<PAGE>
Securities Act File No. 333-
Investment Company Act File No. 811-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT No.1
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and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT No. 1
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MORGAN STANLEY STRATEGIC ADVISER FUND, INC.
(Exact Name of Registrant as Specified in Charter)
1221 Avenue of the Americas, New York, New York 10020
(Address of Principal Executive Office)
Registrant's Telephone Number (800) 548-7786
Harold J. Schaaff, Jr., Esquire
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas, New York, New York 10020
(Name and Address of Agent for Service)
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COPIES TO:
Michael F. Klein, Esquire Richard W. Grant, Esquire
Morgan Stanley Asset Management Inc. Morgan, Lewis & Bockius LLP
1221 Avenue of the Americas 2000 One Logan Square
New York, NY 10020 Philadelphia, PA 19103
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APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: AS SOON AS PRACTICABLE AFTER
EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
Title of Securities Amount Being Amount of
Being Registered Registered Registration Fee
- ------------------- ------------ ----------------
Common Stock, par value Indefinite* $500**
$.001 per share
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* Registrant elects to register an indefinite number of shares of its Common
Stock, par value $.001 per share, pursuant to Rule 24f-2 under the
Investment Company Act of 1940.
** Registrant has paid the Registration Fee upon the filing of its
Registration Statement.
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REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
MORGAN STANLEY STRATEGIC ADVISER FUND, INC.
CROSS REFERENCE SHEET
PART A - INFORMATION REQUIRED IN A PROSPECTUS
Form N-1A Location in Prospectus for the Strategic Adviser Conservative,
Item Number Strategic Adviser Moderate and Strategic Adviser Aggressive
- ----------- Portfolios
Item 1. Cover Page -- Cover Page
Item 2. Synopsis -- The Fund; Investment Management; Offering of Shares;
Fund Expenses
Item 3. Condensed Financial Information -- *
Item 4. General Description of Registrant -- The Portfolios; The Underlying
Funds; Securities and Investment Techniques;
Fundamental Investment Limits; Management of the Fund
Item 5. Management of the Fund -- Investment Management; Management of the
Fund
Item 5A. Management's Discussion of Fund Performance -- **
Item 6. Capital Stock and Other Securities -- Management of the Fund; Account
Policies
Item 7. Purchase of Securities Being Offered -- Cover Page; Offering of
Shares; Management of the Fund; Account Policies
Item 8. Redemption or Repurchase -- Account Policies; Redemption of Shares
Item 9. Pending Legal Proceedings -- *
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* Omitted since the answer is negative or the Item is not applicable.
** Information required by Item 5A is not applicable as the Strategic
Adviser Conservative, Strategic Adviser Moderate and Strategic Adviser
Aggressive Portfolios have not yet commenced operations. Information
required by Item 5A for the aforementioned portfolios will be contained in
the Annual Report to Shareholders following commencement of operations.
<PAGE>
PART B - INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
Form N-1A
Item Number Location in Statement of Additional Information
- ----------- -----------------------------------------------
Item 10. Cover Page -- Cover Page
Item 11. Table of Contents -- Cover Page
Item 12. General Information and History -- *
Item 13. Investment Objectives and Policies -- Securities and Investment
Techniques; Investment Limitations; Determining Maturities of
Certain Instruments; Description of Certain Securities
Ratings; Annex A
Item 14. Management of the Fund -- Management of the Fund
Item 15. Control Persons and Principal Holders of Securities -- Management of
the Fund; General Information
Item 16. Investment Advisory and Other Services -- Management of the Fund;
General Information
Item 17. Brokerage Allocation and Other Practices -- Portfolio Transactions
Item 18. Capital Stock and Other Securities -- General Information
Item 19. Purchase, Redemption and Pricing of Securities Being Offered --
Purchase of Shares; Redemption of Shares; General Information
Item 20. Tax Status -- Certain Federal Income Tax Consequences
Item 21. Underwriters -- Management of the Fund
Item 22. Calculation of Performance Data -- Performance Information
Item 23. Financial Statements -- *
PART C - OTHER INFORMATION
Part C contains the information required by the Items of the
Form N-1A under such Items as set forth in the Form N-1A.
- ---------------
* Omitted since the answer is negative or the Item is not applicable.
<PAGE>
MORGAN STANLEY STRATEGIC ADVISER FUND, INC.
MORGAN STANLEY MILLER
ASSET MANAGEMENT ANDERSON &
INC. SHERRERD, LLP
MORGAN STANLEY STRATEGIC ADVISER FUND, INC. (THE "FUND") IS A MUTUAL FUND THAT
OFFERS INVESTORS A RANGE OF ASSET ALLOCATION STRATEGIES DESIGNED TO ACCOMMODATE
DIFFERENT INVESTORS' PHILOSOPHIES, GOALS AND RISK TOLERANCES. THESE STRATEGIES
ARE IMPLEMENTED THROUGH INVESTMENT IN UNDERLYING PORTFOLIOS OF THE MORGAN
STANLEY INSTITUTIONAL FUND, INC. AND THE MAS FUNDS (EACH AN "UNDERLYING FUND"
AND, COLLECTIVELY, THE "UNDERLYING FUNDS"). THE UNDERLYING FUNDS ARE MANAGED BY
EITHER MORGAN STANLEY ASSET MANAGEMENT INC. ("MSAM") OR MILLER ANDERSON &
SHERRERD, LLP ("MAS"). MORGAN STANLEY & CO. INCORPORATED IS THE DISTRIBUTOR OF
THE FUND'S SHARES. THE FUND MAKES AVAILABLE IN A SINGLE PRODUCT THE COMBINED
STRENGTHS OF THESE LEADING INVESTMENT FIRMS, EACH OF WHICH IS A SUBSIDIARY OF
MORGAN STANLEY, DEAN WITTER, DISCOVER & CO.
