<PAGE>
MORGAN STANLEY DEAN WITTER
FUND OF FUNDS
PROSPECTUS--NOVEMBER 30, 1998
- -------------------------------------------------------------------------------
MORGAN STANLEY DEAN WITTER FUND OF FUNDS (THE "FUND") IS AN OPEN-END,
NON-DIVERSIFIED MANAGEMENT INVESTMENT COMPANY CURRENTLY CONSISTING OF TWO
SEPARATE PORTFOLIOS (INDIVIDUALLY A "PORTFOLIO" AND COLLECTIVELY THE
"PORTFOLIOS") WHICH SEEK TO ACHIEVE THEIR INVESTMENT OBJECTIVES BY INVESTING IN
SHARES OF OTHER OPEN-END MANAGEMENT INVESTMENT COMPANIES THAT ARE EITHER MEMBERS
OF THE MORGAN STANLEY DEAN WITTER FAMILY OF FUNDS OR MANAGED BY AN INVESTMENT
ADVISOR THAT IS AN AFFILIATE OF MORGAN STANLEY DEAN WITTER ADVISORS INC.
(INDIVIDUALLY, AN "UNDERLYING FUND" AND COLLECTIVELY, THE "UNDERLYING FUNDS").
THE INTERNATIONAL PORTFOLIO HAS AN INVESTMENT OBJECTIVE OF LONG-TERM CAPITAL
APPRECIATION AND INVESTS IN A SELECTION OF UNDERLYING FUNDS WHICH INVEST THEIR
ASSETS PRIMARILY IN THE INTERNATIONAL EQUITY MARKETS. THE INVESTMENT OBJECTIVE
OF THE DOMESTIC PORTFOLIO IS TO MAXIMIZE TOTAL INVESTMENT RETURN THROUGH CAPITAL
GROWTH AND INCOME BY INVESTING IN A SELECTION OF UNDERLYING FUNDS WHICH INVEST
THEIR ASSETS PRIMARILY IN THE U.S. EQUITY AND FIXED-INCOME MARKETS. SEE
"INVESTMENT OBJECTIVE AND POLICIES".
The Fund offers four classes of shares (each, a "Class"), each with a different
combination of sales charges, ongoing fees and other features. The different
distribution arrangements permit an investor to choose the method of purchasing
shares that the investor believes is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares and other
relevant circumstances. (See "Purchase of Fund Shares--Alternative Purchase
Arrangements.")
This Prospectus sets forth concisely the information you should know before
investing in the Fund. It should be read and retained for future reference.
Additional information about the Fund is contained in the Statement of
Additional Information, dated November 30, 1998, which has been filed with the
Securities and Exchange Commission, and which is available at no charge upon
request of the Fund at the address or telephone numbers listed on this page. The
Statement of Additional Information is incorporated herein by reference.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Prospectus Summary................................ 2
Summary of Fund Expenses.......................... 4
Financial Highlights.............................. 7
The Fund and its Management....................... 7
Investment Objective and Policies................. 9
Risk Considerations............................. 38
Investment Restrictions........................... 47
Purchase of Fund Shares........................... 47
Shareholder Services.............................. 55
Redemptions and Repurchases....................... 57
Dividends, Distributions and Taxes................ 58
Performance Information........................... 58
Additional Information............................ 59
</TABLE>
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
MORGAN STANLEY DEAN WITTER
FUND OF FUNDS
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(212) 392-2550 or (800) 869-NEWS (toll free)
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
MORGAN STANLEY DEAN WITTER DISTRIBUTORS INC., DISTRIBUTOR
<PAGE>
PROSPECTUS SUMMARY
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
THE FUND The Fund is an open-end, non-diversified management investment company currently consisting of two
separate Portfolios: The International Portfolio and the Domestic Portfolio. The International
Portfolio currently invests in a selection of the following Underlying Funds: Morgan Stanley Dean
Witter European Growth Fund Inc., Morgan Stanley Dean Witter International SmallCap Fund, Morgan
Stanley Dean Witter Japan Fund, and Morgan Stanley Dean Witter Pacific Growth Fund Inc. The
Domestic Portfolio currently invests in a selection of the following Underlying Funds: Morgan
Stanley Dean Witter American Value Fund, Morgan Stanley Dean Witter Capital Appreciation Fund,
Morgan Stanley Dean Witter Capital Growth Securities, Morgan Stanley Dean Witter Competitive Edge
Fund, Morgan Stanley Dean Witter Convertible Securities Trust, Morgan Stanley Dean Witter
Developing Growth Securities, Morgan Stanley Dean Witter Dividend Growth Securities Inc., Morgan
Stanley Dean Witter Financial Services Trust, Morgan Stanley Dean Witter Growth Fund, Morgan
Stanley Dean Witter Health Sciences Trust, Morgan Stanley Dean Witter High Yield Securities Inc.,
Morgan Stanley Dean Witter Income Builder Fund, Morgan Stanley Dean Witter Information Fund,
Morgan Stanley Dean Witter Intermediate Income Securities, Morgan Stanley Dean Witter Market
Leader Trust, Morgan Stanley Dean Witter Mid-Cap Growth Fund, Morgan Stanley Dean Witter Mid-Cap
Dividend Growth Securities, Morgan Stanley Dean Witter Natural Resource Development Securities
Inc., Morgan Stanley Dean Witter Precious Metals and Minerals Trust, Morgan Stanley Dean Witter
S&P 500 Index Fund, Morgan Stanley Dean Witter Short-Term Bond Fund, Morgan Stanley Dean Witter
Special Value Fund, Morgan Stanley Dean Witter U.S. Government Securities Trust, Morgan Stanley
Dean Witter Utilities Fund and Morgan Stanley Dean Witter Value-Added Market Series/Equity
Portfolio. The Underlying Funds in which each Portfolio may invest may be changed from time to
time and additional or different Underlying Funds may be added or substituted.
- ------------------------------------------------------------------------------------------------------------------
SHARES OFFERED Shares of beneficial interest with $0.01 par value (see page 59). Each portfolio of the Fund
offers four Classes of shares, each with a different combination of sales charges, ongoing fees
and other features (see page 47).
- ------------------------------------------------------------------------------------------------------------------
MINIMUM PURCHASE The minimum initial investment for each Class is $1,000 ($100 if the account is opened through
EasyInvest-SM-). Class D shares are only available to persons investing $5 million ($25 million
for certain qualified plans) or more and to certain other limited categories of investors. For the
purpose of meeting the minimum $5 million (or $25 million) investment for Class D shares, and
subject to the $1,000 minimum initial investment for each Class of each Portfolio of the Fund, an
investor's existing holdings of Class A and Class D shares and shares of funds for which Morgan
Stanley Dean Witter Advisors Inc. serves as investment manager ("Morgan Stanley Dean Witter
Funds") that are sold with a front-end sales charge, and concurrent investments in Class D shares
of the Fund and other Morgan Stanley Dean Witter Funds that are multiple class funds will be
aggregated. The minimum subsequent investment is $100 (see page 47).
- ------------------------------------------------------------------------------------------------------------------
INVESTMENT The investment objective of the International Portfolio is long-term capital appreciation. The
OBJECTIVE investment objective of the Domestic Portfolio is to maximize total investment return (see page
9).
- ------------------------------------------------------------------------------------------------------------------
INVESTMENT Morgan Stanley Dean Witter Advisors Inc., the Investment Manager of the Fund, and its wholly-owned
MANAGER subsidiary, Morgan Stanley Dean Witter Services Company Inc., serve in various investment
management, advisory, management and administrative capacities to 100 investment companies and
other portfolios with assets of approximately $117.3 billion at October 31, 1998 (see page 7).
- ------------------------------------------------------------------------------------------------------------------
MANAGEMENT FEE The Fund pays no management fee. However, the Fund, through its investments in the Underlying
Funds, will pay its pro rata share of the management or advisory or sub-advisory fees to the
Investment Manager and/or Sub-Advisors or Advisor of the Underlying Funds (see page 7).
- ------------------------------------------------------------------------------------------------------------------
DISTRIBUTOR AND Morgan Stanley Dean Witter Distributors Inc. is the Fund's Underwriter and Distributor. The Fund
DISTRIBUTION FEE has adopted a distribution plan pursuant to Rule 12b-1 under the Investment Company Act (the
"12b-1 Plan") with respect to the distribution fees paid by the Class A, Class B and Class C
shares of each Portfolio of the Fund to the Distributor. The entire 12b-1 fee payable by Class A
and a portion of the 12b-1 fee payable by each of Class B and Class C equal to 0.25% of the
average daily net assets of the Class are currently each characterized as a service fee within the
meaning of the National Association of Securities Dealers, Inc. guidelines. The remaining portion
of the 12b-1 fee, if any, is characterized as an asset-based sales charge (see pages 47 and 53).
- ------------------------------------------------------------------------------------------------------------------
ALTERNATIVE Each Portfolio of the Fund will invest in the Class D or no load shares of the Underlying Funds
PURCHASE set forth below and accordingly will not pay any sales load or 12b-1 service or distribution fees
ARRANGEMENTS in connection with its investments in shares of the Underlying Funds.
Four classes of shares are offered:
- Class A shares are offered with a front-end sales charge, starting at 5.25% and reduced for
larger purchases. Investments of $1 million or more (and investments by certain other limited
categories of investors) are not subject to any sales charge at the time of purchase but a
contingent deferred sales charge ("CDSC") of 1.0% may be imposed on redemptions within one year of
purchase. The Fund, on behalf of each Portfolio, is authorized to reimburse the Distributor for
specific expenses incurred in promoting the distribution of each Portfolio's Class A shares and
servicing shareholder accounts pursuant to the Fund's 12b-1 Plan. Reimbursement may in no event
exceed an amount equal to payments at an annual rate of 0.25% of average daily net assets of the
Class of each respective Portfolio (see pages 47, 50 and 53).
</TABLE>
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
- Class B shares are offered without a front-end sales charge, but will in most cases be subject
to a CDSC (scaled down from 5.0% to 1.0%) if redeemed within six years after purchase. The CDSC
will be imposed on any redemption of shares if after such redemption the aggregate current value
of a Class B account with the Fund falls below the aggregate amount of the investor's purchase
payments made during the six years preceding the redemption. A different CDSC schedule applies to
investments by certain qualified plans. Class B shares are also subject to a 12b-1 fee assessed at
the annual rate of 1.0% of the average daily net assets of Class B of each respective Portfolio.
Class B shares convert to Class A shares approximately ten years after the date of the original
purchase (see pages 47, 51 and 53).
- Class C shares are offered without a front-end sales charge, but will in most cases be subject
to a CDSC of 1.0% if redeemed within one year after purchase. The Fund, on behalf of each
Portfolio, is authorized to reimburse the Distributor for specific expenses incurred in promoting
the distribution of each Portfolio's Class C shares and servicing shareholder accounts pursuant to
the Fund's 12b-1 Plan. Reimbursement may in no event exceed an amount equal to payments at an
annual rate of 1.0% of average daily net assets of the Class of each respective Portfolio (see
pages 47 and 53).
- Class D shares are offered only to investors meeting an initial investment minimum of $5 million
($25 million for certain qualified plans) and to certain other limited categories of investors.
Class D shares are offered without a front-end sales charge or CDSC and are not subject to any
12b-1 fee (see pages 47 and 53).
- ------------------------------------------------------------------------------------------------------------------
DIVIDENDS AND Dividends from net investment income and distributions from net capital gains, if any, are paid at
CAPITAL GAINS least once per year. Each Portfolio of the Fund may, however, determine to retain all or part of
DISTRIBUTIONS any net long-term capital gains in any year for reinvestment. Dividends and capital gains
distributions paid on shares of a Class are automatically reinvested in additional shares of the
same Class at net asset value unless the shareholder elects to receive cash. Shares acquired by
dividend and distribution reinvestment will not be subject to any sales charge or CDSC (see pages
55 and 58).
- ------------------------------------------------------------------------------------------------------------------
REDEMPTION Shares are redeemable by the shareholder at net asset value less any applicable CDSC on Class A,
Class B or Class C shares. An account may be involuntarily redeemed if the total value of the
account is less than $100 or, if the account was opened through EasyInvest-SM-, if after twelve
months the shareholder has invested less than $1,000 in the account (see page 57).
- ------------------------------------------------------------------------------------------------------------------
RISK The net asset value of each Portfolio's shares will fluctuate with changes in the market value of
CONSIDERATIONS its portfolio securities, and each Portfolio's investment performance will reflect the performance
of the Underlying Funds and the investment selections made by the Fund's Investment Manager.
Investment in either Portfolio of the Fund involves the same risks as an investment in the
Underlying Funds in which each such Portfolio invests. The Fund is a non-diversified management
investment company and, as a result, a relatively high percentage of each Portfolio's shares may
be invested in a limited number of issuers. Investing in lesser known, smaller and medium sized
capitalization companies may involve greater risk of volatility in the Underlying Funds which
invest in such companies and consequently in net asset value of each Portfolio than is customarily
associated with investing in larger, more established companies. To the extent that the
International Portfolio invests in Underlying Funds which concentrate their investments in
particular geographical regions or countries (I.E., Latin America, the Pacific Rim, Japan), the
Portfolio will be subject to the risks of adverse social, political or economic events which occur
in or affect those regions or countries. These may include the risk of expropriation,
nationalization or confiscation of assets or the imposition of restrictions on foreign investment
or repatriation of capital invested, political and social uncertainties, high levels of inflation
and non-uniform corporate disclosure standards and governmental regulation which may lead to less
publicly available and less reliable information than is generally the case for U.S. issuers.
Additionally, it should be recognized that certain foreign securities and markets may pose
different and greater risks than those customarily associated with domestic securities and their
markets such as fluctuations in foreign currency exchange rates (I.E., if a substantial portion of
an Underlying Fund's assets is denominated in foreign currencies which decrease in value with
respect to the U.S. dollar, the value of the investor's shares and the distributions made on those
shares will, likewise, decrease in value), foreign securities exchange controls and foreign tax
rates. The prices of interest-bearing securities are, generally, inversely affected by changes in
interest rates and, therefore, are subject to the risk of market price fluctuations. The values of
fixed-income securities also may be affected by changes in the credit rating or financial
condition of the issuing entities. Mortgage-backed securities are subject to prepayments or
refinancings of the mortgage pools underlying such securities which may have an impact upon the
yield and the net asset value of an Underlying Fund's shares. Certain of the mortgage-backed
securities in which an Underlying Fund may invest have higher yields than traditional
mortgage-backed securities and will have concomitant greater price volatility. Asset-backed
securities involve risks resulting mainly from the fact that such securities do not usually
contain the complete benefit of a security interest in the related collateral. Certain of the high
yield, high risk fixed-income securities in which an Underlying Fund may invest are subject to
greater risk of loss of income and principal than the higher rated lower yielding fixed-income
securities. Certain of the Underlying Funds in which each Portfolio may invest may enter into
repurchase agreements, reverse repurchase agreements and dollar rolls, may purchase securities on
a when-issued, delayed delivery or forward commitment basis or on a "when, as and if issued" basis
which entail certain risks and may utilize certain investment techniques including options and
futures transactions and forward foreign currency exchange transactions which may be considered
speculative in nature and may involve greater risks than those customarily assumed by other
investment companies which do not utilize such instruments. (See pages 38-46).
</TABLE>
- --------------------------------------------------------------------------------
THE ABOVE IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED INFORMATION APPEARING
ELSEWHERE IN THIS PROSPECTUS AND IN THE STATEMENT OF
ADDITIONAL INFORMATION.
3
<PAGE>
SUMMARY OF FUND EXPENSES
- --------------------------------------------------------------------------------
The following table illustrates all expenses and fees that a shareholder of each
Portfolio of the Fund will incur. The expenses and fees set forth in the table
are based on the fees and other expenses for the fiscal period ended September
30, 1998.
<TABLE>
<CAPTION>
DOMESTIC PORTFOLIO CLASS A CLASS B CLASS C CLASS D
- -------------------------------------------------------------------------------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)... 5.25%(1) None None None
Sales Charge Imposed on Dividend Reinvestments.................................. None None None None
Maximum Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds).................................................. None(2) 5.00%(3) 1.00%(4) None
Redemption Fees................................................................. None None None None
Exchange Fee.................................................................... None None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees................................................................. None None None None
12b-1 Fees (5) (6).............................................................. 0.25% 1.00% 1.00% None
Other Expenses*................................................................. 0.90% 0.90% 0.90% 0.90%
Total Fund Operating Expenses* (7).............................................. 1.15% 1.90% 1.90% 0.90%
<CAPTION>
INTERNATIONAL PORTFOLIO CLASS A CLASS B CLASS C CLASS D
- -------------------------------------------------------------------------------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price)... 5.25%(1) None None None
Sales Charge Imposed on Dividend Reinvestments.................................. None None None None
Maximum Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds).................................................. None(2) 5.00%(3) 1.00%(4) None
Redemption Fees................................................................. None None None None
Exchange Fee.................................................................... None None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees................................................................. None None None None
12b-1 Fees (5) (6).............................................................. 0.25% 1.00% 1.00% None
Other Expenses*................................................................. 5.91% 5.91% 5.91% 5.91%
Total Fund Operating Expenses* (7).............................................. 6.16% 6.91% 6.91% 5.91%
</TABLE>
- ---------------
* THE INVESTMENT MANAGER HAD AGREED TO ASSUME ALL OPERATING EXPENSES (EXCEPT
FOR BROKERAGE AND 12b-1 FEES) FOR EACH PORTFOLIO UNTIL SUCH TIME AS THE
RESPECTIVE PORTFOLIO HAD $50 MILLION OF NET ASSETS OR UNTIL SIX MONTHS FROM
COMMENCEMENT OF THE FUND'S OPERATIONS, WHICHEVER OCCURRED FIRST AND HAS
AGREED TO EXTEND SUCH EXPENSE ASSUMPTION THROUGH NOVEMBER 30, 1999. AS A
RESULT OF SUCH WAIVER AND ASSUMPTION OF OTHER EXPENSES, FOR THE FISCAL PERIOD
ENDED SEPTEMBER 30, 1998, THE ACTUAL "OTHER EXPENSES" AMOUNTED TO 0.00% FOR
EACH CLASS OF THE DOMESTIC PORTFOLIO AND 0.00% FOR EACH CLASS OF THE
INTERNATIONAL PORTFOLIO AND "TOTAL FUND OPERATING EXPENSES" AMOUNTED TO
0.22%, 0.92%, 0.92% AND 0.00% FOR CLASS A, B, C AND D RESPECTIVELY OF THE
DOMESTIC PORTFOLIO AND 0.25%, 0.94%, 0.92% AND 0.00% FOR CLASS A, B, C AND D
RESPECTIVELY OF THE INTERNATIONAL PORTFOLIO.
(1) REDUCED FOR PURCHASES OF $25,000 AND OVER (SEE "PURCHASE OF FUND
SHARES--INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES").
(2) INVESTMENTS THAT ARE NOT SUBJECT TO ANY SALES CHARGE AT THE TIME OF PURCHASE
ARE SUBJECT TO A CDSC OF 1.00% THAT WILL BE IMPOSED ON REDEMPTIONS MADE
WITHIN ONE YEAR AFTER PURCHASE, EXCEPT FOR CERTAIN SPECIFIC CIRCUMSTANCES
(SEE "PURCHASE OF FUND SHARES--INITIAL SALES CHARGE ALTERNATIVE--CLASS A
SHARES").
(3) THE CDSC IS SCALED DOWN TO 1.00% DURING THE SIXTH YEAR, REACHING ZERO
THEREAFTER.
(4) ONLY APPLICABLE TO REDEMPTIONS MADE WITHIN ONE YEAR AFTER PURCHASE (SEE
"PURCHASE OF FUND SHARES--LEVEL LOAD ALTERNATIVE--CLASS C SHARES").
(5) THE 12b-1 FEE IS ACCRUED DAILY AND PAYABLE MONTHLY. THE ENTIRE 12b-1 FEE
PAYABLE BY CLASS A AND A PORTION OF THE 12b-1 FEE PAYABLE BY EACH OF CLASS B
AND CLASS C OF EACH PORTFOLIO EQUAL TO 0.25% OF THE AVERAGE DAILY NET ASSETS
OF THE CLASS ARE CURRENTLY EACH CHARACTERIZED AS A SERVICE FEE WITHIN THE
MEANING OF NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. ("NASD")
GUIDELINES AND ARE PAYMENTS MADE FOR PERSONAL SERVICE AND/OR MAINTENANCE OF
SHAREHOLDER ACCOUNTS. THE REMAINDER OF THE 12b-1 FEE, IF ANY, IS AN
ASSET-BASED SALES CHARGE, AND IS A DISTRIBUTION FEE PAID TO THE DISTRIBUTOR
TO COMPENSATE IT FOR THE SERVICES PROVIDED AND THE EXPENSES BORNE BY THE
DISTRIBUTOR AND OTHERS IN THE DISTRIBUTION OF EACH PORTFOLIO OF THE FUND'S
SHARES (SEE "PURCHASE OF FUND SHARES--PLAN OF DISTRIBUTION").
(6) UPON CONVERSION OF CLASS B SHARES TO CLASS A SHARES, SUCH SHARES WILL BE
SUBJECT TO THE LOWER 12b-1 FEE APPLICABLE TO CLASS A SHARES. NO SALES CHARGE
IS IMPOSED AT THE TIME OF CONVERSION OF CLASS B SHARES TO CLASS A SHARES.
CLASS C SHARES DO NOT HAVE A CONVERSION FEATURE AND, THEREFORE, ARE SUBJECT
TO AN ONGOING 1.00% DISTRIBUTION FEE (SEE "PURCHASE OF FUND
SHARES--ALTERNATIVE PURCHASE ARRANGEMENTS").
(7) "TOTAL FUND OPERATING EXPENSES," AS SHOWN ABOVE WITH RESPECT TO EACH CLASS,
ARE BASED UPON THE SUM OF 12b-1 FEES, AND "OTHER EXPENSES" AND DO NOT
INCLUDE ANY EXPENSES INCURRED AS A RESULT OF INVESTMENT IN THE UNDERLYING
FUNDS.
4
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DOMESTIC PORTFOLIO INTERNATIONAL PORTFOLIO
-------------------------- ----------------------------
EXAMPLE 1 YEAR 3 YEARS 1 YEAR 3 YEARS
------------- ----------- --------------- -----------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment
in each of the Portfolios assuming (1) a 5% annual return
and (2) redemption at the end of each time period:
Class A................................................. $ 55 $ 59 55 60
Class B................................................. $ 59 $ 59 60 60
Class C................................................. $ 19 $ 29 19 29
Class D................................................. $ 0 $ 0 0 0
You would pay the following expenses on the same $1,000
investment in each of the Portfolios assuming no redemption
at the end of the period:
Class A................................................. $ 55 $ 59 55 60
Class B................................................. $ 9 $ 29 10 30
Class C................................................. $ 9 $ 29 9 29
Class D................................................. $ 0 $ 0 0 0
</TABLE>
EXPENSE RATIOS OF THE UNDERLYING FUNDS
The Portfolios will invest only in the Class D or no load shares of the
Underlying Funds and, accordingly, will not pay any sales load or 12b-1 service
or distribution fees in connection with their investments in shares of the
Underlying Funds. The Portfolios, however, will indirectly bear their pro rata
share of the fees and expenses incurred by the Underlying Funds that are
applicable to Class D shareholders. The investment returns of the respective
Portfolios, therefore, will be net of the expenses of the Underlying Funds in
which they are invested.
The following charts show the expense ratios applicable to the Class D
shareholders of each Underlying Fund held by a Portfolio, based on operating
expenses for its most recent fiscal year or, in the case of a fund which
recently commenced operations*, the projected annualized expenses:
<TABLE>
<CAPTION>
INTERNATIONAL PORTFOLIO-- OTHER TOTAL
EXPENSE RATIOS OF UNDERLYING FUNDS MANAGEMENT FEES 12b-1 FEE EXPENSES EXPENSES
- ------------------------------------------------------------ --------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
Morgan Stanley Dean Witter European Growth Fund Inc......... 0.97% 0% 0.23% 1.20%
Morgan Stanley Dean Witter Pacific Growth Fund Inc.......... 0.94% 0% 0.45% 1.39%
Morgan Stanley Dean Witter International SmallCap Fund...... 1.15% 0% 0.85% 2.00%
Morgan Stanley Dean Witter Japan Fund....................... 0.95% 0% 0.48% 1.43%
</TABLE>
<TABLE>
<CAPTION>
DOMESTIC PORTFOLIO-- OTHER TOTAL
EXPENSE RATIOS OF UNDERLYING FUNDS MANAGEMENT FEES 12b-1 FEE EXPENSES EXPENSES
- ------------------------------------------------------------ --------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
Morgan Stanley Dean Witter American Value Fund.............. 0.50% 0% 0.13% 0.63%
Morgan Stanley Dean Witter Capital Appreciation Fund........ 0.75% 0% 0.25% 1.00%
Morgan Stanley Dean Witter Capital Growth Securities........ 0.65% 0% 0.19% 0.84%
Morgan Stanley Dean Witter Competitive Edge Fund*........... 0.60% 0% 0.21% 0.81%
Morgan Stanley Dean Witter Convertible Securities Trust..... 0.60% 0% 0.24% 0.84%
Morgan Stanley Dean Witter Developing Growth Securities..... 0.49% 0% 0.20% 0.69%
Morgan Stanley Dean Witter Dividend Growth Securities
Inc........................................................ 0.37% 0% 0.08% 0.45%
Morgan Stanley Dean Witter Financial Services Trust......... 0.75% 0% 0.23% 0.98%
Morgan Stanley Dean Witter Growth Fund...................... 0.79% 0% 0.14% 0.93%
Morgan Stanley Dean Witter Health Sciences Trust............ 1.00% 0% 0.26% 1.26%
Morgan Stanley Dean Witter High Yield Securities Inc........ 0.40% 0% 0.11% 0.51%
Morgan Stanley Dean Witter Income Builder Fund.............. 0.75% 0% 0.17% 0.92%
Morgan Stanley Dean Witter Information Fund................. 0.75% 0% 0.30% 1.05%
Morgan Stanley Dean Witter Intermediate Income Securities... 0.60% 0% 0.26% 0.86%
Morgan Stanley Dean Witter Market Leader Trust.............. 0.75% 0% 0.18% 0.93%
Morgan Stanley Dean Witter Mid-Cap Growth Fund.............. 0.75% 0% 0.24% 0.99%
</TABLE>
5
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DOMESTIC PORTFOLIO-- OTHER TOTAL
EXPENSE RATIOS OF UNDERLYING FUNDS MANAGEMENT FEES 12b-1 FEE EXPENSES EXPENSES
- ------------------------------------------------------------ --------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
Morgan Stanley Dean Witter Mid-Cap Dividend Growth
Securities*................................................ 0.75% 0% 0.30% 1.05%
Morgan Stanley Dean Witter Natural Resource Development
Securities Inc............................................. 0.61% 0% 0.20% 0.81%
Morgan Stanley Dean Witter Precious Metals and Minerals
Trust...................................................... 0.80% 0% 0.56% 1.36%
Morgan Stanley Dean Witter S&P 500 Index Fund*.............. 0.26% 0% 0.24% 0.50%
Morgan Stanley Dean Witter Short-Term Bond Fund............. 0.70% 0% 0.40% 1.10%
Morgan Stanley Dean Witter Special Value Fund............... 0.75% 0% 0.19% 0.94%
Morgan Stanley Dean Witter U.S. Government Securities
Trust...................................................... 0.43% 0% 0.08% 0.51%
Morgan Stanley Dean Witter Utilities Fund................... 0.55% 0% 0.12% 0.67%
Morgan Stanley Dean Witter Value-Added Market Series/Equity
Portfolio.................................................. 0.46% 0% 0.12% 0.58%
</TABLE>
THE ABOVE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES OF EACH CLASS MAY BE GREATER OR LESS
THAN THOSE SHOWN.
The purpose of this table is to assist the investor in understanding the various
costs and expenses that an investor in the Fund will bear directly or
indirectly. For a more complete description of these costs and expenses, see
"The Fund and its Management," "Purchase of Fund Shares--Plan of Distribution"
and "Redemptions and Repurchases."
Long-term shareholders of Class B and Class C may pay more in sales charges,
including distribution fees, than the economic equivalent of the maximum
front-end sales charges permitted by the NASD.
6
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following ratios and per share data for a share of beneficial interest
outstanding throughout the period have been audited by PricewaterhouseCoopers
LLP, the Fund's independent accountants. The financial highlights should be read
in conjunction with the financial statements, notes thereto and the unqualified
report of independent accountants, which are contained in the Statement of
Additional Information. Further information about the performance of the Fund is
contained in the Fund's Annual Report to Shareholders, which may be obtained
without charge upon request to the Fund.
<TABLE>
<CAPTION>
FOR THE PERIOD NOVEMBER 25, 1997* THROUGH SEPTEMBER 30, 1998**
---------------------------------------------------------------------------------------------------------------
INTERNATIONAL DOMESTIC
----------------------------------------------------- -----------------------------------------------------
CLASS A CLASS B CLASS C CLASS D CLASS A CLASS B CLASS C CLASS D
SHARES SHARES SHARES SHARES SHARES SHARES SHARES SHARES
---------- --------- --------- ---------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE
OPERATING
PERFORMANCE:
Net asset
value,
beginning of
period........ $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
---------- --------- --------- ---------- --------- --------- ---------- ----------
Net investment
income........ 0.05 0.03 0.04 0.14 0.21 0.14 0.13 0.22
Net realized
and unrealized
loss.......... (0.88) (0.91) (0.92) (0.96) (0.44) (0.42) (0.41) (0.43)
---------- --------- --------- ---------- --------- --------- ---------- ----------
Total from
investment
operations.... (0.83) (0.88) (0.88) (0.82) (0.23) (0.28) (0.28) (0.21)
---------- --------- --------- ---------- --------- --------- ---------- ----------
Less dividends
from net
investment
income........ (0.09) (0.09) (0.09) (0.09) (0.05) (0.05) (0.05) (0.05)
---------- --------- --------- ---------- --------- --------- ---------- ----------
Net asset
value, end of
period........ $ 9.08 $ 9.03 $ 9.03 $ 9.09 $ 9.72 $ 9.67 $ 9.67 $ 9.74
---------- --------- --------- ---------- --------- --------- ---------- ----------
---------- --------- --------- ---------- --------- --------- ---------- ----------
TOTAL INVESTMENT
RETURN(1)+...... (8.36)% (8.87)% (8.87)% (8.26)% (2.33)% (2.83)% (2.83)% (2.13)%
RATIOS TO AVERAGE
NET
ASSETS(2)(6):
Expenses(5).... 0.25%(3) 0.94%(3) 0.92%(3) 0.00%(3) 0.22%(4) 0.92%(4) 0.92%(4) 0.00%(4)
Net investment
income........ 1.01%(3) 0.32%(3) 0.34%(3) 1.26%(3) 2.21%(4) 1.51%(4) 1.51%(4) 2.43%(4)
SUPPLEMENTAL
DATA:
Net assets, end
of period, in
thousands..... $596 $3,241 $105 $11 $1,359 $24,338 $1,702 $12
Portfolio
turnover
rate(1)....... 135% 135% 135% 135% 227% 227% 227% 227%
</TABLE>
- -------------
* COMMENCEMENT OF OPERATIONS.
** THE PER SHARE AMOUNTS WERE COMPUTED USING AN AVERAGE NUMBER OF SHARES
OUTSTANDING DURING THE PERIOD.
+ DOES NOT REFLECT THE DEDUCTION OF SALES CHARGE. CALCULATED BASED ON THE NET
ASSET VALUE AS OF THE LAST BUSINESS DAY OF THE PERIOD.
(1) NOT ANNUALIZED.
(2) ANNUALIZED.
(3) IF THE FUND HAD BORNE ALL OF ITS EXPENSES THAT WERE REIMBURSED OR WAIVED BY
THE INVESTMENT MANAGER, THE ANNUALIZED EXPENSE AND NET INVESTMENT LOSS
RATIOS WOULD HAVE BEEN 6.16% AND (4.90)%, RESPECTIVELY, FOR CLASS A SHARES,
6.91% AND (5.65)%, RESPECTIVELY, FOR CLASS B SHARES, 6.91% AND (5.65)%,
RESPECTIVELY, FOR CLASS C SHARES AND 5.91% AND (4.65)%, RESPECTIVELY, FOR
CLASS D SHARES.
(4) IF THE FUND HAD BORNE ALL OF ITS EXPENSES THAT WERE REIMBURSED OR WAIVED BY
THE INVESTMENT MANAGER, THE ANNUALIZED EXPENSE AND NET INVESTMENT INCOME
RATIOS WOULD HAVE BEEN 1.15% AND 1.28%, RESPECTIVELY, FOR CLASS A SHARES,
1.90% AND 0.53%, RESPECTIVELY, FOR CLASS B SHARES, 1.90% AND 0.53%,
RESPECTIVELY, FOR CLASS C SHARES AND 0.90% AND 1.53%, RESPECTIVELY, FOR
CLASS D SHARES.
(5) DOES NOT INCLUDE ANY EXPENSES INCURRED AS A RESULT OF INVESTMENT IN THE
UNDERLYING FUNDS.
(6) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
THE FUND AND ITS MANAGEMENT
- --------------------------------------------------------------------------------
Morgan Stanley Dean Witter Fund of Funds (formerly named Dean Witter Fund of
Funds) (the "Fund") is an open-end, non-diversified management investment
company. The Fund is a trust of the type commonly known as a "Massachusetts
business trust" and was organized under the laws of the Commonwealth of
Massachusetts on July 3, 1997.
Morgan Stanley Dean Witter Advisors Inc. ("MSDW Advisors or the "Investment
Manager"), whose address is Two World Trade Center, New York, New York 10048, is
the Fund's Investment Manager. The Investment Manager is a wholly-owned
subsidiary of Morgan Stanley Dean Witter & Co., a preeminent global financial
services firm that maintains leading market positions in each of its three
primary businesses--securities, asset management and credit services. The
Investment Manager, which was incorporated in July, 1992 under the name Dean
Witter InterCapital Inc., changed its name to Morgan Stanley Dean Witter
Advisors Inc. on June 22, 1998.
MSDW Advisors and its wholly-owned subsidiary, Morgan Stanley Dean Witter
Services Company Inc., serve in various investment management, advisory,
management and administrative capacities to 100 investment companies, 28 of
which are listed on the New York Stock Exchange, with combined assets of
approximately $112.9 billion as of October 31, 1998. The Investment Manager also
manages and advises portfolios of pension plans, other institutions and
individuals which aggregated approximately $4.4 billion at such date.
