index to track general stock market performance. Morgan Stanley
is the licensor of certain trademarks, service marks and trade names of
Morgan Stanley and of the EAFE Index. Morgan Stanley has no obligation to
take the needs of the International Index Fund and the International (GDP
Weighted) Index Series or the owners of shares of the International Index
Fund and the International (GDP Weighted) Index Series into consideration
in determining, composing or calculating the EAFE Index. Morgan Stanley is
not responsible for and has not participated in the determination of the
timing of, prices at, or quantities of shares of the International Index
Fund and the International (GDP Weighted) Index Series to be issued or in
the determination or calculation of the equation by which the shares of
the International Index Fund and the International (GDP Weighted) Index
Series are redeemable for cash. Morgan Stanley has no obligation or
liability to owners of shares of the International Index Fund and the
International (GDP Weighted) Index Series in connection with the
administration, marketing or trading of the International Index Fund and
the International (GDP Weighted) Index Series.
Although Morgan Stanley shall obtain
information for inclusion in or for use in the calculation of the EAFE
Index from sources which Morgan Stanley considers reliable, Morgan Stanley
does not guarantee the accuracy and/or the completeness of the EAFE Index
or any data included therein. Morgan Stanley makes no warranty, express or
implied, as to results to be obtained by licensee, licensees
customers and counterparties, owners of shares of the International Index
Fund and the International (GDP Weighted) Index Series, or any other
person or entity from the use of the EAFE Index or any data included
therein in connection with the rights licensed hereunder or for any other
use. Morgan Stanley makes no express or implied warranties, and hereby
expressly disclaims all warranties of merchantability or fitness for a
particular purpose with respect to the EAFE Index or any data included
therein. Without limiting any of the foregoing, in no event shall Morgan
Stanley have any liability for any direct, indirect, special, punitive,
consequential or any other damages (including lost profits) even if
notified of the possibility of such damages.
The Corporation has adopted the following
restrictions and policies relating to the investment of each Funds
assets and activities, which are fundamental policies and may not be
changed with respect to a Fund without the approval of the holders of a
majority of the Funds outstanding voting securities (which for this
purpose and under the Investment Company Act means the lesser of (i) 67%
of the shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (ii) more than 50% of the
outstanding shares). Provided that none of the following restrictions
shall prevent a Fund from investing all of its assets in shares of another
registered investment company with the same investment objective (in a
master/feeder structure), each Fund may not:
|
1. Make any investment
inconsistent with the Funds classification as a non-diversified
company under the Investment Company Act.
|
|
2. Invest more than 25%
of its total assets, taken at market value, in the securities of issuers
in any particular industry (excluding the U.S. Government and its
agencies and instrumentalities); provided, that in replicating the
weighting of a particular industry in its target index, a Series or Fund
may invest more than 25% of its total assets in securities of issuers in
that industry.
|
|
3. Make investments for the
purpose of exercising control or management.
|
|
4. Purchase or sell real
estate, except that, to the extent permitted by law, a Fund may invest
in securities directly or indirectly secured by real estate or interests
therein or issued by companies which invest in real estate or interests
therein.
|
|
5. Make loans to other persons,
except that the acquisition of bonds, debentures or other corporate debt
securities and investment in government obligations, commercial paper,
pass-through instruments, certificates of deposit, bankers acceptances,
repurchase agreements or any similar instruments shall not be deemed to
be the making of a loan, and except further that the Fund may lend its
portfolio securities, provided that the lending of portfolio securities
may be made only in accordance with applicable law and the guidelines
set forth in the Funds Registration Statement, as it may be
amended from time to time.
|
|
6. Issue senior securities to
the extent such issuance would violate applicable law.
|
|
7. Borrow money, except that
(i) a Fund may borrow from banks (as defined in the Investment Company
Act) in amounts up to 33 1
/3% of its total
assets (including the amount borrowed), (ii) a Fund may borrow up to an
additional 5% of its total assets for temporary purposes, (iii) a Fund
may obtain such short term credit as may be necessary for the clearance
of purchases and sales of portfolio securities and (iv) the Fund may
purchase securities on margin to the extent permitted by applicable law.
A Fund may not pledge its assets other than to secure such borrowings
or, to the extent permitted by the Funds investment policies as
set forth in its Registration Statement, as it may be amended from time
to time, in connection with hedging transactions, short sales, when
issued and forward commitment transactions and similar investment
strategies.
|
|
8. Underwrite securities of
other issuers except insofar as a Fund technically may be deemed an
underwriter under the Securities Act in selling portfolio
securities.
|
|
9. Purchase or sell commodities
or contracts on commodities, except to the extent that a Fund may do so
in accordance with applicable law and the Funds Registration
Statement, as it may be amended from time to time, and without
registering as a commodity pool operator under the Commodity Exchange
Act.
|
In addition, although each Fund is
classified as a non-diversified fund under the Investment Company Act and
is not subject to the diversification requirements of the Investment
Company Act, each Fund is required to comply with certain requirements
under the Internal Revenue Code of 1986, as amended (the Code
). To ensure that the Funds satisfy these requirements, the
Declaration of Trust requires that each Series be managed in compliance
with the Code requirements as though such requirements were applicable to
the Series. These requirements include limiting its investments so that at
the close of each quarter of the taxable year (i) not more than 25% of the
market value of a Funds total assets are invested in the securities
of a single issuer, or any two or more issuers which are controlled by the
Fund and engaged in the same, similar or related businesses, and (ii) with
respect to 50% of the market value of its total assets, not more that 5%
of the market value of its total assets are invested in securities of a
single issuer, and the Fund does not own more than 10% of the outstanding
voting securities of a single issuer. The U.S. Government, its agencies
and instrumentalities are not included within the definition of
issuer for purposes of the diversification requirements of the
Code. These requirements will be satisfied at the Series level and not at
the level of the Funds based upon a ruling received from the Internal
Revenue Service (IRS) which entitles the Funds to look
through the shares of the Series to the underlying investments of
the Series for purposes of these diversification requirements.
The Trust has adopted investment
restrictions substantially identical to the foregoing, which are
fundamental policies of the Trust and may not be changed with respect to
any Series without the approval of the holders of a majority of the
interests of the Series.
In addition, the Corporation has adopted
non-fundamental restrictions that may be changed by the Directors without
shareholder approval. Like the fundamental restrictions, none of the
non-fundamental restrictions, including but not limited to restriction (a)
below, shall prevent a Fund from investing all of its assets in shares of
another registered investment company with the same investment objective
(in a master/feeder structure). Under the non-fundamental restrictions, a
Fund may not:
|
(a) Purchase securities of
other investment companies, except to the extent such purchases are
permitted by applicable law. As a matter of policy, however, a Fund will
not purchase shares of any registered open-end investment company or
registered unit investment trust, in reliance on Section 12(d)(1)(F) or
(G) (the fund of funds provisions) of the Investment Company
Act, at any time the Funds shares are owned by another investment
company that is part of the same group of investment companies as the
Fund.
|
|
(b) Make short sales of
securities or maintain a short position, except to the extent permitted
by applicable law and otherwise permitted by the Corporations
Registration Statement.
|
|
(c) Invest in securities that
cannot be readily resold because of legal or contractual restrictions or
that cannot otherwise be marketed, redeemed or put to the issuer or a
third party, if at the time of acquisition more than 15% of its net
assets would be invested in such securities. This restriction shall not
apply to securities that mature within seven days or securities that the
Directors of the Corporation have otherwise determined to be liquid
pursuant to applicable law. Securities purchased in accordance with Rule
144A under the Securities Act (which are restricted securities that can
be resold to qualified institutional buyers, but not to the general
public) and determined to be liquid by the Directors of the Corporation
are not subject to the limitations set forth in this investment
restriction.
|
|
(d) Make any additional
investments if the amount of its borrowings exceeds 5% of its total
assets. Borrowings do not include the use of investment techniques that
may be deemed to create leverage, including, but not limited to, such
techniques as dollar rolls, when-issued securities, options and
futures.
|
If a percentage restriction on the
investment or use of assets set forth above is adhered to at the time a
transaction is effected, later changes in percentages resulting from
changing values will not be considered a violation.
Portfolio securities of each Funds
underlying Series generally may not be purchased from, sold or loaned to
the Investment Adviser or its affiliates or any of their directors,
officers or employees, acting as principal, unless pursuant to a rule or
exemptive order under the Investment Company Act.
Because of the affiliation of Merrill Lynch,
Pierce, Fenner & Smith Incorporated (Merrill Lynch) with
the Investment Adviser, the Fund and Series are prohibited from engaging
in certain transactions involving Merrill Lynch, or its affiliates except
for brokerage transactions permitted under the Investment Company Act
involving only usual and customary commissions or transactions pursuant to
an exemptive order under the Investment Company Act. See Portfolio
Transactions and Brokerage. Without such an exemptive order, the
Fund and Series are prohibited from engaging in portfolio transactions
with Merrill Lynch or its affiliates acting as principal.
Although each Fund will use a passive,
indexing approach to investing, each Fund may engage in a substantial
number of portfolio transactions. The rate of portfolio turnover will be a
limiting factor when the Investment Adviser considers whether to purchase
or sell securities for a Fund only to the extent that the Investment
Adviser will consider the impact of transaction costs on a Funds
tracking error. Changes in the securities comprising a Funds index
will tend to increase that Funds portfolio turnover rate, as the
Investment Adviser restructures the Funds holdings to reflect the
changes in the index. The portfolio turnover rate is, in summary, the
percentage computed by dividing the lesser of a Funds purchases or
sales of securities by the average net asset value of the Fund. High
portfolio turnover involves correspondingly greater brokerage commissions
for a Fund investing in equity securities and other transaction costs
which are borne directly by a Fund. A high portfolio turnover rate may
also result in the realization of taxable capital gains, including
short-term capital gains taxable at ordinary income rates.
Information about the Directors, executive
officers and portfolio managers of the Corporation and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of the portfolio managers and of each
executive officer and Director is P.O. Box 9011, Princeton, New Jersey
08543-9011.
TERRY
K. GLENN
(59) President and Director(1)(2)
Executive Vice President of the Investment Adviser and Merrill Lynch
Asset Management, L.P. (MLAM or the Administrator)
(which terms as used herein include their corporate predecessors) since
1983; Executive Vice President and Director of Princeton Services, Inc. (
Princeton Services) since 1993; President of Princeton Funds
Distributor, Inc. (PFD) since 1986 and Director thereof since
1991; President of Princeton Administrators, L.P. since 1988.
JACK
B. SUNDERLAND
(71) Director(2) P.O. Box 7, West
Cornwall, Connecticut 06796. President and Director of American
Independent Oil Company, Inc. (energy company) since 1987; Member of
Council on Foreign Relations since 1971.
STEPHEN
B. SWENSRUD
(66) Director(2) 24
Federal Street, Suite 400, Boston, Massachusetts 02110. Chairman, Fernwood
Advisors (investment adviser) since 1996; Principal, Fernwood Associates
(financial consultant) since 1975.
J. THOMAS
TOUCHTON
(61) Director(2) Suite
3405, One Tampa City Center, 201 North Franklin Street, Tampa, Florida,
33602. Managing Partner of The Witt-Touchton Company and its predecessor
The Witt Co. (private investment partnership) since 1972; Trustee Emeritus
of Washington and Lee University; Director of TECO Energy Inc. (electric
utility holding company).
JOSEPH
T. MONAGLE
, JR
. (51) Senior Vice President(1)(2)
Senior Vice President of the Investment Adviser since 1990;
Department Head of the Global Fixed Income Division of the Investment
Adviser since 1997; Senior Vice President of Princeton Services since
1993.
GREGORY
MARK
MAUNZ
(47) Senior Vice President and Co-Portfolio
Manager of the Aggregate Bond Index Fund(1)(2) First
Vice President of the Investment Adviser since 1997; Vice President of the
Investment Adviser from 1985 to 1997; Portfolio Manager of the Investment
Adviser since 1984.
JEFFREY
B. HEWSON
(48) Vice President and Co-Portfolio Manager
of the Aggregate Bond Index Fund(1)(2) Director
(Global Fixed Income) of the Investment Adviser since 1998; Vice President
of the Investment Adviser from 1989 to 1998; Portfolio Manager of the
Investment Adviser since 1985.
ERIC
S. MITOFSKY
(45) Senior Vice President and Portfolio
Manager of the S&P 500 Index Fund and Small Cap Index
Fund(1)(2) First Vice President of the Investment
Adviser since 1997; Vice President of the Investment Adviser from 1992 to
1997.
CHRISTOPHER
G. AYOUB
(44) Senior Vice President and
Co-Portfolio Manager of the Aggregate Bond Index Fund(1)(2)
First Vice President of the Investment Adviser since 1998; Vice
President of the Investment Adviser from 1985 to 1998.
DONALD
C. BURKE
(39) Vice President and Treasurer(1)(2)
Senior Vice President and Treasurer of the Investment
Adviser since 1999; Senior Vice President and Treasurer of Princeton
Services since 1999; Vice President of PFD since 1999; First Vice
President of the Investment Adviser from 1997 to 1999; Director of
Taxation of the Investment Adviser since 1990; Vice President of the
Investment Adviser from 1990 to 1997.
IRA
P. SHAPIRO
(36) Secretary(1)(2)
First Vice President of the Investment Adviser since 1998; Director
(Legal Advisory) of the Investment Adviser from 1997 to 1998; Vice
President of the Investment Adviser from 1996 to 1997; Attorney with the
Investment Adviser from 1993 to 1997.
(1)
|
Interested
person, as defined in the Investment Company Act, of the
Corporation.
|
(2)
|
Such Director or
officer is a director, trustee or officer of other investment companies
for which the Investment Adviser or FAM acts as investment
adviser.
|
As of April 1, 2000, the
officers and Directors of the Corporation as a group (eleven persons)
owned an aggregate of less than 1% of the outstanding shares of Common
Stock of Merrill Lynch & Co., Inc. and owned an aggregate of less than
1% of the outstanding shares of any of the Funds.
Compensation of Directors/Trustees
The Trust expects to pay each individual who
serves as a Director/Trustee not affiliated with the Investment Adviser
(each a non-affiliated Director/Trustee) for services to all
funds that invest in the Trust and all series of the Trust a fee of $5,000
per year plus $500 per Board meeting attended, together with such
individuals actual out-of-pocket expenses relating to attendance at
meetings. The Trust also expects to compensate members of the Audit and
Nominating Committee (the Committee), which consists of the
non-affiliated Director/Trustees of the Funds and the Series, with a fee
of $1,000 per year for services to all Funds that invest in the Trust and
all Series of the Trust. Through investment in the Trust, each Fund pays
its pro rata share of the fees paid by the Trust to non-affiliated
Directors/Trustees.
The following table sets forth the aggregate
compensation earned by the Trust paid to the non-affiliated
Directors/Trustees for the fiscal year ended December 31, 1999 and the
total compensation paid to non-affiliated Directors/Trustees from all
registered investment companies advised by the Investment Adviser and its
affiliate, MLAM (FAM/MLAM-Advised Funds) for the calendar year
ended December 31, 1999.
Name of
Director/Trustee
|
|
Aggregate
Compensation From
Trust
|
|
Pension or
Retirement
Benefits Accrued as
Part of
Trust Expenses
|
|
Total
Compensation
From Trust and
FAM/MLAM
Advised Funds Paid
to Directors/Trustees(1)
|
Jack B.
Sunderland |
|
$4,750 |
|
None |
|
$143,975 |
Stephen B.
Swensrud |
|
$4,750 |
|
None |
|
$232,250 |
J. Thomas
Touchton |
|
$4,750 |
|
None |
|
$142,725 |
(1)
|
The
Directors/Trustees serve on the boards of FAM/MLAM Advised Funds as
follows: Mr. Sunderland (18 registered investment companies consisting
of 33 portfolios); Mr. Swensrud (30 registered investment companies
consisting of 66 portfolios); Mr. Touchton (18 registered investment
companies consisting of 33 portfolios).
|
Administration Arrangements
The Corporation has entered into an
administration agreement with Merrill Lynch Asset Management, L.P.
(previously defined as MLAM or the Administrator)
(the Administration Agreement). As discussed in the
Prospectus, effective August 2, 1999 the Administrator receives for its
services to the Funds monthly compensation at the annual rates of the
average daily net assets of each Fund as follows:
Name of
Fund
|
|
Administration
Fee
|
S&P 500 Index
Fund |
|
0.24 |
5% |
Small Cap Index
Fund |
|
0.29 |
% |
Aggregate Bond
Index Fund |
|
0.19 |
% |
International
Index Fund |
|
0.34 |
% |
The table below sets forth information about
the total administrative fees paid by each Fund to the Administrator for
the periods indicated.