THIS PROSPECTUS PERTAINS TO THE CLASS A AND THE CLASS B SHARES OF THE STRATEGIC
ADVISER CONSERVATIVE PORTFOLIO, THE STRATEGIC ADVISER MODERATE PORTFOLIO AND THE
STRATEGIC ADVISER AGGRESSIVE PORTFOLIO (EACH A "PORTFOLIO" AND COLLECTIVELY, THE
"PORTFOLIOS"). THE CLASS A AND CLASS B SHARES CURRENTLY OFFERED BY THE
PORTFOLIOS ARE INTENDED FOR CLASSES OF INVESTORS HAVING DIFFERENT SHAREHOLDER
SERVICING NEEDS AND HAVE DIFFERENT EXPENSES. SHARES OF THE PORTFOLIOS ARE
OFFERED WITH NO SALES CHARGE, EXCHANGE FEE OR REDEMPTION FEE.
THIS PROSPECTUS CONTAINS IMPORTANT INFORMATION ABOUT THE FUND'S INVESTMENTS AND
SERVICES. YOU SHOULD READ IT BEFORE INVESTING, AND KEEP IT ON FILE FOR FUTURE
REFERENCE. A STATEMENT OF ADDITIONAL INFORMATION ("SAI") DATED , 1997,
HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS INCORPORATED
HEREIN BY REFERENCE, AND, THEREFORE, LEGALLY FORMS A PART OF THE PROSPECTUS. FOR
A FREE COPY, CONTACT THE FUND AT THE ADDRESS OR TOLL-FREE NUMBER BELOW.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE FUND'S PORTFOLIOS:
STRATEGIC ADVISER CONSERVATIVE PORTFOLIO
The Strategic Adviser Conservative Portfolio seeks the highest level of
long-term total return that is consistent with a relatively conservative level
of risk. The Portfolio invests primarily in Underlying Fixed Income Funds and,
to a lesser extent, in Underlying Equity Funds. The Portfolio may be appropriate
for relatively conservative investors who have a shorter time horizon for their
investments and seek some capital appreciation while generally preserving
principal.
STRATEGIC ADVISER MODERATE PORTFOLIO
The Strategic Adviser Moderate Portfolio seeks the highest level of long-term
total return that is consistent with a relatively moderate level of risk. The
Portfolio invests in a mix of Underlying Equity Funds and Underlying Fixed
Income Funds. The Portfolio may be appropriate for moderately aggressive
investors who have an intermediate time horizon for their investments and are
willing to bear a moderate level of risk to achieve capital appreciation.
STRATEGIC ADVISER AGGRESSIVE PORTFOLIO
The Strategic Adviser Aggressive Portfolio seeks the highest level of long-term
capital appreciation that is consistent with a relatively high level of risk.
The Portfolio invests primarily in Underlying Equity Funds and, to a lesser
extent, in Underlying Fixed Income Funds. The Portfolio may be appropriate for
relatively aggressive investors who have a longer time horizon for their
investments and are willing to bear a higher level of risk to achieve greater
return.
Prospectus dated , 1997
Morgan Stanley Strategic Adviser Fund, Inc.
P.O. Box 2798, Boston, MA 02208-2798
1-800-548-7786
<PAGE>
THE FUND
The Fund is a type of mutual fund often described as a "fund of funds."
The Fund currently consists of three separate investment portfolios (each
a "Portfolio" and, collectively, the "Portfolios") that invest primarily
in different combinations of the Class A shares of investment portfolios
of Morgan Stanley Institutional Fund, Inc. ("MSIF") and Institutional
Class shares of investment portfolios of MAS Funds (each an "Underlying
Fund" and, collectively, the "Underlying Funds"). The Portfolios have
distinct investment objectives and are designed to offer investors a
range of choices suited to differing philosophies, goals and tolerance
for risk. The following pages describe these investment objectives and
the Underlying Funds each Portfolio may use to seek its objective, as
well as the risks inherent in investing in the Portfolios.
INVESTMENT MANAGEMENT
Morgan Stanley Asset Management Inc. ("MSAM" or the "Adviser") serves as
investment adviser to the Portfolios and is responsible for allocating
each Portfolio's investments among the Underlying Funds. Underlying Funds
are advised by MSAM or Miller Anderson & Sherrerd, LLP ("MAS").
MSAM and MAS are both subsidiaries, and part of the worldwide investment
advisory business, of Morgan Stanley, Dean Witter, Discover & Co., a
global financial services company. As of , 1997, MSAM and MAS,
together with their other affiliated investment advisory companies, had
assets under management, including assets under fiduciary advisory
control, totaling approximately $ billion.
OFFERING OF SHARES
The Portfolios are offered primarily to institutional investors,
including certain employee benefit plans that permit participants to
select among investment options.
<TABLE>
<CAPTION>
PROSPECTUS OUTLINE PAGE
----
<S> <C>
FUND EXPENSES 3
Tables showing the direct and indirect expenses of the Portfolios.
THE PORTFOLIOS 4
For each Portfolio, the investment objective and a summary of
strategy, potential investors, and investment characteristics and risks.
THE UNDERLYING FUNDS 6
A review of the investment characteristics and risks of each
current Underlying Fund.
SECURITIES AND INVESTMENT TECHNIQUES 9
Information about the principal types of investment strategies that
may be used by some or all of the Underlying Funds and discussion of
investment risks and limitations.
FUNDAMENTAL INVESTMENT LIMITS 15
Certain policies that may be changed only by shareholders.
MANAGEMENT OF THE FUND 15
General information about the organization and operation of the
Fund, including details about MSAM, MAS and the Fund's Portfolio Manager,
as well as fees, expenses and performance calculations.
ACCOUNT POLICIES 19
Information on share purchases and redemptions, net asset value
calculation, income and capital gain distributions and taxes.