7
<PAGE>
The Fund has retained the Investment Manager to provide administrative
services, manage its business affairs and manage the investment of the Fund's
assets, which includes the allocation of each Portfolio's assets among the
Underlying Funds. MSDW Advisors has retained Morgan Stanley Dean Witter Services
Company Inc. to perform the aforementioned administrative services for the Fund.
The Fund's Board of Trustees reviews the various services provided by or under
the direction of the Investment Manager to ensure that each Portfolio's general
investment policies and programs are being properly carried out and that
administrative services are being provided to the Fund in a satisfactory manner.
The Investment Manager does not receive a management fee from either
Portfolio of the Fund for providing the aforementioned investment management
services. However, each Portfolio, through its investments in the Class D or no
load shares of the Underlying Funds, will pay its pro rata share of the
management fees and certain other expenses of the Underlying Funds. The Fund's
direct expenses are expected to include certain legal and auditing fees,
transfer agency fees, custodian fees, compensation to the Independent Trustees
and printing and out-of-pocket expenses relating to the Fund's operations which
expenses will be allocated to each Portfolio on the basis of asset size of each
Portfolio. The Investment Manager had agreed to assume all operating expenses
(except for brokerage and 12b-1 fees) for each Portfolio until such time as the
respective Portfolio had $50 million of net assets or until six months from
commencement of the Fund's operations, whichever occurred first, and has agreed
to extend such expense assumption through November 30, 1999.
In addition to serving as the Fund's Investment Manager, MSDW Advisors also
serves as Investment Manager to the following Underlying Funds in which the Fund
may invest: Morgan Stanley Dean Witter American Value Fund, Morgan Stanley Dean
Witter Capital Appreciation Fund, Morgan Stanley Dean Witter Capital Growth
Securities, Morgan Stanley Dean Witter Competitive Edge Fund, Morgan Stanley
Dean Witter Convertible Securities Trust, Morgan Stanley Dean Witter Developing
Growth Securities, Morgan Stanley Dean Witter Dividend Growth Securities Inc.,
Morgan Stanley Dean Witter European Growth Fund Inc., Morgan Stanley Dean Witter
Financial Services Trust, Morgan Stanley Dean Witter Health Sciences Trust,
Morgan Stanley Dean Witter High Yield Securities Inc., Morgan Stanley Dean
Witter Income Builder Fund, Morgan Stanley Dean Witter Information Fund, Morgan
Stanley Dean Witter Intermediate Income Securities, Morgan Stanley Dean Witter
International SmallCap Fund, Morgan Stanley Dean Witter Japan Fund, Morgan
Stanley Dean Witter Market Leader Trust, Morgan Stanley Dean Witter Mid-Cap
Growth Fund, Morgan Stanley Dean Witter Mid-Cap Dividend Growth Securities,
Morgan Stanley Dean Witter Natural Resource Development Securities Inc., Morgan
Stanley Dean Witter Pacific Growth Fund Inc., Morgan Stanley Dean Witter
Precious Metals and Minerals Trust, Morgan Stanley Dean Witter S&P 500 Index
Fund, Morgan Stanley Dean Witter Short-Term Bond Fund, Morgan Stanley Dean
Witter Special Value Fund, Morgan Stanley Dean Witter U.S. Government Securities
Trust, Morgan Stanley Dean Witter Utilities Fund and Morgan Stanley Dean Witter
Value-Added Market Series/Equity Portfolio. Under Sub-Advisory Agreements
between Morgan Stanley Asset Management Inc. ("MSAM" or the "Sub-Advisor") and
the Investment Manager, MSAM provides investment advice and portfolio management
to Morgan Stanley Dean Witter Growth Fund, Morgan Stanley Dean Witter European
Growth Fund (effective December 1, 1998), Morgan Stanley Dean Witter Japan Fund,
Morgan Stanley Dean Witter International SmallCap Fund and Morgan Stanley Dean
Witter Pacific Growth Fund and, subject to the overall supervision of the
Investment Manager.
MSAM, whose address is 1221 Avenue of the Americas, New York, New York,
together with its institutional investment management affiliates manages, as of
October 31, 1998, assets of approximately $156.1 billion primarily for U.S.
corporate and public employee benefit plans, investment companies, endowments,
foundations and wealthy individuals. MSAM, like MSDW Advisors, is a wholly-owned
subsidiary of MSDW.
Set forth below is the compensation received by the Investment Manager and
MSAM for their management, investment advisory services or sub-advisory services
to the aforementioned Underlying Funds set forth below. As full compensation for
the services and facilities furnished to the fund and for expenses of the fund
assumed by the Investment Manager, the fund pays the Investment Manager monthly
compensation calculated daily by applying the following annual rates:
MORGAN STANLEY DEAN WITTER AMERICAN VALUE FUND. 0.625% to the portion of daily
net assets not exceeding $250 million; 0.50% to such assets exceeding $250
million but not exceeding $2.25 billion and scaled down at various asset levels
to 0.425% on such assets exceeding $4.5 billion.
MORGAN STANLEY DEAN WITTER CAPITAL APPRECIATION FUND. 0.75% to the Fund's
average daily net assets not exceeding $500 million; and 0.725% to such assets
exceeding $500 million.
MORGAN STANLEY DEAN WITTER CAPITAL GROWTH SECURITIES. 0.65% to the Fund's
average daily net assets not exceeding $500 million scaled down at various asset
levels to 0.475% on such assets exceeding $1.5 billion.
MORGAN STANLEY DEAN WITTER COMPETITIVE EDGE FUND. 0.65% to each portfolio of
Fund's average daily net assets up to $1.5 billion and 0.625% to such assets
exceeding $1.5 billion.
MORGAN STANLEY DEAN WITTER CONVERTIBLE SECURITIES TRUST. 0.60% to the portion of
the Fund's average daily net assets
8
<PAGE>
not exceeding $750 million, scaled down at various asset levels to 0.425% on
such assets exceeding $3 billion.
MORGAN STANLEY DEAN WITTER DEVELOPING GROWTH SECURITIES. 0.50% to the Fund's
average daily net assets not exceeding $500 million and 0.475% to such assets
exceeding $500 million.
MORGAN STANLEY DEAN WITTER DIVIDEND GROWTH SECURITIES INC. 0.625% to the Fund's
average daily net assets up to $250 million, scaled down at various asset levels
to 0.30% on such assets over $10 billion and 0.275% on such assets over $15
billion.
MORGAN STANLEY DEAN WITTER EUROPEAN GROWTH FUND INC. 1.0% to the portion of the
daily net assets not exceeding $500 million and scaled down at various asset
levels to 0.85% to such assets exceeding $2 billion. As compensation for its
services provided pursuant to the Sub-Advisory Agreement, the Investment Manager
pays to MSAM 40% of its monthly compensation.
MORGAN STANLEY DEAN WITTER FINANCIAL SERVICES TRUST. 0.75% to the Fund's average
daily net assets.
MORGAN STANLEY DEAN WITTER GROWTH FUND. 0.80% to the Fund's average daily net
assets up to $750 million, scaled down at various asset levels to 0.70% on
assets over $1.5 billion. As compensation for its services provided pursuant to
the Sub-Advisory Agreement, the Investment Manager pays to MSAM 40% of its
monthly compensation.
MORGAN STANLEY DEAN WITTER HEALTH SCIENCES TRUST. 1.0% to the Fund's average
daily net assets up to $500 million and 0.95% to such assets exceeding $500
million.
MORGAN STANLEY DEAN WITTER HIGH YIELD SECURITIES INC. 0.50% to the Fund's
average daily net assets up to $500 million scaled down at various asset levels
to 0.30% on such assets exceeding $3 billion.
MORGAN STANLEY DEAN WITTER INCOME BUILDER FUND. 0.75% to the Fund's average
daily net assets up to $500 million and 0.725% to such assets exceeding $500
million.
MORGAN STANLEY DEAN WITTER INFORMATION FUND. 0.75% to the Fund's average daily
net assets up to $500 million and 0.725% to such assets exceeding $500 million.
MORGAN STANLEY DEAN WITTER INTERMEDIATE INCOME SECURITIES. 0.60% to the Fund's
average daily net assets up to $500 million scaled down at various asset levels
to 0.30% on assets exceeding $1 billion.
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND. 1.15% to the Fund's
average daily net assets. As compensation for its services provided pursuant to
the Sub-Advisory Agreement, the Investment Manager pays to MSAM 40% of its
monthly compensation.
MORGAN STANLEY DEAN WITTER JAPAN FUND. 0.95% to the Fund's average daily net
assets. As compensation for its services provided pursuant to the Sub-Advisory
Agreement, the Investment Manager pays 40% of its monthly compensation to MSAM.
MORGAN STANLEY DEAN WITTER MARKET LEADER TRUST. 0.75% to the Fund's average
daily net assets.
MORGAN STANLEY DEAN WITTER MID-CAP DIVIDEND GROWTH SECURITIES. 0.75% to the
Fund's average daily net assets.
MORGAN STANLEY DEAN WITTER MID-CAP GROWTH FUND. 0.75% to the Fund's average
daily net assets.
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC. 0.625%
to the Fund's daily net assets not exceeding $250 million and 0.50% to such
assets exceeding $250 million.
MORGAN STANLEY DEAN WITTER PACIFIC GROWTH FUND INC. 0.95% to the portion of the
Fund's average daily net assets not exceeding $500 million and scaled down at
various asset levels to 0.85% of the portion to such assets exceeding $2
billion. As compensation for its services provided pursuant to the Sub-Advisory
Agreement, the Investment Manager pays to MSAM 40% of its monthly compensation.
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST. 0.80% to the
Fund's average daily net assets.
MORGAN STANLEY DEAN WITTER S&P 500 INDEX FUND. 0.40% to the Fund's average
daily net assets.
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND. 0.70% to the Fund's average
daily net assets.
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND. 0.75% to the Fund's average
daily net assets.
MORGAN STANLEY DEAN WITTER U.S. GOVERNMENT SECURITIES TRUST. 0.50% to the
portion of the Fund's average daily net assets up to $1 billion, scaled down at
various asset levels to 0.30% to such assets over $12.5 billion.
MORGAN STANLEY DEAN WITTER UTILITIES FUND. 0.65% to the portion of the Fund's
average daily net assets up to $500 million, scaled down at various asset levels
to 0.425% to such assets exceeding $5 billion.
MORGAN STANLEY DEAN WITTER VALUE-ADDED MARKET SERIES-- EQUITY PORTFOLIO. 0.50%
to the Fund's average daily net assets up to $500 million, scaled down at
various asset levels to 0.40% on such assets exceeding $2 billion.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund currently consists of two Portfolios: the International Portfolio and
the Domestic Portfolio. The investment objective of the International Portfolio
is long-term capital appreciation; the investment objective of the Domestic
9
<PAGE>
Portfolio is to maximize total investment return. The investment objective of
the International Portfolio and the investment objective of the Domestic
Portfolio are fundamental policies and may not be changed without shareholder
approval of each respective Portfolio. There is no assurance that the objective
of each Portfolio will be achieved.
The International Portfolio seeks to achieve its investment objective by
currently investing, under normal circumstances, at least 65% of its total
assets in the following Morgan Stanley Dean Witter Underlying Funds: Morgan
Stanley Dean Witter European Growth Fund Inc., Morgan Stanley Dean Witter
International SmallCap Fund, Morgan Stanley Dean Witter Japan Fund and Morgan
Stanley Dean Witter Pacific Growth Fund Inc. These Underlying Funds have been
selected in order to give the International Portfolio, as well as investors, the
opportunity for broad international exposure. The Investment Manager will
allocate that Portfolio's assets among the selected Underlying Funds in
accordance with the Portfolio's investment objective, the Investment Manager's
outlook for the various economies and financial markets worldwide and the
relative market valuation of the selected Underlying Funds.
The Domestic Portfolio seeks to achieve its investment objective by
currently investing, under normal circumstances, at least 65% of its total
assets in the following Morgan Stanley Dean Witter Underlying Funds: Morgan
Stanley Dean Witter American Value Fund, Morgan Stanley Dean Witter Capital
Appreciation Fund, Morgan Stanley Dean Witter Capital Growth Securities, Morgan
Stanley Dean Witter Competitive Edge Fund, Morgan Stanley Dean Witter
Convertible Securities Trust, Morgan Stanley Dean Witter Developing Growth
Securities, Morgan Stanley Dean Witter Dividend Growth Securities Inc., Morgan
Stanley Dean Witter Financial Services Trust, Morgan Stanley Dean Witter Growth
Fund, Morgan Stanley Dean Witter Health Sciences Trust, Morgan Stanley Dean
Witter High Yield Securities Inc., Morgan Stanley Dean Witter Information Fund,
Morgan Stanley Dean Witter Intermediate Income Securities, Morgan Stanley Dean
Witter Market Leader Trust, Morgan Stanley Dean Witter Mid-Cap Growth Fund,
Morgan Stanley Dean Witter Mid-Cap Dividend Growth Securities, Morgan Stanley
Dean Witter Natural Resource Development Securities Inc., Morgan Stanley Dean
Witter Precious Metals and Minerals Trust, Morgan Stanley Dean Witter S&P 500
Index Fund, Morgan Stanley Dean Witter Short-Term Bond Fund, Morgan Stanley Dean
Witter Special Value Fund, Morgan Stanley Dean Witter U.S. Government Securities
Trust, Morgan Stanley Dean Witter Utilities Fund and Morgan Stanley Dean Witter
Value-Added Market Series/Equity Portfolio. These Underlying Funds have been
selected in order to give the Domestic Portfolio, as well as investors, the
opportunity for broad exposure to the U.S. equity and fixed-income markets. The
Investment Manager will allocate the Portfolio's assets among the selected
Underlying Funds in accordance with the Portfolio's investment objective, the
Investment Manager's outlook for the U.S. economy and financial markets and the
relative market valuation of the selected Underlying Funds. Under normal
circumstances, the Domestic Portfolio expects to invest between 50%-100% of its
assets in Underlying Funds which invest primarily in equity securities and
between 0%-50% of its assets in Underlying Funds which invest primarily in
fixed-income securities.
The Investment Manager may vary the relative portions of each Portfolio's
assets invested in the Underlying Funds in response to changes in economic
conditions and international and/or domestic markets and therefore the
percentages of each Portfolio's assets invested in any one Underlying Fund as
well as the number of the Underlying Funds in which each Portfolio may invest
may vary at any time. There are no minimum or maximum percentages in which each
Portfolio may invest in any Underlying Fund. Additionally, the Underlying Funds
in which each Portfolio may invest may be changed from time to time and
additional or different Underlying Funds may be added or substituted if such
Underlying Funds are deemed appropriate for investment by each respective
Portfolio.
Each Portfolio may invest up to 35% of its total assets in money market
instruments or cash. The money market instruments in which the Fund may invest
are securities issued or guaranteed by the U.S. Government (Treasury bills,
notes and bonds (including zero coupon securities)) American bank obligations;
Eurodollar certificates of deposit; obligations of American savings
institutions; fully insured certificates of deposit; and commercial paper of
American issuers rated within the two highest grades by Moody's Investors
Service Inc. ("Moody's") or Standard & Poor's Corporation ("S&P") or, if not
rated, issued by a company having an outstanding debt issue rated at least AA by
S&P or Aa by Moody's.
There may be periods during which market conditions warrant reduction of
some or all of the Fund's securities holdings. During such periods, the Fund may
adopt a temporary "defensive" posture in which up to 100% of each Portfolio's
net assets are invested in cash or money market instruments.
Each Portfolio may also enter into repurchase agreements, which may be
viewed as a type of secured lending by a Portfolio, and which typically involve
the acquisition by the Portfolio of debt securities from a selling financial
institution such as a bank, savings and loan association or broker-dealer. The
agreement provides that the Portfolio will sell back to the institution, and
that the institution will repurchase, the underlying security at a specified
price and at a fixed time in the future, usually not more than seven days from
the date of purchase. While repurchase agreements involve certain risks not
associated with direct investments in debt securities, including the risks of
default or bankruptcy of the selling financial institution, each Portfolio
follows procedures designed to minimize
10
<PAGE>
such risks. These procedures include effecting repurchase transactions only with
large, well-capitalized and well-established financial institutions and
maintaining adequate collateralization. It is the current policy of each
Portfolio not to invest in repurchase agreements that do not mature within seven
days if any such investment amounts to more than 15% of each Portfolio's net
assets in keeping with each Portfolio's policy on illiquid securities.
The Fund is classified as a non-diversified investment company under the
Investment Company Act of 1940, as amended (the "Act"), and as such is not
limited by the Act in the proportion of its assets that it may invest in the
obligations of a single issuer. However, the Fund intends to conduct its
operations so as to qualify as a "regulated investment company" under Subchapter
M of the Internal Revenue Code. See "Dividends, Distributions and Taxes." Any
investment in the Underlying Funds will be qualifying assets. To the extent that
a relatively high percentage of the Fund's assets may be invested in the
securities of a limited number of issuers, the Fund's portfolio securities may
be more susceptible to any single economic, political or regulatory occurrence
than the portfolio securities of a diversified investment company. The
limitations described in this paragraph are not fundamental policies and may be
revised to the extent applicable Federal income tax requirements are revised.
Except as specifically noted, all investment objectives, policies and
practices discussed above are not fundamental policies of either Portfolio of
the Fund and, as such, may be changed without shareholder approval.
INVESTMENT OBJECTIVES AND POLICIES OF THE UNDERLYING FUNDS
Set forth below are brief descriptions of the Investment Objectives and Policies
of the Underlying Funds in which the Portfolios of the Fund may invest.
Shareholders, or those who wish to invest in the Underlying Fund directly, are
referred to the Prospectuses of those funds for more detailed information.
MORGAN STANLEY DEAN WITTER AMERICAN VALUE FUND. The investment objective of
this fund is long-term capital growth consistent with an effort to reduce
volatility. The fund seeks to achieve its investment objective by investing in a
diversified portfolio of securities consisting principally of common stocks. The
fund utilizes an investment process that places primary emphasis on seeking to
identify industries, rather than individual companies, as prospects for capital
appreciation and whereby the Investment Manager seeks to invest assets of the
fund in industries it considers to be undervalued at the time of purchase and to
sell those it considers overvalued.
After selection of the fund's target industries, specific company
investments are selected. In this process, the Investment Manager seeks to
identify companies whose prospects are deemed attractive on the basis of an
evaluation of valuation screens and prospective company fundamentals.
Following selection of the fund's specific investments, the Investment
Manager will attempt to allocate the assets of the fund so as to reduce the
volatility of its portfolio. In doing so, the fund may hold a portion of its
portfolio in fixed-income securities (including zero coupon securities) in an
effort to moderate extremes of price fluctuations. The fund may invest up to 35%
of its portfolio in common stocks of non-U.S. companies, in companies in
non-classified industries, and in convertible debt securities, convertible
preferred securities, U.S. Government securities (securities issued or
guaranteed as to principal and interest by the United States or its agencies and
instrumentalities) and investment grade corporate debt securities when, in the
opinion of the Investment Manager, the projected total return on such securities
is equal to or greater than the expected total return on common stocks, or when
such holdings might be expected to reduce the volatility of the portfolio, and
in money market instruments under any one or more of the following
circumstances: (i) pending investment of proceeds of sale of fund shares or of
portfolio securities; (ii) pending settlement of purchases of portfolio
securities; or (iii) to maintain liquidity for the purpose of meeting
anticipated redemptions. Greater than 35% of the fund's total assets may be
invested in money market instruments to maintain, temporarily, a "defensive"
posture when, in the opinion of the Investment Manager, it is advisable to do so
because of economic or market conditions.
Because prices of stocks fluctuate from day to day, the value of an
investment in the fund will vary based upon the fund's investment performance.
The fund's emphasis on "undervalued" industries reflects investment views which
are frequently contrary to general market assessments and which may involve
risks associated with departure from general investment opinions.
The fund has adopted the following specific policies which are not
fundamental investment policies and may be changed by the Board of Trustees.
1. At least 65% of the fund's total assets will be invested in common
stocks of U.S. companies which, at the time of purchase, were in undervalued
or moderately valued industries as determined by the Investment Manager,
except as stated in Paragraph (3) below.
2. Up to 35% of the value of the fund's total assets may be invested in:
(a) common stocks of non-U.S. companies, or companies in non-classified
industries, including American Depository Receipts (which are custody
receipts with respect to foreign securities) (the fund's investments in
unlisted foreign securities are deemed to be illiquid securities, which
under the fund's current investment policies may not in the aggregate amount
to more than 15% of the fund's net
11
<PAGE>
assets); (b) convertible debt securities (bonds, debentures, corporate
notes, preferred stock and other securities) which are convertible into
common stock; (c) U.S. Government securities and investment grade corporate
debt securities, when, in the opinion of the Investment Manager, the
projected total return on such securities is equal to or greater than the
expected total return on equity securities, or when such holdings might be
expected to reduce the volatility of the portfolio; and (d) money market
instruments under any one or more of the following circumstances: (i)
pending investment of proceeds of sale of shares of the fund or of portfolio
securities; (ii) pending settlement of purchases of portfolio securities; or
(iii) to maintain liquidity for the purpose of meeting anticipated
redemptions.
3. Notwithstanding any of the foregoing limitations, the fund may invest
more than 35% of the fund's total assets in money market instruments to
maintain, temporarily, a "defensive" posture when, in the opinion of the
Investment Manager, it is advisable to do so because of economic or market
conditions, including, for example, times during which the Investment
Manager believes the risk, or volatility, relative to expected returns of
the securities it monitors, is excessive.
The foregoing limitations apply at the time of acquisition based on the last
determined market value of the fund's assets, and any subsequent change in any
applicable percentage resulting from market fluctuations or other changes in
total assets will not require elimination of any security from the portfolio.
MORGAN STANLEY DEAN WITTER CAPITAL APPRECIATION FUND. The investment objective
of this fund is long-term capital appreciation. The fund seeks to achieve its
investment objective by investing, under normal circumstances, at least 65% of
its total assets in the common stocks of U.S. companies that, in the opinion of
the Investment Manager, offer the potential for either superior earnings growth
and/ or appear to be undervalued.
The Investment Manager will base the selection of stocks for the fund's
portfolio on research and analysis, taking into account, among other factors, a
company's price/earnings ratio (that is whether the current stock price appears
undervalued in relation to earnings, projected cash flow, or asset value per
share; or the price-to-earnings ratio is attractive relative to the company's
underlying earnings growth rate), growth in sales, market-to-book ratio, the
quality of a company's balance sheet, sales-per-share and profitability in order
to determine whether the current market valuation is less than the Investment
Manager's view of a company's intrinsic value. Also, when reviewing investments
for selection, the Investment Manager will consider the following
characteristics of a company: capable management; attractive business niches;
pricing flexibility; sound financial and accounting practices and a demonstrated
ability or prospects to consistently grow revenues, earnings and cash flow.
Stocks may also be selected on the basis of whether the Investment Manager
believes that the potential exists for some catalyst (such as increased investor
attention, asset sales, a new product/innovation, or a change in management) to
cause the stock's price to rise. Such factors are part of the Investment
Manager's overall investment selection process.
The Investment Manager has no general criteria as to asset size, earnings or
industry type which would make an investment unsuitable for purchase by the
fund. In addition, since the Investment Manager is seeking investments in
companies whose securities may appear to be undervalued, there is no limitation
on the stock price of any particular investment. However, as a result of the
selection process, which focuses on fundamentals in relation to prices, such
review of investments will include companies with low-priced stocks. In this
category are large companies with low-priced stocks (so called "fallen angels")
which, in the opinion of the Investment Manager, may appear to be undervalued
because they are overlooked by many investors; may not be closely followed
through investment research and/or their prices may reflect pessimism about the
companies' (and/or their industries') outlook. Such companies, by virtue of
their stock price, may be takeover candidates. Low-priced stocks are also
associated with smaller companies whose securities' value may reflect a discount
because of smaller size and lack of research coverage, emerging growth companies
and private companies undergoing their initial public offering. The fund will
invest in companies of all sizes. For a discussion of the risks of investing in
the securities of such companies, see "Risk Considerations and Investment
Practices of the Underlying Funds" below.
Consequently, the fund looks for quality businesses with an investment
outlook based upon a mix of growth potential, financial strength and fundamental
value. The focus on price and fundamentals sets the fund apart from pure
"growth" or pure "value" funds. The fund's holdings will be widely diversified
by industry and company and under most circumstances, at the time of initial
purchase, the average position will be less than 1.5% of the fund's net assets.
In addition to U.S. common stock, up to 35% of the fund's total assets may
be invested in debt or preferred equity securities convertible into or
exchangeable for equity securities, rights and warrants, when considered by the
Investment Manager to be consistent with the fund's investment objective. (For a
discussion of the risks of investing in each of these securities, see "Risk
Considerations and Investment Practices of the Underlying Funds" below.)
The fund may also invest in other debt securities without regard to quality
or rating, if in the opinion of the Investment Manager such securities meet the
investment criteria of the fund. The fund will not purchase a non-
12
<PAGE>
investment grade debt security (or junk bond) if, immediately after such
purchase, the fund would have more than 5% of its total assets invested in such
securities.
The fund may invest up to 10% of its assets in foreign securities, including
non-dollar denominated securities traded outside of the U.S. and U.S.
dollar-denominated securities such as American Depository Receipts ("ADRs").
(For a discussion of the risks of investing in foreign securities, see "Risk
Considerations and Investment Practices of the Underlying Funds" below.)
There may be periods during which, in the opinion of the Investment Manager,
market conditions warrant a reduction of some or all of the fund's securities
holdings. During such periods, the fund may adopt a temporary "defensive"
posture in which greater than 35% of its total assets is invested in money
market instruments or cash, including obligations issued or guaranteed as to
principal or interest by the United States Government, its agencies or
instrumentalities, certificates of deposit, bankers' acceptances and other
obligations of domestic banks having total assets of $1 billion or more, and
short-term commercial paper of corporations organized under the laws of any
state or political subdivision of the United States.
The securities in which the fund invests may or may not be listed on a
national stock exchange, but if they are not so listed, will generally have an
established over-the-counter market.
MORGAN STANLEY DEAN WITTER CAPITAL GROWTH SECURITIES. The investment objective
of this fund is long-term capital growth. The fund seeks to achieve its
investment objective by investing, under normal circumstances, at least 65% of
its total assets in common stocks. As part of its management of the fund, the
Investment Manager utilizes a two-stage computerized screening process. The
first stage of the process involves the screening of a database of approximately
3,000 companies for those companies demonstrating a history of consistent growth
in earnings and revenues for the past several years. If further refinement of
the list of companies obtained from the first screen is required, those
companies are then applied against two additional screens designed to measure
current earnings momentum and current price valuations, respectively, in order
to further refine the list of companies for potential investment by the fund,
which investment may be on an equally-weighted basis. (Current earnings momentum
refers to the rate of change in earnings growth over the prior four quarters and
current price valuations refers to the current price of a company's stock in
relation to a theoretical value based upon current dividends, projected growth
rates and the rate of inflation.) Subject to the fund's investment objective,
the Investment Manager, without notice, may modify the foregoing screening
process and/or may utilize additional or different screening processes in
connection with the investment of the fund's assets. Dividend income will not be
a consideration in the selection of stocks for purchase.
Although the fund invests primarily in common stocks, the fund may invest up
to 35% of its total assets (taken at current value and subject to any
restrictions appearing elsewhere in the fund's Prospectus), in any combination
of the following: (a) U.S. Government securities (securities issued or
guaranteed as to principal and interest by the U.S. Government or its agencies
or instrumentalities) and investment grade fixed-income securities; (b)
convertible securities; (c) money market instruments; (d) options on equity and
debt securities; and (e) futures contracts and related options thereon, as
described below. The fund may also purchase unit offerings (where corporate debt
securities are offered as a unit with convertible securities, preferred or
common stocks, warrants, or any combination thereof). U.S. Government securities
in which the fund may invest include zero coupon securities. Convertible
securities in which the fund may invest include bonds, debentures, corporate
notes, preferred stock and other securities. The fund may also purchase
securities on a when-issued or delayed delivery basis, may purchase or sell
securities on a forward commitment basis, and may purchase securities on a
"when, as and if issued" basis.
There may be periods during which, in the opinion of the Investment Manager,
market conditions warrant reduction of some or all of the fund's securities
holdings. During such periods, the fund may adopt a temporary "defensive"
posture in which greater than 35% of its total assets are invested in cash or
money market instruments. Money market instruments in which the fund may invest
are securities issued or guaranteed by the U.S. Government (Treasury bills,
notes and bonds, including zero coupon securities); bank obligations; Eurodollar
certificates of deposit; obligations of savings institutions; fully insured
certificates of deposit; and commercial paper rated within the two highest
grades by Moody's or S&P or, if not rated, are issued by a company having an
outstanding debt issue rated at least AA by S&P or Aa by Moody's.
The fund may invest in securities of foreign companies. However, the fund
will not invest more than 25% of the value of its total assets, at the time of
purchase, in foreign securities (other than securities of Canadian issuers
registered under the Securities Exchange Act of 1934 or American Depository
Receipts, on which there is no such limit). The fund's investments in unlisted
foreign securities are subject to the overall restrictions applicable to its
investments in illiquid securities. For a discussion of the risks of investing
in foreign securities, see "Risk Considerations and Investment Practices of the
Underlying Funds" below.
MORGAN STANLEY DEAN WITTER COMPETITIVE EDGE FUND. This fund currently consists
of two separate portfolios, each of which is operated as an open-end,
diversified management investment company. The investment objective of the
portfolio contained in the fund's current Prospectus, the "Best Ideas" Portfolio
(the " 'Best Ideas' Portfolio" or the "Portfolio"), is long-term capital growth.
13
<PAGE>
The "Best Ideas" Portfolio seeks to achieve its investment objective by
investing, under normal circumstances, at least 80% of its net assets in the
common stock (including depository receipts, such as ADRs or EDRs) of U.S. and
non-U.S. companies included in the "Best Ideas" subgroup of "Global Investing:
The Competitive Edge," a research compilation assembled and maintained by Morgan
Stanley Dean Witter Equity Research ("MSDW Equity Research") and such
Supplemental Securities (as defined below) chosen by the Investment Manager.
MSDW EQUITY RESEARCH. MSDW Equity Research is recognized as a world leader in
global financial research and provides comprehensive research and in-depth
knowledge about general markets and specific companies from around the world. It
believes that companies with a sustainable competitive edge in the operations of
their businesses are worth more than their weaker competitors. Through its on-
going research and analysis, MSDW Equity Research has developed and undertaken a
comprehensive study which it calls "Global Investing: The Competitive Edge"
which represents the list of those companies.
Specifically, MSDW Equity Research group's research analysts and strategists
presently evaluate approximately 2,000 companies in 21 industry sectors
worldwide (the "MSDW Covered Securities"). An initial comprehensive review was
conducted in October 1996 and identified 238 companies from the MSDW Covered
Securities (then nearly 1,650) as having a long-term sustainable competitive
advantage in the global arena (the "Competitive Edge List"). The criteria used
to select companies that have a global competitive advantage vary according to
industry sector. The Competitive Edge List is currently updated annually. From
the Competitive Edge List, MSDW Equity Research then assembled a subgroup of 40
companies which it considered at that time to be the most attractive investment
opportunities of the companies identified as having a long-term sustainable
competitive advantage in the global arena (the "Competitive Edge 'Best Ideas'
List"). MSDW Equity Research's Competitive Edge List and Competitive Edge "Best
Ideas" List are not compiled with any particular client or product in mind and
are not, and will not be, compiled with the fund in mind. When selecting the
companies for its Competitive Edge "Best Ideas" List, MSDW Equity Research does
not take into account country or currency risk, and country or industry sector
diversification concerns. MSDW publishes other lists of recommended securities
that could be appropriate for Portfolio investors but which will not be used by
the Investment Manager for choosing securities for the Portfolio. MSDW could at
any time cease publishing the Competitive Edge List and the Competitive Edge
"Best Ideas" List. In that event the Board of Trustees will make a determination
of how to proceed in the best interests of shareholders of the Portfolio
consistent with the Portfolio's investment objective. A list of the companies
contained on the Competitive Edge "Best Ideas" List as of September 30, 1997 is
set forth in the fund's Statement of Additional Information. The Competitive
Edge "Best Ideas" List is currently updated by MSDW Equity Research quarterly.
In accordance with the Portfolio's investment restrictions described below,
the Portfolio will not invest 25% or more of the value of its total assets in
any one industry. In addition, as the Portfolio principally invests in the
securities of companies on the Competitive Edge "Best Ideas" List, which
currently consists of only 40 companies, the Portfolio will invest in a
relatively small universe of securities. Accordingly, the Portfolio may be
highly invested in any one industry or country. It is the intention of the
Investment Manager that at least 1% and not more than 5% of the Portfolio's net
assets will be invested in each company on the Competitive Edge "Best Ideas"
List, determined at the time of investment and subject to the specific
investment policies and restrictions described below. However, the Investment
Manager may eliminate or reduce its investment in any company on the Competitive
Edge "Best Ideas" List below 1% of the Portfolio's net assets, in the following
circumstances: (a) the stock is no longer publicly traded, such as in the case
of a leveraged buyout or merger; (b) in the view of the Investment Manager,
there is a material adverse development with respect to a company, including but
not limited to the downgrading of the company's rating by MSDW Equity Research;
(c) concerns that, in view of the price of the company's securities, the depth
of the market in those securities and the amount of those securities held or to
be held by the Portfolio, retaining shares of that company or making additional
purchases would be inadvisable because of liquidity concerns; or (d) the
diversification and other requirements that apply to registered investment
companies. The Investment Manager will monitor on an ongoing basis all companies
falling within any of the circumstances described in this paragraph, and may
increase the Portfolio's holdings in such company's shares when and if those
conditions cease to exist. The Portfolio will purchase any security which is
added to the Competitive Edge "Best Ideas" List, and will sell a security which
is eliminated from the Competitive Edge "Best Ideas" List and any related
Supplemental Security (as defined below), as soon as practicable after the
Competitive Edge "Best Ideas" List has been updated by MSDW Equity Research,
unless the Investment Manager decides to hold such security as a Supplemental
Security. Accordingly, securities may be purchased and sold by the Portfolio
when such purchases and sales would not be made under traditional investment
criteria. The Investment Manager will not have access to the Competitive Edge
"Best Ideas" List prior to its quarterly update by MSDW Equity Research.