Period
Ending
|
|
S&P 500
Index Fund
|
|
Small Cap
Index Fund
|
|
Aggregate Bond
Index Fund
|
|
International
Index Fund
|
December 31,
1997* |
|
|
|
|
|
|
|
|
Contractual amount |
|
$
594,524 |
|
$
77,969 |
|
$204,163 |
|
$211,373 |
Amount waived (if
applicable) |
|
$
338,405 |
|
$
77,969 |
|
$139,532 |
|
$175,510 |
December 31,
1998 |
|
|
|
|
|
|
|
|
Contractual amount |
|
$1,815,951 |
|
$
99,667 |
|
$553,925 |
|
$275,261 |
Amount waived (if
applicable) |
|
$
62,952 |
|
$
99,667 |
|
$178,361 |
|
$
57,566 |
December 31,
1999 |
|
|
|
|
|
|
|
|
Contractual amount |
|
$3,188,914 |
|
$140,136 |
|
$697,194 |
|
$325,775 |
Amount waived (if
applicable) |
|
$
39,161 |
|
$
47,563 |
|
$103,971 |
|
$
43,691 |
*
|
Period is from
commencement of operations (April 3, 1997 for the S&P 500 Index Fund
and the Aggregate Bond Index Fund, and April 9, 1997 for the Small Cap
Index Fund and the International Index Fund).
|
The Administration Agreement obligates the
Administrator to provide certain administrative services to the
Corporation and the Funds and to pay all compensation of and furnish
office space for officers and employees of the Corporation as well as the
fees of all Directors who are affiliated persons of the Administrator or
any of their affiliates. Each Fund pays all other expenses incurred in the
operation of the Fund, including, among other things, taxes, expenses for
legal and auditing services, costs of printing proxies, stock
certificates, shareholder reports and prospectuses and statements of
additional information (except to the extent paid by the Distributor),
charges of the Custodian, any Sub-custodian and Transfer Agent, expenses
of portfolio transactions, expenses of redemption of shares, Securities
and Exchange Commission fees, expenses of registering the shares under
Federal, state or foreign laws, fees and actual out-of-pocket expenses of
unaffiliated Directors, accounting and pricing costs (including the daily
calculation of net asset value), insurance, interest, brokerage costs,
litigation and other extraordinary or non-recurring expenses, and other
expenses properly payable by the Corporation or the Fund. Merrill Lynch
Funds Distributor, a division of Princeton Funds Distributor Inc. (the
Distributor) will pay certain of the expenses of the Funds
incurred in connection with the offering of their shares.
Duration and Termination.
Unless earlier terminated as described below, the
Administration Agreement will continue in effect from year to year with
respect to each Fund if approved annually (a) by the Board of Directors
and (b) by a majority of the Directors who are not parties to such
contract or interested persons (as defined in the Investment Company Act)
of any such party. Such contract is not assignable and may be terminated
with respect to a Fund without penalty on 60 days written notice at
the option of either party thereto or by the vote of the shareholders of
the Fund.
Management and Advisory Arrangements
Investment Advisory Services.
Each Fund invests all of its assets in shares of the
corresponding Series of the Trust. Accordingly, the Funds do not invest
directly in portfolio securities and do not require investment advisory
services. All portfolio management occurs at the level of the Trust. The
Trust has entered into a management agreement with the Investment Adviser
(the Management Agreement). The Investment Adviser provides
the Trust with investment advisory and management services. Subject to the
supervision of the Board of Trustees, the Investment Adviser is
responsible for the actual management of each Series portfolio and
constantly reviews the Series holdings in light of its own research
analysis and that from other relevant sources. The responsibility for
making decisions to buy, sell or hold a particular security rests with the
Investment Adviser. The Investment Adviser performs certain of the other
administrative services and provides all the office space, facilities,
equipment and necessary personnel for management of the
Series.
Securities held by the Series of the Trust
may also be held by, or be appropriate investments for, other funds or
investment advisory clients for which the Investment Adviser or its
affiliates act as an adviser. Because of different objectives or other
factors, a particular security may be bought for one or more clients of
the Investment Adviser or an affiliate when one or more clients of the
Investment Adviser or an affiliate are selling the same
security. If purchases or sales of securities by the Investment Adviser for
the Series or other funds for which it acts as investment adviser or for
its advisory clients arise for consideration at or about the same time,
transactions in such securities will be made, insofar as feasible, for the
respective funds and clients in a manner deemed equitable to all. To the
extent that transactions on behalf of more than one client of the
Investment Adviser or its affiliates during the same period may increase
the demand for securities being purchased or the supply of securities
being sold there may be an adverse effect on price.
As discussed in the Prospectus, effective
August 2, 1999 the Investment Adviser receives, for its services to the
Series, monthly compensation at the annual rates of the average daily net
assets of each Series as follows:
Name of
Series
|
|
Management
Fee
|
Master S&P
500 Index Series |
|
.0005% |
Master Small Cap
Index Series |
|
0.01% |
Master Aggregate
Bond Index Series |
|
0.01% |
Master
International (GDP Weighted) Index Series |
|
0.01% |
Effective August 2, 1999, the Investment
Adviser replaced MLAM as the investment adviser of the underlying Series.
The Investment Adviser is an affiliate of MLAM which shares substantially
the same investment personnel, including the personnel responsible for
providing management services to the Series. The table below sets forth
information about the total investment advisory fees paid by the Series to
FAM and MLAM, and any amount voluntarily waived by FAM or MLAM, for the
periods indicated.
Period
|
|
Master
S&P 500
Index Series
|
|
Master
Small Cap
Index Series
|
|
Master
Aggregate Bond
Index Series
|
|
Master
International
(GDP Weighted)
Index Series
|
From inception to
December 31, 1997* |
|
|
|
|
|
|
|
|
Contractual amount |
|
$148,645 |
|
$36,425 |
|
$
88,609 |
|
$100,102 |
Amount waived (if
applicable) |
|
$148,645 |
|
$36,425 |
|
$
37,562 |
|
$
35,546 |
For the fiscal
year ended December 31, 1998 |
|
|
|
|
|
|
|
|
Contractual amount |
|
$454,138 |
|
$61,476 |
|
$238,378 |
|
$142,489 |
Amount waived (if
applicable) |
|
$
0 |
|
$61,476 |
|
$
2,537 |
|
$
87,182 |
For the fiscal
year ended December 31, 1999 |
|
|
|
|
|
|
|
|
Contractual amount |
|
$479,793 |
|
$46,744 |
|
$185,365 |
|
$106,636 |
Amount waived (if
applicable) |
|
$
0 |
|
$23,839 |
|
$
0 |
|
$
26,206 |
*
|
The Master S
&P 500 Index Series and the Master Aggregate Bond Index Series
commenced operations on April 3, 1997 and the Master Small Cap Index
Series and the Master International (GDP Weighted) Index Series
commenced operations on April 9, 1997.
|
Payment of Series Expenses.
The Management Agreement obligates the Investment Adviser
to provide investment advisory services and to pay all compensation of and
furnish office space for officers and employees of the Trust connected
with investment and economic research, trading and investment management
of the Trust, as well as the fees of all Trustees who are affiliated
persons of the Investment Adviser or any of their affiliates. The Trust
pays, or causes to be paid, all other expenses incurred in the operation
of the Trust and the Series (except to the extent paid by the
Distributor), including, among other things, taxes, expenses for legal and
auditing services, costs of printing proxies, stock certificates (if any),
shareholder reports, copies of the Registration Statements, charges of the
custodian, any sub-custodian and Transfer Agent, expenses of portfolio
transactions, expenses of redemption of shares, Securities and Exchange
Commission fees, expenses of registering the shares under federal, state
or foreign laws, fees and out-of-pocket expenses of unaffiliated Trustees,
accounting and pricing costs (including the daily calculation of net asset
value), insurance, interest, brokerage costs, litigation and other
extraordinary or non-recurring expenses, and other expenses properly
payable by the Trust or a Series. The Distributor will pay certain
promotional expenses of the Trust incurred in connection with the
continuous offering of its shares of beneficial interest of each of the
Series. Accounting services are provided to the Trust and the Series by
the Investment Adviser, and the Trust reimburses the Investment Adviser
for its costs in connection with such services.
Organization of the Investment Adviser.
The Investment Adviser is a limited
partnership, the partners of which are ML & Co., a financial services
holding company and the parent of Merrill Lynch, and Princeton Services.
ML & Co. and Princeton Services are controlling persons of
the Investment Adviser as defined under the Investment Company Act because
of their ownership of its voting securities or their power to exercise a
controlling influence over its management or policies.
Duration and Termination.
Unless earlier terminated as described below, the
Management Agreement will continue in effect from year to year with
respect to each Series if approved annually (a) by the Board of Trustees
or with respect to any Series by the vote of a majority of the outstanding
voting securities of the Series and (b) by a majority of the Trustees who
are not parties to such contract or interested persons (as defined in the
Investment Company Act) of any such party. Such contract is not assignable
and may be terminated without penalty on 60 days written notice at
the option of either party thereto or by the vote of the shareholders of
the Series.
Transfer Agency Services.
Financial Data Services, Inc. (the Transfer Agent
), a subsidiary of ML & Co., acts as the Corporations
transfer agent pursuant to a Transfer Agency, Dividend Disbursing Agency
and Shareholder Servicing Agency Agreement (the Transfer Agency
Agreement). Pursuant to the Transfer Agency Agreement, the Transfer
Agent is responsible for the issuance, transfer and redemption of shares
and the opening and maintenance of shareholder accounts. Pursuant to the
Transfer Agency Agreement, the Transfer Agent receives an annual fee at
the annual rate of 0.05% of the average daily value of the net assets of a
Fund for its services and is entitled to reimbursement for out-of-pocket
expenses incurred by it under the Transfer Agency Agreement. For purposes
of the Transfer Agency Agreement, the term account includes a
shareholder account maintained directly by the Transfer Agent and any
other account representing the beneficial interest of a person in the
relevant share class on a record keeping system, provided the record
keeping system is maintained by a subsidiary of ML & Co.
Distribution Expenses.
The Corporation, on behalf of each Fund, has entered into
a distribution agreement with the Distributor in connection with the
continuous offering of shares of the Funds (the Distribution
Agreement). The Distribution Agreement obligates the Distributor to
pay certain expenses in connection with the offering of shares of the
Funds. After the prospectuses, statements of additional information and
periodic reports have been prepared, set in type and mailed to
shareholders, the Distributor pays for the printing and distribution of
copies thereof used in connection with the offering to dealers and
investors. The Distributor also pays for other supplementary sales
literature and advertising costs. The Distribution Agreement is subject to
the same renewal requirements and termination provisions as the Management
Agreement described above.
The Directors, the Trustees, the Investment
Adviser and the Distributor have adopted a Code of Ethics under Rule 17j-1
of the Investment Company Act (the Code). The Code
significantly restricts the personal investing activities of all employees
of the Corporation, the Trust, the Investment Adviser and the Distributor
and, as described below, imposes additional, more onerous, restrictions on
fund investment personnel.
The Code requires, among other things, that
all employees of the Corporation, the Trust, the Investment Adviser and
the Distributor pre-clear any personal securities investment (with limited
exceptions, such as government securities). The pre-clearance requirement
and associated procedures are designed to identify any substantive
prohibition or limitation applicable to the proposed investment. The
substantive restrictions applicable to all employees of the Corporation,
the Trust, the Investment Adviser and the Distributor include a ban on
acquiring any securities in a hot initial public offering and
a prohibition from profiting on short-term trading in securities. In
addition, no employee may purchase or sell any security that at the time
is being purchased or sold (as the case may be), or to the knowledge of
the employee is being considered for purchase or sale, by any fund advised
by the Investment Adviser or its affiliated advisers. Furthermore, the
Code provides for trading blackout periods which prohibit
trading by investment personnel of the Corporation and the Trust within
periods of trading by the Funds and the Series in the same (or equivalent)
security (15 or 30 days depending upon the transaction).
Reference is made to How to Buy, Sell,
Transfer and Exchange Shares in the Prospectus for certain
information as to the purchase of Fund shares.
Shares. Each
Fund offers two classes of shares, Class A shares and Class D shares.
Class A shares of each Fund are offered at a price equal to the next
determined net asset value per share without the imposition of any
front-end or deferred sales charge, and are not subject to any ongoing
account maintenance or distribution fee. Distribution of Class A shares of
each Fund is limited to certain eligible investors. Class D shares of each
Fund are offered at a price equal to the next determined net asset value
per share without the imposition of any front-end or deferred sales charge
and are not subject to any ongoing distribution fee, but are subject to an
ongoing account maintenance fee at an annual rate of 0.25% of average
daily net assets.
Class A shares of a Fund are offered to a
limited group of investors who participate in certain investment programs
which charge a fee for participation, including the Merrill Lynch Mutual
Fund Adviser program. In addition, Class A shares are offered to ML &
Co. and its subsidiaries and their directors and employees and to members
of the Boards of MLAM/FAM-advised investment companies, including the
Corporation. Certain employer sponsored retirement or savings plans,
including eligible 401(K) plans, may purchase Class A shares of the Funds
provided such plans meet the required minimum number of eligible employees
or required amount of assets advised by the Investment Adviser or any of
its affiliates. In addition, plans maintained by a labor union for the
benefit of union members may purchase Class A shares if the plans
maintained by such union commit to purchase Class A shares of any Fund
having a value of at least $7.5 million at the time of purchase. For more
information about these programs, contact the Transfer Agent at
1-800-MER-FUND.
Each Fund offers its shares at a public
offering price equal to the next determined net asset value per share plus
any sales charge applicable to the class of shares selected by the
investor. The applicable offering price for purchase orders is based upon
the net asset value of each Fund next determined after receipt of the
purchase order by the Distributor. As to purchase orders received by
securities dealers prior to the close of business on the New York Stock
Exchange (the NYSE) (generally 4:00 p.m., Eastern time) which
includes orders received after the determination of net asset value on the
previous day, the applicable offering price will be based on the net asset
value on the day the order is placed with the Distributor, provided that
the orders are received by the Distributor prior to 30 minutes after the
close of business on the NYSE on that day. If the purchase orders are not
received prior to 30 minutes after the close of business on the NYSE on
that day, such orders shall be deemed received on the next business day.
Dealers have the responsibility of submitting purchase orders to each Fund
not later than 30 minutes after the close of business on the NYSE in order
to purchase shares at that days offering price.
Each Fund or the Distributor may suspend the
continuous offering of a Funds shares of any class at any time in
response to conditions in the securities markets or otherwise and may
thereafter resume such offering from time to time. Any order may be
rejected by a Fund or the Distributor. Neither the Distributor nor the
dealers are permitted to withhold placing orders to benefit themselves by
a price change. Merrill Lynch may charge its customers a processing fee
(presently $5.35) to confirm a sale of shares to such customers. Purchases
made directly through the Transfer Agent are not subject to the processing
fee.
Reference is made to Fees and Expenses
in the Prospectus for certain information with respect to the
account maintenance plan for Class D shares pursuant to Rule 12b-1 under
the Investment Company Act (the Account Maintenance Plan) with
respect to the account maintenance fees paid by each Fund to the
Distributor with respect to Class D shares of each Fund.
Pursuant to the Account Maintenance Plan,
the Class D shares of each Fund pay the Distributor an ongoing account
maintenance fee, accrued daily and paid monthly, at the annual rate of
0.25% on the average daily net assets attributable to such shares.
Pursuant to a sub-agreement with the Distributor, Merrill Lynch also
provides account maintenance services in respect of the Class D shares of
each Fund. The ongoing account maintenance fee compensates the Distributor
and Merrill Lynch for providing account maintenance services to Class
D
shareholders. Class D shares of each Fund have exclusive voting rights with
respect to the Account Maintenance Plan pursuant to which account
maintenance fees are paid.
The Funds Account Maintenance Plan is
subject to the provisions of Rule 12b-1 under the Investment Company Act.
In their consideration of the Account Maintenance Plan, the Directors must
consider all factors they deem relevant, including information as to the
benefits of the Account Maintenance Plan to the Funds and their Class D
shareholders. The Account Maintenance Plan further provides that, so long
as the Account Maintenance Plan remains in effect, the selection and
nomination of non-interested Directors shall be committed to the
discretion of the non-interested Directors then in office. In approving
the Account Maintenance Plan in accordance with Rule 12b-1, the
non-interested Directors concluded that there is reasonable likelihood
that the Account Maintenance Plan will benefit each Fund, and its Class D
shareholders. The Account Maintenance Plan can be terminated at any time,
without penalty, by the vote of a majority of the non-interested
Directors, or with respect to any Fund, by the vote of the holders of a
majority of the outstanding Class D shares of the Fund. The Account
Maintenance Plan cannot be amended to increase materially the amount to be
spent by the Class D shares of a Fund without shareholder approval, and
all material amendments are required to be approved by the vote of
Directors, including a majority of the non-interested Directors who have
no direct or indirect financial interest in the Account Maintenance Plan,
cast in person at a meeting called for that purpose. Rule 12b-1 further
requires that the Fund preserve copies of the Account Maintenance Plan and
any report made pursuant to such plan for a period of not less than six
years from the date of the Account Maintenance Plan or such report, the
first two years in an easily accessible place.