</TABLE>
2
<PAGE>
FUND EXPENSES
The purpose of the following table is to help you understand the various costs
and expenses that you, as a shareholder, will bear in connection with an
investment in each Portfolio's Class A or Class B Shares.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
STRATEGIC STRATEGIC STRATEGIC
ADVISER ADVISER ADVISER
CONSERVATIVE MODERATE AGGRESSIVE
PORTFOLIO PORTFOLIO PORTFOLIO
------------ ----------- -----------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
Class A............................... None None None
Class B............................... None None None
Maximum Sales Load Imposed
on Reinvested Dividends
Class A............................... None None None
Class B............................... None None None
Deferred Sales Load
Class A............................... None None None
Class B............................... None None None
Redemption Fees
Class A............................... None None None
Class B............................... None None None
Exchange Fees
Class A............................... None None None
Class B............................... None None None
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
STRATEGIC STRATEGIC STRATEGIC
ADVISER ADVISER ADVISER
CONSERVATIVE MODERATE AGGRESSIVE
PORTFOLIO PORTFOLIO PORTFOLIO
------------ ----------- -----------
<S> <C> <C> <C>
Management Fee
Class A............................... None None None
Class B............................... None None None
12b-1 Fees
Class A............................... None None None
Class B............................... 0.25% 0.25% 0.25%
Administration Fee(1)(2)
Class A............................... 0.15% 0.15% 0.15%
Class B............................... 0.15% 0.15% 0.15%
Underlying Fund Expenses(3)
Class A............................... 0.56% 0.66% 0.86%
Class B............................... 0.56% 0.66% 0.86%
Other Expenses(4)
Class A............................... 0.09% 0.09% 0.09%
Class B............................... 0.09% 0.09% 0.09%
----- ----- -----
Total Operating Expenses(2)
Class A............................... 0.80% 0.90% 1.10%
Class B............................... 1.05% 1.15% 1.35%
----- ----- -----
</TABLE>
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(1) Paid to the Adviser for general administration, fund accounting and
shareholder servicing and transfer agent services.
(2) The Adviser has voluntarily agreed to waive its administration fees and/or
reimburse each Portfolio, if necessary, if such fees or the expenses of the
Portfolios or the Underlying Funds would cause the total operating expenses
of any Portfolio to exceed the Total Operating Expenses set forth above. The
Adviser reserves the right to terminate any of its fee waivers and/or
expense reimbursements at any time in its sole discretion. For further
information on Portfolio expenses, see "Management of the Fund--Underlying
Fund Expenses."
(3) Underlying Fund expenses for each Portfolio are estimated based upon the
initial allocation of each Portfolio's investment in Underlying Funds and
the total operating expenses of (i) the MSIF Underlying Funds for the fiscal
year ended December 31, 1996 and (ii) the MAS Underlying Funds for the
fiscal year ended September 30, 1996. Actual Underlying Fund expenses
incurred by each Portfolio may vary with changes in the allocation of each
Portfolio's assets among the Underlying Funds and with other events that
directly affect the expenses of the Underlying Funds. For additional
information on the total operating expenses of each Underlying Fund, please
refer to "Management of the Fund--Underlying Fund Expenses."
(4) Estimated.
An investor in the Portfolios will bear no direct expenses. Shareholders will,
however, bear their proportionate share of the expenses of the Portfolios and
the Underlying Funds. The purpose of the above table is to help you understand
these indirect costs. Expenses and fees for the Portfolios are based on
estimates assuming that the average daily net assets of both the Class A and
Class B shares of each Portfolio will be $50,000,000. Due to the continuous
nature of Rule 12b-1 fees, long term Class B shareholders may pay more than the
equivalent of the maximum front-end sales charges otherwise permitted by the
National Association of Securities Dealers, Inc. ("NASD") Conduct Rules.
EXAMPLE
The following example illustrates the direct and indirect expenses that you
would pay assuming (1) an investment of $1,000; (2) a 5% annual return; and (3)
redemption at the end of each time period. As noted in the table above, the
Portfolios charge no redemption fees of any kind. The following example is based
on the total operating expenses of each Portfolio after fee waivers. The actual
expenses will vary with changes in the allocation of each Portfolio's assets
among the Underlying Funds and with other events that directly affect the
expenses of the Underlying Funds.
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ------ ------
<S> <C> <C> <C> <C>
Strategic Adviser Conservative Portfolio
Class A............................... $ 8 $26 * *
Class B............................... $11 $33 * *
Strategic Adviser Moderate Portfolio
Class A............................... $ 9 $29 * *
Class B............................... $12 $37 * *
Strategic Adviser Aggressive Portfolio
Class A............................... $11 $35 * *
Class B............................... $14 $43 * *
</TABLE>
- ------------
* Because the Portfolios are new, the Fund has not projected expenses for the
Portfolios beyond the three year period shown.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
3
<PAGE>
THE PORTFOLIOS
The Portfolios offer a range of investment objectives for investors with
differing philosophies, goals and risk tolerance. Each Portfolio seeks to
achieve its objective through investing in combinations of Underlying Funds
which, in turn, have their own varying investment objectives and policies. The
Underlying Funds pursue their investment objectives by purchasing the
instruments and using the strategies described under "Securities and Investment
Techniques" below.
MSAM will allocate each Portfolio's investments among Underlying Funds, within
the broad ranges for Fixed Income and Equity investments set forth below for
each Portfolio. MSAM's allocation process is strategic rather than tactical and
focuses on longer term trends in market forces. Accordingly, the allocation of
each Portfolio's investments in Underlying Funds is expected to be relatively
static, with subtle adjustments periodically in response to market developments.
MSAM may also from time to time rebalance each Portfolio's investments in
Underlying Funds to restore weightings to the percentages it believes
appropriate. As with any mutual fund, there is no assurance that the Portfolios
will achieve their objectives.