While the Portfolio intends to invest in securities on the Competitive Edge
"Best Ideas" List, the Portfolio may purchase one or more supplemental
securities ("Supplemental Securities") that are not included on the Competitive
Edge "Best Ideas" List but are on the Competitive Edge List or, in the event no
suitable securities are on the
14
<PAGE>
Competitive Edge List, such other securities deemed suitable by the Investment
Manager. Supplemental Securities will generally be selected by the Investment
Manager from the same or similar industry sector as the security which they are
supplementing or replacing. Accordingly, the Portfolio's holdings may not be
limited to those on the Competitive Edge "Best Ideas" List. While there is no
limit on the total number of Supplemental Securities that the Portfolio may
hold, Supplemental Securities and all other securities that are not on the
Competitive Edge "Best Ideas" List generally will not exceed 35% of the
Portfolio's total assets. In addition, each security on the Competitive Edge
"Best Ideas" List which is supplemented or replaced, together with its
corresponding Supplemental Securities, will have a combined weighting of no more
than 5% of the Portfolio's net assets, determined at the time of investment.
The Portfolio may invest up to 20% of its total assets in money market
instruments or cash. The money market instruments in which the Portfolio may
invest are securities issued or guaranteed by the U.S. Government (Treasury
bills, notes and bonds (including zero coupon securities)) American bank
obligations; Eurodollar certificates of deposit; obligations of American savings
institutions; fully insured certificates of deposit; and commercial paper of
American issuers rated within the two highest grades by Moody's or S&P or, if
not rated, issued by a company having an outstanding debt issue rated at least
AA by S&P or Aa by Moody's.
There may be periods during which market conditions warrant reduction of
some or all of the Portfolio's securities holdings. During such periods, the
Portfolio may adopt a temporary "defensive" posture in which up to 100% of the
Portfolio's net assets are invested in cash or money market instruments.
COMPETITIVE EDGE "BEST IDEAS" SELECTION. The net asset value of the Portfolio
will fluctuate depending upon, among other things, the performance of the
securities included on the Competitive Edge "Best Ideas" List, which currently
consists of 40 companies and which is only updated quarterly. The Portfolio is
subject to all the risks associated with investing in a small universe of
securities. There can be no assurance that the securities contained in the
Competitive Edge "Best Ideas" List will perform as anticipated. The selection of
companies on the Competitive Edge "Best Ideas" List is a subjective
determination by MSDW Equity Research. Past performance of the securities and
issuers included in the Competitive Edge "Best Ideas" List cannot be used to
predict future results of the Portfolio, which is actively managed by the
Investment Manager and the results of which are expected to vary from the
performance of the Competitive Edge "Best Ideas" List.
POTENTIAL INVESTMENT RESTRICTIONS. The activities of an affiliate of the
Investment Manager, including but not limited to Dean Witter Reynolds Inc.
("DWR") or Morgan Stanley & Co. Incorporated ("Morgan Stanley"), may from time
to time limit the Portfolio's ability to purchase or sell securities on the
Competitive Edge "Best Ideas" List. For instance, when DWR or Morgan Stanley or
one of their affiliates is engaged in an underwriting or other distribution of
stock of an issuer, the Investment Manager may be prohibited from purchasing the
stock of that issuer for the Portfolio. In addition, the Competitive Edge "Best
Ideas" List is available to other clients of MSDW and its affiliates, including
the Investment Manager, as well as the Portfolio. The lists are also subject to
restrictions related to MSDW's other businesses and particular securities may or
may not be on the lists due to other business concerns of, or legal restrictions
applicable to, MSDW.
As a diversified financial services firm, with three primary
businesses--securities, asset management and credit services, MSDW provides a
wide range of financial services to issuers of securities and investors in
securities. MSDW and others associated with it may create markets or specialize
in, have positions in and affect transactions in securities of companies
included on its research lists and may also perform or seek to perform
investment banking services for those companies. Within the last three years
MSDW may have managed or co-managed public security offerings for companies
included on their research lists, and they or their employees may have a long or
short position on holdings in the securities, or options on securities, or other
related investments of companies included on their research lists.
The Best Ideas Portfolio may invest in foreign securities and private
placements, may engage in options and futures transactions, may enter into
forward foreign currency exchange contracts, may enter into repurchase
agreements and may lend its portfolio securities. For a discussion of the risks
of investing in these securities, see "Risk Considerations and Investment
Practices of the Underlying Funds" below.
MORGAN STANLEY DEAN WITTER CONVERTIBLE SECURITIES TRUST. The investment
objective of this fund is to seek a high level of total return on its assets
through a combination of current income and capital appreciation.
(1) The fund will normally invest at least 65% of its total assets (taken at
current value) in "convertible securities," I.E., securities (bonds, debentures,
corporate notes, preferred stocks and other securities) which are convertible
into common stock. Securities received upon conversion may be retained in the
fund's portfolio to permit orderly disposition or to establish long-term holding
periods for federal income tax purposes. The fund is not required to sell these
securities for the purpose of assuring that 65% of its assets are invested in
convertible securities.
(2) The fund may invest up to 35% of its total assets (taken at current
value and subject to any restrictions appearing elsewhere in its Prospectus) in
any combination and quantity of the following securities: (a) common stock;
15
<PAGE>
(b) nonconvertible preferred stock; (c) nonconvertible corporate debt
securities; (d) options on debt and equity securities; (e) financial futures
contracts and related options thereon; and (f) money market instruments.
(3) Notwithstanding paragraphs (1) and (2) above, when market conditions
dictate a "defensive" investment strategy, the fund may invest without limit in
money market instruments, including commercial paper, certificates of deposit,
bankers' acceptances and other obligations of domestic banks or domestic
branches of foreign banks, or foreign branches of domestic banks, in each case
having total assets of at least $500 million, and obligations issued or
guaranteed by the United States Government, or foreign governments or their
respective instrumentalities or agencies.
The fund may invest in fixed-income securities rated Baa or lower by
Moody's, or BBB or lower by S&P. Fixed-income securities rated Baa by Moody's or
BBB by S&P have speculative characteristics greater than those of more highly
rated bonds, while fixed-income securities rated Ba or BB or lower by Moody's
and S&P, respectively, are considered to be speculative investments.
Furthermore, the fund does not have any minimum quality rating standard for its
investments. As such, the fund may invest in securities rated as low as Caa, Ca
or C by Moody's or CCC, CC, C or C1 by S&P. Fixed-income securities rated Caa or
Ca by Moody's may already be in default on payment of interest or principal,
while bonds rated C by Moody's, their lowest bond rating, can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Bonds rated C1 by S&P, their lowest bond rating, are no longer making interest
payments. Non-rated securities are also considered for investment by the fund
when the Investment Manager believes that the financial condition of the issuers
of such securities, or the protection afforded by the terms of the securities
themselves, makes them appropriate investments for the fund. A general
description of Moody's and S&P's ratings is set forth in the Appendix to the
Statement of Additional Information.
The fund may invest in securities of foreign companies, may purchase private
placements, real estate investment trusts, repurchase agreements, zero coupon
securities, may purchase securities on a when-issued delayed delivery or forward
commitment basis and may lend its portfolio securities. For a discussion of the
risks of investing in these securities, see "Risk Considerations and Investment
Practices of the Underlying Funds" below.
MORGAN STANLEY DEAN WITTER DEVELOPING GROWTH SECURITIES. The investment
objective of this fund is long-term capital growth. The fund seeks to achieve
capital growth which significantly exceeds the historical total return of common
stocks as measured by the Standard & Poor's 500 index. The primary emphasis is
on the securities of smaller and medium-sized companies that, in the opinion of
the Investment Manager, have the potential to grow much more rapidly than the
economy; at times, investments may also be made in the securities of larger,
established companies which also have such growth potential. The fund will
normally invest at least 65% of its total assets in the securities of such
companies. In addition to common stock, this portion of the portfolio may also
include convertible securities, preferred stocks and warrants.
The Investment Manager attempts to identify companies whose earnings growth
will be significantly higher than the average. Dividend income is not generally
a consideration in the selection of stocks for purchase.
The Investment Manager focuses its stock selection for the fund upon a
diversified group of emerging growth companies which have moved beyond the
difficult and extremely risky "start-up" phase and which at the time of
selection show positive earnings with the prospects of achieving significant
further profit gains in at least the next two-to-three years after acquisition.
New technologies, techniques, products or services, cost-reducing measures,
changes in management, capitalization or asset deployment, changes in government
regulations or favorable shifts in other external circumstances may all
contribute to the anticipated phase of growth.
The application of the fund's investment policies is basically dependent
upon the judgment of the Investment Manager. The proportions of the fund's
assets invested in particular industries will shift from time to time in
accordance with the judgment of the Investment Manager.
The fund may invest up to 35% of its total assets in corporate debt
securities which are rated at the time of purchase Baa or better by Moody's or
BBB or better by S&P or which, if not rated, are deemed to be of comparable
quality by the Investment Manager, and money market instruments. There may be
periods during which, in the opinion of the Investment Manager, general market
conditions warrant reduction of some or all of the fund's securities holdings.
During such periods, the fund may adopt a temporary "defensive" posture in which
greater than 35% of its total assets are invested in cash or money market
instruments, including obligations issued or guaranteed as to principal or
interest by the United States Government, its agencies or instrumentalities,
certificates of deposit, bankers' acceptances and other obligations of domestic
banks having total assets of $1 billion or more, and short-term commercial paper
of corporations organized under the laws of any state or political subdivision
of the United States.
The securities in which the fund invests may or may not be listed on a
national stock exchange, but if they are not so listed, will generally have an
established over-the-counter market.
The fund may invest in foreign securities, real estate investment trusts and
private placements, enter into repurchase agreements, borrow money for the
purpose of leveraging its investments, purchase securities on a when-issued or
delayed delivery basis, purchase or sell securities
16
<PAGE>
on a forward commitment basis, purchase securities on a "when, as and if issued"
basis, and lend its portfolio securities, as discussed under "Risk
Considerations and Investment Practices of the Underlying Funds" below.
MORGAN STANLEY DEAN WITTER DIVIDEND GROWTH SECURITIES INC. The investment
objective of the fund is to provide reasonable current income and long-term
growth of income and capital. The fund seeks to achieve its investment objective
primarily through investments in common stock of companies with a record of
paying dividends and the potential for increasing dividends. Net asset value of
the fund's shares will fluctuate with changes in market values of portfolio
securities. The fund will attempt to avoid speculative securities or those with
speculative characteristics.
This fund has adopted the following specific policies which are not
fundamental investment policies and which may be changed by the fund's Board of
Directors:
1. Up to 30% of the value of the fund's total assets may be invested in:
(a) convertible debt securities, convertible preferred securities, U.S.
Government securities (securities issued or guaranteed as to principal and
interest by the United States or its agencies and instrumentalities),
investment grade corporate debt securities and/or money market instruments
when, in the opinion of the Investment Manager, the projected total return
on such securities is equal to or greater than the expected total return on
equity securities or when such holdings might be expected to reduce the
volatility of the portfolio (for purposes of this provision, the term "total
return" means the difference between the cost of a security and the
aggregate of its market value and income earned); or (b) in money market
instruments under any one or more of the following circumstances: (i)
pending investment of proceeds of sale of fund shares or of portfolio
securities; (ii) pending settlement of purchases of portfolio securities; or
(iii) to maintain liquidity for the purpose of meeting anticipated
redemptions.
2. Notwithstanding any of the foregoing limitations, the fund may invest
more than 30% of its total assets in money market instruments to maintain,
temporarily, a "defensive" posture when, in the opinion of the Investment
Manager, it is advisable to do so because of economic or market conditions.
The foregoing limitations will apply at the time of acquisition based on the
last determined value of the fund's assets. Any subsequent change in any
applicable percentage resulting from fluctuations in value or other change in
total assets will not require elimination of any security from the fund's
portfolio. The fund may purchase securities on a when-issued or delayed delivery
basis, may purchase or sell securities on a forward commitment basis and may
purchase securities on a "when, as and if issued" basis as described below under
"Risk Considerations and Investment Practices of the Underlying Funds."
MORGAN STANLEY DEAN WITTER EUROPEAN GROWTH FUND INC. The investment objective of
this fund is to maximize capital appreciation. The fund seeks to achieve its
investment objective by investing at least 65% of its total assets in securities
issued by issuers located in countries located in Europe. Such issuers will
include companies (i) which are organized under the laws of a European country
and have a principal office in a European country, or (ii) which derive 50% or
more of their total revenues from business in Europe, or (iii) the equity
securities of which are traded principally on a stock exchange in Europe. The
securities invested in will primarily consist of equity securities issued by
companies based in European countries, but may also include fixed-income
securities issued or guaranteed by European governments (including zero coupon
treasury securities), when it is deemed that such investments are consistent
with the fund's investment objective. The principal countries in which such
issuers will be located are France; the United Kingdom; Germany; the
Netherlands; Spain; Sweden; Switzerland and Italy. The fund currently intends to
invest more than 25% of its total assets in the United Kingdom. As such, the
investment performance of the fund will be subject to social, political and
economic events occurring in the United Kingdom to a greater extent than those
occurring in other European countries.
The remainder of the fund's portfolio equalling, at times, up to 35% of its
total assets, may be invested in equity and/or government and convertible
securities issued by issuers located anywhere in the world, including the United
States, subject to its investment objective. In addition, this portion of its
portfolio will consist of various other financial instruments such as forward
foreign exchange contracts, futures contracts and options (see below under "Risk
Considerations and Investment Practices of the Underlying Funds").
It is anticipated that the securities held by the fund in its portfolio will
be denominated, principally, in liquid European currencies. Such currencies
include the German mark, French franc, British pound, Dutch guilder, Swiss
franc, Swedish krona, Italian lira, and Spanish peseta. In addition, the fund
may hold securities denominated in the European Currency Unit (a weighted
composite of the currencies of member states of the European Monetary System)
and, beginning on January 1, 1999, the euro, a single currency expected to be
adopted by many European countries. Securities of issuers within a given country
may be denominated in the currency of a different country.
The fund may also invest in securities of foreign issuers in the form of
American Depository Receipts (ADRs), European Depository Receipts (EDRs) or
other similar securities convertible into securities of foreign issuers (as
described below under "Risk Considerations and Investment Practices of the
Underlying Funds").
MORGAN STANLEY DEAN WITTER FINANCIAL SERVICES TRUST. The investment objective of
this fund is long-term capital appreciation. The fund seeks to achieve its
investment
17
<PAGE>
objective by investing, under normal circumstances, at least 65% of its total
assets in the equity securities of companies in the financial services and
financial services related industries. Issuers in these industries provide
financial services or financial products to companies and individuals or to
other financial services providers. The financial services companies in which
the fund may invest include but are not limited to the following: asset
management companies, securities brokerage firms, financial planners, regional
and money center banks, merchant banks, mortgage companies, consumer finance
companies, savings banks and thrift institutions, insurance companies, insurance
brokerage firms, leasing companies, government-sponsored agencies, credit and
finance companies and foreign financial service companies. Examples of companies
in which the fund may invest which provide products and services to the
aforementioned financial services companies include but are not limited to the
following: providers of financial publishing and news services, credit research
and rating services, financial advertising (including Internet site
development), financial equipment and technology (including financial software),
data processing and payroll services and other financial products or services
which do not involve the providing of credit, brokerage or management of assets.
The equity securities in which the fund may invest may be issued either by
large, established, well-capitalized companies or by newly-formed small
capitalization companies. There are no restrictions on the market capitalization
size of the fund's holdings. While the equity securities in which the fund may
invest will consist primarily of common stocks, the fund may also invest in
other types of equity securities such as preferred and convertible securities,
rights and warrants.
The fund's equity investments will be determined pursuant to an investment
process that seeks to identify companies that show good appreciation prospects
and value. This approach to stock selection involves a fundamental analysis of
individual companies through an analysis of their balance sheets, income
statements, products and services. Also, the Investment Manager will take into
consideration certain criteria which include, among other things, capable
management, attractive business niches or product innovation, sound financial
and accounting practices, ability to grow revenues, earnings and cash flows
consistently, and stock prices and growth potential which, in the opinion of the
Investment Manager, appear to be undervalued or temporarily unrecognized by the
market.
Companies considered to be in the financial services and financial services
related industries will be those which derive at least 35% of their revenues or
earnings from the aforementioned respective activities, or devote at least 35%
of their assets to such respective activities.
Up to 35% of the fund's total assets may be invested in equity securities of
issuers not in the financial services or financial services related industries,
investment grade fixed-income securities, convertible securities, rights and
warrants of issuers not in the financial services or financial services related
industries, U.S. Government securities (including zero coupon securities) or
money market instruments. With respect to corporate non-convertible fixed-income
securities, the term "investment grade" means securities which are rated Baa or
higher by Moody's or BBB or higher by S&P or, if not rated, are deemed by the
Investment Manager to be of comparable quality. The fund may invest up to 25% of
its total assets in the securities of foreign issuers.
Money market instruments in which the fund may invest are securities issued
or guaranteed by the U.S. Government or its agencies (Treasury bills, notes and
bonds); obligations of banks subject to regulation by the U.S. Government and
having total assets of $1 billion or more; Eurodollar certificates of deposit;
obligations of savings banks and savings and loan associations having total
assets of $1 billion or more; fully insured certificates of deposit; and
commercial paper rated within the two highest grades by Moody's or S&P or, if
not rated, issued by a company having an outstanding debt issue rated AA by S&P
or Aa by Moody's.
There may be periods during which, in the opinion of the Investment Manager,
market conditions warrant reduction of some or all of the fund's securities
holdings. During such periods, the fund may adopt a temporary "defensive"
posture in which up to 100% of its total assets is invested in money market
instruments or cash.
In accordance with Securities and Exchange Commission ("SEC") rules, the
fund will not purchase the security of any company which in its most recent
fiscal year derived more than 15% of its gross revenues from securities related
activities (defined by the SEC as activities as a broker, dealer, underwriter or
investment adviser) if immediately after such purchase the fund: (i) would own
more than 5% of any class of equity securities of the company; (ii) would own
more than 10% of the outstanding principal amount of the company's debt
securities; or (iii) would have invested more than 5% of its total assets in
securities of such company.
The fund may invest in convertible securities. Up to 20% of the fund's
assets in convertible fixed-income securities can be rated below investment
grade or, if unrated, are of comparable quality as determined by the Investment
Manager. Securities rated below investment grade are the equivalent of high
yield, high risk bonds (commonly known as "junk bonds"). The fund will not
invest in convertible fixed-income securities that are in default in payment of
principal or interest. In the event that the fund's investments in convertible
securities rated below investment grade, including downgraded convertible
securities, constitute more than 20% of the fund's total assets, the fund will
seek immediately to sell sufficient securities to reduce the total to below the
applicable percentage. See "Risk Considerations and Investment Practices of the
Underlying
18
<PAGE>
Funds" below for a discussion of the risks of investing in convertible
securities and lower-rated and unrated fixed-income securities and the Appendix
to the Statement of Additional Information for a description of fixed-income
security ratings.
As noted above, the fund may invest in securities of foreign companies. Such
investments may also be in the form of ADRs, EDRs or other similar securities
convertible into securities of foreign issuers as described below. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. The fund's investments in unlisted
foreign securities are subject to the fund's overall policy limiting its
investment in illiquid securities to 15% or less of its net assets. The fund may
also engage in options and futures transactions and forward foreign currency
exchange contracts, may invest in repurchase agreements, private placements,
zero coupon securities, convertible securities, real estate investment trusts,
may purchase securities on a when-issued delayed delivery or forward committment
basis and may lend its portfolio securities. For a discussion of the risks of
these investments or techniques, see "Risk Considerations and Investment
Practices of the Underlying Funds" below.
MORGAN STANLEY DEAN WITTER GROWTH FUND. The investment objective of this fund
is long-term growth of capital. The fund invests primarily in common stocks and
securities convertible into common stocks of companies which offer the prospect
for growth of earnings. The fund seeks to achieve its investment objective by
investing under normal circumstances at least 65% of its total assets in common
stocks and convertible securities. There are no minimum rating or quality
requirements with respect to convertible securities in which the fund may invest
and, thus, all or some of such securities may be below investment grade. See the
Appendix to the Statement of Additional Information for a discussion of ratings
of fixed-income securities.
The Sub-Advisor invests the fund's assets by pursuing its "equity growth"
philosophy. That strategy involves a two-step process to achieve value for the
fund's shareholders by taking advantage of unrecognized appreciation potential
created by changes in the economic, social and political environments. Pursuant
to its approach, the Sub-Advisor emphasizes individual security selection.
Individual companies are chosen for investment by the fund, based on factors
including but not limited to: potential growth in earnings and dividends;
quality of management; new products and/or new markets; research and development
capabilities; historical rate of return on equity and invested capital; cash
flow and balance sheet strength; and forcing value through company initiatives
such as cost reduction or share repurchase. As a second step, the Sub-Advisor
considers the weightings that the selected companies and industries will have in
the portfolio.
The fund intends to invest primarily, but not exclusively, in companies
having stock market capitalizations (calculated by multiplying the number of
outstanding shares of a company by the current market price) of at least $1
billion. The Sub-Advisor anticipates that the fund will focus its investments in
fewer than 100 companies, although the Sub-Advisor continuously monitors up to
250 companies for possible investment by the fund. The fund's holdings are
changed by the Sub-Advisor as warranted based on changes in the overall market
or economic environment, as well as factors specific to particular companies.
While the fund invests primarily in common stocks and securities convertible
into common stock, under ordinary circumstances it may invest up to 35% of its
total assets in money market instruments, which are short-term (maturities of up
to thirteen months) fixed-income securities issued by private and governmental
institutions. Money market instruments in which the fund may invest are
securities issued or guaranteed by the U.S. Government or its agencies (Treasury
bills, notes and bonds); obligations of banks subject to regulation by the U.S.
Government and having total assets of $1 billion or more; Eurodollar
certificates of deposit; obligations of savings banks and savings and loan
associations having total assets of $1 billion or more; fully insured
certificates of deposit; and commercial paper rated within the two highest
grades by Moody's S&P or, if not rated, issued by a company having an
outstanding debt issue rated AAA by S&P or Aaa by Moody's.
There may be periods during which, in the opinion of the Investment Manager
or Sub-Advisor, market conditions warrant reduction of some or all of the fund's
securities holdings. During such periods, the fund may adopt a temporary
"defensive" posture in which greater than 35% and, in some circumstances up to
100%, of its assets is invested in money market instruments or cash.
The fund is classified as a non-diversified investment company under the
Investment Company Act of 1940, as amended (the "Act"), and as such is not
limited by the Act in the proportion of its assets that it may invest in the
obligations of a single issuer. However, the fund intends to conduct its
operations so as to qualify as a "regulated investment company" under Subchapter
M of the Internal Revenue Code. See "Dividends, Distributions and Taxes." In
order to qualify, among other requirements, the fund will limit its investments
so that at the close of each quarter of the taxable year, (i) not more than 25%
of the market value of the fund's total assets will be invested in the
securities of a single issuer, and (ii) with respect to 50% of the market value
of its total assets not more than 5% will be invested in the securities of a
single issuer and the fund will not own more than 10% of the outstanding voting
securities of a single issuer. To the extent that a relatively high percentage
of the fund's assets may be invested in the securities of a limited number of
issuers, the fund's portfolio securities may be more susceptible to any single
economic, political or regulatory occurrence than the portfolio securities of a
diversified investment company. The limitations described in this paragraph are
not fundamental policies and may be
19
<PAGE>
revised to the extent applicable Federal income tax requirements are revised.
The fund may also invest in real estate investment trusts, private
placements and restricted securities and zero coupon securities, may enter into
repurchase agreements, may engage in options and futures transactions and may
purchase securities on a when-issued, delayed delivery basis and on a when, as
and if issued basis. For a discussion of the risks of investing in these
securities, see "Risk Considerations and Investment Practices of the Underlying
Funds" below.
MORGAN STANLEY DEAN WITTER HEALTH SCIENCES TRUST. The investment objective of
this fund is capital appreciation. The fund will seek to achieve its investment
objective by investing at least 65% of its total assets in the equity securities
of health science companies throughout the world. A health science company is
defined as a company which is principally engaged in the health sciences
industry. A company is deemed to be "principally engaged" if it has at least 50%
of its earnings or revenues derived from health sciences activities, as defined
below, or at least 50% of its assets is devoted to such activities, based upon
the financial statements of the company's most recently reported fiscal year.
In addition, the Investment Manager may invest in companies other than
health science companies if it considers that such companies have potential for
capital appreciation primarily as a result of particular products, technology,
patents or other market advantages in the health sciences industry. The fund
does not anticipate that companies not principally engaged in the health
sciences industry will represent more than 20% of the fund's investments.
Health sciences activities are defined as activities which consist of the
research, development, production or distribution of products and services by
health science companies which include, but are not limited to, companies such
as: pharmaceutical companies; companies involved in the ownership and/or
operation or delivery of health care services such as hospitals, clinical test
laboratories, convalescent and mental health care facilities, rehabilitation
centers, and products and services for home care; companies involved in
biotechnology, medical diagnostics, biochemical, and nuclear research and
development; and companies that produce and manufacture medical, dental and
optical supplies and equipment.
The fund's portfolio will primarily consist of common stocks. The fund may
also invest up to 35% of its total assets in preferred stock and in investment
grade domestic and foreign debt securities of any type of issuer (such as
foreign and domestic corporations and foreign and domestic governments and their
political subdivisions), including bonds, notes, debentures and debt securities
convertible into equity if the Investment Manager believes that such securities
present a favorable opportunity for capital appreciation. The term investment
grade consists of debt instruments rated Baa or higher by Moody's or BBB or
higher by S&P or, if not rated, determined to be of comparable quality by the
Investment Manager. Investments in securities rated either Baa by Moody's or BBB
by S&P may have speculative characteristics and, therefore, changes in economic
conditions or other circumstances are more likely to weaken their capacity to
make principal and interest payments than would be the case with investments in
securities with higher credit ratings. If a debt instrument held by the fund is
rated BBB or Baa and is subsequently downgraded by a rating agency, the fund
will retain such security in its portfolio until the Investment Manager
determines that it is practicable to sell the security without undue market or
tax consequences to the fund. In the event that such downgraded securities
constitute 5% or more of the fund's total assets, the Investment Manager will
sell immediately sufficient securities to reduce the total to below 5%. The fund
may invest in various other financial instruments such as warrants and forward
foreign currency exchange contracts, futures and options, including stock index
futures contracts and related options in an attempt to hedge its portfolio (see
below under "Risk Considerations and Investment Practices of the Underlying
Funds").
While the fund expects that, from time to time, a significant portion of its
investments will be in securities of U.S. companies, the fund's Investment
Manager believes that a portfolio comprised only of U.S. securities does not
provide the greatest potential for capital appreciation from an investment in
the health sciences industry. It believes that a worldwide focus is necessary if
the fund is to take advantage of the increasing opportunities presented by
health science companies headquartered throughout the world. The fund may invest
substantially in securities denominated in one or more currencies. The
Investment Manager believes that by investing worldwide, the fund can better
position itself to take advantage of available health sciences investment
opportunities.
The fund may also invest in securities of foreign issuers in the form of
ADRs, EDRs or other similar securities convertible into securities of foreign
issuers. These securities may not necessarily be denominated in the same
currency as the securities into which they may be converted (see below). The
fund may also engage in options and futures transactions and forward foreign
currency exchange contracts and enter into repurchase agreements, may purchase
securities on a when-issued delayed delivery or forward commitment basis and may
lend its portfolio securities. For a discussion of the risks of investing in
these securities, see "Risk Considerations and Investment Practices of the
Underlying Funds" below.
MORGAN STANLEY DEAN WITTER HIGH YIELD SECURITIES INC. The primary investment
objective of this fund is to earn a high level of current income. As a secondary
objective, the
20
<PAGE>
fund will seek capital appreciation, but only when consistent with its primary
objective. Capital appreciation may result, for example, from an improvement in
the credit standing of an issuer whose securities are held in the fund's
portfolio or from a general decline in interest rates, or a combination of both.
Conversely, capital depreciation may result, for example, from a lowered credit
standing or a general rise in interest rates, or a combination of both. The
higher yields sought by the fund are generally obtainable from securities rated
in the lower categories by recognized rating services. The fund seeks high
current income by investing principally in fixed-income securities rated Baa or
lower by Moody's, or BBB or lower by S&P. Fixed-income securities rated Baa by
Moody's or BBB by Standard & Poor's have speculative characteristics greater
than those of more highly rated bonds, while fixed-income securities rated Ba or
BB or lower by Moody's and S&P, respectively, are considered to be speculative
investments. Furthermore, the fund does not have any minimum quality rating
standard for its investments. As such, the fund may invest in securities rated
as low as Caa, Ca or C by Moody's or CCC, CC, C or C1 by S&P. Fixed-income
securities rated Caa or Ca by Moody's may already be in default on payment of
interest or principal, while bonds rated C by Moody's, their lowest bond rating,
can be regarded as having extremely poor prospects of ever attaining any real
investment standing. Bonds rated C1 by S&P, their lowest bond rating, are no
longer making interest payments. For a further discussion of the characteristics
and risks associated with high yield securities, see "Risk Considerations and
Investment Practices of the Underlying Funds" below. A description of corporate
bond ratings is contained in the Appendix to the Statement of Additional
Information.
Non-rated securities will also be considered for investment by the fund when
the Investment Manager believes that the financial condition of the issuers of
such securities, or the protection afforded by the terms of the securities
themselves, makes them appropriate investments for the fund.
In circumstances where the Investment Manager determines that investment in
municipal obligations would facilitate the fund's ability to accomplish its
investment objectives, it may invest up to 10% of its total assets in such
obligations, including municipal bonds issued at a discount.
The fund may also invest in securities of foreign companies, may purchase
common stock, repurchase agreements, private placements, zero coupon securities,
may engage in options and futures transactions, may purchase securities on a
when-issued delayed delivery or forward commitment basis and may lend its
portfolio securities. For a discussion of the risks of investing in these
securities, see "Risk Considerations and Investment Practices of the Underlying
Funds" below.
MORGAN STANLEY DEAN WITTER INCOME BUILDER FUND. The primary investment
objective of this fund is to seek reasonable income. Growth of capital is the
secondary objective. The fund seeks to achieve its objectives by investing,
under normal market conditions, at least 65% of its total assets in
income-producing equity securities, including common stock, preferred stock and
convertible securities. Up to 35% of the fund's assets may be invested in
fixed-income securities or common stocks that do not pay a regular dividend but
are expected to contribute to the fund's ability to meet its investment
objectives.
The fund will invest, under normal market conditions, primarily in common
stocks of large-cap companies which have a record of paying dividends and, in
the opinion of the Investment Manager, have the potential for maintaining
dividends, in preferred stock and in securities convertible into common stocks
of small and mid-cap companies. The Investment Manager intends to use a
value-oriented investment style in the selection of securities for the fund's
portfolio. A convertible security is a bond, debenture, note, preferred stock or
other security that may be converted into or exchanged for a prescribed amount
of common stock of the same or a different issuer within a particular period of
time at a specified price or based on a specified formula. Convertible
securities rank senior to common stocks in a corporation's capital structure
and, therefore, entail less risk than the corporation's common stock. The value
of a convertible security is a function of its "investment value" (its value as
if it did not have a conversion privilege), and its "conversion value" (the
security's worth if it were to be exchanged for the underlying security, at
market value, pursuant to its conversion privilege).
The fund also may invest up to 20% in fixed-income securities rated below
investment grade. Securities below investment grade are the equivalent of high
yield, high risk bonds (commonly known as "junk bonds"). Investment grade is
generally considered to be debt securities rated BBB or higher by S&P or Baa or
higher by Moody's. (fixed-income securities rated BBB by S&P or Baa by Moody's
which generally are regarded as having an adequate capacity to pay interest and
repay principal, have speculative characteristics.) However, the fund will not
invest in fixed-income securities that are rated lower than B by S&P or Moody's
or, if not rated, determined to be of comparable quality by the Investment
Manager. The fund will not invest in fixed-income securities that are in default
in payment of principal or interest. The 20% limitation on securities rated
below investment grade in which the fund may invest does not include securities
convertible into common stock. A description of fixed-income securities ratings
is contained in the appendix to this fund's Prospectus as well as in the
Statement of Additional Information of the Fund.
The fund may invest in equity securities of foreign issuers. However, the
fund will not invest more than 25% of the value of its total assets, at the time
of purchase, in securities of foreign issuers (other than securities of Canadian
issuers registered under the Securities Exchange Act of 1934 or American
Depository Receipts, on which there is no such limit). The fund may invest in
ADRs, EDRs or
21
<PAGE>
other similar securities convertible into securities of foreign issuers. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. The fund's investments in unlisted
foreign securities are subject to the fund's overall policy limiting its
investment in illiquid securities to 15% or less of its net assets.
A portion of the fund's assets may be invested in investment grade fixed
income (fixed-rate and adjustable rate) securities such as corporate notes and
bonds and obligations issued or guaranteed by the U.S. Government, its agencies
and instrumentalities.
The non-governmental debt securities in which the fund will invest will
include: (a) corporate debt securities, including bonds, notes and commercial
paper, rated in the four highest categories by a nationally recognized
statistical rating organization ("NRSRO") including Moody's, S&P, Duff and
Phelps, Inc. and Fitch Investors Service, Inc.; and (b) bank obligations,
including CDs, banker's acceptances and time deposits, issued by banks with a
long-term CD rating in one of the four highest categories by a NRSRO.
Investments in securities rated within the four highest rating categories by a
NRSRO are considered "investment grade." However, such securities rated within
the fourth highest rating category by a NRSRO have speculative characteristics
and, therefore, changes in economic conditions or other circumstances are more
likely to weaken their capacity to make principal and interest payments than
would be the case with investments in securities with higher credit ratings.
Where a fixed-income security is not rated by a NRSRO (as may be the case with a
foreign security) the Investment Manager will make a determination of its
creditworthiness and may deem it to be investment grade. A description of
fixed-income security ratings is contained in the appendix to the Prospectus.
The Investment Manager intends to follow a "bottom-up" approach in the
selection of convertible securities. Beginning with a universe of about 500
companies, the Investment Manager will narrow the focus to small and mid-cap
companies and review the issues to determine if the convertible is trading with
the underlying equity security. The yield of the underlying equity security will
be evaluated and company fundamentals will be studied to evaluate cash flow,
risk/reward balance, valuation and the prospects for growth. The Investment
Manager intends to select convertible securities that, in its judgment, are
issued by companies with sound management practices and that represent good
value.
To the extent that a convertible security's investment value is greater than
its conversion value, its price will be primarily a reflection of such
investment value and its price will be likely to increase when interest rates
fall and decrease when interest rates rise, as with a fixed-income security (the
credit standing of the issuer and other factors may also have an effect on the
convertible security's value). If the conversion value exceeds the investment
value, the price of the convertible security will rise above its investment
value and, in addition, may sell at some premium over its conversion value.