Among other things, the Account Maintenance
Plan provides that the Distributor shall provide and the Directors shall
review quarterly reports of the disbursement of the account maintenance
fees paid to the Distributor. For the fiscal year ended December 31, 1999,
the S&P 500 Index Fund, Small Cap Index Fund, Aggregate Bond Index
Fund and the International Index Fund paid the Distributor $1,698,660,
$80,118, $207,292 and $43,825, respectively, pursuant to the Account
Maintenance Plan (based on average daily net assets subject to such Class
D Account Maintenance Plan of approximately $679.5 million, $32.0 million,
$83.1 million and $17.5 million, respectively), all of which was paid to
Merrill Lynch for providing account maintenance activities in connection
with Class D shares.
Reference is made to How to Buy, Sell,
Transfer and Exchange Shares in the Prospectus for certain
information as to the redemption and repurchase of Fund
shares.
Each Fund is required to redeem all shares
of the Fund upon receipt of a written request in proper form. The
redemption price is the net asset value per share next determined after
the initial receipt of proper notice of redemption. There will be no
charge for redemption if the redemption request is sent directly to the
Transfer Agent. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption. The
Corporation will generally pay redemptions in cash; however, if requested
by a shareholder, at the discretion of the Investment Adviser, the
Corporation may pay a redemption or repurchase of shares in an amount of
$10,000,000 or more (which amount may be decreased or increased by the
Investment Adviser from time to time) with portfolio
securities.
The right to redeem shares or to receive
payment with respect to any such redemption may be suspended for more than
seven days only for periods during which trading on the NYSE is restricted
as determined by the Commission or during which the NYSE is closed (other
than customary weekend and holiday closings), for any period during which
an emergency exists as defined by the Commission as a result of which
disposal of portfolio securities or determination of the net asset value
of the Fund is not reasonably practicable, and for such other periods as
the Commission may by order permit for the protection of shareholders of
the Fund.
The value of shares at the time of
redemption may be more or less than the shareholders cost, depending
on the market value of the securities held by the Fund at such
time.
Shares are redeemable at the option of the
Corporation, if in the opinion of the Corporation, ownership of the shares
has or may become concentrated to the extent that would cause the
Corporation or a Fund to be deemed a
personal holding company within the meaning of the Code. Merrill Lynch
reserves the right to terminate any account engaging in market-timing
mutual funds. For the purposes of this policy, market-timing
involves the purchase and sale of shares of mutual funds within short
periods of time with the intention of capturing short-term profits
resulting from market volatility.
Because of the high cost of maintaining
smaller shareholder accounts, the Funds may redeem the shares in your
account (without charging any deferred sales charge) if the net asset
value of your account falls below $500 due to redemptions you have made.
You will be notified that the value of your account is less than $500
before the Funds make an involuntary redemption. You will then have 60
days to make an additional investment to bring the value of your account
to at least $500 before the Funds take any action. This involuntary
redemption does not apply to retirement plans or Uniform Gifts or
Transfers to Minors Act accounts (UGMA/UTMA accounts
).
A shareholder wishing to redeem shares held
with the Transfer Agent may do so without charge by tendering the shares
directly to the Transfer Agent at Financial Data Services, Inc., P.O. Box
45289, Jacksonville, Florida 32232-5289. Redemption requests delivered
other than by mail should be delivered to Financial Data Services, Inc.
4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484. Proper notice
of redemption in the case of shares deposited with the Transfer Agent may
be accomplished by a written letter requesting redemption. Proper notice
of redemption in the case of shares for which certificates have been
issued may be accomplished by a written letter as noted above accompanied
by certificates for the shares to be redeemed. Redemption requests should
not be sent to the Corporation. The redemption request in either event
requires the signature(s) of all persons in whose name(s) the shares are
registered, signed exactly as such name(s) appear(s) on the Transfer Agent
s register. The signature(s) on the redemption requests must be
guaranteed by an eligible guarantor institution as such is
defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, as
amended (the Exchange Act), the existence and validity of
which may be verified by the Transfer Agent through the use of industry
publications. In the event a signature guarantee is required, notarized
signatures are not sufficient. In general, signature guarantees are waived
on redemptions of less than $50,000 as long as the following requirements
are met: (i) all requests require the signature(s) of all persons in whose
name(s) shares are recorded on the Transfer Agents register, (ii)
all checks must be mailed to the stencil address of record on the Transfer
Agents register and (iii) the stencil address must not have changed
within 30 days. Certain rules may apply regarding certain account types
such as, but not limited to, UGMA/UTMA accounts, Joint Tenancies with
Rights of Survivorship, contra broker transactions, and institutional
accounts. In certain instances, the Transfer Agent may require additional
documents such as, but not limited to, trust instruments, death
certificates, appointments as executor or administrator, or certificates
of corporate authority. For shareholders redeeming directly with the
Transfer Agent, payments will be mailed within seven days of receipt of a
proper notice of redemption.
At various times a Fund may be requested to
redeem shares for which it has not yet received good payment (e.g.,
cash, Federal funds or certified check drawn on a U.S. bank). The Fund may
delay or cause to be delayed the mailing of a redemption check until such
time as it has assured itself that good payment (e.g., cash,
Federal funds or certified check drawn on a U.S. bank) has been collected
for the purchase of such Fund shares, which will usually not exceed 10
days.
Each Fund also will repurchase shares
through a shareholders listed securities dealer. The Funds normally
will accept orders to repurchase shares by wire or telephone from dealers
for their customers at the net asset value next computed after the order
is placed. Shares will be priced at the net asset value calculated on the
day the request is received, provided that the request for repurchase is
submitted to the dealer prior to fifteen minutes after the regular close
of business on the NYSE (generally, the NYSE closes at 4:00 p.m., Eastern
time) on the day received, and such request is received by the Fund from
such dealer not later than 30 minutes after the close of business on the
NYSE on the same day. Dealers have the responsibility of submitting such
repurchase requests to the Fund not later than 30 minutes after the close
of business on the NYSE, in order to obtain that days closing
price.
These repurchase arrangements are for the
convenience of shareholders and do not involve a charge by a Fund.
Securities firms that do not have selected dealer agreements with the
Distributor, however, may impose a transaction charge on the shareholder
for transmitting the notice of repurchase to the Fund. Merrill Lynch may
charge its customers a processing fee (presently $5.35) to confirm a
repurchase of shares to such customers. Repurchases made directly through
the Transfer Agent on accounts held at the Transfer Agent are not subject
to the processing fee. The Corporation reserves the right to reject any
order for repurchase, which right of rejection might adversely affect
shareholders seeking redemption through the repurchase procedure. However,
a shareholder whose order for repurchase is rejected by a Fund may redeem
shares as set forth above.
Determination of Net Asset Value
Reference is made to How Shares are
Priced in the Prospectus.
The net asset value of the shares of the
Funds is determined once daily Monday through Friday after the close of
business on the NYSE on each day the NYSE is open for trading, based on
prices at the time of closing. The NYSE generally closes at 4:00 p.m.,
Eastern time. Any assets or liabilities initially expressed in terms of
non-U.S. dollar currencies are translated into U.S. dollars at the
prevailing market rates as quoted by one or more banks or dealers on the
day of valuation. The NYSE is not open for trading on New Years Day,
Martin Luther King, Jr. Day, Presidents Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Net asset value per share is computed by
dividing the market value of the securities held by a Fund plus any cash
or other assets (including interest and dividends accrued but not yet
received) minus all liabilities (including accrued expenses) by the total
number of shares outstanding at such time, rounded to the nearest cent.
Expenses, including the fees payable to the Administrator and Distributor
and the fees payable indirectly by the Series of the Trust to the
Investment Adviser, are accrued daily.
The principal assets of each Fund will
normally be its interest of the underlying Series, which will be valued at
its net asset value. Portfolio securities that are traded on stock
exchanges are valued at the last sale price on the exchange on which such
securities are traded as of the close of business on the day the
securities are being valued or, lacking any sales, at the last available
bid price for long positions and at the last available ask price for short
positions. In cases where securities are traded on more than one exchange,
the securities are valued on the exchange designated by or under the
authority of the Trustees as the primary market. Long positions in
securities traded in the OTC market are valued at the last available bid
price or yield equivalent obtained from one or more dealers or pricing
services approved by the Board of Trustees of the Trust. Portfolio
securities that are traded both in the OTC market and on a stock exchange
are valued according to the broadest and most representative market. Short
positions in securities traded in the OTC market are valued at the last
available ask price. When the Series writes an option, the amount of the
premium received is recorded on the books of the Series as an asset and an
equivalent liability. The amount of the liability is subsequently valued
to reflect the current market value of the option written, based upon the
last sale price in the case of exchange-traded options or, in the case of
options traded in the OTC market, the last asked price. Options purchased
by the Series are valued at their last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC
market, the last bid price. The value of swaps, including interest rate
swaps, caps and floors, will be determined by obtaining dealer quotations.
Other investments, including financial futures contracts and related
options, are stated at market value. Obligations with remaining maturities
of 60 days or less are valued at amortized cost unless the Investment
Adviser believes that this method no longer produces fair valuations.
Repurchase agreements will be valued at cost plus accrued interest.
Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under
the direction of the Trustees of the Trust, including valuations furnished
by a pricing service retained by the Trust. Such valuations and procedures
will be reviewed periodically by the Trustees.
Generally, trading in non-U.S. securities,
as well as U.S. Government Securities and money market instruments, is
substantially completed each day at various times prior to the close of
business on the NYSE. The
values of such securities used in computing the net asset value of a Fund
s shares are determined as of such times. Foreign currency exchange
rates are also generally determined prior to the close of business on the
NYSE. Occasionally, events affecting the values of such securities and
such exchange rates may occur between the times at which they are
determined and the close of business on the NYSE that will not be
reflected in the computation of a Funds net asset value.
Each investor in the Trust may add to or
reduce its investment in any Series on each day the NYSE is open for
trading. The value of each investors (including the respective Funds
) interest in a Series will be determined after the close of
business on the NYSE by multiplying the net asset value of the Series by
the percentage, effective for that day, that represents that investor
s share of the aggregate interests in such Series. The close of
business on the NYSE is generally 4:00 p.m., Eastern time. Any additions
or withdrawals, which are to be effected on that day, will then be
effected. The investors percentage of the aggregate beneficial
interests in a Series will then be recomputed as the percentage equal to
the fraction (i) the numerator of which is the value of such investor
s investment in the Series as of the time or determination on such
day plus or minus, as the case may be, the amount of any additions to or
withdrawals from the investors investment in the Series effected on
such day, and (ii) the denominator of which is the aggregate net asset
value of the Series as of such time on such day plus or minus, as the case
may be, the amount of the net additions to or withdrawals from the
aggregate investments in the Series by all investors in the Series. The
percentage so determined will then be applied to determine the value of
the investors interest in such Series after the close of business of
the NYSE on the next determination of net asset value of the Series.
Computation of Offering Price Per Share
The offering price for Class A and Class D
shares of each Fund based on the value of each Funds net assets as
of December 31, 1999, is calculated as follows:
S&P 500
Index Fund
|
|
Class
A
|
|
Class
D
|
Net
Assets |
|
$848,590,567 |
|
$840,918,199 |
|
|
|
|
|
Number of Shares
Outstanding |
|
47,080,489 |
|
46,729,895 |
|
|
|
|
|
Net Asset Value
Per Share (net assets divided by number of shares outstanding)
and Offering Price |
|
$
18.02 |
|
$
18.00 |
|
|
|
|
|
|
Small Cap Index
Fund
|
|
Class
A
|
|
Class
D
|
Net
Assets |
|
$
30,911,266 |
|
$
45,639,448 |
|
|
|
|
|
Number of Shares
Outstanding |
|
2,625,086 |
|
3,878,918 |
|
|
|
|
|
Net Asset Value
Per Share (net assets divided by number of shares outstanding)
and Offering Price |
|
$
11.78 |
|
$
11.77 |
|
|
|
|
|
|
Aggregate Bond
Index Fund
|
|
Class
A
|
|
Class
D
|
Net
Assets |
|
$324,254,277 |
|
$
79,742,747 |
|
|
|
|
|
Number of Shares
Outstanding |
|
32,913,257 |
|
8,091,090 |
|
|
|
|
|
Net Asset Value
Per Share (net assets divided by number of shares outstanding)
and Offering Price |
|
$
9.85 |
|
$
9.86 |
|
|
|
|
|
International
Index Fund
|
|
Class
A
|
|
Class
D
|
Net
Assets |
|
$104,426,822 |
|
$
30,480,637 |
|
|
|
|
|
Number of Shares
Outstanding |
|
6,903,391 |
|
2,015,131 |
|
|
|
|
|
Net Asset Value
Per Share (net assets divided by number of shares outstanding)
and Offering Price |
|
$
15.13 |
|
$
15.13 |
|
|
|
|
|
PORTFOLIO TRANSACTIONS AND BROKERAGE
Transactions in Portfolio Securities
Because the Funds will invest exclusively in
shares of their corresponding Series, it is expected that all transactions
in portfolio securities will be entered into by the Series. Subject to
policies established by the Board of Trustees, the Investment Adviser is
primarily responsible for the execution of the Series portfolio
transactions and the allocation of brokerage. The Trust has no obligation
to deal with any broker or group of brokers in the execution of
transactions in portfolio securities of the Series and does not use any
particular broker or dealer. In executing transactions with brokers and
dealers, the Investment Adviser seeks to obtain the best net results for
the Series, taking into account such factors as price (including the
applicable brokerage commission or dealer spread), size of order,
difficulty of execution and operational facilities of the firm and the firm
s risk in positioning a block of securities. While the Investment
Adviser generally seeks reasonably competitive commission rates, the
Series do not necessarily pay the lowest spread or commission available.
In addition, consistent with the Conduct Rules of the NASD and policies
established by the Trustees, the Investment Adviser may consider sales of
shares of the Series as a factor in the selection of brokers or dealers to
execute portfolio transactions for the Trust; however, whether or not a
particular broker or dealer sells shares of a Series neither qualifies nor
disqualifies such broker or dealer to execute transactions for the Trust.
Subject to obtaining the best net results,
brokers who provide supplemental investment research services to the
Investment Adviser may receive orders for transactions by the Trust. Such
supplemental research services ordinarily consist of assessments and
analyses of the business or prospects of a company, industry or economic
sector. Information so received will be in addition to and not in lieu of
the services required to be performed by the Investment Adviser under its
Management Agreement and the expense of the Investment Adviser will not
necessarily be reduced as a result of the receipt of such supplemental
information. If in the judgment of the Investment Adviser the Trust will
benefit from supplemental research services, the Investment Adviser is
authorized to pay brokerage commissions to a broker furnishing such
services which are in excess of commissions which another broker may have
charged for effecting the same transaction. Certain supplemental research
services may primarily benefit one or more other investment companies or
other accounts for which the Investment Adviser exercises investment
discretion. Conversely, the Trust may be the primary beneficiary of the
supplemental research services received as a result of portfolio
transactions effected for such other accounts or investment
companies.
The Trust anticipates that their brokerage
transactions involving securities of issuers domiciled in countries other
than the United States generally will be conducted primarily on the
principal stock exchanges of such countries. Brokerage commissions and
other transaction costs on foreign stock exchange transactions generally
are higher than in the United States, although the Trust will endeavor to
achieve the best net results in effecting their portfolio transactions.
There generally is less government supervision and regulation of foreign
stock exchanges and brokers than in the United States.
Information about the
brokerage commissions paid by the Trust, including commissions paid to
Merrill Lynch, is set forth in the following table:
|
|
Brokerage
Commissions Paid
|
Period
|
|
Master
S&P 500
Index Series
|
|
Master
Small Cap
Index Series
|
|
Master
Aggregate Bond
Index Series
|
|
Master
International
(GDP Weighted)
Index Series
|
From inception to
December 31, 1997* |
|
$118,903 |
|
$60,361 |
|
$0 |
|
$146,336 |
For the fiscal
year ended December 31, 1998** |
|
$105,046 |
|
$50,264 |
|
$0 |
|
$
74,373 |
For the fiscal
year ended December 31, 1999 |
|
$145,795 |
|
$20,124 |
|
$0 |
|
$
26,554 |
*
The Master S&P 500 Index Series and the Master Aggregate Bond
Index Series commenced operations on April 3, 1997, and the Master Small
Cap Index Series and the Master International (GDP Weighted) Index Series
commenced operations on April 9, 1997. The Series paid no commissions to
Merrill Lynch.
** The
Master International (GDP Weighted) Index Series paid $1,299 in brokerage
commissions to Merrill Lynch and each of Master S&P 500 Index Series,
Master Small Cap Index Series and Master Aggregate Bond Index Series paid
no commissions to Merrill Lynch.
For the fiscal year ended December 31, 1999,
the Series paid no brokerage commissions to Merrill Lynch.