The Portfolios initially will invest in combinations of the following Underlying
Funds:
EQUITY:
U.S. Equity Funds:
MSIF Equity Growth Portfolio
MSIF U.S. Equity Plus Portfolio
MSIF U.S. Real Estate Portfolio
MAS Mid Cap Growth Portfolio
MAS Mid Cap Value Portfolio
MAS Value Portfolio
International Equity Funds:
MSIF Active Country Allocation Portfolio
MSIF Asian Equity Portfolio
MSIF Emerging Markets Portfolio*
MSIF European Equity Portfolio
MSIF International Equity Portfolio*
MSIF International Magnum Portfolio
MSIF Japanese Equity Portfolio
MSIF Latin American Portfolio
MAS International Equity Portfolio
FIXED INCOME:
U.S. Fixed Income Funds:
MSIF Fixed Income Portfolio
MAS Fixed Income Portfolio
MAS High Yield Portfolio
MAS Intermediate Duration Portfolio
MAS Limited Duration Portfolio
MAS Mortgage-Backed Securities Portfolio
International Fixed Income Fund:
MAS International Fixed Income Portfolio
- ------------
* This Underlying Fund is currently closed to new investors. However, MSAM may
in its discretion permit investment by certain classes of investors, such as
the Fund.
The Portfolios may also invest in other Underlying Funds, U.S. Government
Securities (including Agencies) and Money Market Instruments.
Certain terms used below have initial capital letters ("Underlying Fixed Income
Fund," for example). These terms are further described under "Securities and
Investment Techniques" below.
STRATEGIC ADVISER CONSERVATIVE PORTFOLIO
OBJECTIVE AND STRATEGY: The Strategic Adviser Conservative Portfolio seeks the
highest level of long-term total return that is consistent with a relatively
conservative level of risk. The Portfolio invests primarily in Underlying Fixed
Income Funds and, to a lesser extent, in Underlying Equity Funds, within the
following permitted ranges:
Fixed Income (70%-80%) Equity (20%-30%)
- -------------------------------- ----------------------
It is anticipated that the Portfolio will invest primarily in Underlying Funds
which focus their investments on the U.S. market and which invest primarily in
short-duration Fixed Income Securities and, to a lesser extent, Equity
Securities of larger issuers.
EXAMPLE: The following is an example of how the investments of the Strategic
Adviser Conservative Portfolio may be allocated, based on MSAM's effective
allocations on the date of this Prospectus:
70% MAS Limited Duration Portfolio
10% MAS High Yield Portfolio
7% MSIF Equity Growth Portfolio
13% MSIF U.S. Equity Plus Portfolio
This example is for illustration purposes only. MSAM may alter the allocation of
investments for the Portfolio at any time.
INVESTOR PROFILE: The Portfolio may be appropriate for relatively conservative
investors who have a shorter time horizon for their investments and seek some
capital appreciation while generally preserving principal. Example: investors
who are investing within 3-5 years prior to retirement or during retirement.
RISK PROFILE: LOW TO MODERATE POTENTIAL RISK AND REWARD. The value of the
Portfolio's investments in Underlying Fixed Income Funds can be expected to vary
inversely to changes in prevailing interest rates. The Portfolio may invest, to
a limited extent, in Underlying Fixed Income Funds that purchase High Yield
Securities. High Yield Securities usually entail greater risk and may be more
volatile and less liquid than other Fixed Income Securities. The value of the
Portfolio's investments in Underlying Equity Funds will fluctuate with changes
in the stock market and changes in the economy.
4
<PAGE>
STRATEGIC ADVISER MODERATE PORTFOLIO
OBJECTIVE AND STRATEGY: The Strategic Adviser Moderate Portfolio seeks the
highest level of long-term total return that is consistent with a relatively
moderate level of risk. The Portfolio invests in a mix of Underlying Equity
Funds and Underlying Fixed Income Funds within the following permitted ranges:
Fixed Income (40%-50%) Equity (50%-60%)
- ---------------------- --------------------------------
It is anticipated that the Portfolio will invest in Underlying Funds which focus
their investments on Equity Securities of mid- to large-size U.S. and foreign
issuers, and on short- to intermediate-duration Fixed Income Securities,
including High Yield Securities and Mortgage-Backed Securities ("MBSs").
EXAMPLE: The following is an example of how the investments of the Strategic
Adviser Moderate Portfolio may be allocated, based on MSAM's effective
allocations on the date of this Prospectus:
40% MAS Intermediate Duration Portfolio
10% MAS High Yield Portfolio
15% MSIF International Magnum Portfolio
15% MSIF U.S. Equity Plus Portfolio
10% MSIF Equity Growth Portfolio
10% MAS Value Portfolio
This example is for illustration purposes only. MSAM may alter the allocation of
investments for the Portfolio at any time.
INVESTOR PROFILE: The Portfolio may be appropriate for moderately aggressive
investors who have an intermediate time horizon for their investments and are
willing to bear a moderate level of risk to achieve capital appreciation.
Example: investors who are in their 40's and 50's who plan to retire in their
early to mid-60's and those who are investing during early retirement.
RISK PROFILE: MODERATE POTENTIAL RISK AND REWARD. The value of the Portfolio's
investments in Underlying Equity Funds will fluctuate with changes in the stock
market and changes in the economy. The value of the Portfolio's investments in
Underlying Fixed Income Funds can be expected to vary inversely to changes in
prevailing interest rates. While Fixed Income Securities with longer maturities
tend to produce higher yields, the prices of longer maturity securities are also
subject to greater market fluctuations as a result of changes in interest rates.
Certain Underlying Funds in which the Portfolio invests may purchase High Yield
Securities and MBSs. High Yield Securities usually entail greater risk and may
be more volatile and less liquid than other Fixed Income Securities. MBSs are
subject to the same risks as Fixed Income Securities in general, but also may
react differently or less favorably to changes in interest rates as a result of
prepayment risk. In addition, investing in Underlying Funds that invest
internationally involves different or increased risks. Foreign Investment means
that the performance of the Portfolio will be affected by currency values, the
political and regulatory environment, greater volatility of securities exchanges
and overall political and economic factors in the countries in which the
Underlying Funds invest.