(This premium represents the price investors are willing to pay for the
privilege of purchasing a fixed-income security with a possibility of capital
appreciation due to the conversion privilege.) At such times the price of the
convertible security will tend to fluctuate directly with the price of the
underlying equity security.
The fund may invest up to 25% of its total assets in "enhanced" convertible
securities. Enhanced convertible securities offer holders the opportunity to
obtain higher current income than would be available from a traditional equity
security issued by the same company, in return for reduced participation or a
cap on appreciation in the underlying common stock of the issuer which the
holder can realize. In addition, in many cases, enhanced convertible securities
are convertible into the underlying common stock of the issuer automatically at
maturity, unlike traditional convertible securities which are convertible only
at the option of the security holder. Enhanced convertible securities may be
more volatile than traditional convertible securities due to the mandatory
conversion feature.
The fund also may invest up to 10% in "synthetic" convertible securities.
Unlike traditional convertible securities whose conversion values are based on
the common stock of the issuer of the convertible security,
"synthetic"convertible securities are preferred stocks or debt obligations of an
issuer which are combined with an equity component whose conversion value is
based on the value of the common stock of a different issuer or a particular
benchmark (which may include a foreign issuer or basket of foreign stocks, or a
company whose stock is not yet publicly traded). In many cases, "synthetic"
convertible securities are not convertible prior to maturity, at which time the
value of the security is paid in cash by the issuer.
"Synthetic" convertible securities may be less liquid than traditional
convertible securities and their price changes may be more volatile. Reduced
liquidity may have an adverse impact on the fund's ability to sell particular
synthetic securities promptly at favorable prices and may also make it more
difficult for the fund to obtain market quotations based on actual trades, for
purposes of valuing the fund's portfolio securities.
The fund may invest without limitation in "exchangeable" convertible bonds
and convertible preferred stock which are issued by one company, but convertible
into the common stock of a different publicly traded company. These securities
generally have liquidity trading and risk characteristics similar to traditional
convertible securities noted above.
The U.S. Government securities in which the fund may invest include
securities which are direct obligations of the United States Government, such as
United States treasury bills, notes and bonds, and which are backed by the full
faith and credit of the United States; securities which are
22
<PAGE>
backed by the full faith and credit of the United States but which are
obligations of a United States agency or instrumentality (E.G., obligations of
the Government National Mortgage Association); securities issued by a United
States agency or instrumentality which has the right to borrow, to meet its
obligations, from an existing line of credit with the United States Treasury
(E.G., obligations of the Federal National Mortgage Association); securities
issued by a United States agency or instrumentality which is backed by the
credit of the issuing agency or instrumentality (E.G., obligations of the
Federal Farm Credit System).
Money market instruments in which the fund may invest include securities
issued or guaranteed by the U.S. Government, its agencies and instrumentalities
(Treasury bills, notes and bonds, including zero coupon securities); bank
obligations; Euro-dollar certificates of deposit; obligations of savings
institutions; fully insured certificates of deposit; and commercial paper rated
within the four highest grades by Moody's or S&P or, if not rated, issued by a
company having an outstanding debt issue rated at least AA by S&P or Aa by
Moody's. Such securities may be used to invest uncommitted cash balances.
There may be periods during which, in the opinion of the Investment Manager,
market conditions warrant reduction of some or all of the fund's securities
holdings. During such periods, the fund may adopt a temporary "defensive"
posture in which up to 100% of its total assets is invested in money market
instruments or cash.
The fund may also purchase when-issued and delayed delivery securities, when
as and if issued securities, zero coupon securities, real estate investment
trusts and restricted securities and may enter into repurchase agreements. For a
discussion of the risks of investing in these securities, see "Risk
Considerations and Investment Practices of the Underlying Funds" below.
MORGAN STANLEY DEAN WITTER INFORMATION FUND. The investment objective of this
Fund is long-term capital appreciation. The fund seeks to achieve its investment
objective by investing under normal circumstances at least 65% of its total
assets in common stocks and securities convertible into common stocks of
domestic or foreign companies which are involved in all areas, including
emerging areas, of the communications and information industry. The fund will
not have more than 10% of its total assets invested in convertible securities
determined as of the time of purchase. Under normal circumstances, the fund will
invest in equity securities of issuers located in at least three countries, one
of which is the United States.
The communications and information industry is experiencing widespread
changes and expansion due to rapidly changing technologies (including enabling
technologies), industry migration in search of new markets, communications needs
in developing countries, competitive pressures and changes in governmental
regulation. Additionally, a number of traditional communications industries have
either converged or evolved into new corporate forms and some of these
industries are only beginning to emerge. The Investment Manager believes that as
technologies develop, many of the traditional distinctions and characteristics
of these industries will blur. The Investment Manager believes that the
communications and information industry will continue to grow in the future and
that the fund's investment policies as outlined below are designed to take
advantage of the investment opportunities present in this industry.
Companies in the communications and information industry will be considered
those companies engaged in designing, developing, manufacturing or providing the
following products and services, or the enabling technology with respect
thereto, throughout the world: regular telephone service; communications
equipment and services (including equipment and services for both data and voice
transmission); electronic components and equipment; broadcasting (including
television and radio, satellite, microwave and cable television and
narrow-casting); computer equipment, enabling software, mobile communications
and cellular radio/paging; electronic mail and other electronic data
transmission services; local and wide area networking and linkage of word and
data processing systems; publishing and information systems, including the
storage and transmission of information; video text and teletext; and emerging
technologies combining telephone, television and/or computer systems; the
creation, packaging, distribution, and ownership of entertainment and
information programming throughout the world including but not limited to
prerecorded music, feature length motion pictures, made for T.V. movies,
television series, documentaries, educational tutorials, animation, game shows,
sports programming, news programs, and live events such as professional sporting
events, concerts and theatrical exhibitions and academic courses or tutorials;
television and radio broadcasting via VHF, UHF, satellite and microwave
transmission, cable television programming and systems, and broadcast and cable
networks, wireless cable television and other emerging distribution
technologies, home video, and interactive/multimedia programming including
financial services, education, home shopping, video games and multiplayer games;
publishing including newspapers, magazines and books, advertising agencies and
niche advertising mediums such as in-store and direct mail, emerging
technologies combining television, telephone and computer systems, computer
hardware and software, and equipment used in the creation and distribution of
entertainment programming such as that required in the provision of broadcast,
cable or telecommunications services.
Companies considered to be in communications and information industry will
be those which derive at least 35% of their revenues or earnings from the
aforementioned respective activities, or devote at least 35% of their assets to
such respective activities.
23
<PAGE>
Up to 35% of the fund's total assets may be invested in investment grade
fixed-income securities, U.S. Government securities (including zero coupon
securities) or money market instruments. With respect to corporate fixed-income
securities, the term "investment grade" means securities which are rated Baa or
higher by Moody's or BBB or higher by S&P or, if not rated, are deemed by the
Investment Manager to be of comparable quality.
Investments in fixed-income securities rated either BBB by S&P or Baa by
Moody's (the lowest credit ratings designated "investment grade") have
speculative characteristics and, therefore, changes in economic conditions or
other circumstances are more likely to weaken their capacity to make principal
and interest payments than would be the case with investments in securities with
higher credit ratings. If a fixed-income or convertible security held by the
fund is rated BBB or Baa and is subsequently downgraded by a rating agency, or
otherwise falls below investment grade the Fund will sell such securities as
soon as is practicable without undue market or tax consequences to the fund. See
the Appendix to the Statement of Additional Information for a discussion of
ratings of fixed-income securities.
The fund may invest up to 50% of its total assets in the securities of
foreign issuers. The fund will not invest 25% or more of its total assets in any
one foreign country.
Money market instruments in which the fund may invest are securities issued
or guaranteed by the U.S. Government or its agencies (Treasury bills, notes and
bonds); obligations of banks subject to regulation by the U.S. Government and
having total assets of $1 billion or more; Eurodollar certificates of deposit;
obligations of savings banks and savings and loan associations having total
assets of $1 billion or more; fully insured certificates of deposit; and
commercial paper rated within the two highest grades by Moody's or S&P or, if
not rated, issued by a company having an outstanding debt issue rated AA by S&P
or Aa by Moody's.
There may be periods during which, in the opinion of the Investment Manager,
market conditions warrant reduction of some or all of the fund's securities
holdings. During such periods, the fund may adopt a temporary "defensive"
posture in which greater than 35% of its total assets is invested in money
market instruments or cash.
The fund may invest in investment grade convertible securities. A
convertible security is a bond, debenture, note, preferred stock or other
security that may be converted into or exchanged for a prescribed amount of
common stock of the same or a different issuer within a particular period of
time at a specified price or formula. Convertible securities rank senior to
common stocks in a corporation's capital structure and, therefore, entail less
risk than the corporation's common stock. The value of a convertible security is
a function of its "investment value" (its value as if it did not have a
conversion privilege), and its "conversion value" (the security's worth if it
were to be exchanged for the underlying security, at market value, pursuant to
its conversion privilege).
As noted above, the fund may also invest in securities of foreign companies.
Such investments may also be in the form of ADRs, EDRs or other similar
securities convertible into securities of foreign issuers (see below). These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. The fund's investments in unlisted
foreign securities are subject to the fund's overall policy limiting its
investment in illiquid securities to 15% or less of its net assets.
This fund concentrates its investments in the communications and information
industry. Because of this concentration, the value of the fund's shares may be
more volatile than that of investment companies that do not similarly
concentrate their investments. The communications and information industry may
be subject to greater changes in governmental policies and governmental
regulation than in many other industries in the United States and worldwide.
Regulatory approval requirements, ownership restrictions and restrictions on
rates of return and types of services that may be offered may materially affect
the products and services of this industry. Additionally, the products and
services of companies in this industry may be subject to faster obsolescence as
a result of greater competition, advancing technological developments, and
changing market and consumer preferences. As a result, the stocks of companies
in this industry may exhibit greater price volatility than those of companies in
other industries.
The fund may engage in options and futures contracts and forward foreign
currency exchange contracts, may enter into repurchase agreements, may purchase
private placements, convertible securities, zero coupon securities, when, as and
if issued securities, securities of other investment companies, may purchase
securities on a when-issued delayed delivery or forward commitment basis and may
lend its portfolio securities. For a discussion of the risks of investing in
these securities, see "Risk Considerations and Investment Practices of the
Underlying Funds" below.
MORGAN STANLEY DEAN WITTER INTERMEDIATE INCOME SECURITIES. The investment
objective of this fund is high current income consistent with safety of
principal. The fund seeks to achieve its objective by investing at least 65% of
its total assets in intermediate term, investment grade fixed-income securities.
The fund will maintain an average weighted maturity of approximately seven years
or less and may not invest in securities with remaining maturities greater than
twelve years. Under normal conditions, the fund's average weighted maturity will
not be less than three years. (Under the current interpretation by the staff of
the Securities and Exchange Commission, an intermediate bond fund must have an
average weighted maturity between three and ten years.)
24
<PAGE>
Under normal circumstances, the fund will invest primarily in corporate debt
securities and preferred stock of investment grade, which consists of securities
which are rated at the time of purchase Baa or better by Moody's or BBB or
better by S&P, or which, if unrated, are deemed to be of comparable quality by
the fund's Trustees. Fixed-income securities rated Baa by Moody's have
speculative characteristics. (A more detailed description of bond ratings is
contained in the Appendix to the Statement of Additional Information.) The fund
may also purchase U.S. Government securities (securities guaranteed as to
principal and interest by the United States or its agencies or
instrumentalities) and investment grade securities, denominated in U.S. Dollars,
issued by foreign governments or issuers. U.S. Government securities in which
the Fund may invest include zero coupon securities and mortgage-backed
securities, such as securities issued by the Government National Mortgage
Association, the Federal National Mortgage Association and the Federal Home Loan
Mortgage Corporation. There can be no assurance that the investment objective of
the fund will be achieved.
The Investment Manager believes that the fund's policies of purchasing
intermediate term securities will reduce the volatility of the fund's net asset
value over the long term. Although the values of fixed-income securities
generally increase during periods of declining interest rates and decrease
during periods of increasing interest rates, the extent of these fluctuations
has historically generally been smaller for intermediate term securities than
for securities with longer maturities. Conversely, the yield available on
intermediate term securities has also historically been lower than those
available from long term securities.
Investment by the fund in U.S. Dollar denominated fixed-income securities
issued by foreign governments and other foreign issuers may involve certain
risks not associated with U.S. issued securities. Those risks include the
political or economic instability of the issuer or of the country of issue, the
difficulty of predicting international trade patterns and the possibility of
imposition of exchange controls. In addition, there may be less publicly
available information about a foreign company than about a domestic company. The
fund believes that those risks are substantially lessened because the foreign
securities in which the fund may invest are investment grade.
While the fund will invest primarily in investment grade fixed-income
securities, under ordinary circumstances it also may invest up to 35% of its
total assets in money market instruments, repurchase agreements, as discussed
below, and up to 5% of the fund's net assets may be invested in lower rated
fixed-income securities.
Lower rated fixed-income securities, which are those rated from Ba to C or
BB to C by Moody's or S&P, respectively, are considered to be speculative
investments. Such lower rated securities, while producing higher yields than
investment grade securities, are subject to credit risk to a greater extent than
investment grade securities. The fund does not have any minimum quality rating
standard with respect to the portion (up to 5%) of its net assets which may be
invested in lower rated securities.
There may be periods during which, in the opinion of the Investment Manager,
market conditions warrant reduction of some or all of the fund's securities
holdings. During such periods, the fund may adopt a temporary "defensive"
posture in which greater than 35% of its total assets are invested in cash or
money market instruments. Money market instruments in which the fund may invest
are securities issued or guaranteed by the U.S. Government (Treasury bills,
notes and bonds, including zero coupon securities); bank obligations; Eurodollar
certificates of deposit; obligations of savings institutions; fully insured
certificates of deposit; and commercial paper rated within the two highest
grades by Moody's or S&P or, if not rated, are issued by a company having an
outstanding debt issue rated at least AA by S&P or Aa by Moody's.
The fund may also purchase private placements, zero coupon securities, when,
as and if issued securities, may enter into repurchase agreements and reverse
repurchase agreements, may purchase securities on a when-issued delayed delivery
or forward commitment basis and may lend its portfolio securities. For a
discussion of the risks of investing in these securities, see "Risk
Considerations and Investment Practices of the Underlying Funds" below.
MORGAN STANLEY DEAN WITTER INTERNATIONAL SMALLCAP FUND. The investment objective
of this fund is long-term growth of capital. The fund seeks to achieve its
investment objective by investing, under normal circumstances, at least 65% of
its total assets in equity securities of "small capitalization" companies
located outside of the United States. A "small capitalization" company is
defined as being, at the time of purchase of its equity securities by the fund,
among the smallest capitalized companies (where capitalization is calculated by
multiplying the total number of outstanding shares of common stock of the
company by their market price and by ranking the resulting companies from
smallest to largest capitalization) principally located in a given country,
whose aggregate capitalizations comprise no more than 35% of the total market
capitalization of the country. Equity securities in which the fund may invest
include common stocks, rights or warrants to purchase common stocks and
securities convertible into common stocks. The fund will invest in securities
issued by issuers located in at least three countries outside of the U.S. An
issuer of a security will be considered to be located in a given country if it:
(i) is organized under the laws of the country; (ii) derives at least 50% of its
revenues from goods produced or sold, investments made, or services performed in
the country; (iii) maintains at least 50% of its assets in the country; or (iv)
has securities which are principally traded on a stock exchange in the country.
The fund currently may invest, from time to time, more than 25% of its total
assets in
25
<PAGE>
securities issued by issuers located in each of the United Kingdom and Japan.
The remainder of the fund's portfolio equalling, at times, up to 35% of the
fund's total assets, may be invested in (i) securities issued by companies whose
market capitalizations place them outside the fund's definition of "small
capitalization" and/or (ii) fixed-income securities issued or guaranteed by
foreign governments. In addition, this portion of the fund's portfolio will
consist of various other financial instruments such as forward foreign exchange
contracts, futures contracts and options (see below).
The fund may also invest in securities of foreign issuers in the form of
American Depository Receipts (ADRs), European Depository Receipts (EDRs) or
other similar securities convertible into securities of foreign issuers (as
described below under "Risk Considerations and Investment Practices of the
Underlying Funds").
MORGAN STANLEY DEAN WITTER JAPAN FUND. The investment objective of this fund is
long-term capital appreciation. The fund seeks to achieve its investment
objective by investing, under normal circumstances, at least 65% of its total
assets in equity securities issued by issuers located in Japan. Such issuers
will include companies (i) which are organized under the laws of Japan and have
a principal office in Japan; (ii) which derive 50% or more of their total
revenues from operating business(es) in Japan; or (iii) the equity securities of
which are traded principally on a stock exchange in Japan. Equity securities in
which the fund may invest include common and preferred stocks and rights or
warrants to purchase common stocks. The fund may invest up to 25% of its total
assets in equity securities of Japanese companies traded on the Second Sections
of the Main Japanese exchanges, in securities traded on Japanese Regional
Exchanges and in the over-the-counter market. These would generally be smaller
companies with above-average growth potential.
The remainder of the fund's portfolio equalling, at times, up to 35% of the
fund's total assets, may be invested in fixed-income and convertible securities
of issuers located in Japan or guaranteed by the Japanese government when it is
deemed that such investments are consistent with the fund's investment
objective. This remainder may also include equity, government, fixed-income and
convertible securities issued by issuers located in developed economies in Asia,
Europe and North America, including the United States, subject to the fund's
investment objective. Although the fund may invest up to 35% of its net assets
in fixed-income and convertible securities which are either not rated or rated
below investment grade, the fund has no current intention of investing in excess
of 10% of its net assets in unrated or lower rated convertible securities nor in
excess of 5% of its net assets in unrated or lower rated non-convertible debt
securities. In addition, this portion of the fund's portfolio will consist of
various other financial instruments such as forward foreign exchange contracts,
futures contracts and options (see below).
The fund may also invest in securities of Japanese and other foreign issuers
in the form of American Depository Receipts (ADRs), European Depository Receipts
(EDRs) or other similar securities convertible into securities of foreign
issuers (as described below under "Risk Considerations and Investment Practices
of the Underlying Funds").
MORGAN STANLEY DEAN WITTER MARKET LEADER TRUST. The investment objective of
this fund is long-term growth of capital. The fund seeks to achieve its
objective by investing, under normal circumstances, at least 65% of its total
assets in equity securities of companies that, in the opinion of the Investment
Manager, are established leaders in their respective fields in growing
industries in domestic and foreign markets. The equity securities in which the
fund may invest in include common stocks, preferred stocks and debt or preferred
stocks convertible into or exchangeable for common stocks. These companies
generally will possess well-recognized proprietary skills or products, will have
equity market capitalizations in excess of $1 billion and will be listed on a
United States stock exchange (including U.S. dollar-denominated securities such
as ADRs. Generally these companies will be considered "leaders," in the view of
the Investment Manager, if they are nationally-known and have established a
strong reputation for quality management, products and services in the United
States and/or globally.
In addition to equity securities of market leader companies, up to 35% of
the fund's total assets may be invested in equity securities or debt securities
convertible into or exchangeable for equity securities of other companies, in
non-convertible debt securities, including U.S. Government securities and money
market instruments, and in rights and warrants. (For a discussion of the risks
of investing in each of these securities, see "Risk Considerations and
Investment Practices of the Underlying Funds" below.)
The Investment Manager intends to use both "top down" and "bottom-up"
approaches. The "top down" approach seeks to identify growing industries in
domestic and foreign markets. Within these industries, the Investment Manager
will apply a "bottom-up" fundamental analysis to identify the most attractive
securities to purchase, giving particular attention to companies with the
following attributes: recognized product and service leadership within its
industry, strong financial position (strong financial fundamentals) relative to
its peers, strong history of earnings growth or momentum often exceeding
consensus analyst expectations, evidence of corporate management's attention to
equity structure (evidenced by, among other things, stock buy-backs, the extent
to which management exercises stock options or otherwise acquires shares of the
company and sound financing decisions) as well as other attributes which the
Investment Manager believes are indicators of sustainable long-term growth.
Fixed-income securities in which this fund may invest include corporate
notes and bonds and obligations issued or guaranteed by the United States
Government, its agencies
26
<PAGE>
and instrumentalities. The non-governmental debt securities in which the fund
will invest will include: (a) corporate debt securities, including bonds, notes
and commercial paper, rated in the four highest categories by a nationally
recognized statistical rating organization ("NRSRO") including Moody's, S&P,
Duff and Phelps, Inc. and Fitch Investors Service, Inc., or, if unrated, of
comparable quality as determined by the Investment Manager, and (b) bank
obligations, including CDs, banker's acceptances and time deposits, issued by
banks with a long-term CD rating in one of the four highest categories by a
NRSRO. Investments in securities rated within the four highest rating categories
by a NRSRO are considered "investment grade." However, such securities rated
within the fourth highest rating category by a NRSRO have speculative
characteristics and, therefore, changes in economic conditions or other
circumstances are more likely to weaken the capacity of their issuers to make
principal and interest payments than would be the case with investments in
securities with higher credit ratings. Where a fixed-income security is not
rated by a NRSRO, the Investment Manager will make a determination of its
creditworthiness and may deem it to be investment grade. If a fixed-income
non-convertible security held by the fund is subsequently downgraded by a rating
agency below investment grade, the fund will sell such securities as soon as
practicable without undue market or tax consequences to the fund. See the
Appendix to the Statement of Additional Information for a discussion of ratings
of fixed income securities.
The U.S. Government securities in which this fund may invest include
securities which are direct obligations of the United States Government, such as
United States treasury bills, notes and bonds (including zero coupon bonds), and
which are backed by the full faith and credit of the United States; securities
which are backed by the full faith and credit of the United States but which are
obligations of a United States agency or instrumentality (E.G., obligations of
the Government National Mortgage Association); securities issued by a United
States agency or instrumentality which has the right to borrow, to meet its
obligations, from an existing line of credit with the United States Treasury
(E.G., obligations of the Federal National Mortgage Association); and securities
issued by a United States agency or instrumentality which is backed by the
credit of the issuing agency or instrumentality (E.G., obligations of the
Federal Farm Credit System).
Money market instruments in which the fund may invest include securities
issued or guaranteed by the U.S. Government, its agencies and instrumentalities
(Treasury bills, notes and bonds, including zero coupon securities); bank
obligations; Euro-dollar certificates of deposit; obligations of savings
institutions; fully insured certificates of deposit; and commercial paper rated
within the four highest grades by Moody's or S&P or, if not rated, issued by a
company having an outstanding debt issue rated at least AA by S&P or Aa by
Moody's. Such securities may be used to invest uncommitted cash balances.
There may be periods during which, in the opinion of the Investment Manager,
market conditions warrant reduction of some or all of the fund's securities
holdings. During such periods, the fund may adopt a temporary "defensive"
posture in which up to 100% of its total assets is invested in money market
instruments or cash.
The fund may invest in convertible securities. A convertible security is a
bond, debenture, note, preferred stock or other security that may be converted
into or exchanged for a prescribed amount of common stock of the same or a
different issuer within a particular period of time at a specified price or
formula. Convertible securities rank senior to common stocks in a corporation's
capital structure and, therefore, entail less risk than the corporation's common
stock. The value of a convertible security is a function of its "investment
value" (its value as if it did not have a conversion privilege), and its
"conversion value" (the security's worth if it were to be exchanged for the
underlying security, at market value, pursuant to its conversion privilege).
Up to 20% of this fund's assets in convertible fixed-income securities can
be rated below investment grade or, if unrated, of comparable quality as
determined by the Investment Manager. Securities rated below investment grade
are the equivalent of high yield, high risk bonds (commonly known as "junk
bonds"). The fund will not invest in convertible fixed-income securities that
are in default in payment of principal or interest. In the event that the fund's
investments in convertible securities rated below investment grade, including
downgraded convertible securities, constitute more than 20% of the fund's total
assets, the fund will seek immediately to sell sufficient securities to reduce
the total to below the applicable percentage. See "Risk Considerations and
Investment Practices of the Underlying Funds" below for a discussion of the
risks of investing in lower-rated and unrated fixed-income securities and the
Appendix to the Statement of Additional Information for a description of fixed
income security ratings.
This fund may also purchase and sell futures contracts on stock indexes, may
invest in repurchase agreements, private placements, zero coupon securities and
real estate investment trusts, may purchase securities on a when-issued, delayed
delivery or forward commitment basis, may purchase securities on a "when, as and
if issued" basis, and may lend its portfolio securities, as discussed under
"Risk Considerations and Investment Practices of the Underlying Funds" below.
MORGAN STANLEY DEAN WITTER MID-CAP GROWTH FUND. The investment objective of
this fund is long-term capital growth. This fund seeks to achieve its investment
objective by investing, under normal circumstances, at least 65% of its total
assets in a diversified portfolio of domestic and foreign equity securities of
"mid-cap" companies. A mid-cap company is a company whose market capitalization
falls within the range of $250 million to $5 billion. The fund may invest up to
35% of its total assets in (i) U.S. Government
27
<PAGE>
Securities and investment grade corporate debt securities; or (ii) equity
securities of companies with market capitalizations which fall outside of the
range of $250 million to $5 billion at the time of purchase as long as such
investments are consistent with the fund's investment objective. The fund may
invest up to 35% of its total assets in the equity securities of non-U.S.
companies, including American or other Depository Receipts, rights, warrants,
and the direct purchase of foreign securities.
Equity securities in which the fund may invest include common stocks and
securities convertible into common stocks. The fund utilizes an investment
process that places primary emphasis on seeking to identify industries, rather
than individual companies, as prospects for capital appreciation and whereby the
Investment Manager seeks to invest assets of the fund in industries it considers
to be attractive at the time of purchase and to sell those it considers
overvalued. The Investment Manager will invest principally in those mid-cap
companies that in the opinion of the Investment Manager have above-average
relative growth potential. Mid-cap companies typically have a better growth
potential than their large-cap counterparts because they are still in the early
and more dynamic period of their corporate existences. Often mid-size companies
and the industries in which they are focused are still evolving as opposed to
the more mature industries served by large-cap companies. Moreover, mid-cap
companies are not considered "emerging" stocks, nor are they as volatile as
small-cap firms. This is due to the fact that mid-cap companies have increased
liquidity, attributable to their larger market capitalization as well as longer
and more established track records, and a stronger market presence and dominance
than small-cap firms. Consequently, because of the better growth inherent in
these companies and their industries, mid-cap companies offer superior return
potential to large-cap companies, yet owing to their relatively larger size and
better recognition in the investment community, they have a reduced risk profile
compared to smaller, emerging or micro-cap companies.
In selecting stocks within the mid-cap universe, the Investment Manager will
use an industry approach that seeks to diversify the assets of the fund in
approximately 18 to 35 industries. The fund will hold less than 5% of its net
assets in any one security and will hold less than 10% of its net assets in any
one industry. Companies will be selected based on at least three-year track
records, and purchases will be primarily focused on companies that: (1) have the
potential for above-average relative earnings growth; (2) are focused in
industries that are rapidly expanding or have the potential to see increasing
sales or earnings; (3) historically have had well-defined and recurring
revenues; or (4) are attractive based on an assessment of private market or
franchise values.
After selection of the fund's target industries, specific company
investments are selected. In this process, the Investment Manager seeks to
identify companies whose prospects are deemed attractive on the basis of an
evaluation of valuation screens and prospective company fundamentals. From the
total of all companies included in the industry valuation process, the
Investment Manager selects a limited number from each industry as representative
of that industry. Such selections are made on the basis of various criteria,
including size and quality of a company, the visibility of its earnings and
various valuation parameters. Valuation screens may include dividend discount
model values, price-to-book ratios, price-to-cash flow values, relative and
absolute price-to-earnings ratios and ratios of price-earnings multiples to
earnings growth. Price and earnings momentum ratings derived from external
sources are also factored into the stock selection decision. Those companies
which the Investment Manager believes to be attractive investments are finally
selected for inclusion in the fund. For a discussion of the risks of mid-cap
stocks, see "Risk Considerations and Investment Practices of the Underlying
Funds" below.
Common stocks, particularly those sought for possible capital appreciation,
have historically experienced a great amount of price fluctuation. The
Investment Manager believes it is desirable to attempt to reduce the risks of
extreme price fluctuations even if such an attempt results, as it likely will at
times, in reducing the probabilities of obtaining greater capital appreciation.
Accordingly, the Investment Manager's investment process incorporates elements
which may reduce, although certainly not eliminate, the volatility of a
portfolio. The fund may hold a portion of its portfolio in investment grade
fixed-income securities, including convertible securities, in an effort to
moderate extremes of price fluctuation. The determination of the appropriate
asset allocation as between equity and fixed-income investments will be made by
the Investment Manager in its discretion, based upon its evaluation of economic
and market conditions.
MORGAN STANLEY DEAN WITTER MID-CAP DIVIDEND GROWTH SECURITIES. The investment
objective of this fund is to seek total return. Total return consists of capital
appreciation (including realized and unrealized capital gains and losses) and
current income (including dividends, interest and, in the case of discounted
instruments, discount accruals).
The fund seeks to achieve its investment objective by investing, under
normal circumstances, at least 65% of its total assets in a diversified
portfolio of domestic and foreign equity securities of companies whose
capitalization falls within the range of companies comprising the Standard &
Poor's Mid-Cap 400 Index ("S&P 400"), which capitalization range is
approximately between $220 million and $13 billion as of February 24, 1998, and
that currently pay dividends and that have the potential for increasing
dividends. The fund may invest up to 35% of its total assets in common stocks of
U.S. companies that fall outside the range of mid-cap securities or in
non-dividend paying mid-cap securities and in U.S. Government securities
(securities issued
28
<PAGE>
or guaranteed as to principal and interest by the United States or its agencies
and instrumentalities), investment grade corporate debt securities and/or money
market instruments when, in the opinion of the Investment Manager, the projected
total return on such securities is equal to or greater than the expected total
return on equity securities or when such holdings might be expected to reduce
the volatility of the portfolio (for purposes of this provision, the term "total
return" means the difference between the cost of a security and the aggregate of
its market value and dividends received); or in money market instruments under
any one or more of the following circumstances: (i) pending investment of
proceeds of sale of the fund's shares or of portfolio securities; (ii) pending
settlement of purchases of portfolio securities; or (iii) to maintain liquidity
for the purpose of meeting anticipated redemptions. The fund may also invest up
to 35% of its net assets in convertible bonds or preferred stocks that are
convertible into common stock, or in rights and warrants, so long as each such
investment is consistent with the fund's investment objective. There are no
minimum rating or quality requirements with respect to convertible securities in
which the fund may invest and, thus, all or some of such securities may be below
investment grade. The fund will not invest in convertible securities that are in
default in payment of principal or interest.
In the opinion of the Investment Manager, mid-cap companies typically have a
better growth potential than their large-cap counterparts because they are still
in the early and more dynamic period of their corporate existences. Often
mid-size companies and the industries in which they are focused are still
evolving as opposed to the more mature industries served by large-cap companies.
Moreover, mid-cap companies are not considered "emerging" stocks, nor are they
as volatile as small-cap firms. This is because mid-cap companies have increased
liquidity, attributable to their larger market capitalization as well as longer
and more established track records, and a stronger market presence and dominance
than small-cap firms. Consequently, because of the better growth inherent in
these companies, and their industries, mid-cap companies offer superior return
potential to large-cap companies, albeit with greater risk, yet owing to their
relatively larger size and better recognition in the investment community, they
have a reduced risk profile compared to smaller, emerging or micro-cap
companies, but offer less opportunity for capital appreciation.
The fund may invest up to 25% of the value of its total assets, at the time
of purchase, in equity securities, rights and warrants issued by foreign
issuers. The fund will invest in foreign securities whose market capitalization
is within the range of the companies comprising the S&P 400. Although certain of
these securities may not be mid-cap companies in the foreign markets in which
they trade, they will be included in the mid-cap securities in which the fund
may invest. Such investments may also be in the form of ADRs, EDRs or other
similar securities of foreign issuers. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. The fund's investments in unlisted foreign securities are subject to
the fund's overall policy limiting its investment in illiquid securities to 15%
or less of its net assets.
Notwithstanding the fund's investment objective of seeking total return, the
fund may, for defensive purposes, without limitation, invest in: obligations of
the United States Government, its agencies or instrumentalities; cash & cash
equivalents in major currencies; repurchase agreements; zero coupon securities;
money market instruments; and commercial paper.
The fund may also invest in private placements and restricted securities,
zero coupon securities and real estate investment trusts and may purchase
securities on a when-issued delayed delivery basis or on a when, as and if
issued basis and may lend its portfolio securities. For a discussion of the
risks of investing in these securities, see "Risk Considerations and Investment
Practices of the Underlying Funds" below.
MORGAN STANLEY DEAN WITTER NATURAL RESOURCE DEVELOPMENT SECURITIES INC. The
investment objective of this fund is capital growth. The fund will invest
primarily in common stock of companies in the natural resources and related
areas, and will invest at least 65% of its net assets at all times, except for
temporary and defensive purposes, in the securities of companies engaged in
these areas. A portfolio company is considered to be so engaged when at least
50% of its assets and/or revenues are currently the result of ownership or
development of assets in such areas. Such companies include those engaged in the
exploration for and development, production and distribution of natural
resources, in the development of energy-efficient technologies or in other
natural resource-related supplies or services.
The fund will seek capital growth by investing in securities of issuers
believed to be responsive to domestic and world demand for natural resources. As
a result of the challenges presented by natural resource needs, the fund
believes that opportunities for growth can be found in securities of issuers
which: (1) own or process natural resources, such as precious metals, other
minerals, water, timberland and forest products; (2) own or produce sources of
energy such as oil, natural gas, coal, uranium, geothermal, oil shale and
biomass; (3) participate in the exploration for and development of natural
resources supplies from new and conventional sources; (4) own or control oil,
gas, or other mineral leases (which may not produce recoverable energy or
resources), rights or royalty interests; (5) provide natural resources
transportation, distribution or processing services, such as refining and
pipeline services; (6) provide related services or supplies, such as drilling,
well servicing, chemicals, parts and equipment; and (7) contribute
energy-efficient technologies, such as systems for energy conversion,
conservation and pollution
29
<PAGE>
control. Emphasis on natural resources may result in exposure of some portfolio
companies to foreign political and currency risks and substantial price
fluctuations.