The Trust may invest in certain securities
traded in the OTC market and intends to deal directly with the dealers who
make a market in securities involved, except in those circumstances in
which better prices and execution are available elsewhere. Under the
Investment Company Act, persons affiliated with the Trust and persons who
are affiliated with such persons are prohibited from dealing with the
Trust as principal in the purchase and sale of securities unless a
permissive order allowing such transactions is obtained from the
Commission. Since transactions in the OTC market usually involve
transactions with dealers acting as principal for their own accounts,
affiliated persons of the Trust, including Merrill Lynch and any of its
affiliates, will not serve as the Trusts dealer in such
transactions. However, affiliated persons of the Trust may serve as its
broker in OTC transactions conducted on an agency basis provided that,
among other things, the fee or commission received by such affiliated
broker is reasonable and fair compared to the fee or commission received
by non-affiliated brokers in connection with comparable transactions. In
addition, the Trust may not purchase securities during the existence of
any underwriting syndicate for such securities of which Merrill Lynch is a
member or in a private placement in which Merrill Lynch serves as
placement agent except pursuant to procedures adopted by the Trustees that
either comply with rules adopted by the Commission or with interpretations
of the Commission staff. See Investment Objectives and Policies
Investment Restrictions.
Section 11(a) of the Exchange Act generally
prohibits members of the United States national securities exchanges from
executing exchange transactions for their affiliates and institutional
accounts that they manage unless the member (i) has obtained prior express
authorization from the account to effect such transactions, (ii) at least
annually furnishes the account with the aggregate compensation received by
the member in effecting such transactions, and (iii) complies with any
rules the Commission has prescribed with respect to the requirements of
clauses (i) and (ii). To the extent Section 11(a) would apply to Merrill
Lynch acting as a broker for the Trust in any of its portfolio
transactions executed on any such securities exchange of which it is a
member, appropriate consents have been obtained from the Trust and annual
statements as to aggregate compensation will be provided to the
Trust.
The Trustees have considered the possibility
of seeking to recapture for the benefit of the Series brokerage
commissions and other expenses of possible portfolio transactions by
conducting portfolio transactions through affiliated entities. For
example, brokerage commissions received by affiliated brokers could be
offset against the advisory fees paid by the Series to the Investment
Adviser. After considering all factors deemed relevant, the Trustees made
a determination not to seek such recapture. The Trustees will reconsider
this matter from time to time.
Because of different objectives or other
factors, a particular security may be bought for one or more clients of
the Investment Adviser or an affiliate when one or more clients of the
Investment Adviser or an affiliate are selling the same security. If
purchases or sales of securities arise for consideration at or about the
same time that
would involve the Trust or other clients or funds for which the Investment
Adviser or an affiliate acts as manager, transactions in such securities
will be made, insofar as feasible, for the respective funds and clients in
a manner deemed equitable to all. To the extent that transactions on
behalf of more than one client of the Investment Adviser or an affiliate
during the same period may increase the demand for securities being
purchased or the supply of securities being sold, there may be an adverse
effect on price.
The Funds offer a number of shareholder
services and investment plans described below that are designed to
facilitate investment in their shares. Full details as to each of such
services and copies of the various plans and instructions as to how to
participate in the various services or plans, or how to change options
with respect thereto, can be obtained from the Funds, by calling the
telephone number on the cover page hereof, or from the Distributor or
Merrill Lynch. Certain of these services are available only to U.S.
investors.
Each shareholder whose account is maintained
at the Transfer Agent has an Investment Account and will receive
statements, at least quarterly, from the Transfer Agent. These statements
will serve as transaction confirmations for automatic investment purchases
and the reinvestment of dividends. The statements will also show any other
activity in the account since the preceding statement. Shareholders will
receive separate confirmations for each purchase or sale transaction other
than automatic investment purchases and the reinvestment of dividends. A
shareholder with an account held at the Transfer Agent may make additions
to his or her Investment Account at any time by mailing a check directly
to the Transfer Agent. A shareholder may also maintain an account through
Merrill Lynch. Upon the transfer of shares out of a Merrill Lynch
brokerage account, an Investment Account in the transferring shareholder
s name may be opened automatically at the Transfer
Agent.
Share certificates are issued only for full
shares and only upon the specific request of a shareholder who has an
Investment Account. Issuance of certificates representing all or only part
of the full shares in an Investment Account may be requested by a
shareholder directly from the Transfer Agent.
Shareholders may transfer their Fund shares
from Merrill Lynch to another securities dealer that has entered into a
selected dealer agreement with Merrill Lynch. Certain shareholder services
may not be available for the transferred shares. After the transfer, the
shareholder may purchase additional shares of funds owned before the
transfer and all future trading of these assets must be coordinated by the
new firm. If a shareholder wishes to transfer his or her shares to a
securities dealer that has not entered into a selected dealer agreement
with Merrill Lynch, the shareholder must either (i) redeem his or her
shares, paying any applicable CDSC or (ii) continue to maintain an
Investment Account at the Transfer Agent for those shares. The shareholder
may also request the new securities dealer to maintain the shares in an
account at the Transfer Agent registered in the name of the securities
dealer for the benefit of the shareholder whether the securities dealer
has entered into a selected dealer agreement or not.
Shareholders considering transferring a
tax-deferred retirement account, such as an individual retirement account,
from Merrill Lynch to another securities dealer would be aware that, if
the firm to which the retirement account is to be transferred will not
take delivery of shares of the Fund, a shareholder must either redeem the
shares, paying any applicable CDSC, so that the cash proceeds can be
transferred to the account at the new firm, or such shareholder must
continue to maintain a retirement account at Merrill Lynch for those
shares.
Shareholders of certain fee-based programs
and/or employer-sponsored retirement plans are allowed to exchange the
various share classes for other classes of a second MLAM/FAM-advised
mutual fund.
Retirement and Education Savings Plans
Individual retirement accounts and other
retirement and education savings plans are available from Merrill Lynch.
Under these plans, investments may be made in a Fund and certain of the
other mutual funds sponsored by Merrill Lynch as well as in other
securities. Merrill Lynch may charge an initial establishment fee and an
annual custodial fee for each account. Information with respect to these
plans is available on request from Merrill Lynch.
Dividends received in each of the plans
referred to above are exempt from Federal taxation until distributed from
the plans. Different tax rules apply to ROTH IRA plans and education
savings plans. Investors considering participation in any retirement or
education savings plan should review specific tax laws relating thereto
and should consult their attorneys or tax advisers with respect to the
establishment and maintenance of any such plan.
Automatic Investment Plans
A shareholder may make additions to an
Investment Account at any time by purchasing Class A shares (if he or she
is an eligible Class A investor) or Class D shares at the applicable
public offering price. These purchases may be made either through the
shareholders securities dealer, or by mail directly to the Transfer
Agent, acting as agent for such securities dealer. Voluntary accumulation
also can be made through a service known as the Funds Automatic
Investment Plan. Each Fund would be authorized, on a regular basis, to
provide systematic additions to the Investment Account of such shareholder
through charges of $50 or more to the regular bank account of the
shareholder by either pre-authorized checks or automated clearing house
debits. An investor that maintains a CMA® or CBA® account may
arrange to have periodic investments of amounts of $100 or more ($1 or
more for retirement accounts), made in a Fund through the CMA® or CBA
® Automatic Investment Program.
Automatic Dividend Reinvestment Plan
Unless specific instructions are given as to
the method of payment, dividends will be automatically reinvested in
additional full and fractional shares of the Funds. Such reinvestment will
be at the net asset value of shares of a Fund as determined after the
close of business on the NYSE on the monthly payment date for such
dividends.
Shareholders may, at any time, by written
notification to Merrill Lynch if the shareholders account is
maintained with Merrill Lynch, or by written notification or by telephone
(1-800-MER-FUND) to the Transfer Agent, if the shareholders account
is maintained with the Transfer Agent, elect to have subsequent dividends
paid in cash, rather than reinvested, in which event payment will be
mailed on or about the payment date (provided that, in the event that a
payment on an account maintained at the Transfer Agent would amount to
$10.00 or less, a shareholder will not receive such payment in cash and
such payment will be automatically reinvested in additional shares). Cash
payments can also be directly deposited to the shareholders bank
account. Commencing ten days after the receipt by the Transfer Agent of
such notice, those instructions will be effected. A Fund is not
responsible for any failure of delivery to the shareholders address
of record and no interest will accrue on amounts represented by uncashed
dividend or redemption checks.
Systematic Withdrawal Plan
A shareholder may elect to receive
systematic withdrawals from his or her Investment Account of Class A or
Class D shares by check or through automatic payment by direct deposit to
his or her bank account on either a monthly or quarterly basis as provided
below. Quarterly withdrawals are available for shareholders that have
acquired shares of a Fund having a value, based on cost or the current
offering price, of $5,000 or more, and monthly withdrawals are available
for shareholders with shares having a value of $10,000 or
more.
At the time of each withdrawal payment,
sufficient shares are redeemed from those on deposit in the shareholder
s account to provide the withdrawal payment specified by the
shareholder. The shareholder may specify the dollar amount and the class
of shares to be redeemed. With respect to shareholders who hold accounts
directly at the Transfer Agent, redemptions will be made at net asset
value as determined 15 minutes after the close of business on the NYSE
(generally, 4:00 p.m., Eastern time) on the 24th day of each month or the
24th day of the last month of each quarter, whichever is applicable. If
the NYSE is not open for business on such date, the
shares will be redeemed at the net asset value determined after the close of
business on the following business day. The check for withdrawal payment
will be mailed, or the direct deposit for withdrawal payment will be made,
on the next business day following redemption. When a shareholder is
making systematic withdrawals, dividends on all shares in the Investment
Account are reinvested automatically in shares of the Funds. A shareholder
s Systematic Withdrawal Plan may be terminated at any time, without
charge or penalty, by the shareholder, a Fund, the Transfer Agent or the
Distributor.
Withdrawal payments should not be considered
as dividends. Each withdrawal is a taxable event. If periodic withdrawals
continuously exceed reinvested dividends, the shareholders original
investment may be reduced correspondingly. Purchases of additional shares
concurrent with withdrawals are ordinarily disadvantageous to the
shareholder because of sales charges and tax liabilities. A Fund will not
knowingly accept purchase orders for shares of the Fund from investors
that maintain a Systematic Withdrawal Plan unless such purchase is equal
to at least one years scheduled withdrawals or $1,200, whichever is
greater. Automatic investments may not be made into an Investment Account
in which the shareholder has elected to make systematic
withdrawals.
Alternatively, a shareholder whose shares
are held within a CMA® or CBA® Account may elect to have shares
redeemed on a monthly, bimonthly, quarterly, semiannual or annual basis
through the CMA® or CBA® Systematic Redemption Program. The
minimum fixed dollar amount redeemable is $50. The proceeds of systematic
redemptions will be posted to the shareholders account three
business days after the date the shares are redeemed. All redemptions are
made at net asset value. A shareholder may elect to have his or her shares
redeemed on the first, second, third or fourth Monday of each month, in
the case of monthly redemptions, or of every other month, in the case of
bimonthly redemptions. For quarterly, semiannual or annual redemptions,
the shareholder may select the month in which the shares are to be
redeemed and may designate whether the redemption is to be made on the
first, second, third, or fourth Monday of the month. If the Monday
selected is not a business day, the redemption will be processed at net
asset value on the next business day. The CMA® or CBA® Systematic
Redemption Program is not available if Fund shares are being purchased
within the account pursuant to the Automated Investment Program. For more
information on the CMA(R) or CBA(R) Systematic Redemption Program,
eligible shareholders should contact their Merill Lynch Financial
Consultant.
Capital gains and ordinary income received
in each of the retirement plans referred to above are exempt from Federal
taxation until distributed from the plans. Investors considering
participation in any such plan should review specific tax laws relating
thereto and should consult their attorneys or tax advisers with respect to
the establishment and maintenance of any such plan.
The Corporation intends to distribute
substantially all of its net investment income, if any. Dividends from
such net investment income are paid at least annually with respect to each
of the S&P 500 Index Fund, Small Cap Index Fund and International
Index Fund. Dividends with respect to the Aggregate Bond Index Fund are
declared daily and paid monthly. All net realized capital gains, if any,
are distributed to Fund shareholders at least annually. From time to time,
a Fund may declare a special distribution at or about the end of the
calendar year in order to comply with Federal tax requirements that
certain percentages or its ordinary income and capital gains be
distributed during the calendar year. See Shareholder Services
Automatic Dividend Reinvestment Plan for information
concerning the manner in which dividends and distributions may be
reinvested automatically in shares of the Funds. If in any fiscal year, a
Fund has net income from certain foreign currency transactions, such
income will be distributed at least annually. Shareholders may elect in
writing to receive any such dividends in cash.
The Funds intend to continue to qualify for
the special tax treatment afforded regulated investment companies (
RICs) under the Internal Revenue Code of 1986, as amended (the
Code). As long as a Fund so qualifies, a Fund (but not its
shareholders) will not be subject to Federal income tax on the part of its
net ordinary income and
net realized capital gains which it distributes to shareholders. The Funds
intend to distribute substantially all of such income.
In order to qualify, the Fund generally
must, among other things, (i) derive at least 90% of its gross income from
dividends, interest, payments with respect to certain securities loans,
gains from the sale of securities, or other income (including but not
limited to gains from options or futures) derived with respect to its
business of investing in such stock or securities; (ii) distribute at
least 90% of its dividend, interest and certain other taxable income each
year; (iii) at the end of each fiscal quarter maintain at least 50% of the
value of its total assets in cash, government securities, securities of
other RICs, and other securities of issuers which represent, with respect
to each issuer, no more than 5% of the value of the Funds total
assets and 10% of the outstanding voting securities of such issuer; and
(iv) at the end of each fiscal quarter have no more than 25% of its assets
invested in the securities (other than those of the government or other
RICs) of any one issuer or of two or more issuers which the Fund controls
and which are engaged in the same, similar or related trades and
businesses.
Dividends paid by a Fund from its ordinary
income or from an excess of net realized short-term capital gains over net
long-term capital losses (together referred to hereafter as ordinary
income dividends) are taxable to shareholders as ordinary income.
Distributions made from an excess of net long-term gains over short-term
capital losses (including gains or losses from certain transactions in
options (capital gain dividends) are taxable to shareholders
as capital gains, regardless of the length of time the shareholder has
owned Fund shares. Any loss upon the sale or exchange of Fund shares held
for six months or less will be treated as long-term capital loss to the
extent of any capital gain dividends received by the shareholder.
Distributions in excess of a Funds earnings and profits will first
reduce the adjusted tax basis of a holders shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to
such holder (assuming the shares are held as a capital asset). Certain
categories of capital gains are taxable at different rates. Generally not
later than 60 days after the close of its taxable year, the Funds will
provide shareholders with a written notice designating the amounts of any
ordinary income dividends or capital gains dividends.
Dividends are taxable to shareholders even
though they are reinvested in additional shares of a Fund. A portion of
the ordinary income dividends paid by the S&P 500 Index Fund and Small
Cap Index Fund may be eligible for the 70% dividends received deduction
allowed to corporations under the Code, if certain requirements are met.
For this purpose, the Funds will allocate dividends eligible for the
dividends received deduction between the Class A and Class D shareholders
according to a method (which it believes is consistent with the Commission
rule permitting the issuance and sale of multiple classes of stock) that
is based upon the gross income that is allocable to the Class A and Class
D shareholders during the taxable year, or such other method as the
Internal Revenue Service may prescribe. Dividends paid by the Aggregate
Bond Index Fund and the International Index Fund will not be eligible for
the dividends received deduction. If a Fund pays a dividend in January
which was declared in the previous October, November or December to
shareholders of record on a specified date in one of such months, then
such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the year in which such
dividend was declared.
A loss realized on a sale or exchange of
shares of a Fund will be disallowed if other Fund shares are acquired
(whether through the automatic reinvestment of dividends or otherwise)
within a 61-day period beginning 30 days before and ending 30 days after
the date that the shares are disposed of. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed
loss.
Ordinary income dividends paid to
shareholders who are nonresident aliens or foreign entities generally will
be subject to a 30% U.S. withholding tax under existing provisions of the
Code applicable to foreign individuals and entities unless a reduced rate
of withholding or a withholding exemption is provided under applicable
treaty law. Nonresident shareholders are urged to consult their own tax
advisers concerning the applicability of the U.S. withholding
tax.
Dividends and interest received by the
International Index Fund and the Aggregate Bond Index Fund may give rise
to withholding and other taxes imposed by foreign countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. Shareholders of the International Index Fund may be
able to claim U.S. foreign tax credits with respect to such taxes, subject
to certain provisions and limitations
contained in the Code. For example, certain retirement accounts cannot claim
foreign tax credits on investments in foreign securities held by the Fund.
The International Index Fund expects to be eligible, and intends, to file
an election with the Internal Revenue Service pursuant to which
shareholders of the Fund will be required to include their proportionate
share of such withholding taxes in their U.S. income tax returns as gross
income, treat such proportionate share as taxes paid by them, and deduct
such proportionate share in computing their taxable incomes or,
alternatively, subject to certain limitations, restrictions, and holding
period requirements use them as foreign tax credits against their U.S.
income taxes. No deductions for foreign taxes, however, may be claimed by
noncorporation shareholders who do not itemize deductions. A shareholder
that is a nonresident alien individual or a foreign corporation may be
subject to U.S. withholding tax on the income resulting from the Fund
s election described in this paragraph but may not be able to claim
a credit or deduction against such U.S. tax for the foreign taxes treated
as having been paid by such shareholder. The International Index Fund will
report annually to its shareholders the amount per share of such
withholding taxes. For this purpose, the Fund will allocate foreign taxes
and foreign source income among the Class A and Class D shareholders
according to a method similar to that described above for the allocation
of dividends eligible for the dividends received deduction.