STRATEGIC ADVISER AGGRESSIVE PORTFOLIO
OBJECTIVE AND STRATEGY: The Strategic Adviser Aggressive Portfolio seeks the
highest level of long-term capital appreciation that is consistent with a
relatively high level of risk. The Portfolio invests primarily in Underlying
Equity Funds and, to a lesser extent, in Underlying Fixed Income Funds within
the following permitted ranges:
Fixed Income (10%-20%) Equity (80%-90%)
- ---------------------- --------------------------------
It is anticipated that the Portfolio will invest in Underlying Funds which focus
their investments on Equity Securities of U.S. and foreign issuers, including
Emerging Market Country Securities, and, to a lesser extent, on intermediate- to
long-duration Fixed Income Securities, including High Yield Securities and MBSs.
EXAMPLE: The following is an example of how the investments of the Strategic
Adviser Aggressive Portfolio may be allocated, based on MSAM's effective
allocations on the date of this Prospectus:
25% MSIF International Magnum Portfolio
15% MSIF Equity Growth Portfolio
15% MAS Value Portfolio
10% MSIF Emerging Markets Portfolio
10% MAS Mid Cap Growth Portfolio
10% MSIF U.S. Equity Plus Portfolio
15% MAS Fixed Income Portfolio
This example is for illustration purposes only. MSAM may alter the allocation of
investments for the Portfolio at any time.
INVESTOR PROFILE: The Portfolio may be appropriate for relatively aggressive
investors who have a longer time horizon for their investments and are willing
to bear a higher level of risk to achieve greater return. Example: investors in
their 20s, 30s, or 40s who are saving for their retirements and who plan to
retire in their early to mid-60s.
RISK PROFILE: MODERATE TO HIGH POTENTIAL RISK AND REWARD. The value of the
Portfolio's investments in Underlying Equity Funds will fluctuate with changes
in the stock market and changes in the economy. The value of the
5
<PAGE>
Portfolio's investments in Underlying Fixed Income Funds can be expected to vary
inversely to changes in prevailing interest rates. While Fixed Income Securities
with longer maturities tend to produce higher yields, the prices of longer
maturity securities are also subject to greater market fluctuations as a result
of changes in interest rates. Underlying Funds that invest in MBSs will be
subject to the same risks as Fixed Income Securities in general, but also may
react differently or less favorably to changes in interest rates as a result of
prepayment risk. In addition, investing in Underlying Funds that invest
internationally involves different or increased risks. Foreign Investment means
that the performance of the Portfolio will be affected by currency values, the
political and regulatory environment, greater volatility of securities exchanges
and overall political and economic factors in the countries in which the
Underlying Funds invest. Certain Underlying Funds may invest in Emerging Market
Country Securities which may increase these risks, but may offer superior growth
opportunities.
THE UNDERLYING FUNDS
The Underlying Funds that will be initially considered for investment by each
Portfolio are described below. The Underlying Funds in which the Portfolios
intend to invest may change from time to time and the Portfolios may invest in
Underlying Funds in addition to those described below at the discretion of the
Adviser without shareholder approval.
The value of each Underlying Fund's investments and the income they generate
will vary from day-to-day and generally reflect market conditions, interest
rates, and other company, political, or economic developments both in the United
States and abroad. When a Portfolio redeems shares of an Underlying Fund, they
may be worth more or less than their original cost. As with any mutual fund,
there is no assurance that an Underlying Fund will achieve its objective.
The Underlying Funds spread investment risk in varying degrees by limiting their
holdings in any one company or industry. Nevertheless, each Underlying Fund will
experience price volatility the extent of which will be affected by the types of
securities and techniques the particular Underlying Fund uses.
The MAS International Fixed Income Portfolio and the MSIF International Magnum,
U.S. Real Estate, Emerging Markets and Latin American Portfolios are non-
diversified portfolios under the Investment Company Act of 1940, as amended (the
"1940 Act"). Accordingly, the 1940 Act does not limit the proportion of their
assets that may be invested in the securities of a single issuer. These
Underlying Funds have the investment flexibility to invest a greater proportion
of their assets in the securities of a small number of issuers. As a result,
they will be subject to a greater risk of loss in the event such an investment
underperforms expectations. However, these Underlying Funds attempt to comply
with diversification requirements imposed by the Internal Revenue Code of 1986,
as amended (the "Code"), for qualification as regulated investment companies.
In addition to the Underlying Funds' investments described below, each
Underlying Fund may invest in Derivatives and securities described under Other
Securities to pursue portfolio strategy. Derivatives involve certain risks that
are different from the risks associated with other securities.
Each Underlying Fund normally will be invested according to its investment
strategy. However, the Underlying Funds also have the ability to invest without
limitation in high-quality Money Market Instruments or other Temporary
Investments for temporary, defensive purposes.
U.S. EQUITY FUNDS
MSIF EQUITY GROWTH PORTFOLIO
The MSIF Equity Growth Portfolio seeks long-term capital appreciation by
investing in growth-oriented Equity Securities of medium and large
capitalization U.S. corporations and, to a limited extent, foreign corporations.
The Underlying Fund invests primarily in rapidly growing, high quality
companies, and companies with lower, but accelerating, earnings growth,
generally with market capitalizations of $500 million or more. The Underlying
Fund may invest in both Common Stocks and Convertible Securities. In addition to
the general risks associated with Equity Securities, to the extent that it
invests in securities of foreign issuers, the Underlying Fund will be subject to
the risks described under Foreign Investment.
MSIF U.S. EQUITY PLUS PORTFOLIO
The MSIF U.S. Equity Plus Portfolio seeks long-term capital appreciation by
investing primarily in Common Stocks and other Equity Securities of issuers
included in the Standard & Poor's Ratings Group ("S&P") 500 Index.
MSIF U.S. REAL ESTATE PORTFOLIO
The MSIF U.S. Real Estate Portfolio seeks above-average current income and
long-term capital appreciation by investing primarily in Equity Securities of
companies in the U.S. real estate industry, including real estate investment
trusts ("REITs"). In addition to the general risks associated with Equity
Securities, the Underlying Fund's investments may be subject to additional risks
associated with real estate investments generally and REITs in particular.