The fund may purchase zero coupon securities and private placements, may
also purchase securities on a when issued or delayed delivery basis, may
purchase or sell securities on a forward commitment basis and may purchase
securities on a "when, as and if issued" basis, may enter into repurchase
agreements and may invest in options and futures transactions all as described
below under "Risk Considerations and Investment Practices of the Underlying
Funds."
MORGAN STANLEY DEAN WITTER PACIFIC GROWTH FUND INC. The investment objective of
this fund is to maximize capital appreciation. The fund seeks to achieve its
investment objective by investing at least 65% of its total assets in securities
issued by issuers located in Asia, Australia and New Zealand. Such issuers will
include companies which are organized under the laws of an Asian country,
Australia or New Zealand and have a principal office in an Asian country,
Australia or New Zealand, or which derive 50% or more of their total revenues
from business in an Asian country, Australia or New Zealand. The securities
invested in will primarily consist of equity securities issued by companies
based in Asian countries, Australia and New Zealand which the Investment Manager
and/or Sub-Advisor believe are most likely to help the fund meet its investment
objective, but may also include fixed-income securities issued or guaranteed by
(or the direct obligations of) the governments of such countries (including zero
coupon treasury securities), when it is deemed by the Investment Manager or
Sub-Advisor that such investments are consistent with the fund's investment
objective. The principal countries in which such issuers will be located are
Japan, Australia, Malaysia, Singapore, Hong Kong, Thailand, the Philippines,
Indonesia, Taiwan, South Korea and India. The fund may invest more than 25% of
its total assets in Japan, reflecting the dominance of the Japanese stock market
in the Pacific basin. The fund also may invest over 25% of its total assets in
securities issued by issuers located in Hong Kong, Malaysia, South Korea and
Taiwan. The fund may also purchase securities issued by various agencies and
instrumentalities of the U.S. Government and may invest up to 10% of its total
assets in securities issued by other investment companies in order to
participate in certain foreign markets where foreigners are prohibited from
investing directly in the securities of foreign issuers.
The remainder of the fund's portfolio equalling, at times, up to 35% of the
fund's total assets, may be invested in equity and/or fixed-income and
convertible securities issued by issuers located anywhere in the world,
including the United States, subject to the fund's investment objective. In
addition, this portion of the fund's portfolio will consist of various other
financial instruments such as forward foreign exchange contracts, futures
contracts and options (see below under "Risk Considerations and Investment
Practices of the Underlying Funds").
It is anticipated that the securities held by the fund in its portfolio will
be denominated, principally, in the liquid Asian currencies and the Australian
dollar. Such currencies include the Japanese yen, Malaysian ringgit, Singapore
dollar, Hong Kong dollar, Thai baht, Philippine peso, Indonesia rupiah, Taiwan
dollar, South Korean won and Indian rupee. Securities of issuers within a given
country may be denominated in the currency of a different country.
The fund may also invest in securities of foreign issuers in the form of
American Depository Receipts (ADRs) or other similar securities convertible into
securities of foreign issuers (as described below under "Risk Considerations and
Investment Practices of the Underlying Funds").
MORGAN STANLEY DEAN WITTER PRECIOUS METALS AND MINERALS TRUST. The investment
objective of this fund is long-term capital appreciation. The fund will attempt
to achieve its investment objective by investing principally in the securities
of foreign and domestic companies engaged in the exploration, mining,
fabrication, processing, distribution or trading of precious metals and minerals
or in companies engaged in financing, managing, controlling or operating
companies engaged in these activities and also by investing a portion of its
assets in gold, silver, platinum and palladium bullion and coins.
Except during temporary defensive periods, the fund will invest at least 65%
of its total assets in precious metals and minerals securities and precious
metals bullion and coins as well as other precious metals-related investments
(such as debt instruments indexed to or payable in precious metals warrants).
This concentration policy is a fundamental policy of the fund.
The precious metals and minerals securities in which the fund will invest
include foreign and domestic common stocks, securities convertible into common
stocks, preferred stocks, debt securities, precious metals indexed debt
securities and options issued by companies engaged in the exploration, mining,
fabricating, processing, distributing or trading of precious metals and
minerals. A company will be considered to be principally engaged in such
activities if it derives more than 50% of its income or devotes 50% or more of
its assets to such activities.
Up to 35% of the fund's total assets may be invested in (a) common stocks of
companies that derive less than 50% of their income or devote 50% or less of
their assets to precious metals and minerals activities, (b) long-term U.S.
Government securities (securities guaranteed as to principal and interest by the
U.S. Government or its agencies or instrumentalities) (including zero coupon
bonds) and (c) short-term money market instruments such as obligations of, or
guaranteed by, the United States government, its agencies or instrumentalities
(including zero coupon bonds); commercial paper; bankers' acceptances and
certificates of deposit of U.S. domestic banks, including foreign
30
<PAGE>
branches of domestic banks, with assets of $500 million or more; time deposits;
or debt securities rated within the two highest grades by Moody's or S&P or, if
not rated, are of comparable quality as determined by the Investment Manager and
which mature within one year from the date of purchase. Investments in
short-term money market instruments may equal more than 35% of the fund's assets
during temporary defensive periods. Additionally, within the percentage
limitation described above, up to 20% of the fund's total assets may be invested
in long-term U.S. Government securities in order to offset the possible decline
in the value of precious metals and precious metals securities during periods of
low inflation rates.
Because most of the world's gold production is outside of the United States,
the fund expects that a majority of its assets will be invested in the
securities of foreign issuers. The percentage of assets invested in particular
countries or regions, however, will change from time to time according to the
Investment Manager's judgement of their political stability and economic
outlook. Under normal market conditions, the Fund intends to invest at least 30%
of its assets in the securities of foreign issuers. Such securities may be in
the form of ADRs, EDRs or other similar securities convertible into securities
of foreign issuers. These securities may not necessarily be denominated in the
same currency as the securities into which they may be converted. ADRs are
receipts typically issued by a United States bank or trust company evidencing
ownership of the underlying securities. EDRs are European receipts evidencing a
similar arrangement with a European bank. Generally, ADRs in registered form,
are designed for use in the United States securities markets and EDRs, in bearer
form, are designed for use in the European securities markets. In the event that
ADRs or EDRs are not available for a particular security, the fund nevertheless
may invest in that security. Such securities may or may not be listed on a
foreign securities exchange.
The fund will also invest a portion of its assets in gold, silver, platinum
and palladium bullion and coins (or certificates, receipts or contracts
representing ownership interests in these precious metals). While it is intended
that no more than 25% of the fund's total assets will be invested in such
bullion or coins, the fund's investment in bullion or coins may be further
restricted in order to comply with regulations of states where the fund's shares
are qualified for sale.
Bullion and coins will only be bought from and sold to U.S. and foreign
banks, regulated U.S. commodities exchanges, exchanges affiliated with a
regulated U.S. stock exchange, and dealers who are members of, or affiliated
with members of, a regulated U.S. commodities exchange, in accordance with
applicable investment laws. Gold, silver, platinum and palladium bullion will
not be purchased in any form that is not readily marketable. Coins will not be
purchased for their numismatic value and will not be considered for purchase if
they cannot be bought or sold in an active market. Any bullion or coins
purchased by the fund will be delivered to and stored with a qualified custodian
bank in the U.S. Investors should note that bullion and coins do not generate
income, offering only the potential for capital appreciation or depreciation,
and in these transactions the fund may encounter higher custody and transaction
costs than those normally associated with the ownership of securities, as well
as shipping and insurance costs. The fund may attempt to minimize the costs
associated with actual custody of bullion or coins by the use of receipts or
certificates representing ownership interests in these precious metals. The
fund's Investment Manager believes that investments in precious metals
themselves could serve to moderate fluctuations in the value of the fund's
portfolio since at times the prices of precious metals have tended not to
fluctuate as widely as the securities of issuers engaged in the mining of such
metals.
Investments related to gold and other precious metals and minerals are
considered speculative and are impacted by a host of world-wide economic,
financial and political factors. Prices of gold and other precious metals may
fluctuate sharply over short periods of time due to changes in inflation or
expectations regarding inflation in various countries, the availability of
supplies of these precious metals, changes in industrial and commercial demand,
metal sales by governments, central banks or international agencies, investment
speculation, monetary and other economic policies of various governments and
governmental restrictions on the private ownership of certain precious metals
and minerals. Additionally, the precious metals and minerals securities in which
the fund may invest may not necessarily move in tandem with the prices of actual
precious metals and minerals.
At the present time, there are five major producers of gold bullion. In
order of magnitude they are: the Republic of South Africa, the successor states
of the former Soviet Union, Canada, the United States and Australia. Political
and economic conditions in these countries may have a direct effect on the
mining, distribution and price of gold and sales of central bank gold holdings.
The fund may engage in options and futures transactions and forward currency
exchange transactions, may purchase private placements, zero coupon securities,
when, as and if issued securities, may purchase securities on a when-issued
delayed delivery or forward commitment basis and may lend its portfolio
securities. For a discussion of the risks of investing in these securities, see
"Risk Considerations and Investment Practices of the Underlying Funds" below.
MORGAN STANLEY DEAN WITTER S&P 500 INDEX FUND. The investment objective of this
fund is to provide investment results that, before expenses, correspond to the
total return (I.E., the combination of capital changes and income) of the
Standard & Poor's-Registered Trademark- 500 Composite Stock Price Index (the
"S&P 500 Index").
31
<PAGE>
The fund seeks to achieve its objective by investing, under normal
circumstances, at least 80% of its total assets in common stocks included in the
S&P 500 Index in approximately the same weightings as the Index. The fund
intends to invest in substantially all of the stocks that comprise the S&P 500
Index in approximately the same weightings as they are represented in the Index.
The fund operates as a "straight" index fund and will not be actively managed;
as such, adverse performance of a security will ordinarily not result in the
elimination of the security from the fund's portfolio. The fund will remain
invested in common stocks even when stock prices are generally falling.
Ordinarily, portfolio securities will not be sold except to reflect additions or
deletions of the stocks that comprise the S&P 500 Index, including mergers,
reorganizations and similar transactions, or as may be necessary to satisfy
redemption requests.
Over the long term, the Investment Manager seeks a correlation between the
performance of the fund, before expenses, and that of the S&P 500 Index of 0.95
or better. A figure of 1.00 would indicate perfect correlation. The fund's
ability to correlate its performance, before expenses, with the S&P 500 Index
may be affected by, among other things, changes in securities markets, the
manner in which the S&P 500 Index is calculated and the timing of purchases and
redemptions. The fund's ability to correlate its performance to the Index also
depends to some extent on the size of the fund's portfolio and the size of cash
flows into and out of the fund. To accommodate these cash flows, investment
changes may be made to maintain the similarity of the fund's portfolio to the
S&P 500 Index to the maximum practicable extent. The Investment Manager
regularly monitors the correlation and, in the event the desired correlation is
not achieved, the Investment Manager will determine what additional investment
changes may need to be made.
STOCK INDEX FUTURES CONTRACTS. The fund may purchase and sell stock index
futures contracts ("futures contracts") that are traded on U.S. commodity
exchanges on the S&P 500 Index ("stock index" futures). As a futures contract
purchaser, the fund incurs an obligation to take delivery of a specified amount
of the obligation underlying the contract at a specified time in the future for
a specified price. As a seller of a futures contract, the fund incurs an
obligation to deliver the specified amount of the underlying obligation at a
specified time in return for an agreed upon price. The fund will purchase or
sell stock index futures contracts for the following reasons: to simulate full
investment in the S&P 500 Index while retaining a cash balance for fund
management purposes, to facilitate trading, to reduce transaction costs or to
seek higher investment returns when a futures contract is priced more
attractively than stocks comprising the S&P 500 Index. The fund may enter into
such instruments provided that not more than 5% of its assets are required as an
initial margin deposit and provided that the contract prices of the stock index
futures contracts do not exceed 20% of its total assets. While such instruments
can be used as leveraged investments, the fund may not use them to leverage its
assets.
ADDITIONAL INFORMATION CONCERNING THE S&P 500 INDEX. The S&P 500 Index is a
well-known stock market index that includes common stocks of 500 companies from
several industrial sectors representing a significant portion of the market
value of all common stocks publicly traded in the United States, most of which
are listed on the New York Stock Exchange Inc. (the "NYSE"). Stocks in the S&P
500 Index are weighted according to their market capitalization (I.E., the
number of shares outstanding multiplied by the stock's current price). The
Investment Manager believes that the performance of the S&P 500 Index is
representative of the performance of publicly traded common stocks in general.
The composition of the S&P 500 Index is determined by S&P and is based on such
factors as the market capitalization and trading activity of each stock and its
adequacy as a representation of stocks in a particular industry group, and may
be changed from time to time.
"Standard & Poor's-Registered Trademark-," "S&P-Registered Trademark-," "S&P
500-Registered Trademark-," "Standard & Poor's 500," and "500" are trademarks of
The McGraw Hill Companies, Inc. and have been licensed for use by the fund. The
fund is not sponsored, endorsed, sold or promoted by Standard & Poor's, a
division of The McGraw Hill Companies, Inc. ("Standard & Poor's") and Standard &
Poor's makes no representation regarding the advisability of investing in the
fund.
The fund may also invest in repurchase agreements, zero coupon securities
and may lend its portfolio securities, as discussed under "Risk Considerations
and Investment Practices of the Underlying Funds" below.
The fund reserves the right to seek to achieve its investment objective by
converting to a "master/feeder" fund structure.
MORGAN STANLEY DEAN WITTER SHORT-TERM BOND FUND. The investment objective of
this fund is to provide investors with a high level of current income,
consistent with the preservation of capital. The fund seeks to achieve its
investment objective by investing in short-term, fixed-income securities with a
dollar-weighted average portfolio maturity of less than three years. The fund
may invest in nominally longer-term securities that have many of the
characteristics of shorter-term securities which will be deemed to have
maturities earlier than their ultimate maturity dates (E.G., securities with
demand features). A substantial portion of the fund's portfolio will consist of
fixed-income securities issued by U.S. corporate issuers and by the U.S.
Government, its agencies and instrumentalities.
Under normal market conditions, at least 65% of the fund's total assets will
be invested in bonds (for purposes of this provision, debt securities, which had
at time of issuance a maturity of greater than one year, are defined as
"bonds"). Furthermore, a portion of the fund's portfolio (up
32
<PAGE>
to 25% of the fund's total assets) may be invested in fixed-income securities
issued by foreign corporate and government issuers.
The fund is designed for the investor who seeks a higher yield than a money
market fund and less fluctuation in net asset value than a longer-term bond
fund. In addition, while an investment in the fund is not federally insured and
there is no guarantee of price stability (the fund is not a money market fund
with a virtually constant net asset value per share), an investment in the
fund--unlike a certificate of deposit ("CD")--is not frozen for any specific
period of time, may be redeemed at any time without incurring early withdrawal
penalties, and may also provide a higher yield.
The non-governmental debt securities in which the fund will invest will
include: (a) corporate debt securities, including bonds, notes and commercial
paper, rated in the four highest categories by a nationally recognized
statistical rating organization ("NRSRO") including Moody's, S&P, Duff and
Phelps, Inc. and Fitch Investors Service, Inc.; (b) bank obligations, including
CDs, bankers' acceptances and time deposits, issued by banks with a long-term CD
rating in one of the four highest categories by a NRSRO; and (c) investment
grade fixed-rate and adjustable rate Mortgage-Backed and Asset-Backed securities
of corporate issuers. Investments in securities rated within the four highest
rating categories by a NRSRO are considered "investment grade." However, such
securities rated within the fourth highest rating category by a NRSRO may have
speculative characteristics and, therefore, changes in economic conditions or
other circumstances are more likely to weaken their capacity to make principal
and interest payments than would be the case with investments in securities with
higher credit ratings. Where a fixed-income security is not rated by a NRSRO (as
may be the case with a foreign security) the Investment Manager will make a
determination of its creditworthiness and may deem it to be investment grade.
The fund may also invest in preferred stocks rated in one of the four
highest categories by a NRSRO.
Up to 5% of the fund's net assets may be invested in fixed-income securities
rated below investment grade. Such lower-rated securities are considered to be
speculative investments and, while producing higher yields than investment grade
securities, are subject to greater credit risks. The fund does not have any
minimum quality rating standards with respect to this portion of its portfolio.
If an investment grade fixed-income security held by the fund is downgraded by a
rating agency to a grade below investment grade, the fund may retain such
security in its portfolio unless such downgraded security, together with all
other non-investment grade fixed-income securities held by the fund constitute,
in the aggregate, more than 5% of the fund's net assets. In such event, the
Investment Manager will seek to sell such securities from its portfolio, as soon
as is reasonably practicable, in sufficient amounts to reduce this total to
below 5% of its net assets. A description of fixed-income security ratings is
contained in the Appendix to the Statement of Additional Information.
The United States Government securities (including zero coupon securities)
in which the fund will invest include securities which are direct obligations of
the United States Government, such as United States treasury bills, and which
are backed by the full faith and credit of the United States; securities which
are backed by the full faith and credit of the United States but which are
obligations of a United States agency or instrumentality (E.G., obligations of
the Government National Mortgage Association); securities issued by a United
States agency or instrumentality which has the right to borrow, to meet its
obligations, from an existing line of credit with the United States Treasury
(E.G., obligations of the Federal National Mortgage Association); securities
issued by a United States agency or instrumentality which is backed by the
credit of the issuing agency or instrumentality (E.G., obligations of the
Federal Farm Credit System); and governmentally issued mortgage-backed
securities.
In addition, as stated above, up to 25% of the fund's total assets may be
invested in securities issued by foreign corporations and governments and their
agencies and instrumentalities. Such securities may be denominated in foreign
currencies. The principal foreign currencies in which such securities will be
denominated are: the Australian dollar; Deutsche mark; Japanese yen; French
franc; British pound; Canadian dollar; Mexican peso; Swiss franc; Dutch guilder;
Austrian schilling; Spanish Peseta; Swedish Krona; European Currency Unit; and,
beginning on January 1, 1999, the single European Currency, the euro. The fund
will only invest in foreign securities which are rated by a NRSRO as investment
grade or which, if unrated, are deemed by the Investment Manager to be of
investment grade creditworthiness.
The fund may also purchase foreign securities, repurchase agreements, when,
as and if issued securities, zero coupon securities, may purchase securities on
a when-issued delayed delivery or forward commitment basis and may lend its
portfolio securities. For a discussion of the risks of investing in these
securities, see "Risk Considerations and Investment Practices of the Underlying
Funds" below.
MORGAN STANLEY DEAN WITTER SPECIAL VALUE FUND. The investment objective of this
fund is long-term capital appreciation. This fund seeks to achieve its
objectives by investing primarily in equity securities issued by companies whose
equity market capitalization, at the time of purchase, falls within the range of
$100 million to $1 billion and that, in the opinion of the Investment Manager,
appear undervalued relative to the marketplace or to investments in similar
companies. Under normal market conditions, the fund will invest at least 65% of
its total assets in common stocks issued by these small-sized companies. Up to
35% of the fund's total assets may be invested in common stocks not
33
<PAGE>
meeting the foregoing small company equity market parameters, in debt or
preferred equity securities convertible into or exchangeable for equity
securities, in non-convertible debt or preferred equity securities, and in
rights and warrants.
The Investment Manager intends to pursue a value-oriented approach in
selecting securities for the fund's portfolio. This approach seeks to identify
securities whose market value, in the Investment Manager's view, is less than
their intrinsic value. The Investment Manager believes that securities of
certain small companies often trade at a discount from their intrinsic value
(sometimes also referred to as "business value" or "investment worth").
Stocks of small companies are often under-researched and not widely
recognized by stock analysts or the financial press and, as a result, may be
less efficiently priced than larger, better-known companies. In addition, small
companies may have other unique attributes which make them relatively
undervalued in the market place compared to other similar larger companies. The
Investment Manager will attempt to identify and invest in such securities for
the fund with the expectation that the "value discount" may narrow over time and
lead to capital appreciation for the fund.
As part of the value-oriented approach, the Investment Manager, based on
research and analysis, will seek to identify companies with attributes which the
Investment Manager believes provide growth opportunities but are not fairly
valued in the market place. Such attributes may include, among other things, one
or more of the following: valuable franchises or other intangibles; ownership of
valuable trademarks or trade names; control of distribution networks or of other
market share for particular products; ownership of real estate, the value of
which is understated; underutilized liquidity and other factors that would
identify the issuer as a potential takeover target or turnaround candidate.
In addition to, or instead of, seeking companies with attributes such as
those described above, the Investment Manager may select securities for
investment by the fund on the basis of the Investment Manager's belief that the
potential exists for some catalyst to cause a stock's price to rise. Such a
catalyst might include, among other things, one or more of the following:
increased investor attention, asset sales, corporate restructurings or
reorganizations, a cyclical turnaround of a depressed business or industry, a
new product/innovation, or significant changes in management and regulatory or
environmental shifts.
In its security selection process, the Investment Manager will focus
initially on securities with market-to-book ratios and price-earnings ratios
which are lower than those of the general market averages or those of securities
of similar companies, although the fund is not restricted to selecting only
securities with those characteristics if other indicators of a value discount
exist. In evaluating a company as a potential investment of the fund, the
Investment Manager will consider factors such as the company's dividend yield
(if any), growth in sales, balance sheet, average sales-per-share, cash flow per
share, management capabilities, attractiveness of business opportunities,
pricing flexibility, financial and accounting practices and an ability or
prospects to increase revenues, earning and cash flow, and profitability, in an
effort to determine whether the company's intrinsic value is greater than its
market price.
The fund's strategy of investing in small companies will involve investment
in a large number of portfolio securities which may be volatile and long-term in
nature. Such investments may include "micro-cap" companies (generally, companies
with equity market capitalization of less than $150 million) which represent
some of the smallest and least liquid equity securities in the U.S. markets. An
investment in the fund, therefore, should be considered a long-term holding and
not a complete investment program and may not be suitable for all investors, For
a further discussion of the risks of investing in smaller companies, see "Risk
Considerations and Investment Practices of the Underlying Funds" below.
Fixed-income securities in which the fund may invest include corporate notes
and bonds and obligations issued or guaranteed by the U.S. Government, its
agencies and instrumentalities. The non-governmental debt securities in which
the fund will invest will include: (a) corporate debt securities, including
bonds, notes and commercial paper, rated in the four highest categories by a
NRSRO including Moody's, S&P, Duff and Phelps, Inc. and Fitch Investors Service,
Inc., or, if unrated, of comparable quality as determined by the Investment
Manager, and (b) bank obligations, including CDs, banker's acceptances and time
deposits, issued by banks with a long-term CD rating in one of the four highest
categories by a NRSRO. Investments in securities rated within the four highest
rating categories by a NRSRO are considered "investment grade." However, such
securities rated within the fourth highest rating category by a NRSRO have
speculative characteristics and, therefore, changes in economic conditions or
other circumstances are more likely to weaken the capacity of their issuers to
make principal and interest payments than would be the case with investments in
securities with higher credit ratings. Where a fixed-income security is not
rated by a NRSRO, the Investment Manager will make a determination of its
creditworthiness and may deem it to be investment grade.
This fund also may invest up to 20% of its total assets in convertible
fixed-income securities rated below investment grade or, if unrated, of
comparable quality as determined by the Investment Manager. In addition, the
fund may invest up to 5% of its total assets in non-convertible fixed-income
securities rated below investment grade or, if unrated, of comparable quality as
determined by the Investment Manager. Securities below investment grade are the
34
<PAGE>
equivalent of high yield, high risk bonds (commonly known as " junk bonds"). The
fund will not invest in fixed-income securities that are in default in payment
of principal or interest. In the event that the fund's investments in securities
rated below investment grade, including downgraded securities, constitute more
than 20% (in the case of convertible fixed-income securities) or 5% (in the case
of non-convertible fixed-income securities) of the fund's total assets, the fund
will seek immediately to sell sufficient securities to reduce the total to below
the applicable percentage. See "Risk Considerations and Investment Practices of
the Underlying Funds" below for a discussion of the risks of investing in
lower-rated and unrated fixed-income securities and the Appendix to the
Statement of Additional Information for a description of fixed-income security
ratings.
The U.S. Government securities in which the fund may invest include
securities which are direct obligations of the United States Government, such as
United States treasury bills, notes and bonds, and which are backed by the full
faith and credit of the United States; securities which are backed by the full
faith and credit of the United States but which are obligations of a United
States agency or instrumentality (E.G., obligations of the Government National
Mortgage Association); securities issued by a United States agency or
instrumentality which has the right to borrow, to meet its obligations, from an
existing line of credit with the United States Treasury (E.G., obligations of
the Federal National Mortgage Association); securities issued by the United
States agency or instrumentality which is backed by the credit of the issuing
agency or instrumentality (E.G., obligations of the Federal Farm Credit System).
Money market instruments in which the fund may invest include securities
issued or guaranteed by the U.S. Government, its agencies and instrumentalities
(Treasury bills, notes and bonds, including zero coupon securities); bank
obligations; Eurodollar certificates of deposit; obligations of savings
institutions; fully insured certificates of deposit; and commercial paper rated
within the four highest grades by Moody's or S&P or, if not rated, issued by a
company having an outstanding debt issue rated at least AA by S&P or Aa by
Moody's. Such securities may be used to invest uncommitted cash balances.
There may be periods during which, in the opinion of the Investment Manager,
market conditions warrant reduction of some of all of the fund's securities
holdings. During such periods, the fund may adopt a temporary "defensive"
posture in which up to 100% of its total assets is invested in money market
instruments or cash.
The fund may invest in American Depository Receipts and securities of
Canadian issuers registered under the Securities Act of 1934, but under current
policy the fund will not otherwise invest in foreign securities. The fund may
also purchase and sell futures contracts on stock indexes, may invest in
repurchase agreements, private placements, zero coupon securities and real
estate investment trusts, may purchase securities on a when-issued, delayed
delivery or forward commitment basis, may purchase securities on a "when, as and
if issued" basis, and may lend its portfolio securities, as discussed under
"Risk Considerations and Investment Practices of the Underlying Funds" below.
The fund intends to suspend the offering of its shares to new investors
whenever the Investment Manager determines that doing so is in the best
interests of prudent portfolio management. During any such suspension, current
shareholders of the fund will continue to be able to purchase additional fund
shares. The fund currently anticipates suspending the offering of its shares to
new investors if its net assets reach a level of approximately $250 million,
unless the Investment Manager determines that the continued offering of the
fund's shares is consistent at that time with prudent portfolio management.
Subsequently, the fund may recommence offering its shares to new investors from
time to time as may be consistent with prudent portfolio management.
MORGAN STANLEY DEAN WITTER U.S. GOVERNMENT SECURITIES TRUST. The investment
objective of this fund is high current income consistent with safety of
principal. The fund seeks to achieve its objective by investing in obligations
issued or guaranteed by the U.S. Government or its instrumentalities ("U.S.
Government securities"). All such obligations are backed by the "full faith and
credit" of the United States. Investments may be made in obligations of
instrumentalities of the U.S. Government only where such obligations are
guaranteed by the U.S. Government.
U.S. Government securities include U.S. Treasury securities consisting of
Treasury bills, Treasury notes and Treasury bonds. Some of the other U.S.
Government securities in which the fund may invest include securities of the
Federal Housing Administration, the Government National Mortgage Association,
the Department of Housing and Urban Development, the Export-Import Bank, the
Farmers Home Administration, the General Services Administration, the Maritime
Administration, Resolution Funding Corporation and the Small Business
Administration. The maturities of such securities usually range from three
months to thirty years.
The fund is not limited as to the maturities of the U.S. Government
securities in which it may invest, except that the fund will not purchase zero
coupon securities with remaining maturities of longer than ten years. For a
discussion of the risks of investing in U.S. Government securities (including
such securities purchased on a when-issued, delayed delivery or firm commitment
basis and zero coupon securities), see "Risk Considerations and Investment
Practices of the Underlying Funds" below.
While the fund has the ability to invest in any securities backed by the
full faith and credit of the United States, it is currently anticipated that a
substantial portion of the
35
<PAGE>
fund's assets will be invested in Certificates of the Government National
Mortgage Association (GNMA). Should market or economic conditions warrant, this
policy is subject to change at any time at the discretion of the Investment
Manager.
Yields on pass-through securities are typically quoted by investment dealers
and vendors based on the maturity of the underlying instruments and the
associated average life assumption. In periods of falling interest rates the
rate of prepayment tends to increase, thereby shortening the actual average life
of a pool of mortgage-related securities. Conversely, in periods of rising rates
the rate of prepayment tends to decrease, thereby lengthening the actual average
life of the pool. Reinvestment by the fund of prepayments may occur at higher or
lower interest rates than the original investment. Historically, actual average
life has been consistent with the twelve-year assumption referred to above. The
actual yield of each GNMA Certificate is influenced by the prepayment experience
of the mortgage pool underlying the Certificates. Interest on GNMA Certificates
is paid monthly rather than semi-annually as for traditional bonds.
The fund will invest in mortgage pass-through securities representing
participation interests in pools of residential mortgage loans originated by
United States governmental or private lenders such as banks, broker-dealers and
financing corporations and guaranteed, to the extent provided in such
securities, by the United States Government or one of its agencies or
instrumentalities. Such securities, which are ownership interests in the
underlying mortgage loans, differ from conventional debt securities, which
provide for periodic payment of interest in fixed amounts (usually
semi-annually) and principal payments at maturity or on specified call dates.
Mortgage pass-through securities provide for monthly payments that are a
"pass-through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans, net
of any fees paid to the guarantor of such securities and the servicer of the
underlying mortgage loans. The guaranteed mortgage pass-through securities in
which the fund may invest include those issued or guaranteed by GNMA or other
entities which securities are backed by the full faith and credit of the United
States.
Certificates for mortgage-backed securities evidence an interest in a
specific pool of mortgages. These certificates are, in most cases, "modified
pass-through" instruments, wherein the issuing agency guarantees the payment of
principal and interest on mortgages underlying the certificates, whether or not
such amounts are collected by the issuer on the underlying mortgages.
The fund may also invest in adjustable rate mortgage securities ("ARMs"),
which are pass-through mortgage securities collateralized by mortgages with
adjustable rather than fixed rates. ARMs eligible for inclusion in a mortgage
pool generally provide for a fixed initial mortgage interest rate for either the
first three, six, twelve or thirteen scheduled monthly payments. Thereafter, the
interest rates are subject to periodic adjustment based on changes to a
designated benchmark index.
The fund may also invest in collateralized mortgage obligations or "CMOs"
which are debt obligations collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by GNMA, FNMA or
FHLMC Certificates, but also may be collateralized by whole loans or private
mortgage pass-through securities (such collateral collectively hereinafter
referred to as "Mortgage Assets"). Multiclass pass-through securities are equity
interests in a trust composed of Mortgage Assets. Payments of principal of and
interest on the Mortgage Assets, and any reinvestment income thereon, provide
the funds to pay debt service on the CMOs or make scheduled distributions on the
multiclass pass-through securities. CMOs may be issued by agencies or
instrumentalities of the United States government, or by private originators of,
or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing. However, the fund will only invest in CMOs which
are backed by the full faith and credit of the United States.
The fund also may invest in, among other things, parallel pay CMOs and
Planned Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured
to provide payments of principal on each payment date to more than one class.
These simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds always are
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes.
For a discussion of the risks of investing in mortgage-backed securities,
see "Risk Considerations and Investment Practices of the Underlying Funds"
below.
MORGAN STANLEY DEAN WITTER UTILITIES FUND. The investment objective of this
fund is to provide current income and long-term growth of income and capital.
The fund seeks to achieve its investment objective by investing primarily in
equity and fixed-income securities of companies engaged in the public utilities
industry. The term "public utilities industry" consists of companies engaged in
the manufacture, production, generation, transmission, sale and distribution of
gas and electric energy, as well as companies engaged in the communications
field, including telephone, telegraph, satellite, microwave and other companies
providing communication facilities for the public, but excluding public
broadcasting companies.
36
<PAGE>
The fund invests in both equity securities (common stocks and securities
convertible into common stock) and fixed income securities (bonds and preferred
stock) in the public utilities industry. The fund does not have any set policies
to concentrate within any particular segment of the utilities industry.
Fixed-income securities in which the fund may invest are debt securities and
preferred stocks, which are rated at the time of purchase Baa or better by
Moody's or BBB or better by S&P, or which, if unrated, are deemed to be of
comparable quality by the fund's Trustees. The fund may also purchase equity and
fixed-income securities issued by foreign issuers.
Investments in fixed-income securities rated either BBB by S&P or Baa by
Moody's (the lowest credit ratings designated "investment grade") may have
speculative characteristics and, therefore, changes in economic conditions or
other circumstances are more likely to weaken their capacity to make principal
and interest payments than would be the case with investments in securities with
higher credit ratings. If a fixed-income security held by the fund is rated BBB
or Baa and is subsequently downgraded by a rating agency, the fund will retain
such security in its portfolio until the Investment Manager determines that it
is practicable to sell the security without undue market or tax consequences to
the fund. In the event that such downgraded securities constitute 5% or more of
the fund's total assets, the Investment Manager will sell immediately securities
sufficient to reduce the total to below 5%.
While the fund will invest primarily in the securities of public utility
companies, under ordinary circumstances it may invest up to 35% of its total
assets in U.S. Government securities (securities issued or guaranteed as to
principal and interest by the United States or its agencies and
instrumentalities), money market instruments and repurchase agreements. U.S.
Government securities in which the fund may invest include zero coupon
securities.
There may be periods during which, in the opinion of the Investment Manager,
market conditions warrant reduction of some or all of the fund's securities
holdings. During such periods, the fund may adopt a temporary "defensive"
posture in which greater than 35% of its net assets are invested in cash or
money market instruments.
The fund may invest in securities of foreign companies, may purchase private
placements, zero coupon securities, when, as and if issued securities, may enter
into repurchase agreements, may purchase securities on a when-issued delayed
delivery or forward commitment basis and may lend its portfolio securities. For
a discussion of the risks of investing in these securities, see "Risk
Considerations and Investment Practices of the Underlying Funds" below.
MORGAN STANLEY DEAN WITTER VALUE-ADDED MARKET SERIES-- EQUITY PORTFOLIO. The
investment objective of the Equity Portfolio, currently this fund's single
investment portfolio, is to achieve a high level of total return on its assets
through a combination of capital appreciation and current income. The fund will
seek to attain the Equity Portfolio's investment objective by investing on an
equally-weighted basis in a diversified portfolio of common stocks of the
companies which are included in the Standard & Poor's 500 Composite Stock Price
Index (the "S&P 500 Index"). The S&P 500 Index consists of 500 common stocks
selected by S&P, most of which are listed on the New York Stock Exchange.