The Code requires a RIC to pay a
nondeductible 4% excise tax to the extent the RIC does not distribute,
during each calendar year, 98% of its ordinary income, determined on a
calendar basis, and 98% of its capital gains, determined in general, on an
October 31 year end, plus certain undistributed amounts from previous
years. For purposes of determining its distribution requirements, each
Fund will account for its share of items of income, gain, loss and
deductions of the Series as they are taken into account by the Series.
While each Fund intends to distribute its income and capital gains in the
manner necessary to minimize imposition of the 4% excise tax, there can be
no assurance that sufficient amounts of the Funds taxable income and
capital gains will be distributed to avoid entirely the imposition of the
tax. In such event, the Fund will be liable for the tax only on the amount
by which it does not meet the foregoing distribution
requirements.
Under certain provisions of the Code, some
shareholders may be subject to a 31% withholding tax on reportable
dividends, capital gains dividends and redemption payments (backup
withholding). Generally, shareholders subject to backup withholding
will be those for whom a certified taxpayer identification number is not
on file with the Corporation or who, to the Corporations knowledge,
have furnished an incorrect number. When establishing an account, an
investor must certify under penalty of perjury that such number is correct
and that such investor is not otherwise subject to backup
withholding.
Tax Treatment of Options and Futures Transactions
Each Fund may purchase or sell options and
futures. Options and futures contracts that are Section 1256
contracts will be marked to market for Federal income
tax purposes at the end of each taxable year, i.e., each such
option or futures contract will be treated as sold for its fair market
value on the last day of the taxable year. In general, unless such
contract is a forward foreign exchange contract, or is a non-equity or a
regulated futures contract for a non-U.S. currency for which the Fund
elects to have gain or loss treated as ordinary gain or loss under Code
Section 988 (as described below), gain or loss from Section 1256 contracts
will be 60% long-term and 40% short-term capital gain or loss.
Code Section 1259 will require the
recognition of gain (but not loss) if a Fund makes a constructive
sale of an appreciated financial position (e.g., debt
instruments and stocks). A Fund generally will be considered to make a
constructive sale of an appreciated financial position if it sells the
same or substantially identical property short, enters into a futures or
forward contract to deliver the same or substantially identical property,
or enters into certain other similar transactions.
Code Section 1092, which applies to certain
straddles, may affect the taxation of each Funds
transactions in options and futures contracts. Under Section 1092, a Fund
may be required to postpone recognition for tax purposes of losses
incurred in certain closing transactions in options and futures.
Similarly, Code Section 1091, which deals with wash sales, may
cause a Fund to postpone recognition of certain losses for tax purposes;
and Code Section 1258, which deals with conversion transactions,
may apply to recharacterize certain capital gains as ordinary
income for tax purposes.
Special Rules for Certain Foreign Currency Transactions
In general, gains from foreign
currencies and from foreign currency options, foreign currency
futures and forward foreign exchange contracts relating to investments in
stocks, securities or foreign currencies will be qualifying income for
purposes of determining whether a Series qualifies as a RIC. It is
currently unclear, however, who will be treated as the issuer of a foreign
currency instrument or how foreign currency options, foreign currency
futures and forward foreign exchange contracts will be valued for purposes
of the RIC diversification requirements applicable to a
Series.
Under Code Section 988, special rules are
provided for certain transactions in a foreign currency other than the
taxpayers functional currency (i.e., unless certain special
rules apply, currencies other than the U.S. dollar). In general, foreign
currency gains or losses from certain debt instruments, from certain
forward contracts, from futures contracts that are not regulated
futures contracts and from unlisted options will be treated as
ordinary income or loss under Code Section 988. In certain circumstances,
a Series may elect capital gain or loss treatment for such transactions.
In general, however, Code Section 988 gains or losses will increase or
decrease the amount of a Funds investment company taxable income
available to be distributed to shareholders as ordinary income.
Additionally, if Code Section 988 losses exceed other investment company
taxable income during a taxable year, the Fund would not be able to make
any ordinary dividend distributions, and all or a portion of distributions
made before the losses were realized but in the same taxable year would be
treated as a return of capital to shareholders, thereby reducing the basis
of each shareholders Fund shares and resulting in a capital gain for
any shareholder who received a distribution greater than such shareholder
s basis in Fund shares (assuming the shares were held as a capital
asset).
The Trust and each Fund have received a
private letter ruling from the Internal Revenue Service (IRS),
in which the IRS ruled that each Series is classified as a partnership for
tax purposes and, based upon that ruling, that each Fund will be entitled
to look to the underlying assets of the Series in which it has invested
for purposes of satisfying the diversification requirements and other
requirements of the Code applicable to RICs. If any of the facts upon
which such ruling is premised change in any material respect (e.g.,
if the Trust were required to register its interests under the Securities
Act) and the Trust is unable to obtain a revised private letter ruling
from the IRS indicating that each Series will continue to be classified as
a partnership, then the Board of Directors of the Corporation will
determine, in its discretion, the appropriate course of action for the
Funds. One possible course of action would be to withdraw the Funds
investments from the Series and to retain an investment adviser to manage
the Funds assets in accordance with the investment policies
applicable to the respective Fund. See Investment Objectives and
Policies.
The foregoing is a general and abbreviated
summary of the applicable provisions of the Code and Treasury regulations
presently in effect. For the complete provisions, reference should be made
to the pertinent Code sections and the Treasury regulations promulgated
thereunder. The Code and the Treasury regulations are subject to change by
legislative or administrative action either prospectively or
retroactively.
Ordinary income and capital gain dividends
and gains on the sale or exchange of shares in a Fund may also be subject
to state and local taxes.
Shareholders are urged to consult their own
tax advisers regarding specific questions as to Federal, state, local or
foreign taxes or estate or inheritance tax. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in
a Fund.
From time to time a Fund may include its
average annual total return and other total return data, as well as yield,
in advertisements or information furnished to present or prospective
shareholders. Total return and yield figures are based on a Funds
historical performance and are not intended to indicate future
performance. Average annual total return and yield are determined
separately for Class A and Class D shares of each Fund in accordance with
a formula specified by the Commission.
Average annual total return
quotations for the specified periods are computed by finding the average
annual compounded rates of return (based on net investment income and any
realized and unrealized capital gains or losses on portfolio investments
over such periods) that would equate the initial amount invested to the
redeemable value of such investment at the end of each period. Average
annual total return is computed assuming all dividends and distributions
are reinvested and taking into account all applicable recurring and
nonrecurring expenses. Dividends paid by a Fund with respect to all
shares, to the extent any dividends are paid, will be calculated in the
same manner at the same time on the same day and will be in the same
amount, except that account maintenance and distribution charges and any
incremental transfer agency costs relating to each class of shares will be
borne exclusively by the class. A Fund will include performance data for
both classes of shares of a Fund in any advertisement or information
including performance data of the Fund.
Each Fund also may quote annual, average
annual and annualized total return and aggregate total return performance
data both as a percentage and as a dollar amount based on a hypothetical
$1,000 investment, for various periods other than those noted below. Such
data will be computed as described above, except that as required by the
periods of the quotations, actual annual, annualized or aggregate data,
rather than average annual data, may be quoted.
Actual annual or annualized total return
data generally will be lower than average annual total return data since
the average rates of return reflect compounding of return; aggregate total
return data generally will be higher than average annual total return data
since the aggregate rates of return reflect compounding over a longer
period of time. A Funds total return may be expressed either as a
percentage or as a dollar amount in order to illustrate such total return
on a hypothetical $1,000 investment in the Fund at the beginning of each
specified period.
Yield quotations will be computed based on a
30-day period by dividing (a) the net income based on the yield of each
security earned during the period by (b) the average number of shares
outstanding during the period that were entitled to receive dividends
multiplied by the maximum offering price per share on the last day of the
period.
A Funds total return and yield will
vary depending on market conditions, the securities comprising the Fund
s portfolio, the Funds operating expenses and the amount of
realized and unrealized net capital gains or losses during the period. The
value of an investment in the Fund will fluctuate and investors
shares, when redeemed, may be worth more or less than their original
cost.
Each Fund will generally compare its
performance to the index it attempts to replicate. A Fund may also compare
its performance to data contained in publications such as Lipper
Analytical Services, Inc., or performance data published by Morningstar
Publications, Inc., Morningstar, CDA Investment Technology,
Inc., Money Magazine, U.S. News and World Report, Business Week, CDA
Investment Technology, Inc., Forbes Magazine, Fortune Magazine
or other industry publications. When comparing its performance to a market
index, a Fund may refer to various statistical measures derived from the
historic performances of the Fund and the index, such as standard
deviation and beta. From time to time, a Fund may include the Funds
Morningstar risk-adjusted performance ratings in advertisements or
supplemental sales literature. As with other performance data, performance
comparisons should not be considered indicative of a Funds relative
performance for any future period.
Each Fund may provide information designed
to help investors understand how the Fund is seeking to achieve its
investment objectives. This may include information about past, current or
possible economic, market, political, or other conditions, descriptive
information on general principles of investing such as asset allocation,
diversification and risk tolerance, discussion of the Funds
portfolio composition, investment philosophy, strategy or investment
techniques, comparisons of the Funds performance or portfolio
composition to that of other funds or types of investments, indices
relevant to the comparison being made, or to a hypothetical or model
portfolio. Each Fund may also quote various measures of volatility and
benchmark correlation in advertising and other materials, and may compare
these measures to those of other funds or types of
investments.
Set forth below is total return and yield
information for Class A and Class D shares of the Funds for the periods
indicated.
|
|
S&P 500
Index Fund |
|
|
|
Class A
Shares
|
|
Class D
Shares
|
Period
|
|
Expressed as
a percentage
based on a
hypothetical
$1,000 investment
|
|
Redeemable
Value
of a hypothetical
$1,000 investment
at the end of
the period
|
|
Expressed as
a percentage
based on a
hypothetical
$1,000 investment
|
|
Redeemable
Value
of a hypothetical
$1,000 investment
at the end of
the period
|
|
|
|
Average Annual
Total Return |
One Year Ended
December 31, 1999 |
|
20.45
% |
|
$1,204.50 |
|
20.16
% |
|
$1,201.60 |
Inception (April
3, 1997) to
December 31, 1999 |
|
29.20
% |
|
$2,020.40 |
|
28.88
% |
|
$2,006.90 |
|
|
|
|
Annual Total
Return |
Year Ended
December 31, |
|
|
|
|
|
|
|
|
1999 |
|
20.45
% |
|
$1,204.50 |
|
20.16
% |
|
$1,201.60 |
1998 |
|
28.24
% |
|
$1,282.40 |
|
27.95
% |
|
$1,279.50 |
|
Inception (April
3, 1997) to
December 31, 1997 |
|
30.80
% |
|
$1,308.00 |
|
30.53
% |
|
$1,305.30 |
|
|
|
|
Aggregate
Total Return |
Inception (April
3, 1997) to
December 31, 1999 |
|
102.04
% |
|
$2,020.40 |
|
100.69
% |
|
$2,006.90 |
|
|
|
Small Cap
Index Fund |
|
|
|
Class A
Shares
|
|
Class D
Shares
|
Period
|
|
Expressed as
a percentage
based on a
hypothetical
$1,000 investment
|
|
Redeemable
Value
of a hypothetical
$1,000 investment
at the end of
the period
|
|
Expressed as
a percentage
based on a
hypothetical
$1,000 investment
|
|
Redeemable
Value
of a hypothetical
$1,000 investment
at the end of
the period
|
|
|
|
Average Annual
Total Return |
One Year Ended
December 31, 1999 |
|
20.79
% |
|
$1,207.90 |
|
20.45
% |
|
$1,204.50 |
Inception (April
9, 1997) to
December 31, 1999 |
|
15.63
% |
|
$1,486.20 |
|
15.33
% |
|
$1,475.90 |
|
|
|
|
Annual Total
Return |
Year Ended
December 31, |
|
|
|
|
|
|
|
|
1999 |
|
20.79
% |
|
$1,207.90 |
|
20.45
% |
|
$1,204.50 |
1998 |
|
(3.14)% |
|
$
968.60 |
|
(3.41)% |
|
$
965.90 |
|
|
Inception (April
9, 1997) to
December 31, 1997 |
|
27.04
% |
|
$1,270.40 |
|
26.87
% |
|
$1,268.70 |
|
|
|
|
Aggregate
Total Return |
Inception (April
9, 1997) to
December 31, 1999 |
|
48.62
% |
|
$1,486.20 |
|
47.59
% |
|
$1,475.90 |
|
|
Aggregate Bond
Index Fund |
|
|
|
Class A
Shares
|
|
Class D
Shares
|
Period
|
|
Expressed as
a percentage
based on a
hypothetical
$1,000 investment
|
|
Redeemable
Value
of a hypothetical
$1,000 investment
at the end of
the period
|
|
Expressed as
a percentage
based on a
hypothetical
$1,000 investment
|
|
Redeemable
Value
of a hypothetical
$1,000 investment
at the end of
the period
|
|
|
|
Average Annual
Total Return |
|
One Year Ended
December 31, 1999 |
|
(1.36% |
) |
|
$
986.40 |
|
(1.50% |
) |
|
$
985.00 |
Inception (April
3, 1997) to
December 31, 1999 |
|
5.97% |
|
|
$1,172.50 |
|
5.75% |
|
|
$1,165.70 |
|
|
|
Annual Total
Return |
Year Ended
December 31, |
|
|
|
|
|
|
|
|
|
|
1999 |
|
(1.36% |
) |
|
$
986.40 |
|
(1.50% |
) |
|
$
985.00 |
1998 |
|
8.56% |
|
|
$1,085.60 |
|
8.29% |
|
|
$1,082.90 |
Inception (April
3, 1997) to
December 31, 1997 |
|
9.49% |
|
|
$1,094.90 |
|
9.29% |
|
|
$1,092.90 |
|
|
|
Aggregate
Total Return |
Inception (April
3, 1997) to
December 31, 1999 |
|
17.25% |
|
|
$1,172.50 |
|
16.57% |
|
|
$1,165.70 |
|
|
|
Yield |
30 Days Ended
December 31, 1999 |
|
6.58% |
|
|
|
|
6.32% |
|
|
|
|
|
|
International
Index Fund |
|
|
|
Class A
Shares
|
|
Class D
Shares
|
Period
|
|
Expressed as
a percentage
based on a
hypothetical
$1,000 investment
|
|
Redeemable
Value
of a hypothetical
$1,000 investment
at the end of
the period
|
|
Expressed as
a percentage
based on a
hypothetical
$1,000 investment
|
|
Redeemable
Value
of a hypothetical
$1,000 investment
at the end of
the period
|
|
|
|
Average Annual
Total Return |
|
One Year Ended
December 31, 1999 |
|
31.29% |
|
|
$1,312.90 |
|
30.95% |
|
|
$1,309.50 |
Inception (April
9, 1997) to
December 31, 1999 |
|
23.76% |
|
|
$1,789.10 |
|
23.46% |
|
|
$1,777.10 |
|
|
|
Annual Total
Return |
|
Year Ended
December 31, |
|
|
|
|
|
|
|
|
|
|
1999 |
|
31.29% |
|
|
$1,312.90 |
|
30.95% |
|
|
$1,309.50 |
1998 |
|
25.65% |
|
|
$1,256.50 |
|
25.40% |
|
|
$1,254.00 |
Inception (April
9, 1997) to
December 31, 1997 |
|
8.45% |
|
|
$1,084.50 |
|
8.22% |
|
|
$1,082.20 |
|
|
|
Aggregate
Total Return |
Inception (April
9, 1997) to
December 31, 1999 |
|
78.91% |
|
|
$1,789.10 |
|
77.71% |
|
|
$1,777.10 |
The Corporation is a Maryland corporation
incorporated on October 25, 1996. It has an authorized capital of
1,000,000,000 shares of Common Stock, par value $0.0001 per share, of
which the Corporation is authorized to issue 125,000,000 shares each of
Class A and Class D shares for each of the four Funds: S&P 500 Index
Fund, Small Cap Index Fund, Aggregate Bond Index Fund and International
Index Fund. Class A and Class D shares of a Fund represent interests in
the same assets of the Series and are identical in all respects except
that the Class D shares bear certain expenses related to the account
maintenance associated with such shares. Class D shares have exclusive
voting rights with respect to matters relating to the class account
maintenance expenditures.