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MAS MID CAP GROWTH PORTFOLIO
The MAS Mid Cap Growth Portfolio seeks long-term capital growth by investing
primarily in Common Stocks and other Equity Securities of smaller and medium
size U.S. companies that offer long-term growth potential. The Underlying Fund
generally invests in companies with capitalizations between $300 million and $3
billion. The Underlying Fund will be subject to the risks associated with
investing in the instruments described under Equity Securities.
MAS MID CAP VALUE PORTFOLIO
The MAS Mid Cap Value Portfolio seeks above-average total return over a market
cycle of three to five years by investing primarily in Equity Securities of U.S.
companies with equity capitalizations in the range of the companies represented
in the S&P MidCap 400 Index (currently from $800 million to $3 billion) that are
deemed to be undervalued. The Underlying Fund will be subject to the risks
associated with investing in the instruments described under Equity Securities.
MAS VALUE PORTFOLIO
The MAS Value Portfolio seeks above-average total return over a market cycle of
three to five years by investing primarily in Equity Securities of U.S.
companies with equity capitalizations usually greater than $300 million that are
deemed to be relatively undervalued. The Underlying Fund will be subject to the
risks associated with investing in the instruments described under Equity
Securities.
INTERNATIONAL EQUITY FUNDS
MSIF ACTIVE COUNTRY ALLOCATION PORTFOLIO
The MSIF Active Country Allocation Portfolio seeks long-term capital
appreciation by investing in Equity Securities of non-U.S. issuers which, in the
aggregate, replicate broad country indices. In addition to the general risks
associated with Equity Securities, the Underlying Fund will be subject to the
risks described under Foreign Investment. Investing in Emerging Market Country
Securities may increase these risks, but may offer superior growth
opportunities.
MSIF ASIAN EQUITY PORTFOLIO
The MSIF Asian Equity Portfolio seeks long-term capital appreciation by
investing primarily in Equity Securities which are traded on recognized stock
exchanges in Asia (excluding Japan) and in Equity Securities of companies
organized under the laws of an Asian country (excluding Japan) whose business is
conducted principally in Asia. The Underlying Fund will invest primarily in the
more established markets in Asia, which generally are considered to be emerging
markets. Accordingly, the Underlying Fund will be subject to the risks
associated with investing in Emerging Market Country Securities, in addition to
the risks associated with Equity Securities and Foreign Investment.
MSIF EMERGING MARKETS PORTFOLIO
The MSIF Emerging Markets Portfolio seeks long-term capital appreciation by
investing primarily in Equity Securities of emerging market country issuers. The
Underlying Fund also may invest in Fixed Income Securities, including High Yield
Securities, of issuers in emerging and developed countries. The Underlying Fund
will be subject to the risks associated with investing in Emerging Market
Country Securities, in addition to the risks associated with Equity Securities
and Foreign Investment.
MSIF EUROPEAN EQUITY PORTFOLIO
The MSIF European Equity Portfolio seeks long-term capital appreciation by
investing in Equity Securities of European issuers. Investments may be made in
issuers located in the more developed countries in Europe, but the Underlying
Fund may also invest in the smaller and emerging markets of Europe. In addition
to the general risks associated with Equity Securities, the Underlying Fund will
be subject to the risks described under Foreign Investment. Investing in
Emerging Market Country Securities may increase these risks, but may offer
superior growth opportunities.
MSIF INTERNATIONAL EQUITY PORTFOLIO
The MSIF International Equity Portfolio seeks long-term capital appreciation by
investing primarily in the Equity Securities of non-U.S. issuers. Investments
will be made primarily in issuers domiciled in developed countries, but may also
be made in issuers domiciled in emerging markets. In addition to the general
risks associated with Equity Securities, the Underlying Fund will be subject to
the risks described under Foreign Investment. Investing in Emerging Market
Country Securities may increase these risks, but may offer superior growth
opportunities.
MSIF INTERNATIONAL MAGNUM PORTFOLIO
The MSIF International Magnum Portfolio seeks long-term capital appreciation by
investing primarily in Equity Securities of non-U.S. issuers domiciled in
countries comprising the Morgan Stanley Capital International EAFE Index, which
include Australia, Japan, New Zealand, most nations located in Western Europe
and certain developed countries in Asia. In addition to the general risks
associated with Equity Securities, the
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Underlying Fund will be subject to the risks described under Foreign Investment.
MSIF JAPANESE EQUITY PORTFOLIO
The MSIF Japanese Equity Portfolio seeks long-term capital appreciation by
investing primarily in Equity Securities and, to a limited extent, Fixed Income
Securities of Japanese issuers. The Underlying Fund will be subject to the
general risks associated with Equity Securities and, to a limited extent Fixed
Income Securities, as well as the risks described under Foreign Investment.
MSIF LATIN AMERICAN PORTFOLIO
The MSIF Latin American Portfolio seeks long-term capital appreciation by
investing primarily in Equity Securities of Latin American issuers and also in
Fixed Income Securities issued or guaranteed by a Latin American government or
governmental entity. The Underlying Fund may invest greater than 25% of its
total assets in securities of issuers in the telecommunications or financial
services industries if the Underlying Fund's Board of Directors determines that,
in view of the importance of these sectors to the markets in one or more Latin
American countries, it is in the Underlying Fund's best interest to do so.
Certain of the Fixed Income Securities in which the Underlying Fund may invest
are High Yield Securities. The Underlying Fund focuses its investments in the
more developed markets in Latin America, which generally are considered to be
emerging markets. Accordingly, the Underlying Fund will be subject to the risks
associated with investing in Emerging Market Country Securities, in addition to
the risks associated with Equity Securities, Fixed Income Securities and Foreign
Investment.
MAS INTERNATIONAL EQUITY PORTFOLIO
The MAS International Equity Portfolio seeks above-average total return over a
market cycle of three to five years, by investing primarily in Equity Securities
of non-U.S. issuers, including issuers located in emerging markets. In addition
to the general risks associated with Equity Securities, the Underlying Fund will
be subject to the risks described under Foreign Investment. Investing in
Emerging Market Country Securities may increase these risks, but may offer
superior growth opportunities.