Inclusion of a stock in the S&P 500 Index implies no opinion by S&P as to the
quality of the stock as an investment. The S&P 500 Index is determined, composed
and calculated by S&P without regard to the fund. S&P is neither a sponsor of,
nor in any way affiliated with, the fund, and S&P makes no representation or
warranty, express or implied, on the advisability of investing in the fund or as
to the ability of the S&P Index to track general stock market performance, and
S&P disclaims all warranties of merchantability or fitness for a particular
purpose or use with respect to the S&P Index or any data included therein. S&P
has no connection with the fund other than the licensing to the Investment
Manager of the use of the S&P 500 Index in connection with the fund.
The fund invests in the stocks included in the S&P 500 Index on an
equally-weighted basis; that is, to the extent practicable and subject to the
specific investment policies and restrictions described below, an equal portion
of the fund's assets is invested in each of the 500 securities in the S&P 500
Index. This differs from the S&P 500 Index and nearly all other major indexes,
which generally are weighted on a market-capitalization basis. For example, the
50 largest capitalization issuers in the S&P 500 Index represent approximately
45% of the S&P 500 Index. However, in accordance with its investment policies,
the fund will strive to maintain each stock holding equally, so that, subject to
the specific investment policies and investment restrictions described below,
approximately 0.20 of 1% of the fund's total invested assets will be invested in
each of the 500 companies included in the S&P 500 Index. The equal-weighting
technique is based on the Investment Manager's statistical analysis that most
portfolio performance is usually generated by only one-quarter to one-third of
the portfolio. Since there is no certainty that any specific company or industry
selection, even within a broad-based index such as the S&P 500 Index, will
achieve superior performance, the Investment Manager believes equal-weighting
may benefit the fund in seeking to attain its investment objective.
The holdings of the fund will be adjusted by the Investment Manager not less
than quarterly to reflect changes in the fund's asset levels and in the relative
values of the common stocks in the fund's portfolio so that following each
adjustment the value of the fund's investment in each security will be equal to
the extent practicable. In addition, whenever a company is eliminated from or
added to the S&P 500 Index, the fund will sell or purchase the stock of such
company, as the case may be, as soon as practicable.
37
<PAGE>
Accordingly, securities may be purchased and sold by the fund when such
purchases and sales would not be made under traditional investment criteria.
In addition, the Investment Manager may eliminate one or more securities (or
elect not to increase the fund's position in such securities), notwithstanding
the continued listing of such securities in the S&P 500 Index, in the following
circumstances: (a) the stock is no longer publicly traded, such as in the case
of a leveraged buyout or merger; (b) an unexpected adverse development with
respect to a company, such as bankruptcy or insolvency; (c) in the view of the
Investment Manager, there is a high degree of risk with respect to a company
that bankruptcy or insolvency will occur; or (d) in the view of the Investment
Manager, based on its consideration of the price of a company's securities, the
depth of the market in those securities and the amount of those securities held
or to be held by the fund, retaining shares of a company or making any
additional purchases would be inadvisable because of liquidity risks. The
Investment Manager will monitor on an ongoing basis all companies falling within
any of the circumstances described in this paragraph, and will return such
company's shares to the fund's portfolio, or recommence purchases, when and if
those conditions cease to exist.
RISK CONSIDERATIONS AND INVESTMENT PRACTICES OF THE UNDERLYING FUNDS
The net asset value of each Portfolio of the Fund's shares will fluctuate with
changes in the market value of the Fund's portfolio securities. The market value
of the Fund's portfolio securities will increase or decrease due to a variety of
economic, market or political factors which cannot be predicted. At times,
purchases or redemptions of the Underlying Funds by the Fund could adversely
impact the Underlying Fund. An Underlying Fund may be required to sell
securities at inopportune times in order to meet Fund redemption requests. In
addition, there may be tax consequences associated with sales of securities and
such sales may also increase transaction costs. The Investment Manager will seek
to minimize the impact of allocation decisions on the Underlying Funds and may,
at times, allocate or re-allocate assets in greater or lesser amounts among
funds than it otherwise would have had the Investment Manager not taken such
factors into account. A general description and the risks involved of the
various investment practices and techniques which some or all of the Underlying
Funds (in this section "fund" or "funds") may engage in is set forth below. A
more detailed discussion can be found in this Fund's Statement of Additional
Information as well as in the Prospectus and Statement of Additional Information
of each Underlying Fund.
FOREIGN SECURITIES. Investors should carefully consider the risks of investing
in securities of foreign issuers and securities denominated in non-U.S.
currencies. Fluctuations in the relative rates of exchange between the different
currencies of different nations will affect the value of a fund's investments.
Changes in foreign currency exchange rates relative to the U.S. dollar will
affect the U.S. dollar value of a funds' assets denominated in that currency and
thereby impact upon the fund's total return on such assets.
Foreign currency exchange rates are determined by forces of supply and
demand on the foreign exchange markets. These forces are themselves affected by
the international balance of payments and other economic and financial
conditions, government intervention, speculation and other factors. Moreover,
foreign currency exchange rates may be affected by the regulatory control of the
exchanges on which the currencies trade.
Investments in foreign securities will also occasion risks relating to
political and economic developments abroad, including the possibility of
expropriations or confiscatory taxation, limitations on the use or transfer of a
fund's assets and any effects of foreign social, economic or political
instability. Political and economic developments in Asia may have profound
effects upon the value of a large segment of a fund's portfolio. Foreign
companies are not subject to the regulatory requirements of U.S. companies and,
as such, there may be less publicly available information about such companies.
Moreover, foreign companies are not subject to uniform accounting, auditing and
financial reporting standards and requirements comparable to those applicable to
U.S. companies.
Securities of foreign issuers may be less liquid than comparable securities
of U.S. issuers and, as such, their price changes may be more volatile.
Furthermore, foreign exchanges and broker-dealers are generally subject to less
government and exchange scrutiny and regulation than their American
counterparts. Brokerage commissions, dealer concessions and other transaction
costs may be higher on foreign markets than in the U.S. In addition, differences
in clearance and settlement procedures on foreign markets may occasion delays in
settlements of fund trades effected in such markets. Inability to dispose of
portfolio securities due to settlement delays could result in losses to a fund
due to subsequent declines in value of such securities and the inability of the
fund to make intended security purchases due to settlement problems could result
in a failure of the fund to make potentially advantageous investments.
The foreign securities in which the Fund will be investing through its
investments in the Underlying Funds may be issued by issuers located in
developing countries. Compared to the United States and other developed
countries, developing countries may have relatively unstable governments,
economies based on only a few industries, and securities markets which trade a
small number of securities. Prices of these securities tend to be especially
volatile and, in the past, securities in these countries have offered greater
potential for gain (as well as loss) than securities of companies located in
developed countries.
38
<PAGE>
Many European countries are about to adopt a single European currency, the
euro (the "Euro Conversion"). The consequences of the Euro Conversion for
foreign exchange rates, interest rates and the value of European securities
eligible for purchase by an Underlying Fund are presently unclear. Such
consequences may adversely affect the value and/or increase the volatility of
securities held by an Underlying Fund.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Certain Underlying Funds may enter
into forward foreign currency exchange contracts ("forward contracts") in
connection with their foreign securities investments.
A forward contract involves an obligation to purchase or sell a currency at
a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
A fund may enter into forward contracts as a hedge against fluctuations in
future foreign exchange rates.
A fund will enter into forward contracts under various circumstances. When a
fund enters into a contract for the purchase or sale of a security denominated
in a foreign currency, it may, for example, desire to "lock in" the price of the
security in U.S. dollars or some other foreign currency which the fund is
temporarily holding in its portfolio. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars or other currency, of the
amount of foreign currency involved in the underlying security transactions, the
fund will be able to protect itself against a possible loss resulting from an
adverse change in the relationship between the U.S. dollar or other currency
which is being used for the security purchase (by the fund or the counterparty)
and the foreign currency in which the security is denominated during the period
between the date on which the security is purchased or sold and the date on
which payment is made or received.
At other times, when, for example, a fund's Investment Manager or Advisor or
Sub-Advisor believe that the currency of a particular foreign country may suffer
a substantial decline against the U.S. dollar or some other foreign currency,
the fund may enter into a forward contract to sell, for a fixed amount of
dollars or other currency, the amount of foreign currency approximating the
value of some or all of the fund's securities holdings (or securities which the
fund has purchased for its portfolio) denominated in such foreign currency.
Under identical circumstances, a fund may enter into a forward contract to sell,
for a fixed amount of U.S. dollars or other currency, an amount of foreign
currency other than the currency in which the securities to be hedged are
denominated approximating the value of some or all of the portfolio securities
to be hedged. This method of hedging, called "cross-hedging," will be selected
by the Investment Manager or Advisor or Sub-Advisor when it is determined that
the foreign currency in which the portfolio securities are denominated has
insufficient liquidity or is trading at a discount as compared with some other
foreign currency with which it tends to move in tandem.
In addition, when a fund's Investment Manager or Advisor or Sub-Advisor
anticipate purchasing securities at some time in the future, and wishes to lock
in the current exchange rate of the currency in which those securities are
denominated against the U.S. dollar or some other foreign currency, the fund may
enter into a forward contract to purchase an amount of currency equal to some or
all of the value of the anticipated purchase, for a fixed amount of U.S. dollars
or other currency. The fund may, however, close out the forward contract without
purchasing the security which was the subject of the "anticipatory" hedge.
In all of the above circumstances, if the currency in which a fund's
securities holdings (or anticipated portfolio securities) are denominated rises
in value with respect to the currency which is being purchased (or sold), then
the fund will have realized fewer gains than had the fund not entered into the
forward contracts. Moreover, the precise matching of the forward contract
amounts and the value of the securities involved will not generally be possible,
since the future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date the forward contract is entered into and the date it matures. A fund is not
required to enter into such transactions with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate by
the Investment Manager or Advisor or Sub-Advisor. A fund generally will not
enter into a forward contract with a term of greater than one year, although it
may enter into forward contracts for periods of up to five years. A fund may be
limited in its ability to enter into hedging transactions involving forward
contracts by the Internal Revenue Code requirements relating to qualification as
a regulated investment company.
OPTIONS AND FUTURES TRANSACTIONS. Certain of the Underlying Funds may purchase
and sell (write) call and put options on (i) portfolio securities which are
denominated in either U.S. dollars or foreign currencies; (ii) stock indexes;
and (iii) the U.S. dollar and foreign currencies. Such options are or may in the
future be listed on several U.S. and foreign securities exchanges or may be
traded in over-the-counter transactions ("OTC options"). OTC options are
purchased from or sold (written) to dealers or financial institutions which have
entered into direct agreements with the fund.
A fund is permitted to write covered call options on portfolio securities
and the U.S. dollar and foreign currencies, without limit, in order to hedge
against the decline in the value of a security or currency in which such
security is denominated (although such hedge is limited to the value of the
premium received) and to close out long call option positions. A fund may write
covered put options, under which the fund incurs an obligation to buy the
security (or currency) underlying the option from the purchaser of the put at
the option's exercise price at any time during the option period, at the
purchaser's election.
39
<PAGE>
A fund may purchase listed and OTC call and put options in amounts equalling
up to 5% of its total assets. A fund may purchase call options to close out a
covered call position or to protect against an increase in the price of a
security it anticipates purchasing or, in the case of call options on a foreign
currency, to hedge against an adverse exchange rate change of the currency in
which the security it anticipates purchasing is denominated vis-a-vis the
currency in which the exercise price is denominated. A fund may purchase put
options on securities which it holds in its portfolio to protect itself against
a decline in the value of the security and to close out written put positions in
a manner similar to call option closing purchase transactions. There are no
other limits on a fund's ability to purchase call and put options other than
compliance with the foregoing policies.
A fund may purchase and sell futures contracts that are currently traded, or
may in the future be traded, on U.S. and foreign commodity exchanges on
underlying portfolio securities, on any currency ("currency" futures), on U.S.
and foreign fixed-income securities ("interest rate" futures) and on such
indexes of U.S. or foreign equity or fixed-income securities as may exist or
come into being ("index" futures). A fund may purchase or sell interest rate
futures contracts for the purpose of hedging some or all of the value of its
portfolio securities (or anticipated portfolio securities) against changes in
prevailing interest rates. A fund may purchase or sell index futures contracts
for the purpose of hedging some or all of its portfolio (or anticipated
portfolio) securities against changes in their prices. A fund may purchase or
sell currency futures contracts to hedge against an anticipated rise or decline
in the value of the currency in which a portfolio security is denominated vis-a-
vis another currency. As a futures contract purchaser, a fund incurs an
obligation to take delivery of a specified amount of the obligation underlying
the contract at a specified time in the future for a specified price. As a
seller of a futures contract, a fund incurs an obligation to deliver the
specified amount of the underlying obligation at a specified time in return for
an agreed upon price.
A fund also may purchase and write call and put options on futures contracts
which are traded on an exchange and enter into closing transactions with respect
to such options to terminate an existing position.
New futures contracts, options and other financial products and various
combinations thereof continue to be developed. A fund may invest in any such
futures, options or products as may be developed, to the extent consistent with
its investment objective and applicable regulatory requirements.
RISKS OF OPTIONS AND FUTURES TRANSACTIONS. A fund may close out its position as
writer of an option, or as a buyer or seller of a futures contract, only if a
liquid secondary market exists for options or futures contracts of that series.
There is no assurance that such a market will exist, particularly in the case of
OTC options, as such options may generally only be closed out by entering into a
closing purchase transaction with the purchasing dealer. Also, exchanges may
limit the amount by which the price of many futures contracts may move on any
day. If the price moves equal the daily limit on successive days, then it may
prove impossible to liquidate a futures position until the daily limit moves
have ceased.
Futures contracts and options transactions may be considered speculative in
nature and may involve greater risks than those customarily assumed by other
investment companies which do not invest in such instruments. One such risk is
that the Investment Manager or Advisor or Sub-Advisor could be incorrect in its
expectations as to the direction or extent of various interest rate or price
movements or the time span within which the movements take place. For example,
if a fund sold futures contracts for the sale of securities in anticipation of
an increase in interest rates, and then interest rates went down instead,
causing bond prices to rise, the fund would lose money on the sale. Another risk
which will arise in employing futures contracts to protect against the price
volatility of portfolio securities is that the prices of securities, currencies
and indexes subject to futures contracts (and thereby the futures contract
prices) may correlate imperfectly with the behavior of the U.S. dollar cash
prices of a fund's portfolio securities and their denominated currencies. See
the Statement of Additional Information for a further discussion of these risks.
REPURCHASE AGREEMENTS. Certain Underlying Funds may enter into repurchase
agreements, which may be viewed as a type of secured lending, and which
typically involve the acquisition by a fund of debt securities, from a selling
financial institution such as a bank, savings and loan association or
broker-dealer. The agreement provides that the fund will sell back to the
institution, and that the institution will repurchase, the underlying security
at a specified price and at a fixed time in the future, usually not more than
seven days from the date of purchase. While repurchase agreements involve
certain risks not associated with direct investments in debt securities,
including the risks of default or bankruptcy of the selling financial
institution, a fund follows procedures to minimize such risks. These procedures
include effecting repurchase transactions only with large, well-capitalized and
well-established financial institutions and maintaining adequate
collateralization.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. Certain Underlying Funds may
also use reverse repurchase agreements and dollar rolls as part of their
investment strategy. Reverse repurchase agreements involve sales by a fund of
portfolio assets concurrently with an agreement by that fund to repurchase the
same assets at a later date at a fixed price. A fund may enter into dollar rolls
in which the fund sells securities and simultaneously contracts to repurchase
substantially similar (same type and coupon) securities on a specified future
date. Reverse repurchase agreements and dollar rolls involve the risk that the
market
40
<PAGE>
value of the securities the fund is obligated to repurchase under the agreement
may decline below the repurchase price. In the event the buyer of securities
under a reverse repurchase agreement or dollar roll files for bankruptcy or
becomes insolvent, the fund's use of proceeds of the agreement may be restricted
pending a determination by the other party, or its trustee or receiver, whether
to enforce the fund's obligation to repurchase the securities. Reverse
repurchase agreements and dollar rolls are speculative techniques involving
leverage, and are considered borrowings by a fund.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. From time
to time, in the ordinary course of business, certain of the Underlying Funds may
purchase securities on a when-issued or delayed delivery basis or may purchase
or sell securities on a forward commitment basis. When such transactions are
negotiated, the price is fixed at the time of the commitment, but delivery and
payment can take place a month or more after the date of the commitment. There
is no overall limit on the percentage of the fund's assets which may be
committed to the purchase of securities on a when-issued, delayed delivery or
forward commitment basis. An increase in the percentage of the fund's assets
committed to the purchase of securities on a when-issued, delayed delivery or
forward commitment basis may increase the volatility of a fund's net asset
value.
WHEN, AS AND IF ISSUED SECURITIES. Certain Underlying Funds may purchase
securities on a "when, as and if issued" basis under which the issuance of the
security depends upon the occurrence of a subsequent event, such as approval of
a merger, corporate reorganization, leveraged buyout or debt restructuring. If
the anticipated event does not occur and the securities are not issued, the fund
will have lost an investment opportunity. There is no overall limit on the
percentage of a fund's assets which may be committed to the purchase of
securities on a "when, as and if issued" basis. An increase in the percentage of
a fund's assets committed to the purchase of securities on a "when, as and if
issued" basis may increase the volatility of its net asset value.
ZERO COUPON SECURITIES. A portion of the fixed-income securities purchased by
certain Underlying Funds may be zero coupon securities. Such securities are
purchased at a discount from their face amount, giving the purchaser the right
to receive their full value at maturity. The interest earned on such securities
is, implicitly, automatically compounded and paid out at maturity. While such
compounding at a constant rate eliminates the risk of receiving lower yields
upon reinvestment of interest if prevailing interest rates decline, the owner of
a zero coupon security will be unable to participate in higher yields upon
reinvestment of interest received on interest-paying securities if prevailing
interest rates rise.
A zero coupon security pays no interest to its holder during its life.
Therefore, to the extent the fund invests in zero coupon securities, it will not
receive current cash available for distribution to shareholders. In addition,
zero coupon securities are subject to substantially greater price fluctuations
during periods of changing prevailing interest rates than are comparable
securities which pay interest on a current basis. Current federal tax law
requires that a holder (such as a fund) of a zero coupon security accrue a
portion of the discount at which the security was purchased as income each year
even though the fund receives no interest payments in cash on the security
during the year.
PRIVATE PLACEMENTS. Certain Underlying Funds may invest up to either 5% or 10%
of their total assets in securities which are subject to restrictions on resale
because they have not been registered under the Securities Act of 1933, as
amended (the "Securities Act"), or which are otherwise not readily marketable.
(Securities eligible for resale pursuant to Rule 144A under the Securities Act,
and determined to be liquid pursuant to the procedures discussed in the
following paragraph, are not subject to the foregoing restriction.) These
securities are generally referred to as private placements or restricted
securities. Limitations on the resale of such securities may have an adverse
effect on their marketability, and may prevent a fund from disposing of them
promptly at reasonable prices. A fund may have to bear the expense of
registering such securities for resale and the risk of substantial delays in
effecting such registration.
The Securities and Exchange Commission has adopted Rule 144A under the
Securities Act, which permits a fund to sell restricted securities to qualified
institutional buyers without limitation. The Investment Manager, pursuant to
procedures adopted by the Trustees of each Underlying Fund, will make a
determination as to the liquidity of each restricted security purchased by that
fund. If a restricted security is determined to be "liquid," such security will
not be included within the category "illiquid securities," which under current
policy may not exceed 15% of each Underlying Fund's net assets.
CONVERTIBLE SECURITIES. Certain Underlying Funds may acquire, through purchase
or a distribution by the issuer of a security held in its portfolio, a
fixed-income security which is convertible into common stock of the issuer. A
convertible security is a bond, debenture, note, preferred stock or other
security that may be converted into or exchanged for a prescribed amount of
common stock of the same or a different issuer within a particular period of
time at a specified price or formula. Convertible securities rank senior to
common stocks in a corporation's capital structure and, therefore, entail less
risk than the corporation's common stock. The value of a convertible security is
a function of its "investment value" (its value as if it did not have a
conversion privilege), and its "conversion value" (the security's worth if it
were to be exchanged for the underlying security, at market value, pursuant to
its conversion privilege).
To the extent that a convertible security's investment value is greater than
its conversion value, its price will be
41
<PAGE>
primarily a reflection of such investment value and its price will be likely to
increase when interest rates fall and decrease when interest rates rise, as with
a fixed-income security (the credit standing of the issuer and other factors may
also have an effect on the convertible security's value). If the conversion
value exceeds the investment value, the price of the convertible security will
rise above its investment value and, in addition, will sell at some premium over
its conversion value. (This premium represents the price investors are willing
to pay for the privilege of purchasing a fixed-income security with a
possibility of capital appreciation due to the conversion privilege.) At such
times the price of the convertible security will tend to fluctuate directly with
the price of the underlying equity security.
A portion of the fixed-income and convertible securities in which certain
Underlying Funds may invest are not rated; when rated, such ratings will
generally be below investment grade. Securities below investment grade are the
equivalent of high yield, high risk bonds, commonly known as "junk bonds."
Investment grade is generally considered to be debt securities rated BBB or
higher by S&P or Baa or higher by Moody's. However, the aforementioned funds
will not invest in debt securities that are in default in payment of principal
or interest.
Because of the special nature of investments in lower rated debt securities,
a fund's Investment Manager or Advisor or Sub-Advisor must take account of
certain special considerations in assessing the risks associated with such
investments. The prices of lower rated securities have been found to be less
sensitive to changes in prevailing interest rates than higher rated investments,
but are likely to be more sensitive to adverse economic changes or individual
corporate developments. During an economic downturn or substantial period of
rising interest rates, highly leveraged issuers may experience financial stress
which would adversely affect their ability to service their principal and
interest payment obligations, to meet their projected business goals or to
obtain additional financing. If the issuer of a fixed-income security owned by a
fund defaults, the fund may incur additional expenses to seek recovery. In
addition, periods of economic uncertainty and change can be expected to result
in an increased volatility of market prices of lower rated securities and a
corresponding volatility in the net asset value of a share of a fund holding
such securities.
HIGH YIELD SECURITIES. All fixed-income securities are subject to two types of
risks: the credit risk and the interest rate risk. The credit risk relates to
the ability of the issuer to meet interest or principal payments or both as they
come due. Generally, higher yielding bonds are subject to a credit risk to a
greater extent than higher quality bonds. The interest rate risk refers to the
fluctuations in net asset value of any portfolio of fixed-income securities
resulting solely from the inverse relationship between price and yield of
fixed-income securities; that is, when the general level of interest rates
rises, the prices of outstanding fixed-income securities generally decline, and
when interest rates fall, prices generally rise.
The ratings of fixed-income securities by Moody's and Standard & Poor's are
a generally accepted barometer of credit risk.
Because of the special nature of a fund's investment in high yield
securities, commonly known as junk bonds, the Investment Manager must take
account of certain special considerations in assessing the risks associated with
such investments. Although the growth of the high yield securities market in the
1980s had paralleled a long economic expansion, recently many issuers have been
affected by adverse economic and market conditions. It should be recognized that
an economic downturn or increase in interest rates is likely to have a negative
effect on the high yield bond market and on the value of the high yield
securities held by a fund, as well as on the ability of the securities' issuers
to repay principal and interest on their borrowings.
The prices of high yield securities have been found to be less sensitive to
changes in prevailing interest rates than higher-rated investments, but are
likely to be more sensitive to adverse economic changes or individual corporate
developments. During an economic downturn or substantial period of rising
interest rates, highly leveraged issuers may experience financial stress which
would adversely affect their ability to service their principal and interest
payment obligations, to meet their projected business goals or to obtain
additional financing. If the issuer of a fixed-income security owned by a fund
defaults, the fund may incur additional expenses to seek recovery. In addition,
periods of economic uncertainty and change can be expected to result in an
increased volatility of market prices of high yield securities and a concomitant
volatility in the net asset value of a share of a fund. Moreover, the market
prices of certain of a fund's portfolio securities which are structured as zero
coupon and payment-in-kind securities are affected to a greater extent by
interest rate changes and thereby tend to be more volatile than securities which
pay interest periodically and in cash.
The secondary market for high yield securities may be less liquid than the
markets for higher quality securities and, as such, may have an adverse effect
on the market prices of certain securities. The limited liquidity of the market
may also adversely affect the ability of a fund's Directors/Trustees to arrive
at a fair value for certain high yield securities at certain times and could
make it difficult for the fund to sell certain securities. In addition, new laws
and potential new laws may have an adverse effect upon the value of high yield
securities and a concomitant negative impact upon the net asset value of a share
of a fund.
MORTGAGE-BACKED SECURITIES. As stated above, a portion of a fund's investments
may be in Mortgage-Backed securities. Mortgage-Backed securities are securities
that directly or indirectly represent a participation in, or are secured by and
payable from, mortgage loans secured by
42
<PAGE>
real property. The term Mortgage-Backed securities as used herein includes
adjustable rate mortgage securities and derivative mortgage products such as
collateralized mortgage obligations, stripped Mortgage-Backed securities and
other products described below.
There are currently three basic types of Mortgage-Backed securities: (i)
those issued or guaranteed by the United States Government or one of its
agencies or instrumentalities, such as the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA") and the
Federal Home Loan Mortgage Corporation ("FHLMC") (securities issued by GNMA, but
not those issued by FNMA or FHLMC, are backed by the "full faith and credit" of
the United States); (ii) those issued by private issuers that represent an
interest in or are collateralized by Mortgage-Backed securities issued or
guaranteed by the United States Government or one of its agencies or
instrumentalities; and (iii) those issued by private issuers that represent an
interest in or are collateralized by whole mortgage loans or Mortgage-Backed
securities without a government guarantee but usually having some form of
private credit enhancement.
Mortgage-Backed securities have certain different characteristics than
traditional debt securities. Among the major differences are that interest and
principal payments are made more frequently, usually monthly, and that principal
may be prepaid at any time because the underlying mortgage loans or other assets
generally may be prepaid at any time. As a result, if a fund purchases such a
security at a premium, a prepayment rate that is faster than expected will
reduce yield to maturity, while a prepayment rate that is slower than expected
will have the opposite effect of increasing yield to maturity. Alternatively, if
a fund purchases these securities at a discount, faster than expected
prepayments will increase, while slower than expected prepayments will reduce,
yield to maturity. A fund may invest a portion of its assets in derivative
Mortgage-Backed securities such as Stripped Mortgage-Backed securities which are
highly sensitive to changes in prepayment and interest rates. The Investment
Manager seeks to manage these risks (and potential benefits) by investing in a
variety of such securities and through hedging techniques.
Mortgage-Backed securities, like all fixed income securities, generally
decrease in value as a result of increases in interest rates. In addition,
although generally the value of fixed-income securities increases during periods
of falling interest rates and, as stated above, decreases during periods of
rising interest rates, as a result of prepayments and other factors, this is not
always the case with respect to Mortgage-Backed securities.
Although the extent of prepayments on a pool of mortgage loans depends on
various economic and other factors, as a general rule prepayments on fixed rate
mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by a fund are likely to be greater during a period of
declining interest rates and, as a result, likely to be reinvested at lower
interest rates than during a period of rising interest rates. Mortgage-Backed
securities generally decrease in value as a result of increases in interest
rates and may benefit less than other fixed-income securities from declining
interest rates because of the risk of prepayment.
There are certain risks associated specifically with CMOs. CMOs issued by
private entities are not U.S. Government securities and are not guaranteed by
any government agency, although the securities underlying a CMO may be subject
to a guarantee. Therefore, if the collateral securing the CMO, as well as any
third party credit support or guarantees, is insufficient to make payment, the
holder could sustain a loss. Also, a number of different factors, including the
extent of prepayment of principal of the Mortgage Assets, affect the
availability of cash for principal payments by the CMO issuer on any payment
date and, accordingly, affect the timing of principal payments on each CMO
class. In addition, CMO classes with higher yields tend to be more volatile with
respect to cash flow of the underlying mortgages; as a result the market prices
of a yield on these classes tend to be more volatile.
Asset-Backed securities represent the securitization techniques used to
develop Mortgage-Backed securities applied to a broad range of other assets.
Through the use of trusts and special purpose corporations, various types of
assets, primarily automobile and credit card receivables and home equity loans,
are being securitized in pass-through structures similar to the mortgage
pass-through structures described above or in a pay-through structure similar to
the CMO structure. Asset-Backed securities involve certain risks that are not
posed by Mortgage-Backed securities, resulting mainly from the fact that
Asset-Backed securities do not usually contain the complete benefit of a
security interest in the related collateral. For example, credit card
receivables generally are unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, including the
bankruptcy laws, some of which may reduce the ability to obtain full payment. In
the case of automobile receivables, due to various legal and economic factors,
proceeds for repossessed collateral may not always be sufficient to support
payments on these securities.
RIGHTS AND WARRANTS. Certain Underlying Funds may acquire rights and/or
warrants which are attached to other securities in its portfolio, or which are
issued as a distribution by the issuer of a security held in its portfolio.
Rights and/or warrants are, in effect, options to purchase equity securities at
a specific price, generally valid for a specific period of time, and have no
voting rights, pay no dividends and have no rights with respect to the
corporation issuing them.
REAL ESTATE INVESTMENT TRUSTS. A fund may invest in real estate investment
trusts which pool investors' funds for investments primarily in commercial real
estate properties.
43
<PAGE>
Investment in real estate investment trusts may be the most practical available
means for a fund to invest in the real estate industry (a fund is prohibited
from investing in real estate directly). As a shareholder in a real estate
investment trust, a fund would bear its ratable share of the real estate
investment trust's expenses, including its advisory and administration fees. At
the same time the fund would continue to pay its own investment management fees
and other expenses, as a result of which the fund and its shareholders in effect
will be absorbing duplicate levels of fees with respect to investments in real
estate investment trusts.
OTHER INVESTMENT VEHICLES. Certain Underlying Funds may invest a small portion
of their total assets in securities issued by other investment companies. Such
investments may be necessary in order to participate in certain foreign markets
where foreigners are prohibited from investing directly in the securities of
individual issuers. Each fund will incur any indirect expenses incurred through
investment in an investment company, such as the payment of a management fee
(which may result in the payment of an additional advisory fee). Furthermore, it
should be noted that foreign investment companies are not subject to the U.S.
securities laws and may be subject to fewer or less stringent regulations than
U.S. investment companies.
SECURITIES RECEIPTS. Certain Underlying Funds may also invest in securities of
foreign issuers in the form of American Depository Receipts (ADRs), European
Depository Receipts (EDRs) or other similar securities convertible into
securities of foreign issuers. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts typically issued by a United States bank or trust
company evidencing ownership of the underlying securities. EDRs are European
receipts evidencing a similar arrangement. Generally, ADRs, in registered form,
are designed for use in the United States securities markets and EDRs, in bearer
form, are designed for use in European securities markets.
INVESTMENTS IN EUROPEAN SECURITIES. The Morgan Stanley Dean Witter European
Growth Fund Inc. invests its assets primarily in the securities of European
issuers. Political and economic developments in Europe, especially as they
relate to changes in the structure of the European Economic Community and the
anticipated development of a unified common market, may have profound effects
upon the value of a large segment of that fund's portfolio. Continued progress
in the evolution of, for example, a united European common market may be slowed
by unanticipated political or social events and may, therefore, adversely affect
the value of certain of the securities held in that fund's portfolio. Foreign
companies are not subject to the regulatory requirements of U.S. companies and,
as such, there may be less publicly available information about such companies.
The Dean Witter International SmallCap Fund may invest more than 25% of its
total assets in British issuers and that fund's investment performance may be
affected by social, political and economic events occurring in the United
Kingdom.
SMALL-CAP STOCKS. Certain Underlying Funds invest primarily in small
capitalization foreign or U.S. equity securities. Investing in lesser-known,
smaller capitalized companies may involve greater risk of volatility of a fund's
net asset value than is customarily associated with investing in larger, more
established companies. There is typically less publicly available information
concerning foreign and smaller companies than for domestic and larger, more
established companies. Some small companies have limited product lines,
distribution channels and financial and managerial resources and tend to
concentrate on fewer geographic markets than do larger companies. Also, because
smaller companies normally have fewer shares outstanding than larger companies
and trade less frequently, it may be more difficult for the fund to buy and sell
significant amounts of such shares without an unfavorable impact on prevailing
market prices. Some of the companies in which the fund may invest may
distribute, sell or produce products which have recently been brought to market
and may be dependent on key personnel with varying degrees of experience.
MID-CAP STOCKS. Investing in medium-sized market capitalization companies may
involve greater risk of volatility of a fund's net asset value than is
customarily associated with investing in larger, more established companies.
Often mid-size companies and the industries in which they are focused are still
evolving and while this may offer better growth potential than larger,
established companies it also may make them more sensitive to changing market
conditions. Because prices of stocks, including mid-cap stocks, fluctuate from
day to day, the value of an investment in the Underlying Fund will vary based
upon the Underlying Fund's investment performance.
INVESTMENTS IN ASIAN AND PACIFIC RIM SECURITIES. Dean Witter Pacific Growth
Fund Inc. and Dean Witter International SmallCap Fund may invest all or large
portions of their assets in Asian and Pacific Rim securities. Certain Asian and
Pacific Rim countries may be subject to a greater degree of economic, political
and social instability than is the case in the United States and Western
European countries. Such instability may result from, among other things, the
following: (i) authoritarian governments or military involvement in political
and economic decision-making, including changes in government through
extra-constitutional means; (ii) popular unrest associated with demands for
improved political, economic and social conditions; (iii) internal insurgencies;
(iv) hostile relations with neighboring countries; and (v) ethnic, religious and
racial disaffection. Such social, political and economic instability could
44
<PAGE>
disrupt the principal financial markets in which the Underlying Funds invest and
adversely affect the value of the assets of these Underlying Funds.
During the past decade, countries in the Asian region have experienced real
economic growth rates exceeding those experienced by many Western industrialized
countries. Certain economic conditions which presently exist in the Asian region
may offer the potential for long-term capital appreciation from investment in
equity securities of Asian issuers. Among these conditions, are the following:
the increasing industrialization of Asian economies, favorable demographics and
competitive wage rates, high rates of domestic savings available to fund
investment, particularly in the area of infrastructure, the ability to attract
foreign direct investment, the emergence of a regional trading zone and rising
per capita incomes available to support local markets for consumer goods. The
rapid ongoing shift from primary industries into industrial manufacturing has
contributed to high rates of economic activity. Between 1970 and 1991, there was
a significant shift in the percentage of gross domestic product ("GDP")
accounted for by the agricultural sector in these markets and a marked increase
in output by the industrial sector, most markedly in Indonesia, Malaysia and
Thailand. Generally, in the Asian countries there is still potential for further
industrialization so as to reach the levels presently attained by the countries
of the industrialized world.