Shareholders are entitled to one vote for
each full share held and to fractional votes for fractional shares held in
the election of Directors (to the extent hereafter provided) and on other
matters submitted to the vote of shareholders. All shares of each Fund
have equal voting rights, except that each Fund has exclusive voting rights
to matters affecting only such Fund, and except that as noted above, Class D
shares have exclusive voting rights with respect to matters relating to
the class account maintenance expenditures. There normally will be
no meeting of shareholders for the purpose of electing Directors unless
and until such time as less than a majority of the Directors holding
office have been elected by the shareholders, at which time the Directors
then in office will call a shareholders meeting for the election of
Directors. Shareholders may, in accordance with the terms of the Articles
of Incorporation, cause a meeting of shareholders to be held for the
purpose of voting on the removal of Directors. Also, the Corporation will
be required to call a special meeting of shareholders in accordance with
the requirements of the Investment Company Act to seek approval of new
management and advisory arrangements, of a material increase in account
maintenance fees or of a change in fundamental policies, objectives or
restrictions. Except as set forth above, the Directors shall continue to
hold office and appoint successor Directors. Each issued and outstanding
share of Class A and Class D Common Stock is entitled to participate
equally in dividends and distributions declared and in net assets upon
liquidation or dissolution remaining after satisfaction of outstanding
liabilities, except that, as noted above, Class D shares bear certain
additional expenses. Shares issued are fully-paid and non-assessable by
the Fund. Voting rights for Directors are not cumulative.
Stock certificates are issued by the
Transfer Agent only on specific request. Certificates for fractional
shares are not issued in any case.
The Trust consists of fourteen Series (six
of which are not currently proposed to be activated) and is organized as a
Delaware business trust. Whenever a Fund is requested to vote on a
fundamental policy of a Series, the Corporation will hold a meeting of the
investing Funds shareholders and will cast its vote as instructed by
such Funds shareholders.
Deloitte & Touche LLP, Princeton
Forrestal Village, 116-300 Village Boulevard, Princeton, New Jersey 08540
has been selected as the independent auditors of the Corporation and the
Trust. The independent auditors are responsible for auditing the annual
financial statements of the Funds.
Merrill Lynch Trust Company, 800 Scudders
Mill Road, Plainsboro, New Jersey 08536, acts as custodian of the assets
of S&P 500 Index Series, Small Cap Index Series and Aggregate Bond
Index Series. State Street Bank and Trust Company (State Street
), One Heritage Drive P2N, North Quincy, Massachusetts 02171, acts
as the custodian of the assets of International Index Series. Under its
contract with the Trust, State Street is authorized, among other things,
to establish separate accounts in foreign currencies and to cause foreign
securities owned by the International (GDP Weighted) Index Series to be
held in its offices outside the United States and with certain foreign
banks and securities depositories. Each custodian is responsible for
safeguarding and controlling cash and securities, handling the receipt and
delivery of securities and collecting interest and dividends on
investments.
Financial Data Services, Inc., 4800 Deer
Lake Drive East, Jacksonville, Florida 32246-6484, acts as the Transfer
Agent of the Corporation. The Transfer Agent is responsible for the
issuance, transfer and redemption of shares and the opening, maintenance
and servicing of shareholder accounts. See How to Buy, Sell,
Transfer and Exchange Shares in the Prospectus.
Swidler Berlin Shereff Friedman,
LLP, The Chrysler
Building, 405 Lexington Avenue, New York, New York 10174, is counsel for
the Corporation and the Trust.
The fiscal year of the Funds ends on
December 31 of each year. The Corporation sends to its shareholders at
least quarterly reports showing the Funds portfolio and other
information. An annual report, containing financial statements audited by
independent auditors, is sent to shareholders each year. After the end of
each year shareholders will receive Federal income tax information
regarding dividends and capital gains distributions.
Shareholder inquiries may be addressed to
the Funds at the address or telephone number set forth on the cover page
of this Statement of Additional Information.
The Prospectus and this Statement of
Additional Information do not contain all the information set forth in the
Registration Statement and the exhibits relating thereto, which the
Corporation has filed with the Securities and Exchange Commission,
Washington, D.C., under the Securities Act and the Investment Company Act
of 1940, to which reference is hereby made.
Under a separate agreement, ML&Co. has
granted the Corporation, on its own behalf and on behalf of the Funds, the
right to use the Merrill Lynch name and has reserved the right
to withdraw its consent to the use of such name by the Corporation and the
Funds at any time or to grant the use of such name to any other company,
and the Corporation, on its own behalf and on behalf of the Funds, has
granted ML&Co. under certain conditions, the use of any other name it
might assume in the future, with respect to any corporation organized by ML
&Co.
To the knowledge of the Corporation, the
following persons or entities owned beneficially 5% or more of any class
of a Funds shares as of April 1, 2000:
Fund
|
|
Name/Address
|
S&P 500 Index
Fund
61.5% of Class A
9.3% of Class D |
|
Merrill Lynch
Trust Co.
P.O. Box 30532
New Brunswick, NJ 08989 |
|
|
Small Cap Index
Fund
45.2% of Class A |
|
Merrill Lynch
Trust Co.
P.O. Box 30532
New Brunswick, NJ 08989 |
|
|
Small Cap Index
Fund
11.7% of Class A |
|
Merrill Lynch
Trust Co.
Trustee FBO KPMG
Attn: Neil Dorflinger
P.O. Box 30532
New Brunswick, NJ 08989 |
|
|
International
Index Fund
26.1% of Class A |
|
Merrill Lynch
Trust Co.
P.O. Box 30532
New Brunswick, NJ 08989 |
|
|
International
Index Fund
8.1% of Class A |
|
Merrill Lynch
Trust Co.
Trustee FBO KPMG
Attn: Neil Dorflinger
P.O. Box 30532
New Brunswick, NJ 08989 |
|
|
International
Index Fund
14.1% of Class D |
|
Nextgen 100
Equity Portfolio
Maine College Savings Plan
83 Western Ave.
Augusta, ME 04330 |
Fund
|
|
Name/Address
|
|
|
International
Index Fund
7.3% of Class D |
|
Nextgen 75 Equity
Portfolio
5 Community Drive, P.O. Box 949
Augusta, ME 04332 |
|
|
Aggregate Bond
Index Fund
7.1% of Class A |
|
Merrill Lynch
Trust Co.
P.O. Box 30532
New Brunswick, NJ 08989 |
|
|
Aggregate Bond
Index Fund
15.4% of Class D |
|
Piedmont
Liability Trust
2568 Ivy Road #3
Charlottesville, VA 22903 |
The Funds and Series audited
financial statements are incorporated in this Statement of Additional
Information by reference to their 1999 annual reports to shareholders. You
may request a copy of the annual reports at no charge by calling (800)
456-4587 Ext. 789 between 8:00 a.m. and 8:00 p.m. on any business
day.
RATINGS OF FIXED
INCOME SECURITIES
Description of
Moodys Investors Service Inc.s (Moodys)
Corporate Ratings
Aaa |
|
Bonds that 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 that are
rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they
comprise what are generally known as high grade bonds. They are rated
lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make
the long-term risks appear
somewhat larger than in Aaa securities. |
|
|
A |
|
Bonds that 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 that 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 that
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 therefore not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes
bonds in this class. |
|
|
B |
|
Bonds that
are rated B generally lack characteristics of desirable
investments. Assurance of interest and
principal payments or of maintenance of other terms of the contract
over any long period of time may be
small. |
|
|
Caa |
|
Bonds that
are rated Caa are of poor standing. Such issues may be in default
or there may be present
elements of danger with respect to principal or interest. |
|
|
Ca |
|
Bonds that
are rated Ca represent obligations which are speculative in a
high degree. Such issues are often
in default or have other marked shortcomings. |
|
|
C |
|
Bonds
that are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having
extremely poor prospects of ever attaining any real investment
standing. |
Note. Moodys
may apply numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating
system. The modifier I indicates that the security ranks in the
higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that
the issue ranks in the lower end of its generic rating
category.
Description of Moodys Commercial Paper
Ratings
The term commercial paper
as used by Moodys means promissory obligations not
having an original maturity in excess of nine months. Moodys
makes no representations as to whether such commercial paper is by
any other definition commercial paper or is exempt
from registration under the Securities Act of 1933, as amended
(the Securities Act).
Moodys commercial paper
ratings are opinions of the ability of issuers to repay punctually
promissory obligations not having an original maturity in excess
of nine months. Moodys makes no representation that such
obligations are exempt from registration under the Securities Act,
nor does it represent that any specific note is a
valid obligation of a rated issuer or issued in conformity with any
applicable law. Moodys employs the following three
designations, all judged to be investment grade, to indicate the
relative repayment capacity of rated issuers:
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
|
Issuers rated Prime-2
(or related supporting institutions) have a strong capacity for
repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound,
will be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3
(or related supporting institutions) have an acceptable capacity
for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result
in changes in level of debt protection measurements and the
requirement for relatively high financial leverage. Adequate
alternate liquidity is maintained.
Issuers rated Not Prime
do not fall within any of the Prime rating categories.
If an issuer represents to
Moodys that its commercial paper obligations are supported
by the credit of another entity or entities, then the name or
names of such supporting entity or entities are listed within
parentheses beneath the name of the issuer, or there is a footnote
referring the reader to another page for the name or names of the
supporting entity or entities. In assigning ratings to such
issuers, Moodys evaluates the financial strength of the
indicated affiliated corporations, commercial banks, insurance
companies, foreign governments or other entities, but only as one
factor in the total rating assessment. Moodys makes no
representation and gives no opinion on the legal validity or
enforceability of any support arrangement. You are cautioned to
review with your counsel any questions regarding particular
support arrangements.
Description of Moodys Preferred Stock
Ratings
Because of the fundamental
differences between preferred stocks and bonds, a variation of the
bond rating symbols is being used in the quality ranking of
preferred stocks. The symbols, presented below, are designed to
avoid comparison with bond quality in absolute terms. It should
always be borne in mind that preferred stocks occupy a junior
position to bonds within a particular capital structure and that
these securities are rated within the universe of preferred
stocks.
Preferred stock rating symbols
and their definitions are as follows:
aaa
|
An issue
that is rated aaa is considered to be a top-quality
preferred stock. This rating indicates good asset protection and
the least risk of dividend impairment within the universe of
preferred stocks.
|
aa
|
An issue
that is rated aa is considered a high-grade
preferred stock. This rating indicates that there is reasonable
assurance that earnings and asset protection will remain
relatively well maintained in the foreseeable
future.
|
a
|
An issue
that is rated a is considered to be an upper-medium
grade preferred stock. While risks are judged to be somewhat
greater than in the aaa and aa
classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate
levels.
|
baa
|
An issue
that is rated baa is considered to be medium grade,
neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable
over any great length of time.
|
ba
|
An issue
that is rated ba is considered to have speculative
elements and its future cannot be considered well assured.
Earnings and asset protection may be very moderate and not well
safeguarded during adverse periods. Uncertainty of position
characterizes preferred stocks in this class.
|
b
|
An issue
that is rated b generally lacks the characteristics
of a desirable investment. Assurance of dividend payments and
maintenance of other terms of the issue over any long period of
time may be small.
|
caa
|
An issue
that is rated caa is likely to be in arrears on
dividend payments. This rating designation does not purport to
indicate the future status of payments.
|
ca
|
An issue
that is rated ca is speculative in a high degree and
is likely to be in arrears on dividends with little likelihood
of eventual payment.
|
c
|
This is
the lowest rated class of preferred or preference stock. Issues
so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
|
Note: Moodys
may apply numerical modifiers 1, 2 and 3 in each rating
classification from aa through b in its
preferred stock rating system. The modifier 1 indicates that the
security ranks in the higher end of its generic rating category;
the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic
rating category.
Description of Standard & Poors Corporate Debt
Ratings
A Standard & Poors
corporate or municipal rating is a current assessment of the
creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors
such as guarantors, insurers or lessees.
The debt rating is not a
recommendation to purchase, sell or hold a security, inasmuch as
it does not comment as to market price or suitability for a
particular investor.
The ratings are based on
current information furnished by the issuer or obtained by
Standard & Poors from other sources it considers
reliable. Standard & Poors does not perform an audit in
connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such
information or for other reasons.
The ratings are based, in
varying degrees, on the following considerations: (1) likelihood
of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in
accordance with the terms of the obligation; (2) nature of and
provisions of the obligation; and (3) protection afforded by, and
relative position of, the obligation in the event of bankruptcy,
reorganization or other arrangement under the laws of bankruptcy
and other laws affecting creditors rights.
AAA |
|
Debt
rated AAA has the highest rating assigned by Standard & Poor
s. 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 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. |
|
Debt rated BB, B, CCC, CC and C is regarded as having
predominantly speculative characteristics with respect to
capacity to pay interest and repay principal. BB indicates the
least degree of speculation and C the highest 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.
|
BB |
|
Debt
rated BB has less near-term vulnerability to default than other
speculative grade debt. However, it
faces major ongoing uncertainties or exposure to adverse business,
financial or economic conditions which
could lead to inadequate capacity to meet timely interest and
principal payment. The BB rating category is
also used for debt subordinated to senior debt that is assigned an
actual or implied BBB-rating. |
|
B |
|
Debt
rated B has a greater vulnerability to default but presently has
the capacity to meet interest payments
and principal repayments. Adverse business, financial or economic
conditions would likely impair capacity
or willingness to pay interest and repay principal. The B rating
category is also used for debt subordinated
to senior debt that is assigned an actual or implied BB or
BB-rating. |
|
CCC |
|
Debt
rated CCC has a current identifiable vulnerability to default,
and is dependent upon favorable
business, financial and economic conditions to meet timely
payments of interest and repayments of
principal. In the event of adverse business, financial or economic
conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating
category is also used for debt subordinated to
senior debt that is assigned an actual or implied B or
B-rating. |
|
CC |
|
The
rating CC is typically applied to debt subordinated to senior
debt which is assigned an actual or
implied CCC rating. |
|
C |
|
The
rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied
CCC-debt rating. The C rating may be used to cover a situation
where a bankruptcy petition has been filed
but debt service payments are continued. |
|
CI |
|
The
rating CI is reserved for income bonds on which no interest is
being paid. |
|
D |
|
Debt
rated D is in default. The D rating is assigned on the day an
interest or principal payment is missed.
The D rating also will be used upon the filing of a bankruptcy
petition if debt service payments are
jeopardized. |
Plus (+) or minus (-): The
ratings from AA to CCC may be modified by the addition of a plus
or minus sign to show relative standing within the major ratings
categories.
Provisional ratings: The
letter p indicates that the rating is provisional. A
provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that
payment of debt service requirements is largely or entirely
dependent upon the successful and timely completion of the
project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the
likelihood or risk of default upon failure of such completion. The
investor should exercise judgment with respect to such likelihood
and risk.
L |
|
The
letter L indicates that the rating pertains to the
principal amount of those bonds to the extent that the
underlying deposit collateral is insured by the Federal Savings
& Loan Insurance Corp. or the Federal
Deposit Insurance Corp. and interest is adequately
collateralized. |
|
* |
|
Continuance of the rating is contingent upon Standard
& Poors receipt of an executed copy of the escrow
agreement or closing documentation confirming investments and cash
flows. |
|
NR |
|
Indicates
that no rating has been requested, that there is insufficient
information on which to base a rating or
that Standard & Poors does not rate a particular type of
obligation as a matter of policy. |
Debt obligations of issuers
outside the United States and its territories are rated on the
same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into
account currency exchange and related uncertainties.
Bond Investment Quality
Standards: Under present commercial bank regulations issued by the
Comptroller of the Currency, bonds rated in the top four
categories (AAA, AA, A,
BBB, commonly known as investment grade
ratings) are generally regarded as eligible for bank investment.
In addition, the laws of various states governing legal
investments impose certain rating or other standards for
obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries
generally.
Description of Standard & Poors Commercial
Paper Ratings
A Standard & Poors
commercial paper rating is a current assessment of the likelihood
of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into four categories, ranging
from A for the highest quality obligations to D
for the lowest. The four categories are as
follows:
A
|
Issues
assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are
delineated with the numbers 1, 2 and 3 to indicate the relative
degree of safety.
|
A-l
|
This
designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are
denoted with a plus (+) sign designation.
|
A-2
|
Capacity
for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for
issues designated A-l.
|
A-3
|
Issues
carrying this designation have a satisfactory capacity for
timely payment. They are however, somewhat more vulnerable to
the adverse effects of changes in circumstances than obligations
carrying the higher designations.
|
B
|
Issues
rated B are regarded as having only adequate
capacity for timely payment. However, such capacity may be
damaged by changing conditions or short-term
adversities.
|
C
|
This
rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
|
D
|
This
rating indicates that the issue is either in default or is
expected to be in default upon maturity.
|
The commercial paper rating is
not a recommendation to purchase or sell a security. The ratings
are based on current information furnished to Standard & Poor
s by the issuer or obtained from other sources it considers
reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in or unavailability of such
information.
Description of Standard & Poors Preferred
Stock Ratings
A Standard & Poors
preferred stock rating is an assessment of the capacity and
willingness of an issuer to pay preferred stock dividends and any
applicable sinking fund obligations. A preferred stock rating
differs from a bond rating inasmuch as it is assigned to an equity
issue, which issue is intrinsically different from, and
subordinated to, a debt issue. Therefore, to reflect this
difference, the preferred stock rating symbol will normally not be
higher than the bond rating symbol assigned to, or that would be
assigned to, the senior debt of the same issuer.