U.S. FIXED INCOME FUNDS
MSIF FIXED INCOME PORTFOLIO
The MSIF Fixed Income Portfolio seeks a high total return consistent with the
preservation of capital by investing primarily in a diversified portfolio of
U.S. Government Securities, Corporate Bonds, MBSs, other Fixed Income Securities
of U.S. issuers and, to a limited extent, Fixed Income Securities of non-U.S.
issuers. Short and intermediate-term bonds form the core of the Underlying
Fund's portfolio, and long-term bonds are purchased on a short-term
opportunistic basis. In addition to the general risks associated with Fixed
Income Securities, to the extent that it invests in securities of foreign
issuers, the Underlying Fund will be subject to the risks described under
Foreign Investment.
MAS FIXED INCOME PORTFOLIO
The MAS Fixed Income Portfolio seeks above-average total return over a market
cycle of three to five years by investing primarily in a diversified portfolio
of U.S. Government Securities (including Agencies), Corporate Bonds, MBSs,
Foreign Bonds and other Fixed Income Securities. The Underlying Fund will focus
on Investment Grade Securities and investments of intermediate maturity, but may
invest in High Yield Securities to a limited extent. Average weighted maturity
will ordinarily exceed five years and will usually be between five and fifteen
years. The Underlying Fund will be subject to the general risks associated with
Fixed Income Securities and, to a lesser extent, the risks described under High
Yield Securities.
MAS HIGH YIELD PORTFOLIO
The MAS High Yield Portfolio seeks above-average total return over a market
cycle of three to five years by investing primarily in a diversified portfolio
of High Yield Securities, including Corporate Bonds and other Fixed Income
Securities. The Underlying Fund's average weighted maturity will ordinarily
exceed five years and will usually be between five and fifteen years. The
Underlying Fund will be subject to the general risks associated with Fixed
Income Securities and the risks described under High Yield Securities.
MAS INTERMEDIATE DURATION PORTFOLIO
The MAS Intermediate Duration Portfolio seeks above-average total return over a
market cycle of three to five years, by investing primarily in a diversified
portfolio of Fixed Income Securities, including U.S. Government Securities,
Corporate Bonds and other Investment Grade Securities of U.S. and foreign
issuers. The Underlying Fund ordinarily will have a portfolio duration between
two and five years. Investments are diversified among a wide variety of
Investment Grade Fixed Income Securities in all market sectors, including MBSs.
The Underlying Fund will be subject to the general risks associated with Fixed
Income Securities.
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MAS LIMITED DURATION PORTFOLIO
The MAS Limited Duration Portfolio seeks above-average total return over a
market cycle of three to five years, consistent with reasonable risk, by
investing in a diversified portfolio of Fixed Income Securities, including U.S.
Government Securities, Corporate Bonds and other Investment Grade Fixed Income
Securities. The Underlying Fund will maintain a duration of between one and
three years. The Underlying Fund will be subject to the general risks associated
with Fixed Income Securities.
MAS MORTGAGE-BACKED SECURITIES PORTFOLIO
The MAS Mortgage-Backed Securities Portfolio seeks above-average total return
over a market cycle of three to five years, by investing primarily in MBSs. The
Underlying Fund may also invest in U.S. Government Securities, and other
short-term Fixed Income Securities. The average weighted maturity will
ordinarily be greater than seven years, while the duration will generally be
between two and seven years. The Underlying Fund will be subject to the general
risks associated with Fixed Income Securities and the risks described under
MBSs.
INTERNATIONAL FIXED INCOME FUND
MAS INTERNATIONAL FIXED INCOME PORTFOLIO
The MAS International Fixed Income Portfolio seeks above-average total return
over a market cycle of three to five years, by investing primarily in Investment
Grade Fixed Income Securities of foreign issuers, including Foreign Bonds. In
addition to the general risks associated with Fixed Income Securities, the
Underlying Fund will be subject to the risks described under Foreign Investment.
Investing in Emerging Market Country Securities may increase these risks, but
may offer superior growth opportunities.
SECURITIES AND INVESTMENT TECHNIQUES
The following pages contain more detailed information about types of instruments
in which the Underlying Funds may invest and strategies MSAM or MAS may employ
in pursuit of an Underlying Fund's investment objective. A summary of risks and
restrictions associated with these instruments and investment practices is
included as well.
EQUITY SECURITIES. Equity Securities commonly include, but are not limited to,
Common Stocks, Preferred Stocks, Depositary Receipts, Rights, Warrants, Foreign
Equities and certain types of Structured Investments. Convertible Securities,
Preferred Stocks and Structured Investments are contained in both the definition
of Equity Securities and Fixed Income Securities because they may exhibit
characteristics commonly associated with each type of security.
Two of the more common methods of evaluating Equity Securities are growth
investing and value investing. Underlying Funds that emphasize growth investing
seek to invest in Equity Securities generally characterized by higher growth
rates of revenues and earnings. These stocks tend to have higher price
volatility, higher price/earnings ratios, and lower yields than the stock market
in general.
Underlying Funds that emphasize value investing seek to invest in Equity
Securities that are undervalued relative to the stock market in general, based
on value measures such as price/earnings ratios and price/book ratios. Value
stocks are generally dividend-paying Common Stocks. However, non-dividend paying
stocks may also be selected for their value characteristics.
COMMON STOCKS. Common Stocks are Equity Securities which represent an ownership
interest in a corporation, entitling the stockholder to voting rights and
receipt of dividends paid based on proportionate ownership.
CONVERTIBLE SECURITIES. Convertible Securities are securities that may be
exchanged under certain circumstances for a fixed number of shares of Common
Stock or other Equity Securities.