INVESTMENTS IN JAPANESE SECURITIES. Morgan Stanley Dean Witter Pacific Growth
Fund Inc., Morgan Stanley Dean Witter International SmallCap Fund and Morgan
Stanley Dean Witter Japan Fund all may invest large portions of their assets in
Japanese Securities. The concentration of assets in Japanese issuers will
subject these funds to the risks of adverse social, political or economic events
which occur in Japan. Specifically, investments in the Japanese stock market may
entail a higher degree of risk than investments in other markets as, by
fundamental measures of corporate valuation, such as its high price-earnings
ratios and low dividend yields, the Japanese market as a whole may appear
expensive relative to other world stock markets (I.E., the prices of Japanese
stocks may be relatively high). In addition, the prices of securities traded on
the Japanese markets may be more volatile than many other markets.
Overall, Japanese securities markets have declined significantly since 1989
which has contributed to a weakness in the Japanese economy and the impact of a
further decline cannot be ascertained. The common stocks of many Japanese
companies continue, as they have historically, to trade at high price-earnings
ratios in comparison with those in the U.S., even after the recent market
decline. Differences in accounting methods make it difficult to compare the
earnings of Japanese companies with those of companies in other countries,
especially the United States.
The Japanese economy experienced its worst recession since World War II in
the 1990s. While Japan's Economic Planning Agency claims the recession ended in
October 1993, the economy has been largely stagnant since then. In addition,
asset deflation, both financial and in real estate, has exerted a continuous
drag on the economy. The Japanese government has called for a transformation of
the economy away from its high dependency on export-led growth towards greater
stimulation of the domestic economy. The plan calls for direct government
spending on public works and includes measures to support weak land prices and
to revitalize Japan's stagnating financial markets. There is no assurance that
this package, however, will succeed in fueling economic growth. Japan is largely
dependent upon foreign economies for raw materials. International trade is
important to Japan's economy, as exports provide the means to pay for many of
the raw materials it must import. Because of the concentration of Japanese
exports in highly visible products such as automobiles, machine tools and
semiconductors, and the large trade surpluses ensuing therefrom, Japan has
entered a difficult phase in its relations with its trading partners,
particularly with respect to the United States, with whom the trade imbalance is
the greatest. It is possible that differences over trade policy may lead the
U.S. to take actions which may have an adverse effect on the Japanese economy.
INVESTMENTS IN LATIN AMERICAN SECURITIES. The securities markets of Latin
American countries are substantially smaller, less developed, less liquid and
more volatile than the major securities markets in the United States. The
limited size of many Latin American securities markets and limited trading
volume in issuers compared to volume of trading in U.S. securities could cause
prices to be erratic for reasons apart from factors that affect the quality of
the securities. For example, limited market size may cause prices to be unduly
influenced by traders who control large positions. Adverse publicity and
investors' perceptions, whether or not based on fundamental analysis, may
decrease the value and liquidity of portfolio securities, especially in these
markets.
Latin American companies are not subject to the regulatory requirements of
U.S. companies and, as such, there may be less publicly available information
about such companies. Moreover, Latin American companies are not subject to
uniform accounting, auditing and financial reporting standards and requirements
comparable to those applicable to U.S. companies. Also, certain Latin American
countries may impose unusually high withholding taxes on dividends payable to a
fund, thereby effectively reducing the fund's investment income.
In addition, Latin American exchanges and broker-dealers are generally
subject to less government and exchange scrutiny and regulation than their
American counterparts. Brokerage commissions, dealer concessions, custodial
expenses and other transaction costs may be higher in foreign markets than in
the U.S.
45
<PAGE>
Political and economic developments in Latin America may have profound
effects upon the value of a fund's portfolio. In the event of expropriation,
nationalization or other complication, a fund could lose its entire investment
in any one country. In addition, individual Latin American countries may place
restrictions on the ability of foreign entities such as the fund to invest in
particular segments of the local economies. Certain Latin American countries are
among the largest debtors to commercial banks and foreign governments. At times
certain Latin American countries have declared moratoria on the payment of
principal and/or interest on external debt. Most Latin American countries have
experienced substantial, and in some periods extremely high, rates of inflation
for many years. Inflation and rapid fluctuations in inflation rates have had and
may continue to have very negative effects on the economies and securities
markets of certain Latin American countries.
In addition, many of the currencies of Latin American countries have
experienced steady devaluations relative to the U.S. dollar, and major
devaluations have historically occurred in certain countries. Any devaluations
in the currencies in which a fund's portfolio securities are denominated may
have a detrimental impact on a fund. Some Latin American countries also may have
managed currencies which are not free floating against the U.S. dollar. In
addition, there is a risk that certain Latin American countries may restrict the
free conversion of their currencies into other currencies. Further, certain
Latin American currencies may not be internationally traded.
See the Statement of Additional Information for additional information
regarding the risks of the Underlying Funds' investment policies.
YEAR 2000. The investment management services provided to each Portfolio of the
Fund by the Investment Manager and the services provided to shareholders by the
Distributor and the Transfer Agent depend on the smooth functioning of their
computer systems. Many computer software systems in use today cannot recognize
the year 2000, but revert to 1900 or some other date, due to the manner in which
dates were encoded and calculated. That failure could have a negative impact on
the handling of securities trades, pricing and account services for each
Portfolio of the Fund as well as for the Underlying Funds. The Investment
Manager, the Distributor and the Transfer Agent have been actively working on
necessary changes to their own computer systems to prepare for the year 2000 and
expect that their systems will be adapted before that date, but there can be no
assurance that they will be successful, or that interaction with other
non-complying computer systems will not impair their services at that time.
In addition, it is possible that the markets for securities in which the
Underlying Funds invest may be detrimentally affected by computer failures
throughout the financial services industry beginning January 1, 2000. Improperly
functioning trading systems may result in settlement problems and liquidity
issues. In addition, corporate and governmental data processing errors may
result in production problems for individual companies and overall economic
uncertainties. Earnings of individual issuers will be affected by remediation
costs, which may be substantial and may be reported inconsistently in U.S. and
foreign financial statements. Accordingly, the Underlying Funds' investments and
each Portfolio's investments in the Underlying Funds may be adversely affected.
PORTFOLIO MANAGEMENT
Each Portfolio of the Fund is managed by the Investment Manager with a view to
achieving the respective Portfolio's investment objective. In determining the
selection of the Underlying Funds for each Portfolio, the Investment Manager
will rely on information from various sources, including research, analysis and
appraisals of brokers and dealers, the views of Trustees of the Fund and others
regarding economic developments and interest rate trends, and the Investment
Manager's own analysis of factors it deems relevant.
Each Portfolio of the Fund will be managed by a separate Committee
consisting of, in each case, the Chief Investment Officer of the Investment
Manager as well as Senior Portfolio Managers assigned to the respective
Committees. The investment activities of the International Portfolio and the
Domestic Portfolio will be directed by the International Committee and the
Domestic Committee, respectively.
Each of the Underlying Funds incurs expenses relating to their portfolio
management which costs include custodial costs, brokerage commissions and other
transaction charges related to investing in foreign securities markets which
costs are generally higher than in the United States.
Although the Fund does not intend to engage in short-term trading, it may
sell Underlying Funds and portfolio securities without regard to the length of
time they have been held when such sale will, in the opinion of the Investment
Manager, contribute to each Portfolio's investment objective. The portfolio
turnover rate for each Portfolio (I.E., the rate at which each Portfolio buys
and sells shares of the Underlying Funds) is not expected to exceed 200% in any
one year.
The Fund will incur brokerage costs commensurate with its portfolio turnover
rate. Short term gains and losses may result from such portfolio transactions.
See "Dividends, Distributions and Taxes" for a discussion of the tax
implications of the Fund's trading policy. A more extensive discussion of the
Fund's portfolio brokerage policies is set forth in the Statement of Additional
Information.
46
<PAGE>
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The investment restrictions listed below are among the restrictions which have
been adopted by the Fund as fundamental policies of the Portfolios. Under the
Investment Company Act of 1940, as amended (the "Act"), a fundamental policy may
not be changed with respect to a Portfolio, without the vote of a majority of
the outstanding voting securities of that Portfolio, as defined in the Act. For
purposes of the following limitations: (i) all percentage limitations apply
immediately after a purchase or initial investment, and (ii) any subsequent
change in any applicable percentage resulting from market fluctuations or other
changes in total or net assets does not require elimination of any security from
the Portfolio.
Each Portfolio of the Fund may not:
1. Invest 25% or more of the value of its total assets in securities of
issuers in any one industry except that each Portfolio will concentrate its
investments in the mutual fund industry. This restriction does not apply to
a Portfolio's investments in the mutual fund industry by virtue of its
investments in the Underlying Morgan Stanley Dean Witter Funds or investment
companies managed by an advisor that is an affiliate of the Investment
Manager. This restriction also does not apply to obligations issued or
guaranteed by the United States Government, its agencies or
instrumentalities.
2. Borrow money except a bank for temporary or emergency purposes,
including the meeting of redemption requests in an amount not exceeding
33 1/3% of the value of each Portfolio's total assets (including the amount
borrowed) valued at market less liabilities (not including the amount
borrowed) at the time the borrowing is made.
Notwithstanding any other investment policy or restriction, each Portfolio
of the Fund may seek to achieve its investment objective by investing all or
substantially all of its assets in another investment company having
substantially the same investment objective and policies as the respective
Portfolio.
PURCHASE OF FUND SHARES
- --------------------------------------------------------------------------------
GENERAL
Each Portfolio of the Fund offers each class of its shares for sale to the
public on a continuous basis. Pursuant to a Distribution Agreement between the
Fund and Morgan Stanley Dean Witter Distributors Inc. ("MSDW Distributors" or
the "Distributor"), an affiliate of the Investment Manager, shares of each
Portfolio of the Fund are distributed by the Distributor and offered by Dean
Witter Reynolds Inc. ("DWR"), a selected dealer and subsidiary of Morgan Stanley
Dean Witter & Co., and other dealers which have entered into agreements with the
Distributor ("Selected Broker-Dealers"). The principal executive office of the
Distributor is located at Two World Trade Center, New York, New York 10048. It
is anticipated that DWR will undergo a change of corporate name which is
expected to incorporate the brand name of "Morgan Stanley Dean Witter," pending
approval of various regulatory authorities.
Each Portfolio of the Fund offers four classes of shares (each, a "Class").
Class A shares are sold to investors with an initial sales charge that declines
to zero for larger purchases; however, Class A shares sold without an initial
sales charge are subject to a contingent deferred sales charge ("CDSC") of 1.0%
if redeemed within one year of purchase, except for certain specific
circumstances. Class B shares are sold without an initial sales charge but are
subject to a CDSC (scaled down from 5.0% to 1.0%) payable upon most redemptions
within six years after purchase. (Class B shares purchased by certain qualified
plans are subject to a CDSC scaled down from 2.0% to 1.0% if redeemed within
three years after purchase.) Class C shares are sold without an initial sales
charge but are subject to a CDSC of 1.0% on most redemptions made within one
year after purchase. Class D shares are sold without an initial sales charge or
CDSC and are available only to investors meeting an initial investment minimum
of $5 million ($25 million for certain qualified plans), and to certain other
limited categories of investors. At the discretion of the Board of Trustees of
the Fund, Class A shares may be sold to categories of investors in addition to
those set forth in this prospectus at net asset value without a front-end sales
charge, and Class D shares may be sold to certain other categories of investors,
in each case as may be described in the then current prospectus of the Fund. See
"Alternative Purchase Arrangements--Selecting a Particular Class" for a
discussion of factors to consider in selecting which Class of shares to
purchase.
The minimum initial purchase is $1,000 for each Class of shares, although
Class D shares are only available to persons investing $5 million ($25 million
for certain qualified plans) or more and to certain other limited categories of
investors. For the purpose of meeting the minimum $5 million (or $25 million)
initial investment for Class D shares, and subject to the $1,000 minimum initial
investment for each Class of the Fund, an investor's existing holdings of Class
A and Class D shares of the Fund and other Morgan Stanley Dean Witter Funds that
are multiple class funds ("Morgan Stanley Dean Witter Multi-Class Funds") and
shares of Morgan Stanley Dean Witter Funds sold with a front-end sales charge
("FSC Funds") and
47
<PAGE>
concurrent investments in Class D shares of the Fund and other Morgan Stanley
Dean Witter Multi-Class Funds will be aggregated. Subsequent purchases of $100
or more may be made by sending a check, payable to Morgan Stanley Dean Witter
Fund of Funds, directly to Morgan Stanley Dean Witter Trust FSB (the "Transfer
Agent" or "MSDW Trust") at P.O. Box 1040, Jersey City, NJ 07303 or by contacting
a Morgan Stanley Dean Witter Financial Advisor or other Selected Broker-Dealer
representative. When purchasing shares of the Fund, investors must specify which
Portfolio they wish to invest in and whether the purchase is for Class A, Class
B, Class C or Class D shares. If no Class is specified, the Transfer Agent will
not process the transaction until the proper Class is identified. The minimum
initial purchase, in the case of investments through EasyInvest-SM-, an
automatic purchase plan (see "Shareholder Services"), is $100, provided that the
schedule of automatic investments will result in investments totalling at least
$1,000 within the first twelve months. The minimum initial purchase in the case
of an "Education IRA" is $500, if the Distributor has reason to believe that
additional investments will increase the investment in the account to $1,000
within three years. In the case of investments pursuant to (i) Systematic
Payroll Deduction Plans (including Individual Retirement Plans), (ii) the MSDW
Advisors mutual fund asset allocation program and (iii) fee-based programs
approved by the Distributor, pursuant to which participants pay an asset-based
fee for services in the nature of investment advisory, administrative and/or
brokerage services, the Fund, in its discretion, may accept investments without
regard to any minimum amounts which would otherwise be required, provided, in
the case of Systematic Payroll Deduction Plans, that the Distributor has reason
to believe that additional investments will increase the investment in all
accounts under such Plans to at least $1,000. Certificates for shares purchased
will not be issued unless a request is made by the shareholder in writing to the
Transfer Agent.
Shares of the Fund are sold through the Distributor on a normal three
business day settlement basis; that is, payment is due on the third business day
(settlement date) after the order is placed with the Distributor. Since DWR and
other Selected Broker-Dealers forward investors' funds on settlement date, they
will benefit from the temporary use of the funds if payment is made prior
thereto. As noted above, orders placed directly with the Transfer Agent must be
accompanied by payment. Investors will be entitled to receive income dividends
and capital gains distributions if their order is received by the close of
business on the day prior to the record date for such distributions. Sales
personnel of a Selected Broker-Dealer are compensated for selling shares of the
Fund at the time of their sale by the Distributor or any of its affiliates
and/or the Selected Broker-Dealer. In addition, some sales personnel of the
Selected Broker-Dealer will receive various types of non-cash compensation as
special sales incentives, including trips, educational and/or business seminars
and merchandise. The Fund and the Distributor reserve the right to reject any
purchase orders.
ALTERNATIVE PURCHASE ARRANGEMENTS
Each Portfolio of the Fund offers several Classes of shares to investors
designed to provide them with the flexibility of selecting an investment best
suited to their needs. The general public is offered three Classes of shares:
Class A shares, Class B shares and Class C shares, which differ principally in
terms of sales charges and rate of expenses to which they are subject. A fourth
Class of shares, Class D shares, is offered only to limited categories of
investors (see "No Load Alternative--Class D Shares" below).
Each Class A, Class B, Class C or Class D share of each Portfolio of the
Fund represents an identical interest in the respective investment Portfolio of
the Fund except that Class A, Class B and Class C shares bear the expenses of
the ongoing shareholder service fees, Class B and Class C shares bear the
expenses of the ongoing distribution fees and Class A, Class B and Class C
shares which are redeemed subject to a CDSC bear the expense of the additional
incremental distribution costs resulting from the CDSC applicable to shares of
those Classes. The ongoing distribution fees of a Portfolio that are imposed on
Class A, Class B and Class C shares will be imposed directly against those
Classes of that Portfolio and not against all assets of the Fund and,
accordingly, such charges against one Class will not affect the net asset value
of any other Class or have any impact on investors choosing another sales charge
option. See "Plan of Distribution" and "Redemptions and Repurchases."
Set forth below is a summary of the differences between the Classes and the
factors an investor should consider when selecting a particular Class. This
summary is qualified in its entirety by detailed discussion of each Class that
follows this summary.
CLASS A SHARES. Class A shares are sold at net asset value plus an initial
sales charge of up to 5.25%. The initial sales charge is reduced for certain
purchases. Investments of $1 million or more (and investments by certain other
limited categories of investors) are not subject to any sales charges at the
time of purchase but are subject to a CDSC of 1.0% on redemptions made within
one year after purchase, except for certain specific circumstances. Class A
shares are also subject to a 12b-1 fee of up to 0.25% of the average daily net
assets of the Class. See "Initial Sales Charge Alternative--Class A Shares."
CLASS B SHARES. Class B shares are offered at net asset value with no initial
sales charge but are subject to a CDSC (scaled down from 5.0% to 1.0%) if
redeemed within six years of purchase. (Class B shares purchased by certain
qualified plans are subject to a CDSC scaled down from 2.0% to 1.0% if redeemed
within three years after purchase.) This CDSC may be waived for certain
redemptions. Class B shares are also subject to an annual 12b-1 fee of
48
<PAGE>
1.0% of the average daily net assets of Class B. The Class B shares'
distribution fee will cause that Class to have higher expenses and pay lower
dividends than Class A or Class D shares.
After approximately ten (10) years, Class B shares will convert
automatically to Class A shares of the Fund, based on the relative net asset
values of the shares of the two Classes on the conversion date. In addition, a
certain portion of Class B shares that have been acquired through the
reinvestment of dividends and distributions will be converted at that time. See
"Contingent Deferred Sales Charge Alternative--Class B Shares."
CLASS C SHARES. Class C shares are sold at net asset value with no initial
sales charge but are subject to a CDSC of 1.0% on redemptions made within one
year after purchase. This CDSC may be waived for certain redemptions. They are
subject to an annual 12b-1 fee of up to 1.0% of the average daily net assets of
the Class C shares. The Class C shares' distribution fee may cause that Class to
have higher expenses and pay lower dividends than Class A or Class D shares. See
"Level Load Alternative--Class C Shares."
CLASS D SHARES. Class D shares are available only to limited categories of
investors (see "No Load Alternative-- Class D Shares" below). Class D shares are
sold at net asset value with no initial sales charge or CDSC. They are not
subject to any 12b-1 fees. See "No Load Alternative-- Class D Shares."
SELECTING A PARTICULAR CLASS. In deciding which Class of Fund shares to
purchase, investors should consider the following factors, as well as any other
relevant facts and circumstances:
The decision as to which Class of shares is more beneficial to an investor
depends on the amount and intended length of his or her investment. Investors
who prefer an initial sales charge alternative may elect to purchase Class A
shares. Investors qualifying for significantly reduced or, in the case of
purchases of $1 million or more, no initial sales charges may find Class A
shares particularly attractive because similar sales charge reductions are not
available with respect to Class B or Class C shares. Moreover, Class A shares
are subject to lower ongoing expenses than are Class B or Class C shares over
the term of the investment. As an alternative, Class B and Class C shares are
sold without any initial sales charge so the entire purchase price is
immediately invested in the Fund. Any investment return on these additional
investment amounts may partially or wholly offset the higher annual expenses of
these Classes. Because the Fund's future return cannot be predicted, however,
there can be no assurance that this would be the case.
Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, although Class C shares are subject to a significantly lower
CDSC upon redemptions, they do not, unlike Class B shares, convert into Class A
shares after approximately ten years, and, therefore, are subject to an ongoing
12b-1 fee of 1.0% (rather than the 0.25% fee applicable to Class A shares) for
an indefinite period of time. Thus, Class B shares may be more attractive than
Class C shares to investors with longer term investment outlooks. Other
investors, however, may elect to purchase Class C shares if, for example, they
determine that they do not wish to be subject to a front-end sales charge and
they are uncertain as to the length of time they intend to hold their shares.
For the purpose of meeting the $5 million (or $25 million) minimum
investment amount for Class D shares, holdings of Class A and Class D shares in
all Morgan Stanley Dean Witter Multi-Class Funds, shares of FSC Funds and shares
of Morgan Stanley Dean Witter Funds for which such shares have been exchanged,
will be included together with the current investment amount.
Sales personnel may receive different compensation for selling each Class of
shares. Investors should understand that the purpose of a CDSC is the same as
that of the initial sales charge in that the sales charges applicable to each
Class provide for the financing of the distribution of shares of that Class.
Set forth below is a chart comparing the sales charge, 12b-1 fees and
conversion options applicable to each Class of shares:
<TABLE>
<CAPTION>
CONVERSION
CLASS SALES CHARGE 12b-1 FEE FEATURE
<C> <S> <C> <C>
A Maximum 5.25% initial 0.25% No
sales charge reduced for
purchases of $25,000 and
over; shares sold without
an initial sales charge
generally subject to a
1.0% CDSC during first
year.
B Maximum 5.0% CDSC during 1.0% B shares
the first year decreasing convert to A
to 0 after six years shares
automatically
after
approximately
ten years
C 1.0% CDSC during first 1.0% No
year
D None None No
</TABLE>
See "Purchase of Fund Shares" and "The Fund and its Management" for a
complete description of the sales charges and service and distribution fees for
each Class of shares and "Determination of Net Asset Value," "Dividends,
Distributions and Taxes" and "Shareholder Services--Exchange Privilege" for
other differences between the Classes of shares.
49
<PAGE>
INITIAL SALES CHARGE ALTERNATIVE-- CLASS A SHARES
Class A shares are sold at net asset value plus an initial sales charge. In some
cases, reduced sales charges may be available, as described below. Investments
of $1 million or more (and investments by certain other limited categories of
investors) are not subject to any sales charges at the time of purchase but are
subject to a CDSC of 1.0% on redemptions made within one year after purchase
(calculated from the last day of the month in which the shares were purchased),
except for certain specific circumstances. The CDSC will be assessed on an
amount equal to the lesser of the current market value or the cost of the shares
being redeemed. The CDSC will not be imposed (i) in the circumstances set forth
below in the section "Contingent Deferred Sales Charge Alternative--Class B
Shares-- CDSC Waivers," except that the references to six years in the first
paragraph of that section shall mean one year in the case of Class A shares, and
(ii) in the circumstances identified in the section "Additional Net Asset Value
Purchase Options" below. Class A shares are also subject to an annual 12b-1 fee
of up to 0.25% of the average daily net assets of the Class.
The offering price of Class A shares will be the net asset value per share
next determined following receipt of an order (see "Determination of Net Asset
Value" below), plus a sales charge (expressed as a percentage of the offering
price) on a single transaction as shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE
-------------------------------------
PERCENTAGE OF APPROXIMATE
AMOUNT OF PUBLIC OFFERING PERCENTAGE OF
SINGLE TRANSACTION PRICE AMOUNT INVESTED
- --------------------------- ----------------- ------------------
<S> <C> <C>
Less than $25,000.......... 5.25% 5.54%
$25,000 but less
than $50,000............. 4.75% 4.99%
$50,000 but less
than $100,000............ 4.00% 4.17%
$100,000 but less
than $250,000............ 3.00% 3.09%
$250,000 but less
than $1 million.......... 2.00% 2.04%
$1 million and over........ 0 0
</TABLE>
Upon notice to all Selected Broker-Dealers, the Distributor may reallow up
to the full applicable sales charge as shown in the above schedule during
periods specified in such notice. During periods when 90% or more of the sales
charge is reallowed, such Selected Broker-Dealers may be deemed to be
underwriters as that term is defined in the Securities Act of 1933.
The above schedule of sales charges is applicable to purchases in a single
transaction by, among others: (a) an individual; (b) an individual, his or her
spouse and their children under the age of 21 purchasing shares for his, her or
their own accounts; (c) a trustee or other fiduciary purchasing shares for a
single trust estate or a single fiduciary account; (d) a pension, profit-sharing
or other employee benefit plan qualified or non-qualified under Section 401 of
the Internal Revenue Code; (e) tax-exempt organizations enumerated in Section
501(c)(3) or (13) of the Internal Revenue Code; (f) employee benefit plans
qualified under Section 401 of the Internal Revenue Code of a single employer or
of employers who are "affiliated persons" of each other within the meaning of
Section 2(a)(3)(c) of the Act; and for investments in Individual Retirement
Accounts of employees of a single employer through Systematic Payroll Deduction
plans; or (g) any other organized group of persons, whether incorporated or not,
provided the organization has been in existence for at least six months and has
some purpose other than the purchase of redeemable securities of a registered
investment company at a discount.
COMBINED PURCHASE PRIVILEGE. Investors may have the benefit of reduced sales
charges in accordance with the above schedule by combining purchases of Class A
shares of the Fund in single transactions with the purchase of Class A shares of
other Morgan Stanley Dean Witter Multi-Class Funds and shares of FSC Funds. The
sales charge payable on the purchase of the Class A shares of the Fund, the
Class A shares of the other Morgan Stanley Dean Witter Multi-Class Funds and the
shares of the FSC Funds will be at their respective rates applicable to the
total amount of the combined concurrent purchases of such shares.
RIGHT OF ACCUMULATION. The above persons and entities may benefit from a
reduction of the sales charges in accordance with the above schedule if the
cumulative net asset value of Class A shares purchased in a single transaction,
together with shares of the Fund and other Morgan Stanley Dean Witter Funds
previously purchased at a price including a front-end sales charge (including
shares of the Fund and other Morgan Stanley Dean Witter Funds acquired in
exchange for those shares, and including in each case shares acquired through
reinvestment of dividends and distributions), which are held at the time of such
transaction, amounts to $25,000 or more. If such investor has a cumulative net
asset value of shares of FSC Funds and Class A and Class D shares that, together
with the current investment amount, is equal to at least $5 million ($25 million
for certain qualified plans), such investor is eligible to purchase Class D
shares subject to the $1,000 minimum initial investment requirement of that
Class of the Fund. See "No Load Alternative--Class D Shares" below.
The Distributor must be notified by DWR or a Selected Broker-Dealer or the
shareholder at the time a purchase order is placed that the purchase qualifies
for the reduced charge under the Right of Accumulation. Similar notification
must be made in writing by the dealer or shareholder when such an order is
placed by mail. The reduced sales charge will not be granted if: (a) such
notification is not furnished at the time of the order; or (b) a review of the
records of the Selected Broker-Dealer or the Transfer Agent fails to confirm the
investor's represented holdings.
50
<PAGE>
LETTER OF INTENT. The foregoing schedule of reduced sales charges will also be
available to investors who enter into a written Letter of Intent providing for
the purchase, within a thirteen-month period, of Class A shares of the Fund from
DWR or other Selected Broker-Dealers. The cost of Class A shares of the Fund or
shares of other Morgan Stanley Dean Witter Funds which were previously purchased
at a price including a front-end sales charge during the 90-day period prior to
the date of receipt by the Distributor of the Letter of Intent, or of Class A
shares of the Fund or shares of other Morgan Stanley Dean Witter Funds acquired
in exchange for shares of such funds purchased during such period at a price
including a front-end sales charge, which are still owned by the shareholder,
may also be included in determining the applicable reduction.
ADDITIONAL NET ASSET VALUE PURCHASE OPTIONS. In addition to investments of $1
million or more, Class A shares also may be purchased at net asset value by the
following:
(1) trusts for which MSDW Trust (which is an affiliate of the Investment
Manager) provides discretionary trustee services;
(2) persons participating in a fee-based program approved by the
Distributor, pursuant to which such persons pay an asset based fee for services
in the nature of investment advisory, administrative and/or brokerage services
(such investments are subject to all of the terms and conditions of such
programs, which may include termination fees, mandatory redemption upon
termination and such other circumstances as specified in the programs'
agreements, and restrictions on transferability of Fund shares);
(3) employer-sponsored 401(k) and other plans qualified under Section 401(a)
of the Internal Revenue Code ("Qualified Retirement Plans") with at least 200
eligible employees and for which MSDW Trust serves as Trustee or DWR's
Retirement Plan Services serves as recordkeeper pursuant to a written
Recordkeeping Services Agreement;
(4) Qualified Retirement Plans for which MSDW Trust serves as Trustee or
DWR's Retirement Plan Services serves as recordkeeper pursuant to a written
Recordkeeping Services Agreement whose Class B shares have converted to Class A
shares, regardless of the plan's asset size or number of eligible employees;
(5) investors who are clients of a Morgan Stanley Dean Witter Financial
Advisor who joined Morgan Stanley Dean Witter from another investment firm
within six months prior to the date of purchase of Fund shares by such
investors, if the shares are being purchased with the proceeds from a redemption
of shares of an open-end proprietary mutual fund of the Financial Advisor's
previous firm which imposed either a front-end or deferred sales charge,
provided such purchase was made within sixty days after the redemption and the
proceeds of the redemption had been maintained in the interim in cash or a money
market fund; and
(6) other categories of investors, at the discretion of the Board, as
disclosed in the then current prospectus of the Fund.
No CDSC will be imposed on redemptions of shares purchased pursuant to
paragraphs (1), (2) or (5), above.
For further information concerning purchases of the Fund's shares, contact
DWR or another Selected Broker-Dealer or consult the Statement of Additional
Information.
CONTINGENT DEFERRED SALES CHARGE ALTERNATIVE--CLASS B SHARES
Class B shares are sold at net asset value next determined without an initial
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in the Fund. A CDSC, however, will be imposed on most Class
B shares redeemed within six years after purchase. The CDSC will be imposed on
any redemption of shares if after such redemption the aggregate current value of
a Class B account with the Fund falls below the aggregate amount of the
investor's purchase payments for Class B shares made during the six years (or,
in the case of shares held by certain Qualified Retirement Plans, three years)
preceding the redemption. In addition, Class B shares are subject to an annual
12b-1 fee of 1.0% of the average daily net assets of Class B.
Except as noted below, Class B shares of the Fund which are held for six
years or more after purchase (calculated from the last day of the month in which
the shares were purchased) will not be subject to any CDSC upon redemption.
Shares redeemed earlier than six years after purchase may, however, be subject
to a CDSC which will be a percentage of the dollar amount of shares redeemed and
will be assessed on an amount equal to the lesser of the current market value or
the cost of the shares being redeemed. The size of this percentage will depend
upon how long the shares have been held, as set forth in the following table:
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE CDSC AS A PERCENTAGE
PAYMENT MADE OF AMOUNT REDEEMED
- ---------------------------------------- ---------------------
<S> <C>
First................................... 5.0%
Second.................................. 4.0%
Third................................... 3.0%
Fourth.................................. 2.0%
Fifth................................... 2.0%
Sixth................................... 1.0%
Seventh and thereafter.................. None
</TABLE>
In the case of Class B shares of the Fund purchased by Qualified Retirement
Plans for which MSDW Trust serves as Trustee or DWR's Retirement Plan Services
serves as recordkeeper pursuant to a written Recordkeeping Services Agreement,
shares held for three years or more after purchase (calculated as described in
the paragraph above)
51
<PAGE>
will not be subject to any CDSC upon redemption. However, shares redeemed
earlier than three years after purchase may be subject to a CDSC (calculated as
described in the paragraph above), the percentage of which will depend on how
long the shares have been held, as set forth in the following table:
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE CDSC AS A PERCENTAGE
PAYMENT MADE OF AMOUNT REDEEMED
- ---------------------------------------- ---------------------
<S> <C>
First................................... 2.0%
Second.................................. 2.0%
Third................................... 1.0%
Fourth and thereafter................... None
</TABLE>
CDSC WAIVERS. A CDSC will not be imposed on: (i) any amount which represents an
increase in value of shares purchased within the six years (or, in the case of
shares held by certain Qualified Retirement Plans, three years) preceding the
redemption; (ii) the current net asset value of shares purchased more than six
years (or, in the case of shares held by certain Qualified Retirement Plans,
three years) prior to the redemption; and (iii) the current net asset value of
shares purchased through reinvestment of dividends or distributions and/or
shares acquired in exchange for shares of FSC Funds or of other Morgan Stanley
Dean Witter Funds acquired in exchange for such shares. Moreover, in determining
whether a CDSC is applicable it will be assumed that amounts described in (i),
(ii) and (iii) above (in that order) are redeemed first.
In addition, the CDSC, if otherwise applicable, will be waived in the case
of:
(1) redemptions of shares held at the time a shareholder dies or becomes
disabled, only if the shares are: (A) registered either in the name of an
individual shareholder (not a trust), or in the names of such shareholder and
his or her spouse as joint tenants with right of survivorship; or (B) held in a
qualified corporate or self-employed retirement plan, Individual Retirement
Account ("IRA") or Custodial Account under Section 403(b)(7) of the Internal
Revenue Code ("403(b) Custodial Account"), provided in either case that the
redemption is requested within one year of the death or initial determination of
disability;
(2) redemptions in connection with the following retirement plan
distributions: (A) lump-sum or other distributions from a qualified corporate
or self-employed retirement plan following retirement (or, in the case of a "key
employee" of a "top heavy" plan, following attainment of age 59 1/2); (B)
distributions from an IRA or 403(b) Custodial Account following attainment of
age 59 1/2; or (C) a tax-free return of an excess contribution to an IRA;
(3) all redemptions of shares held for the benefit of a participant in a
Qualified Retirement Plan which offers investment companies managed by the
Investment Manager or its subsidiary, MSDW Services, as self-directed investment
alternatives and for which MSDW Trust serves as Trustee or DWR's Retirement Plan
Services serves as recordkeeper pursuant to a written Recordkeeping Services
Agreement ("Eligible Plan"), provided that either: (A) the plan continues to be
an Eligible Plan after the redemption; or (B) the redemption is in connection
with the complete termination of the plan involving the distribution of all plan
assets to participants; and
(4) certain redemptions pursuant to the Fund's Systematic Withdrawal Plan
(see "Shareholder Services--Systematic Withdrawal Plan").
With reference to (1) above, for the purpose of determining disability, the
Distributor utilizes the definition of disability contained in Section 72(m)(7)
of the Internal Revenue Code, which relates to the inability to engage in
gainful employment. With reference to (2) above, the term "distribution" does
not encompass a direct transfer of IRA, 403(b) Custodial Account or retirement
plan assets to a successor custodian or trustee. All waivers will be granted
only following receipt by the Distributor of confirmation of the shareholder's
entitlement.