The preferred stock ratings
are based on the following considerations:
|
I.
Likelihood of payment capacity and
willingness of the issuer to meet the timely payment of
preferred stock dividends and any applicable sinking fund
requirements in accordance with the terms of the
obligation.
|
|
II.
Nature of, and provisions of, the issue.
|
|
III.
|
Relative
position of the issue in the event of bankruptcy,
reorganization, or other arrangements affecting creditors
rights.
|
AAA
|
|
This is
the highest rating that may be assigned by Standard & Poor
s to a preferred stock issue and indicates an extremely
strong capacity to pay the preferred stock
obligations.
|
|
AA |
|
A
preferred stock issue rated AA also qualifies as a
high-quality fixed income security. The
capacity to pay preferred stock obligations is very strong,
although not as overwhelming as for issues
rated AAA. |
|
A |
|
An issue
rated A is backed by a sound capacity to pay the
preferred stock obligations, although it
is somewhat more susceptible to the adverse effects of changes in
circumstances and economic
conditions. |
|
BBB |
|
An issue
rated BBB is regarded as backed by an adequate
capacity to pay the preferred stock
obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions
or changing circumstances are more likely to lead to a weakened
capacity to make payments for a
preferred stock in this category than for issues in the A
category. |
|
BB,
B,
CCC |
|
Preferred
stock rated BB, B, and CCC
are regarded, on balance, as predominantly B,
speculative with respect to the issuers capacity to pay
preferred stock obligations. BB indicates
the lowest degree of speculation and CCC the highest
degree of speculation. While such issues will
likely have some quality and protection characteristics, these are
outweighed by large uncertainties or
major risk exposures to adverse conditions. |
|
CC |
|
The
rating CC is reserved for a preferred stock issue in
arrears on dividends or sinking fund
payments but that is currently paying. |
|
C |
|
A
preferred stock rated C is a non-paying
issue. |
|
D |
|
A
preferred stock rated D is a non-paying issue with
the issuer in default on debt instruments. |
NR indicates that no rating
has been requested, that there is insufficient information on
which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
Plus (+) or minus (-): To
provide more detailed indications of preferred stock quality, the
ratings from AA to CCC may be modified by
the addition of a plus or minus sign to show relative standing
within the major rating categories.
The preferred stock ratings
are not a recommendation to purchase or sell a security, inasmuch
as market price is not considered in arriving at the rating.
Preferred stock ratings are wholly unrelated to Standard Poor
s earnings and dividend rankings for common
stocks.
The ratings are based on
current information furnished to Standard & Poors by the
issuer, and obtained by Standard & Poors from other
sources it considers reliable. The ratings may be changed,
suspended, or withdrawn as a result of changes in, or
unavailability of, such information.
Description of Fitch IBCA, Inc.s (Fitch
) Investment Grade Bond Ratings
Fitch investment grade bond
ratings provide a guide to investors in determining the credit
risk associated with a particular security. The ratings represent
Fitchs assessment of the issuers ability to meet the
obligations of a specific debt issue or class of debt in a timely
manner.
The rating takes into
consideration special features of the issue, its relationship to
other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and of
any guarantor, as well as the economic and political environment
that might affect the issuers future financial strength and
credit quality.
Fitch ratings do not reflect
any credit enhancement that may be provided by insurance policies
or financial guaranties unless otherwise indicated.
Bonds carrying the same rating
are of similar but not necessarily identical credit quality since
the rating categories do not fully reflect small differences in
the degrees of credit risk.
Fitch ratings are not
recommendations to buy, sell, or hold any security. Ratings do not
comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature or
taxability of payments made in respect of any
security.
Fitch ratings are
based on information obtained from issuers, other obligors,
underwriters, their experts, and other sources Fitch believes to
be reliable. Fitch does not audit or verify the truth or accuracy
of such information. Ratings may be changed, suspended, or
withdrawn as a result of changes in, or the unavailability of,
information or for other reasons.
AAA |
|
Bonds
considered to be investment grade and of the highest credit
quality. The obligor has an
exceptionally strong ability to pay interest and repay principal,
which is unlikely to be affected by
reasonably foreseeable events. |
|
AA |
|
Bonds
considered to be investment grade and of very high credit
quality. The obligors ability to pay
interest and repay principal is very strong, although not quite as
strong as bonds rated AAA. Because
bonds rated in the AAA and AA categories
are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated
F-I+. |
|
A |
|
Bonds
considered to be investment grade and of satisfactory credit
quality. The obligors ability to pay
interest and repay principal is considered to be strong, but may
be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher
ratings. |
|
BBB |
|
Bonds
considered to be investment grade and of satisfactory credit
quality. The obligors ability to pay
interest and repay principal is considered to be adequate. Adverse
changes in economic conditions and
circumstances, however, are more likely to have adverse impact on
these bonds, and therefore, impair
timely payment. The likelihood that the ratings of these bonds
will fall below investment grade is higher
than for bonds with higher ratings. |
Plus (+) or Minus
(-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating
category. Plus and minus signs, however, are not used in the
AAA category.
NR |
|
Indicates
that Fitch does not rate the specific issue. |
|
Conditional |
|
A
conditional rating is premised on the successful completion of a
project or the occurrence of a
specific event. |
|
Suspended |
|
A rating
is suspended when Fitch deems the amount of information
available from the issuer to
be inadequate for rating purposes. |
|
Withdrawn |
|
A rating
will be withdrawn when an issue matures or is called or
refinanced and, at Fitchs
discretion, when an issuer fails to furnish proper and timely
information. |
|
Fitch
Alert |
|
Ratings
are placed on Fitch Alert to notify investors of an occurrence
that is likely to result in a
rating change and the likely direction of such change. These are
designated as Positive
indicating a potential upgrade, Negative, for
potential downgrade, or Evolving, where
ratings may be raised or lowered. Fitch Alert is relatively
short-term, and should be resolved
within 12 months. |
Ratings Outlook: An
outlook is used to describe the most likely direction of any
rating change over the intermediate term. It is described as
Positive or Negative. The absence of a
designation indicates a stable outlook.
Description of Fitch Speculative Grade Bond
Ratings
Fitch speculative grade bond
ratings provide a guide to investors in determining the credit
risk associated with a particular security. The ratings (BB
to C) represent Fitchs assessment of the
likelihood of timely payment of principal and interest in
accordance with the terms of obligation for bond issues not in
default. For defaulted bonds, the rating (DDD to
D) is an assessment of the ultimate recovery value
through reorganization or liquidation.
The rating takes into
consideration special features of the issue, its relationship to
other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and
any guarantor, as well as the economic and political environment
that might affect the issuers future financial
strength.
Bonds that have the
same rating are of similar but not necessarily identical credit
quality since rating categories cannot fully reflect the
differences in degrees of credit risk.
BB |
|
Bonds are
considered speculative. The obligors ability to pay
interest and repay principal may
be affected over time by adverse economic changes. However,
business and financial
alternatives can be identified which could assist the obligor in
satisfying its debt service
requirements. |
|
B |
|
Bonds are
considered highly speculative. While bonds in this class are
currently meeting debt
service requirements, the probability of continued timely payment
of principal and interest
reflects the obligors limited margin of safety and the need
for reasonable business and
economic activity throughout the life of the issue. |
|
CCC |
|
Bonds
have certain identifiable characteristics which, if not remedied
may lead to default. The
ability to meet obligations requires an advantageous business and
economic environment. |
|
CC |
|
Bonds are
minimally protected. Default in payment of interest and/or
principal seems probable
over time. |
|
C |
|
Bonds are
in default in payment of interest or principal. |
|
DDD,
DD, D |
|
Bonds are
in default on interest and/or principal payments. Such bonds are
extremely
speculative and should be valued on the basis of their ultimate
recovery value in liquidation or
reorganization of the obligor. DDD represents the
highest potential for recovery on these
bonds, and D represents the lowest potential for
recovery. |
|
Plus (+) or Minus (-): Plus and
minus signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the DDD,
DD, or D categories. |
|
|
Description of Fitch Investment Grade Short-Term
Ratings |
|
|
Fitchs
short-term ratings apply to debt obligations that are payable
on demand or have original maturities of generally up to three
years, including commercial paper, certificates of deposit,
medium-term notes, and municipal and investment
notes. |
|
|
The short-term
rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuers
obligations in a timely manner. |
|
|
Fitch short-term
ratings are as follows: |
|
|
F-1+ |
|
Exceptionally Strong Credit Quality. Issues assigned
this rating are regarded as having the
strongest degree of assurance for timely payment. |
|
F-1 |
|
Very
Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment
only slightly less in degree than issues rated F-1+.
|
|
F-2 |
|
Good
Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for
timely payment, but the margin of safety is not as great as for
issues assigned F-1+ and F-
1 ratings. |
|
F-3 |
|
Fair
Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of
assurance for timely payment is adequate, however, near-term
adverse changes could cause
these securities to be rated below investment grade. |
|
F-S |
|
Weak
Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal
degree of assurance for timely payment and are vulnerable to
near-term adverse changes in
financial and economic conditions. |
|
D |
|
Default. Issues assigned this rating are in actual or
imminent payment default. |
|
LOC |
|
The
symbol LOC indicates that the rating is based on a
letter of credit issued by a
commercial bank. |
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Code
# 19004-0499
PART
C. OTHER INFORMATION
Item
23. Exhibits.
Exhibit
Number
|
|
Description
|
1(a) |
|
Articles of Incorporation of Registrant.(1) |
1(b) |
|
Articles of Amendment.(2) |
2 |
|
By-Laws of Registrant.(1) |
3 |
|
Instrument Defining Rights of Shareholders. Incorporated
by reference to Exhibits 1 and 2 above.(3) |
4 |
|
Not Applicable. |
5 |
|
Distribution Agreement between Registrant and Merrill
Lynch Funds Distributor, Inc.(3) |
6 |
|
None. |
7(a) |
|
Form of Custody Agreement between Registrant and Merrill
Lynch Trust Company.(3) |
7(b) |
|
Form of Custody Agreement between Registrant and State
Street Bank and Trust Company.(3) |
8(a) |
|
Form of Administration Agreement between Registrant and
Merrill Lynch Asset Management, L.P.(3) |
8(b) |
|
Form of Amendment No. 1 Administration Agreement between
Registrant and Merrill Lynch Asset
Management, L.P. |
8(c) |
|
Form of Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency
Agreement between Registrant and Merrill Lynch Financial Data
Services, Inc.(3) |
8(d) |
|
License Agreement relating to Use of Name between
Merrill Lynch & Co., Inc. and Registrant.(3) |
8(e) |
|
Form of Fee Waiver Agreement by and among the
Registrant, Fund Asset Management L.P., Merrill
Lynch Asset Management, L.P. and Index Master Series
Trust. |
9 |
|
Opinion and consent of Shereff, Friedman, Hoffman &
Goodman, LLP, counsel for Registrant.(3) |
10(a) |
|
Consent of Deloitte & Touche LLP
, independent auditors for the Registrant. |
10(b) |
|
Consent of Swidler Berlin Shereff Friedman, LLP, counsel
for Registrant. |
11 |
|
None. |
12 |
|
Certificate of Merrill Lynch Asset
Management.(3) |
13 |
|
Account Maintenance Plan of the Registrant and Plan
Sub-Agreement.(3) |
14(a) |
|
Rule 18f-3 Plan.(5) |
14(b) |
|
Power of Attorneys for Officers, Directors and
Trustees.(3) |
14(c) |
|
Power of Attorneys for Donald C. Burke.(4) |
15 |
|
Not Applicable. |
16 |
|
Code of Ethics. |
(1)
|
Incorporated by reference to identically numbered
Exhibit to Registrants initial Registration Statement on
Form N-1A (File No. 333-15265).
|
(2)
|
Incorporated by reference to identically numbered
Exhibit to Pre-Effective Amendment No. 1 to the Registrant
s Registration Statement on Form N-1A (File No.
333-15265).
|
(3)
|
Incorporated by reference to the corresponding exhibit
number in Pre-Effective Amendment No. 1 to Registrants
Registration Statement on Form N-1A (File No. 333-15265) as
set forth below:
|
Exhibit
Number
|
|
Incorporated by
Reference to
Exhibit Number
|
3 |
|
4 |
|
5 |
|
6 |
|
7(a) |
|
8 |
(a) |
7(b) |
|
8 |
(b) |
Exhibit
Number
|
|
Incorporated by
Reference to
Exhibit Number
|
8 |
(a) |
|
9(a) |
8 |
(c) |
|
9(b) |
8 |
(d) |
|
9(c) |
9 |
|
|
10 |
Exhibit
Number
|
|
Incorporated by
Reference to
Exhibit Number
|
12 |
|
13 |
|
13 |
|
15 |
|
14(b) |
|
17 |
(b) |
|
|
|
|
(4)
|
Incorporated by reference to exhibit number 15(c) in
Post-Effective Amendment No. 3 to the Registrants
Registration Statement on Form N-1A (File No.
333-15265).
|
(5)
|
Incorporated by reference to the corresponding exhibit
number in Post-Effective Amendment No. 4 to the Registrant
s Registration Statement on Form N-1A (File No.
333-15265).
|
Item
24. Persons Controlled by or under
Common Control with Registrant.
Registrant is not
controlled by or under common control with any
person.
Item
25.
Indemnification.
Reference is made to
Article VI of the Registrants Articles of Incorporation,
Article VI of the Registrants By-Laws (the By-Laws
), Section 9 of the Distribution Agreement and Section
2-418 of the Maryland General Corporation Law.
Article VI of the
By-Laws provides that each officer and Director of the
Registrant shall be indemnified by the Registrant to the full
extent permitted under the General Laws of the State of
Maryland, except that such indemnity shall not protect any such
person against any liability to the Registrant or any
stockholder thereof to which such person would otherwise be
subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of his office. Absent a court determination that an
officer or Director seeking indemnification was not liable on
the merits or guilty of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of his office, the decision by the Registrant to
indemnify such person must be based upon the reasonable
determination of independent counsel or non-party independent
directors, after review of the facts, that such officer or
Director is not guilty of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of his office.
Each officer and
Director of the Registrant claiming indemnification within the
scope of Article VI of the By-Laws shall be entitled to advances
from the Registrant for payment of the reasonable expenses
incurred by him in connection with proceedings to which he is a
party in the manner and to the full extent permitted under the
General Laws of the State of Maryland; provided, however, that
the person seeking indemnification shall provide to the
Registrant a written affirmation of his good faith belief that
the standard of conduct necessary for indemnification by the
Registrant has been met and a written undertaking to repay any
such advance, if it should ultimately be determined that the
standard of conduct has not been met, and provided further that
at least one of the following additional conditions is met: (a)
the person seeking indemnification shall provide a security in
form and amount acceptable to the Registrant for his
undertaking; (b) the Registrant is insured against losses
arising by reason of the advance; (c) a majority of a quorum of
non-party independent directors, or independent legal counsel in
a written opinion, shall determine, based on a review of facts
readily available to the Registrant at the time the advance is
proposed to be made, that there is reason to believe that the
person seeking indemnification will ultimately be found to be
entitled to indemnification.
The Registrant may
purchase insurance on behalf of an officer or Director
protecting such person to the full extent permitted under the
General Laws of the State of Maryland from liability arising
from his activities as officer or Director of the Registrant.
The Registrant, however, may not purchase insurance on behalf of
any officer or Director of the Registrant that protects or
purports to protect such person from liability to the Registrant
or to its stockholders to which such officer or Director would
otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office.
The Registrant may
indemnify, make advances or purchase insurance to the extent
provided in Article VI of the By-Laws on behalf of an employee
or agent who is not an officer or Director of the
Registrant.
The Registrant has
purchased an insurance policy insuring its officers and
Directors against liabilities, and certain costs of defending
claims against such officers and Directors, to the extent such
officers and Directors are not found to have committed conduct
constituting willful misfeasance, bad faith, gross negligence or
reckless disregard in the performance of their
duties.
Article IV of the
Administration Agreement between Registrant and Merrill Lynch
Asset Management, Inc. (now called Merrill Lynch Asset
Management, L.P.) (MLAM) (Exhibit 8(a) to Registrant
s Registration Statement on Form N-1A) limits the
liability of MLAM to liabilities arising from willful
misfeasance, bad faith or gross negligence in the performance of
their respective duties or from reckless disregard of their
respective duties and obligations.
In Section 9 of the
Distribution Agreement relating to the securities being offered
hereby, the Registrant agrees to indemnify the Distributor and
each person, if any, who controls the Distributor within the
meaning of
the Securities Act of 1933, as amended (the Act),
against certain types of civil liabilities arising in connection
with the Registration Statement or Prospectus and Statement of
Additional Information.
Insofar as
indemnification for liabilities arising under the Act may be
permitted to Directors, 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 Securities and Exchange
Commission such indemnification is against public policy as
expressed in the 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, officer, or controlling person of the
Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is
asserted by such Director, officer or controlling person or the
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 Act and will be governed by the final
adjudication of such issue.