CONVERSION TO CLASS A SHARES. Class B shares will convert automatically to
Class A shares, based on the relative net asset values of the shares of the two
Classes on the conversion date, which will be approximately ten (10) years after
the date of the original purchase. The ten year period is calculated from the
last day of the month in which the shares were purchased or, in the case of
Class B shares acquired through an exchange or a series of exchanges from the
last day of the month in which the original Class B shares were purchased,
provided that shares acquired in exchange for shares of another fund originally
purchased before May 1, 1997 will convert to Class A shares in May, 2007. The
conversion of shares purchased on or after May 1, 1997 will take place in the
month following the tenth anniversary of the purchase. There will also be
converted at that time such proportion of Class B shares acquired through
automatic reinvestment of dividends and distributions owned by the shareholder
as the total number of his or her Class B shares converting at the time bears to
the total number of outstanding Class B shares purchased and owned by the
shareholder. In the case of Class B shares held by a Qualified Retirement Plan
for which MSDW Trust serves as Trustee or DWR's Retirement Plan Services serves
as recordkeeper pursuant to a written Recordkeeping Services Agreement, the plan
is treated as a single investor and all Class B shares will convert to Class A
shares on the conversion date of the first shares of a Morgan Stanley Dean
Witter Multi-Class Fund purchased by that plan. In the case of Class B shares
previously exchanged for shares of an "Exchange Fund" (see "Shareholder
Services--Exchange Privilege"), the period of time the shares were held in the
Exchange Fund (calculated from the last day of the month in which the Exchange
Fund shares were acquired) is excluded from the holding period for conversion.
If those shares are subsequently re-exchanged for Class B shares of a Morgan
Stanley Dean Witter Multi-Class Fund, the holding period resumes on the
52
<PAGE>
last day of the month in which Class B shares are reacquired.
If a shareholder has received share certificates for Class B shares, such
certificates must be delivered to the Transfer Agent at least one week prior to
the date for conversion. Class B shares evidenced by share certificates that are
not received by the Transfer Agent at least one week prior to any conversion
date will be converted into Class A shares on the next scheduled conversion date
after such certificates are received.
Effectiveness of the conversion feature is subject to the continuing
availability of a ruling of the Internal Revenue Service or an opinion of
counsel that (i) the conversion of shares does not constitute a taxable event
under the Internal Revenue Code, (ii) Class A shares received on conversion will
have a basis equal to the shareholder's basis in the converted Class B shares
immediately prior to the conversion, and (iii) Class A shares received on
conversion will have a holding period that includes the holding period of the
converted Class B shares. The conversion feature may be suspended if the ruling
or opinion is no longer available. In such event, Class B shares would continue
to be subject to Class B 12b-1 fees.
LEVEL LOAD ALTERNATIVE-- CLASS C SHARES
Class C shares are sold at net asset value next determined without an initial
sales charge but are subject to a CDSC of 1.0% on most redemptions made within
one year after purchase (calculated from the last day of the month in which the
shares were purchased). The CDSC will be assessed on an amount equal to the
lesser of the current market value or the cost of the shares being redeemed. The
CDSC will not be imposed in the circumstances set forth above in the section
"Contingent Deferred Sales Charge Alternative-- Class B Shares--CDSC Waivers,"
except that the references to six years in the first paragraph of that section
shall mean one year in the case of Class C shares. Class C shares are subject to
an annual 12b-1 fee of up to 1.0% of the average daily net assets of the Class.
Unlike Class B shares, Class C shares have no conversion feature and,
accordingly, an investor that purchases Class C shares will be subject to 12b-1
fees applicable to Class C shares for an indefinite period subject to annual
approval by the Fund's Board of Trustees and regulatory limitations.
NO LOAD ALTERNATIVE-- CLASS D SHARES
Class D shares are offered without any sales charge on purchase or redemption
and without any 12b-1 fee. Class D shares are offered only to investors meeting
an initial investment minimum of $5 million ($25 million for Qualified
Retirement Plans for which MSDW Trust serves as Trustee or DWR's Retirement Plan
Services serves as recordkeeper pursuant to a written Recordkeeping Services
Agreement) and the following categories of investors: (i) investors
participating in the MSDW Advisors mutual fund asset allocation program pursuant
to which such persons pay an asset based fee; (ii) persons participating in a
fee-based program approved by the Distributor, pursuant to which such persons
pay an asset based fee for services in the nature of investment advisory,
administrative and/or brokerage services (subject to all of the terms and
conditions of such programs referred to in (i) and (ii) above, which may include
termination fees, mandatory redemption upon termination and such other
circumstances as specified in the programs' agreements, and restrictions on
transferability of Fund shares); (iii) employee benefit plans maintained by
Morgan Stanley Dean Witter & Co. or any of its subsidiaries for the benefit of
certain employees of Morgan Stanley Dean Witter & Co. and its subsidiaries; (iv)
certain Unit Investment Trusts sponsored by DWR; (v) certain other open-end
investment companies whose shares are distributed by the Distributor; (vi)
investors who were shareholders of Dean Witter Retirement Series on September
11, 1998 (with respect to additional purchases for their former Dean Witter
Retirement Series accounts); and (vii) other categories of investors, at the
discretion of the Board, as disclosed in the then current prospectus of the
Fund. Investors who require a $5 million (or $25 million) minimum initial
investment to qualify to purchase Class D shares may satisfy that requirement by
investing that amount in a single transaction in Class D shares of the Fund and
other Morgan Stanley Dean Witter Multi-Class Funds, subject to the $1,000
minimum initial investment required for that Class of the Fund. In addition, for
the purpose of meeting the $5 million (or $25 million) minimum investment
amount, holdings of Class A and Class D shares in all Morgan Stanley Dean Witter
Multi-Class Funds, shares of FSC Funds and shares of Dean Witter Funds for which
such shares have been exchanged will be included together with the current
investment amount. If a shareholder redeems Class A shares and purchases Class D
shares, such redemption may be a taxable event.
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under the Act
with respect to the distribution of Class A, Class B and Class C shares of each
Portfolio of the Fund. In the case of Class A and Class C shares, the Plan
provides that the Fund will, on behalf of each Portfolio, reimburse the
Distributor and others for the expenses of certain activities and services
incurred by them specifically on behalf of those shares. Reimbursements for
these expenses will be made in monthly payments by each Portfolio of the Fund to
the Distributor, which will in no event exceed amounts equal to payments at the
annual rates of 0.25% and 1.0% of the average daily net assets of Class A and
Class C, respectively. In the case of Class B shares, the Plan provides that the
Fund, on behalf of each Portfolio, will pay the Distributor a fee, which is
accrued daily and paid
53
<PAGE>
monthly, at the annual rate of 1.0% of the average daily net assets of Class B.
The fee is treated by each Portfolio of the Fund as an expense in the year it is
accrued. In the case of Class A shares, the entire amount of the fee currently
represents a service fee within the meaning of the NASD guidelines. In the case
of Class B and Class C shares, a portion of the fee payable pursuant to the
Plan, equal to 0.25% of the average daily net assets of each of these Classes,
is currently characterized as a service fee. A service fee is a payment made for
personal service and/or the maintenance of shareholder accounts.
Additional amounts paid under the Plan in the case of Class B and Class C
shares are paid to the Distributor for services provided and the expenses borne
by the Distributor and others in the distribution of the shares of those
Classes, including the payment of commissions for sales of the shares of those
Classes and incentive compensation to and expenses of Morgan Stanley Dean Witter
Financial Advisors and others who engage in or support distribution of shares or
who service shareholder accounts, including overhead and telephone expenses;
printing and distribution of prospectuses and reports used in connection with
the offering of the Fund's shares to other than current shareholders; and
preparation, printing and distribution of sales literature and advertising
materials. In addition, the Distributor may utilize fees paid pursuant to the
Plan in the case of Class B shares to compensate DWR and other Selected
Broker-Dealers for their opportunity costs in advancing such amounts, which
compensation would be in the form of a carrying charge on any unreimbursed
expenses.
For the fiscal period ended September 30, 1998, Class B shares of the
Domestic Portfolio and the International Portfolio accrued payments under the
Plan amounting to $187,858 and $23,647 (net of amounts waived), respectively,
which amounts are equal to 0.92% of the average daily net assets of Class B of
the Domestic Portfolio and 0.94% of the average daily net assets of Class B of
the International Portfolio for the fiscal period. For the fiscal period ended
September 30, 1998, Class A and Class C shares of the Domestic Portfolio and the
International Portfolio of the Fund accrued payments under the Plan amounting to
$3,390 and $877, respectively for Class A and, $14,042 and $835, respectively
for Class C, which amounts are equal to 0.22% and 0.25%, respectively, of the
average daily net assets of Class A and 0.92% of the average daily net assets of
Class C, respectively, for each Portfolio, for the fiscal year.
In the case of Class B shares, at any given time, the expenses in
distributing Class B shares of each Portfolio of the Fund may be in excess of
the total of (i) the payments made by a Portfolio of the Fund pursuant to the
Plan, and (ii) the proceeds of CDSCs paid by investors upon the redemption of
Class B shares of that Portfolio. For example, if $1 million in expenses in
distributing Class B shares of the Fund had been incurred and $750,000 had been
received as described in (i) and (ii) above, the excess expense would amount to
$250,000. The Distributor has informed the Fund that such excess amounts,
including the carrying charge described above, totalled $1,709,171 for the
Domestic Portfolio and $659,369 for the International Portfolio at September 30,
1998, which was equal to 7.02% and 20.34% respectively of the net assets of
Class B of the Domestic Portfolio and Class B of the International Portfolio
respectively, for the fiscal period. Because there is no requirement under the
Plan that the Distributor be reimbursed for all distribution expenses or any
requirement that the Plan be continued from year to year, such excess amount
does not constitute a liability of that Portfolio of the Fund. Although there is
no legal obligation for a Portfolio of the Fund to pay expenses incurred in
excess of payments made to the Distributor under the Plan, and the proceeds of
CDSCs paid by investors upon redemption of shares, if for any reason the Plan is
terminated the Trustees will consider at that time the manner in which to treat
such expenses. Any cumulative expenses incurred, but not yet recovered through
distribution fees or CDSCs, may or may not be recovered through future
distribution fees or CDSCs.
In the case of Class A and Class C shares of any Portfolio, expenses
incurred pursuant to the Plan in any calendar year in excess of 0.25% or 1.0% of
the average daily net assets of Class A or Class C, respectively, will not be
reimbursed by a Portfolio of the Fund through payments in any subsequent year,
except that expenses representing a gross sales commission credited to Morgan
Stanley Dean Witter Financial Advisors and other Selected Broker-Dealer
representatives at the time of sale may be reimbursed in the subsequent calendar
year. The Distributor has advised the Fund that unreimbursed expenses
representing a gross sales commission credited to Morgan Stanley Dean Witter
Financial Advisors and other Selected Broker-Dealer representatives at the time
of sale totalled $11,139 for the Domestic Portfolio and $541 for the
International Portfolio in the case of Class C for each Portfolio at December
31, 1997, which amounts were equal to 0.89% and 0.75% respectively of the net
assets of Class C of the Domestic Portfolio and the International Portfolio on
such date, and that there were no such expenses that may be
reimbursed in the subsequent year in the case of Class A on such date. No
interest or other financing charges will be incurred on any Class A or Class C
distribution expenses incurred by the Distributor under the Plan or on any
unreimbursed expenses due to the Distributor pursuant to the Plan.
Each Portfolio of the Fund will invest in the Class D or no load shares of
the Underlying Funds and accordingly will not pay any sales load or 12b-1
service or distribution fees in connection with its investments in shares of the
Underlying Funds.
54
<PAGE>
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Portfolio is determined once daily as of
4:00 p.m., New York time, on each day that the New York Stock Exchange is open
(or, on days when the New York Stock Exchange closes prior to 4:00 p.m., at such
earlier time) by taking the net assets of each Portfolio of the Fund, dividing
by the respective number of shares outstanding and adjusting to the nearest
cent. The assets of each Portfolio, belonging to the Class A, Class B, Class C
and Class D shares will be invested together in a single portfolio. The net
asset value of each Class of each Portfolio, however, will be determined
separately by subtracting each Class's accrued expenses and liabilities. The net
asset value per share will not be determined on Good Friday and on such other
federal and non-federal holidays as are observed by the New York Stock Exchange.
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
AUTOMATIC INVESTMENT OF DIVIDENDS AND DISTRIBUTIONS. All income dividends and
capital gains distributions are automatically paid in full and fractional shares
of the applicable Class of each respective Portfolio of the Fund (or, if
specified by the shareholder in shares of any other open-end Morgan Stanley Dean
Witter Fund), unless the shareholder requests that they be paid in cash. Shares
so acquired are acquired at net asset value and are not subject to the
imposition of a front-end sales charge or a CDSC (see "Redemptions and
Repurchases").
INVESTMENT OF DIVIDENDS AND DISTRIBUTIONS RECEIVED IN CASH. Any shareholder who
receives a cash payment representing a dividend or capital gains distribution
may invest such dividend or distribution in shares of the applicable Class at
the net asset value per share next determined after receipt by the Transfer
Agent, by returning the check or the proceeds to the Transfer Agent within
thirty days after the payment date. Shares so acquired are acquired at net asset
value are not subject to the imposition of a front-end sales charge or a CDSC
(see "Redemptions and Repurchases").
EASYINVEST.-SM- Shareholders may subscribe to EasyInvest, an automatic purchase
plan which provides for any amount from $100 to $5,000 to be transferred
automatically from a checking or savings account or following redemption of
shares of a Morgan Stanley Dean Witter money market fund, on a semi-monthly,
monthly or quarterly basis, to the Transfer Agent for investment in shares of
the Fund. (See "Purchase of Fund Shares" and "Redemptions and
Repurchases--Involuntary Redemption").
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan (the "Withdrawal
Plan") is available for shareholders whose shares of Morgan Stanley Dean Witter
Funds have an aggregate value of $10,000 or more. Shares of any Fund from which
redemptions will be made pursuant to the Plan must have a value of $1,000 or
more (referred to as a "SWP Fund"). The required share values are determined on
the date the shareholder establishes the Withdrawal Plan. The Withdrawal Plan
provides for monthly, quarterly, semi-annual or annual payments in any amount
not less than $25, or in any whole percentage of the value of the SWP Funds'
shares, on an annualized basis. Any applicable CDSC will be imposed on shares
redeemed under the Withdrawal Plan (see "Purchase of Fund Shares"), except that
the CDSC, if any, will be waived on redemptions under the Withdrawal Plan of up
to 12% annually of the value of each SWP Fund account, based on the share values
next determined after the shareholder establishes the Withdrawal Plan.
Redemptions for which this CDSC waiver policy applies may be in amounts up to 1%
per month, 3% per quarter, 6% semi-annually or 12% annually. Under this CDSC
waiver policy, amounts withdrawn each period will be paid by first redeeming
shares not subject to a CDSC because the shares were purchased by the
reinvestment of dividends or capital gains distributions, the CDSC period has
elapsed or some other waiver of the CDSC applies. If shares subject to a CDSC
must be redeemed, shares held for the longest period of time will be redeemed
first and continuing with shares held the next longest period of time until
shares held the shortest period of time are redeemed. Any shareholder
participating in the Withdrawal Plan will have sufficient shares redeemed from
his or her account so that the proceeds (net of any applicable CDSC) to the
shareholder will be the designated monthly, quarterly, semi-annual or annual
amount.
A shareholder may suspend or terminate participation in the Withdrawal Plan
at any time. A shareholder who has suspended participation may resume payments
under the Withdrawal Plan, without requiring a new determination of the account
value for the 12% CDSC waiver. The Withdrawal Plan may be terminated or revised
at any time by the Fund.
Prior to adding an additional SWP Fund to
an existing Withdrawal Plan, the required $10,000/$1,000 share values must be
met, to be calculated on the date the shareholder adds the additional SWP Fund.
However, the addition of a new SWP Fund will not change the account value for
the 12% CDSC waiver for the SWP Funds already participating in the Withdrawal
Plan.
Withdrawal Plan payments should not be considered as dividends, yields or
income. If periodic Withdrawal Plan payments continuously exceed net investment
income and net capital gains, the shareholder's original investment will be
correspondingly reduced and ultimately exhausted. Each withdrawal constitutes a
redemption of shares and any gain or loss realized must be recognized for
federal income tax purposes.
55
<PAGE>
Shareholders should contact their Morgan Stanley Dean Witter Financial
Advisor or other Selected Broker-Dealer representative or the Transfer Agent for
further information about any of the above services.
TAX-SHELTERED RETIREMENT PLANS. Retirement plans are available for use by
corporations, the self-employed, Individual Retirement Accounts and Custodial
Accounts under Section 403(b)(7) of the Internal Revenue Code. Adoption of such
plans should be on advice of legal counsel or tax advisor.
For further information regarding plan administration, custodial fees and
other details, investors should contact their Morgan Stanley Dean Witter
Financial Advisor or other Selected Broker-Dealer representative or the Transfer
Agent.
EXCHANGE PRIVILEGE
Shares of each Class may be exchanged for shares of the same Class of any other
Morgan Stanley Dean Witter Multi-Class Fund without the imposition of any
exchange fee. Shares may also be exchanged for shares of the following funds:
Morgan Stanley Dean Witter Short-Term U.S. Treasury Trust, Morgan Stanley Dean
Witter Limited Term Municipal Trust, Morgan Stanley Dean Witter Short-Term Bond
Fund and five Morgan Stanley Dean Witter funds which are money market funds (the
"Exchange Funds"). Class A shares may also be exchanged for shares of Morgan
Stanley Dean Witter Multi-State Municipal Series Trust and Morgan Stanley Dean
Witter Hawaii Municipal Trust, which are Morgan Stanley Dean Witter Funds sold
with a front-end sales charge ("FSC Funds"). Exchanges may be made after the
shares of the Fund acquired by purchase (not by exchange or dividend
reinvestment) have been held for thirty days. There is no waiting period for
exchanges of shares acquired by exchange or dividend reinvestment.
An exchange to another Morgan Stanley Dean Witter Multi-Class Fund, any FSC
Fund or any Exchange Fund that is not a money market fund is on the basis of the
next calculated net asset value per share of each fund after the exchange order
is received. When exchanging into a money market fund from the Fund, shares of
the Fund are redeemed out of the Fund at their next calculated net asset value
and the proceeds of the redemption are used to purchase shares of the money
market fund at the net asset value determined the following business day.
Subsequent exchanges between any of the Morgan Stanley Dean Witter Multi-Class
Funds, FSC Funds or any Exchange Fund that is not a money market fund can be
effected on the same basis.
No CDSC is imposed at the time of any exchange of shares, although any
applicable CDSC will be imposed upon ultimate redemption. During the period of
time the shareholder remains in an Exchange Fund (calculated from the last day
of the month in which the Exchange Fund shares were acquired), the holding
period (for the purpose of determining the rate of the CDSC) is frozen. If those
shares are subsequently re-exchanged for shares of a Morgan Stanley Dean Witter
Multi-Class Fund, the holding period previously frozen when the first exchange
was made resumes on the last day of the month in which shares of a Morgan
Stanley Dean Witter Multi-Class Fund are reacquired. Thus, the CDSC is based
upon the time (calculated as described above) the shareholder was invested in
shares of a Morgan Stanley Dean Witter Multi-Class Fund (see "Purchase of Fund
Shares"). In the case of exchanges of Class A shares which are subject to a
CDSC, the holding period also includes the time (calculated as described above)
the shareholder was invested in shares of a FSC Fund. In the case of shares
exchanged into an Exchange Fund on or after April 23, 1990, upon a redemption of
shares which results in a CDSC being imposed, a credit (not to exceed the amount
of the CDSC) will be given in an amount equal to the Exchange Fund 12b-1
distribution fees incurred on or after that date which are attributable to those
shares. (Exchange Fund 12b-1 distribution fees are described in the prospectuses
for those funds.) Class B shares of the Fund acquired in exchange for Class B
shares of another Morgan Stanley Dean Witter Multi-Class Fund having a different
CDSC schedule than that of this Fund will be subject to the higher CDSC
schedule, even if such shares are subsequently re-exchanged for shares of the
fund with the lower CDSC schedule.
ADDITIONAL INFORMATION REGARDING EXCHANGES. Purchases and exchanges should be
made for investment purposes only. A pattern of frequent exchanges may be deemed
by the Investment Manager to be abusive and contrary to the best interests of
the Fund's other shareholders and, at the Investment Manager's discretion, may
be limited by the Fund's refusal to accept additional purchases and/or exchanges
from the investor. Although the Fund does not have any specific definition of
what constitutes a pattern of frequent exchanges, and will consider all relevant
factors in determining whether a particular situation is abusive and contrary to
the best interests of the Fund and its other shareholders, investors should be
aware that the Fund and each of the other Morgan Stanley Dean Witter Funds may
in their discretion limit or otherwise restrict the number of times this
Exchange Privilege may be exercised by any investor. Any such restriction will
be made by the Fund on a prospective basis only, upon notice of the shareholder
not later than ten days following such shareholder's most recent exchange. Also,
the Exchange Privilege may be terminated or revised at any time by the Fund
and/or any of such Morgan Stanley Dean Witter Funds for which shares of the Fund
have been exchanged, upon such notice as may be required by applicable
regulatory agencies. Shareholders maintaining margin accounts with DWR or
another Selected Broker-Dealer are referred to their Morgan Stanley Dean Witter
Financial Advisor or other Selected Broker-Dealer representative regarding
restrictions on exchange of shares of the Fund pledged in the margin account.
56
<PAGE>
The current prospectus for each fund describes its investment objective(s)
and policies, and shareholders should obtain a copy and examine it carefully
before investing. Exchanges are subject to the minimum investment requirement of
each Class of Shares and any other conditions imposed by each fund. In the case
of any shareholder holding a share certificate or certificates, no exchanges may
be made until all applicable share certificates have been received by the
Transfer Agent and deposited in the shareholder's account. An exchange will be
treated for federal income tax purposes the same as a repurchase or redemption
of shares, on which the shareholder may realize a capital gain or loss. However,
the ability to deduct capital losses on an exchange may be limited in situations
where there is an exchange of shares within ninety days after the shares are
purchased. The Exchange Privilege is only available in states where an exchange
may legally be made.
If DWR or another Selected Broker-Dealer is the current dealer of record and
its account numbers are part of the account information, shareholders may
initiate an exchange of shares of the Fund for shares of any of the Morgan
Stanley Dean Witter Funds (for which the Exchange Privilege is available)
pursuant to this Exchange Privilege by contacting their Morgan Stanley Dean
Witter Financial Advisor or other Selected Broker-Dealer representative (no
Exchange Privilege Authorization Form is required). Other shareholders (and
those shareholders who are clients of DWR or another Selected Broker-Dealer but
who wish to make exchanges directly by writing or telephoning the Transfer
Agent) must complete and forward to the Transfer Agent an Exchange Privilege
Authorization Form, copies of which may be obtained from the Transfer Agent, to
initiate an exchange. If the Authorization Form is used, exchanges may be made
in writing or by contacting the Transfer Agent at (800) 869-NEWS (toll free).
The Fund will employ reasonable procedures to confirm that exchange
instructions communicated over the telephone are genuine. Such procedures may
include requiring various forms of personal identification such as name, mailing
address, social security or other tax identification number and DWR or other
Selected Broker-Dealer account number (if any). Telephone instructions may also
be recorded. If such procedures are not employed, the Fund may be liable for any
losses due to unauthorized or fraudulent instructions.
Telephone exchange instructions will be accepted if received by the Transfer
Agent between 9:00 a.m. and 4:00 p.m., New York time, on any day the New York
Stock Exchange is open. Any shareholder wishing to make an exchange who has
previously filed an Exchange Privilege Authorization Form and who is unable to
reach the Fund by telephone should contact his or her Morgan Stanley Dean Witter
Financial Advisor or other Selected Broker-Dealer representative, if
appropriate, or make a written exchange request. Shareholders are advised that
during periods of drastic economic or market changes, it is possible that the
telephone exchange procedures may be difficult to implement, although this has
not been the experience with the Morgan Stanley Dean Witter Funds in the past.
Shareholders should contact their Morgan Stanley Dean Witter Financial
Advisor or other Selected Broker-Dealer representative or the Transfer Agent for
further information about the Exchange Privilege.
REDEMPTIONS AND REPURCHASES
- --------------------------------------------------------------------------------
REDEMPTION. Shares of each Class of each Portfolio of the Fund can be redeemed
for cash at any time at the net asset value per share next determined less the
amount of any applicable CDSC in the case of Class A, Class B or Class C shares
(see "Purchase of Fund Shares"). If shares are held in a shareholder's account
without a share certificate, a written request for redemption sent to the Fund's
Transfer Agent at P.O. Box 983, Jersey City, NJ 07303 is required. If
certificates are held by the shareholder(s), the shares may be redeemed by
surrendering the certificates with a written request for redemption, along with
any additional information required by the Transfer Agent.
REPURCHASE. DWR and other Selected Broker-Dealers are authorized to repurchase
shares represented by a share certificate which is delivered to any of their
offices. Shares held in a shareholder's account without a share certificate may
also be repurchased by DWR and other Selected Broker-Dealers upon the telephonic
or telegraphic request of the shareholder. The repurchase price is the net asset
value next computed (see "Purchase of Fund Shares") after such repurchase order
is received by DWR or other Selected Broker-Dealer, reduced by any applicable
CDSC.
The CDSC, if any, will be the only fee imposed by either the Fund, the
Distributor or DWR or other Selected Broker-Dealer. The offer by DWR and other
Selected Broker-Dealers to repurchase shares may be suspended without notice by
the Distributor at any time. In that event, shareholders may redeem their shares
through the Fund's Transfer Agent as set forth above under "Redemption."
The Fund is not subject to any contingent deferred sales charges at any time
with respect to its investments in the Underlying Funds.
PAYMENT FOR SHARES REDEEMED OR REPURCHASED. Payment for shares presented for
repurchase or redemption will be made by check within seven days after receipt
by the Transfer Agent of the certificate and/or written request in good order.
Such payment may be postponed or the right of redemption suspended under unusual
circumstances; E.G., when normal trading is not taking place on the New York
Stock Exchange. If the shares to be redeemed
57
<PAGE>
have recently been purchased by check, payment of the redemption proceeds may be
delayed for the minimum time needed to verify that the check used for investment
has been honored (not more than fifteen days from the time of receipt of the
check by the Transfer Agent). Shareholders maintaining margin accounts with DWR
or another Selected Broker-Dealer are referred to their Morgan Stanley Dean
Witter Financial Advisor or other Selected Broker-Dealer representative
regarding restrictions on redemption of shares of the Fund pledged in the margin
account.
REINSTATEMENT PRIVILEGE. A shareholder who has had his or her shares redeemed
or repurchased and has not previously exercised this reinstatement privilege
may, within 35 days after the date of the redemption or repurchase, reinstate
any portion or all of the proceeds of such redemption or repurchase in shares of
the Fund in the same Class and Portfolio from which such shares were redeemed or
repurchased at their net asset value next determined after a reinstatement
request, together with the proceeds, is received by the Transfer Agent and
receive a pro rata credit for any CDSC paid in connection with such redemption
or repurchase.
INVOLUNTARY REDEMPTION. The Fund reserves the right to redeem, on sixty days'
notice and at net asset value, the shares of any shareholder (other than shares
held in an Individual Retirement Account or Custodial Account under Section
403(b)(7) of the Internal Revenue Code) whose shares due to redemptions by the
shareholder have a value of less than $100 or such lesser amount as may be fixed
by the Trustees or, in the case of an account opened through EasyInvest-SM-, if
after twelve months the shareholder has invested less than $1,000 in the
account. However, before the Fund redeems such shares and sends the proceeds to
the shareholder, it will notify the shareholder that the value of the shares is
less than the applicable amount and allow him or her sixty days to make an
additional investment in an amount which will increase the value of his or her
account to at least the applicable amount before the redemption is processed. No
CDSC will be imposed on any involuntary redemption.
DIVIDENDS, DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS. Each Portfolio of the Fund intends to distribute
substantially all of its net investment income and distribute capital gains, if
any, at least once each year. Each Portfolio may, however, determine either to
distribute or to retain all or part of any long-term capital gains in any year
for reinvestment.
All dividends and any capital gains distributions will be paid in additional
shares of the same Class and automatically credited to the shareholder's account
without issuance of a share certificate unless the shareholder requests in
writing that all dividends and/or distributions be paid in cash. Shares acquired
by dividend and distribution reinvestments will not be subject to any front-end
sales charge or CDSC. Class B shares acquired through dividend and distribution
reinvestments will become eligible for conversion to Class A shares on a pro
rata basis. Distributions paid on Class A and Class D shares will be higher than
for Class B and Class C shares because distribution fees paid by Class B and
Class C shares are higher. (See "Shareholder Services--Automatic Investment of
Dividends and Distributions.")
TAXES. Because the Fund intends to distribute all of its net investment income
and net short-term capital gains to shareholders and otherwise qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code, it
is not expected that the Fund will be required to pay any Federal income tax on
any such income and capital gains. Shareholders will normally have to pay
Federal income taxes, and any state and local income taxes, on the dividends and
distributions they receive from the Fund. Any dividends declared in the last
quarter of any calendar year which are paid in the following year prior to
February 1 will be deemed for tax purposes to have been received in the prior
year.
Distributions of net long-term capital gains, if any, are taxable to
shareholders as long-term capital gains regardless of how long a shareholder has
held the Fund's shares and regardless of whether the distribution is received in
additional shares or in cash. Capital gains distributions are not eligible for
the dividends received deduction.
After the end of the calendar year, shareholders will be sent full
information on their dividends and capital gains distributions for tax purposes.
To avoid being subject to a 31% Federal backup withholding tax on taxable
dividends, capital gains distributions and the proceeds of redemptions and
repurchases, shareholders' taxpayer identification numbers must be furnished and
certified as to their accuracy.
Shareholders should consult their tax advisors as to the applicability of
the foregoing to their current situation.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time each Portfolio of the Fund may quote its "total return" in
advertisements and sales literature. These figures are computed separately for
Class A, Class B, Class C and Class D shares. The total return of the Fund is
58
<PAGE>
based on historical earnings and is not intended to indicate future performance.
The "average annual total return" of the Fund refers to a figure reflecting
the average annualized percentage increase (or decrease) in the value of an
initial investment in a Class of the Fund of $1,000 over periods of one, five
and ten years, or the life of the Fund, if less than any of the foregoing.
Average annual total return reflects all income earned by the Fund, any
appreciation or depreciation of the Fund's assets, all expenses incurred by the
applicable Class and all sales charges which will be incurred by shareholders,
for the stated periods. It also assumes reinvestment of all dividends and
distributions paid by the Fund.
In addition to the foregoing, the Fund may advertise its total return for
each Class over different periods of time by means of aggregate, average, and
year-by-year or other types of total return figures. Such calculations may or
may not reflect the deduction of any sales charge which, if reflected, would
reduce the performance quoted. The Fund may also advertise the growth of
hypothetical investments of $10,000, $50,000 and $100,000 in each Class of
shares of the Fund. The Fund from time to time may also advertise its
performance relative to certain performance rankings and indexes compiled by
independent organizations, such as mutual fund performance rankings of Lipper
Analytical Services, Inc.
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS. All shares of beneficial interest of the Fund are of $0.01 par
value and are equal as to earnings, assets and voting privileges except that
each Class of each Portfolio will have exclusive voting privileges with respect
to matters relating to distribution expenses borne solely by such Class or any
other matter in which the interests of one Class differ from the interests of
any other Class. In addition, Class B shareholders will have the right to vote
on any proposed material increase in Class A's expenses, if such proposal is
submitted separately to Class A shareholders. Also, as discussed herein, Class
A, Class B and Class C of each Portfolio bear the expenses related to the
distribution of their respective shares.
The Fund is not required to hold Annual Meetings of Shareholders and, in
ordinary circumstances, the Fund does not intend to hold such meetings. The
Trustees may call Special Meetings of Shareholders for action by shareholder
vote as may be required by the Act or the Declaration of Trust. Under certain
circumstances the Trustees may be removed by action of the Trustees or by the
shareholders.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for obligations of the
Fund. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Fund, requires that Fund
obligations include such disclaimer, and provides for indemnification and
reimbursement of expenses out of the Fund's property for any shareholder held
personally liable for the obligations of the Fund. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund itself would be unable to meet its
obligations. Given the above limitations on shareholder personal liability, and
the nature of the Fund's assets and operations, in the opinion of Massachusetts
counsel to the Fund, the risk to shareholders of personal liability is remote.
CODE OF ETHICS. Directors, officers and employees of MSDW Advisors, MSDW
Services and MSDW Distributors are subject to a strict Code of Ethics adopted by
those companies. The Code of Ethics is intended to ensure that the interests of
shareholders and other clients are placed ahead of any personal interest, that
no undue personal benefit is obtained from a person's employment activities and
that actual and potential conflicts of interest are avoided. To achieve these
goals and comply with regulatory requirements, the Code of Ethics requires,
among other things, that personal securities transactions by employees of the
companies be subject to an advance clearance process to monitor that no Morgan
Stanley Dean Witter Fund is engaged at the same time in a purchase or sale of
the same security. The Code of Ethics bans the purchase of securities in an
initial public offering, and also prohibits engaging in futures and options
transactions and profiting on short-term trading (that is, a purchase within
sixty days of a sale or a sale within sixty days of a purchase) of a security.
In addition, investment personnel may not purchase or sell a security for their
personal account within thirty days before or after any transaction in any
Morgan Stanley Dean Witter Fund managed by them. Any violations of the Code of
Ethics are subject to sanctions, including reprimand, demotion or suspension or
termination of employment. The Code of Ethics comports with regulatory
requirements and the recommendations in the 1994 report by the Investment
Company Institute Advisory Group on Personal Investing.
MASTER/FEEDER CONVERSION. Each Portfolio of the Fund reserves the right to seek
to achieve its investment objective by investing all of its investable assets in
a diversified, open-end management investment company having the same investment
objective and policies and substantially the same investment restrictions as
those applicable to the respective Portfolio.
SHAREHOLDER INQUIRIES. All inquiries regarding the Fund should be directed to
the Fund at the telephone numbers or address set forth on the front cover of
this Prospectus.
59
<PAGE>
MORGAN STANLEY
DEAN WITTER
FUND OF FUNDS
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Wayne E. Hedien
Manuel N. Johnson
Michael E. Nugent
Philip J. Purcell
John L. Schroeder
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Barry Fink
Vice President, Secretary and General Counsel
Thomas F. Caloia
Treasurer
CUSTODIAN
The Bank of New York
90 Washington Street
New York, New York 10286
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center
Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
INVESTMENT MANAGER
Morgan Stanley
Dean Witter Advisors Inc.