Item
26. Business and Other Connections of
Investment Adviser.
Fund Asset Management,
L.P. (FAM or the Investment Adviser) acts as the
investment adviser for the following open-end registered
investment companies: CBA Money Fund, CMA Government Securities
Fund, CMA Money Fund, CMA Multi-State Municipal Series Trust,
CMA Tax-Exempt Fund, CMA Treasury Fund, The Corporate Fund
Accumulation Program, Inc., Financial Institutions Series Trust,
Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California
Municipal Series Trust, Merrill Lynch Corporate Bond Fund, Inc.,
Merrill Lynch Corporate High Yield Fund, Inc., Merrill Lynch
Emerging Tigers Fund, Inc., Merrill Lynch Federal Securities
Trust, Merrill Lynch Focus Twenty Fund, Inc., Merrill Lynch
Funds for Institutions Series, Merrill Lynch Large Cap Series
Funds, Inc., Merrill Lynch Multi-State Limited Maturity
Municipal Series Trust, Merrill Lynch Multi-State Municipal
Series Trust, Merrill Lynch Municipal Bond Fund, Inc., Merrill
Lynch Phoenix Fund, Inc., Merrill Lynch Premier Growth Fund,
Inc., Merrill Lynch Special Value Fund, Inc., Merrill Lynch
World Income Fund, Inc. and The Municipal Fund Accumulation
Program, Inc.; and the following closed-end registered
investment companies: Apex Municipal Fund, Inc., Corporate High
Yield Fund, Inc., Corporate High Yield Fund II, Inc., Corporate
High Yield Fund III, Inc., Debt Strategies Fund, Inc., Debt
Strategies Fund II, Inc., Debt Strategies Fund III, Inc., Income
Opportunities Fund 2000, Inc., Merrill Lynch Municipal Strategy
Fund, Inc., MuniAssets Funds, Inc., MuniEnhanced Fund, Inc.,
MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc.,
MuniHoldings California Insured Fund II, Inc., MuniHoldings
California Insured Fund V, Inc., MuniHoldings Florida Insured
Fund, MuniHoldings Florida Insured Fund V, MuniHoldings Insured
Fund, Inc., MuniHoldings Insured Fund II, Inc., MuniHoldings
Insured Fund III, Inc., MuniHoldings Insured Fund IV, Inc.,
MuniHoldings Michigan Insured Fund II, Inc., MuniHoldings New
Jersey Insured Fund, Inc., MuniHoldings New Jersey Fund IV,
Inc., MuniHoldings New York Insured Fund, Inc., MuniHoldings New
York Insured Fund IV, Inc., MuniInsured Fund, Inc., MuniVest
Fund, Inc., MuniVest Fund II, Inc., MuniYield Arizona Fund,
Inc., MuniYield California Fund, Inc., MuniYield California
Insured Fund, Inc., MuniYield California Insured Fund II, Inc.,
MuniYield Florida Fund, MuniYield Florida Insured Fund,
MuniYield Fund, Inc., MuniYield Insured Fund, Inc., MuniYield
Michigan Fund, Inc., MuniYield Michigan Insured Fund, Inc.,
MuniYield New Jersey Fund, Inc., MuniYield New Jersey Insured
Fund, Inc., MuniYield New York Insured Fund, Inc., MuniYield
Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield
Quality Fund II, Inc., Senior High Income Portfolio, Inc.,
Quantitative Master Series Trust, and Worldwide DollarVest Fund,
Inc.
Merrill Lynch Asset
Management, L.P. (MLAM), an affiliate of the
Investment Adviser, acts as the investment adviser for the
following open-end registered investment companies: Merrill
Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch
Americas Income Fund, Inc., Merrill Lynch Asset Builder Program,
Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset
Income Fund, Inc., Merrill Lynch Capital Fund, Inc.,
Merrill Lynch Convertible Fund, Inc., Merrill Lynch Developing
Capital Markets Fund, Inc., Merrill Lynch Disciplined Equity
Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch
EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill
Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond
Fund for Investment and Retirement, Merrill Lynch Global
Convertible Fund, Inc., Merrill Lynch Global Growth Fund, Inc.,
Merrill Lynch Global Holdings, Inc., Merrill Lynch Global
Resources Trust, Merrill Lynch Global SmallCap Fund, Inc.,
Merrill Lynch Global Technology Fund, Inc., Merrill Lynch Global
Utility Fund, Inc., Merrill Lynch Global Value, Inc., Merrill
Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill
Lynch Intermediate Government Bond Fund, Merrill Lynch
International Equity Fund, Merrill Lynch Latin America Fund,
Inc., Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch
Municipal Series Trust, Merrill Lynch Pacific Fund, Inc.,
Merrill Lynch Ready Assets Trust, Merrill Lynch Real Estate
Fund, Inc., Merrill Lynch Retirement Series Trust, Merrill Lynch
Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund,
Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch
U.S.A. Government Reserves, Merrill Lynch U.S. Treasury Money
Fund, Merrill Lynch Utility Income Fund, Inc., Merrill Lynch
Variable Series Funds, Inc. and Hotchkis and Wiley Funds
(advised by Hotchkis and Wiley, a division of MLAM); and for the
following closed-end registered investment companies: Merrill
Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch
Senior Floating Rate Fund, Inc. and Merrill Lynch Senior
Floating Rate Fund II, Inc. MLAM also acts as a sub-adviser to
Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic
Value Equity Portfolio, two investment portfolios of EQ Advisors
Trust.
The address of each of
these registered investment companies is P.O. Box 9011,
Princeton, New Jersey 08543-9011, except that the address of
Merrill Lynch Funds for Institutions Series and Merrill Lynch
Intermediate Government Bond Fund is One Financial Center, 23rd
Floor, Boston, Massachusetts 02111-2665. The address of the
Manager, FAM, Princeton Services, Inc. (Princeton Services
) and Princeton Administrators, L.P. (Princeton
Administrators) is also P.O. Box 9011, Princeton, New
Jersey 08543-9011. The address of Merrill Lynch Funds
Distributor (MLFD), a division of Princeton Funds
Distributor, Inc. is P.O. Box 9081, Princeton, New Jersey
08543-9081. The address of Merrill Lynch and Merrill Lynch &
Co., Inc. (ML & Co.) is World Financial Center,
North Tower, 250 Vesey Street, New York, New York 10281-1201.
The address of the Funds transfer agent Financial Data
Services, Inc. (FDS) is 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
Set forth below is a
list of each executive officer and Director of the Investment
Adviser indicating each business, profession, vocation or
employment of a substantial nature in which each such person has
been engaged since December 31, 1997 for his or her or its own
account or in the capacity of director, officer, employee,
partner or trustee. In addition, Mr. Glenn is President and Mr.
Burke is Vice President and Treasurer of all or substantially
all of the investment companies described in the first two
paragraphs of this Item 26. Messrs. Doll, Giordano and Monagle
are officers of one or more of such companies.
Officers and partners
of FAM are set forth as follows:
Name
|
|
Position with the
Investment Adviser
|
|
Other Substantial Business,
Profession, Vocation or Employment
|
ML
& Co. |
|
Limited
Partner |
|
Financial Services Holding Company; Limited
Partner of Merrill Lynch Asset
Management, L.P. (MLAM) |
|
|
Princeton Services |
|
General
Partner |
|
General
Partner of MLAM |
|
|
Jeffrey
M. Peek |
|
President |
|
President of MLAM; President and Director of
Princeton Services; Executive Vice
President of ML & Co., Managing Director
and Co-Head of the Investment Banking
Division of Merrill Lynch in 1997 |
|
|
Terry
K. Glenn |
|
Executive Vice President |
|
Executive Vice President of MLAM;
Executive Vice President and Director of
Princeton Services; President and Director
of Princeton Funds Distributor, Inc.;
Director of FDS; President of Princeton
Administrators |
|
Name
|
|
Position with the
Investment Adviser
|
|
Other Substantial Business,
Profession, Vocation or Employment
|
Gregory
A. Bundy |
|
Chief
Operative Officer
and Managing Director |
|
Chief
Operating Officer and Managing
Director of MLAM, Chief Operating Officer
and Managing Director of Princeton Service
Co-CEO of Merrill Lynch Austria from
1997 to 1999 |
|
|
Donald
C. Burke |
|
Senior
Vice President,
Treasurer and Director
of Taxation |
|
Senior
Vice President and Treasurer of
MLAM; Senior Vice President and
Treasurer of Princeton Services; Vice
President of Princeton Funds Distributor,
Inc.; First Vice President of MLAM from
1997 to 1999; Vice President of MLAM
from 1990 to 1997 |
|
|
Michael
G. Clark |
|
Senior
Vice President |
|
Senior
Vice President of MLAM; Senior Vice
President of Princeton Services; Director
and Treasurer of Princeton Funds
Distributor, Inc.; First Vice President of
MLAM from 1997 to 1999; Vice President
of MLAM from 1996 to 1997 |
|
|
Robert
C. Doll |
|
Senior
Vice President |
|
Senior
Vice President of MLAM; Senior Vice
President of Princeton Services; Chief
Investment Officer of Oppenheimer Funds,
Inc. in 1999 and Executive Vice President
thereof from 1991 to 1999 |
|
|
Linda
L. Federeci |
|
Senior
Vice President |
|
Senior
Vice President of MLAM; Senior Vice
President of Princeton Services |
|
|
Vincent
R. Giordano |
|
Senior
Vice President |
|
Senior
Vice President of MLAM; Senior Vice
President of Princeton Services |
|
|
Michael
J. Hennewinkel |
|
Senior
Vice President,
Secretary and
General Counsel |
|
Senior
Vice President, Secretary and General
Counsel of MLAM; Senior Vice President
of Princeton Services |
|
|
Philip
L. Kirstein |
|
Senior
Vice President
and Secretary |
|
Senior
Vice President and Secretary of
MLAM; Senior Vice President, Director and
Secretary of Princeton Services |
|
|
|
|
|
|
|
|
|
|
Debra
W. Landsman-Yaros |
|
Senior
Vice President |
|
Senior
Vice President of MLAM; Senior Vice
President of Princeton Services; Vice
President of Princeton Funds Distributor,
Inc. |
|
|
|
|
|
|
|
|
|
|
Stephen
M.M. Miller |
|
Senior
Vice President |
|
Executive Vice President of Princeton
Administrators, L.P.; Senior Vice President
of Princeton Services |
|
|
|
|
|
|
|
|
|
|
Joseph
T. Monagle, Jr. |
|
Senior
Vice President |
|
Senior
Vice President of MLAM; Senior Vice
President of Princeton Services |
|
|
|
|
|
|
|
|
|
|
Brian
A. Murdock |
|
Senior
Vice President |
|
Senior
Vice President of MLAM; Senior Vice
President of Princeton Services |
|
|
Gregory
D. Upah |
|
Senior
Vice President |
|
Senior
Vice President of MLAM; Senior Vice
President of Princeton Services |
|
|
|
|
|
|
|
Item
27. Principal
Underwriters.
(a)
Princeton Funds Distributor, Inc. (PFD) or
its division, MLFD, acts as the principal underwriter for the
Registrant, placement agent for Quantitative Master Series
Trust and as principal underwriter for each of the open-end
registered investment companies referred to in the first two
paragraphs of Item 26 except CBA Money Fund, CMA Government
Securities Fund, CMA Money Fund, CMA Multi-State Municipal
Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The
Corporate Fund Accumulation Program, Inc., and The Municipal
Fund Accumulation Program, Inc. PFD or its division, MLFD also
acts as principal underwriter for the following closed-end
registered investment companies: Merrill Lynch High Income
Municipal Bond Fund, Inc., Merrill Lynch Municipal Strategy
Fund, Inc., Merrill Lynch Senior Floating Rate Fund, Inc., and
Merrill Lynch Senior Floating Rate Fund II, Inc. A separate
division of Princeton Funds Distributor, Inc. acts as the
principal underwriter of a number of other investment
companies.
(b) Set
forth below is information concerning each director and officer
of PFD. The principal business address of each such person is
P.O. Box 9011, Princeton, New Jersey 08543-9011, except that
the address of Messrs. Breen, Crook, Fatseas and Wasel is One
Financial Center, 23rd Floor, Boston, Massachusetts
02111-2665.
(1)
Name
|
|
(2)
Positions and Offices
with the Distributor
|
|
(3)
Positions and Offices
with Registrant
|
Terry
K. Glenn |
|
President and Director |
|
President and Director |
Michael
G. Clark |
|
Director and Treasurer |
|
None |
Thomas
J. Verage |
|
Director |
|
None |
Robert
W. Crook |
|
Senior
Vice President |
|
None |
Michael
J. Brady |
|
Vice
President |
|
None |
William
M. Breen |
|
Vice
President |
|
None |
Donald
C. Burke |
|
Vice
President |
|
Treasurer and Vice President |
James
T. Fatseas |
|
Vice
President |
|
None |
Debra
W. Landsman-Yaros |
|
Vice
President |
|
None |
Michelle T. Lau |
|
Vice
President |
|
None |
Salvatore Venezia |
|
Vice
President |
|
None |
William
Wasel |
|
Vice
President |
|
None |
Robert
Harris |
|
Secretary |
|
None |
(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, and the rules
thereunder are maintained at the offices of the Registrant, 800
Scudders Mill Road, Plainsboro, New Jersey 08536, and its
transfer agent, Financial Data Services, Inc., 4800 Deer Lake
Drive East, Jacksonville, Florida 32246-6484.
Item
29. Management
Services.
Other than as set
forth under the caption Management of the FundFund
Asset Management in the Prospectus constituting Part A of
the Registration Statement and under Management of the Fund
Management and Advisory Arrangements in the
Statement of Additional Information constituting Part B of the
Registration Statement, the Registrant is not party to any
management-related service contract.
Item
30. Undertakings.
None.
SIGNATURES
Pursuant to the
requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all
of the requirements for effectiveness of this Post-Effective
Amendment to the Registration Statement under rule 485(b) under
the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, duly
authorized, in the Township of Plainsboro, and State of New
Jersey, on the 17th day of April, 2000.
|
MERRILL
LYNCH
INDEX
FUNDS
, INC
.
|
|
(Donald C. Burke, Vice President and
Treasurer)
|
Pursuant to the
requirements of the Securities Act, this Registration Statement
has been signed below by the following persons in the capacities
and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
*
(Terry K. Glenn) |
|
President and Director
(Principal Executive Officer) |
|
|
|
|
*
(Donald C. Burke) |
|
Vice
President and Treasurer
(Principal Financial and
Accounting Officer) |
|
|
|
|
*
(Jack B. Sunderland) |
|
Director |
|
|
|
|
*
(Stephen B. Swensrud) |
|
Director |
|
|
|
|
*
(J.
Thomas Touchton) |
|
Director |
|
|
|
/S
/ DONALD
C. BURKE
*By:
(Donald C. Burke, Attorney-in-Fact) |
|
Director |
|
April
17, 2000 |
|
*This registration statement has been signed
by each of the persons so indicated by the
undersigned as Attorney-in-Fact. |
|
|
|
|
SIGNATURES
Quantitative Master
Series Trust has duly caused this Registration Statement of
Merrill Lynch Index Funds, Inc. to be signed on its behalf by
the undersigned, duly authorized, in the Township of Plainsboro,
and State of New Jersey, on the 17th day of April,
2000.
|
QUANTITATIVE
MASTER
SERIES
TRUST
|
|
(Donald C. Burke, Vice President and
Treasurer)
|
The Registration
Statement of Merrill Lynch Index Funds, Inc. has been signed
below by the following persons in the capacities and on the
dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
*
(Terry K. Glenn) |
|
President and Trustee (Principal
Executive Officer) |
|
|
|
|
*
(Donald C. Burke) |
|
Vice
President and Treasurer
(Principal Financial and
Accounting Officer) |
|
|
|
|
*
(Jack B. Sunderland) |
|
Trustee |
|
|
|
|
*
(Stephen B. Swensrud) |
|
Trustee |
|
|
|
|
*
(J.
Thomas Touchton) |
|
Trustee |
|
|
|
|
/S
/ DONALD
C. BURKE
*By:
(Donald C. Burke, Attorney-in-Fact) |
|
Director |
|
April
17, 2000 |
|
*This
registration statement has been signed
by each of the persons so indicated by the
undersigned as Attorney-in-Fact. |
|
|
|
|
EXHIBIT INDEX
Exhibits
|
|
Description
|
8(b) |
|
Form of Amendment No. 1 to Administration Agreement
between Registrant and Merrill Lynch
Asset Management, L.P. |
8(e) |
|
Form of Fee Waiver Agreement by and among the
Registrant, Fund Asset Management L.P., Merrill
Lynch Asset Management, L.P. and Index Master Series
Trust |
10(a) |
|
Consent of Deloitte & Touche, LLP,
independent auditors for the Registrant |
10(b) |
|
Consent of Swidler Berlin Shereff Friedman LLP, counsel
for Registrant |
16 |
|
Code of Ethics |
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