DEPOSITARY RECEIPTS. Depositary Receipts are Equity Securities representing
ownership interests in securities of foreign companies (an "underlying issuer")
which are deposited with the depositary. Depositary Receipts include American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global
Depositary Receipts ("GDRs") and other types of Depositary Receipts (which,
together with ADRs, EDRs and GDRs, are hereinafter collectively referred to as
"Depositary Receipts").
Depositary Receipts may be "sponsored" or "unsponsored". Sponsored Depositary
Receipts are established jointly by a depositary and the underlying issuer,
whereas unsponsored Depositary Receipts may be established by a depositary
without participation by the underlying issuer. Holders of an unsponsored
Depositary Receipt generally bear all the costs associated with establishing the
unsponsored Depositary Receipt. In addition, the issuers of the securities
underlying unsponsored Depositary Receipts are not obligated to disclose
material information in the United States and, therefore, there may be less
information available regarding such issuers and there may not be a correlation
between such information and the market value of the Depositary Receipts.
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INVESTMENT COMPANY SECURITIES. Investment Company Securities are securities of
other open-end or closed-end investment companies. The Investment Company Act of
1940, as amended (the "1940 Act"), generally prohibits an Underlying Fund from
acquiring more than 3% of the outstanding voting shares of an investment company
and limits such investments to no more than 5% of the Underlying Fund's total
assets in any one investment company and no more than 10% in any combination of
investment companies.
To the extent an Underlying Fund invests a portion of its assets in Investment
Company Securities, those assets will be subject to the expenses of the
purchased investment company as well as to the expenses of the Underlying Fund
itself.
PREFERRED STOCKS. Preferred Stocks are generally non-voting securities which
evidence ownership in a corporation and which pay a fixed or variable stream of
dividends.
RIGHTS. Rights represent a preemptive right of stockholders to purchase
additional shares of a stock at the time of a new issuance, before the stock is
offered to the general public, allowing the stockholder to retain the same
ownership percentage after the new stock offering.
WARRANTS. Warrants are instruments giving holders the right, but not the
obligation, to buy shares of a company at a given price during a specified
period.
FIXED INCOME SECURITIES. Fixed Income Securities commonly include, but are not
limited to, debentures, U.S. Government Securities, Zero Coupons, Agencies,
Corporate Bonds, High Yield Securities, MBSs, SMBSs, CMOs, Asset-Backeds,
Convertible Securities, Brady Bonds, Floaters, Inverse Floaters, Money Market
Instruments, Municipals, Repurchase Agreements, Preferred Stocks, Structured
Investments and Foreign Bonds. Convertible Securities, Preferred Stocks and
Structured Investments are contained in both the definition of Equity Securities
and Fixed Income Securities since they may exhibit characteristics commonly
associated with each type of security.
AGENCIES. Agencies are securities which are not guaranteed by, or backed by the
full faith and credit of, the U.S. Government, but which are issued, sponsored
or guaranteed by a federal agency or federally sponsored agency such as the
Student Loan Marketing Association, Resolution Funding Corporation, or any of
several other agencies.
ASSET-BACKEDS. Asset-backed securities ("Asset-Backeds") are securities
collateralized by shorter-term loans such as automobile loans, home equity
loans, computer leases or credit card receivables. The payments from the
collateral are passed through to the security holder. The collateral behind
Asset-Backeds tends to have prepayment rates that usually do not vary with
interest rates. In addition, the short-term nature of the loans reduces the
impact of any change in prepayment level. Due to amortization, the average life
for Asset-Backeds is also the conventional proxy for maturity.
Due to the possibility that prepayments (on automobile loans and other
collateral) will alter the cash flow on Asset-Backeds, it is not possible to
determine in advance the actual final maturity date or average life. Faster
prepayment will shorten the average life and slower prepayment will lengthen it.
However, it is possible to determine what the range of that movement could be
and to calculate the effect that it will have on the price of the security. In
selecting these securities, the Underlying Funds will look for those securities
that offer a higher yield to compensate for any variation in average maturity.
CMOs. Collateralized Mortgage Obligations ("CMOs") are instruments which are
collateralized by mortgage pass-through securities. Cash flows from the mortgage
pass-through securities are allocated to various tranches in a predetermined,
specified order. Each tranche has a stated maturity and an average life. The
average life is typically used as a proxy for maturity because the debt is
amortized (repaid a portion at a time), rather than paid off entirely at
maturity. CMOs are subject to prepayment risk. See "MBSs" below.
CORPORATE BONDS. Corporate Bonds are Fixed Income Securities issued by
corporations. Bondholders, as creditors, have a prior legal claim over holders
of Common Stocks and Preferred Stocks of the corporation as to both income and
assets for the principal and interest due to the bondholder.
FLOATERS. Floaters are Fixed Income Securities with a floating or variable rate
of interest, i.e. the rate of interest varies with changes in specified market
rates or indices, such as the prime rate, or at specified intervals. Certain
Floaters may carry a demand feature that permits the holder to tender them back
to the issuer of the underlying instrument, or to a third party, at par value
prior to maturity. When the demand feature of certain Floaters represents an
obligation of a foreign entity, the demand feature will be subject to certain
risks discussed under "Foreign Investment."
HIGH YIELD SECURITIES. High Yield Securities are generally considered to
include Corporate Bonds, Preferred Stocks and Convertible Securities rated Ba
through C by Moody's Investors Service, Inc. ("Moody's") or BB through D by the
Standard & Poor's Rating Group ("S&P"), and unrated securities considered to be
of equivalent quality. Securities rated less than Baa by Moody's or BBB by S&P
are classified as non-Investment Grade Securities and are commonly referred to
as junk bonds or High Yield Securities. Such
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securities carry a high degree of risk and are considered speculative by the
major credit rating agencies.
While such securities offer higher yields, they also normally carry with them a
greater degree of risk than securities with higher ratings. Lower-rated bonds
are considered speculative by traditional investment standards. Also, High Yield
Securities are often issued by smaller, less credit worthy companies, or by
highly leveraged (indebted) companies, which are generally less able than more
established or less leveraged companies to make scheduled payments of interest
and principal. The price movement of these securities is influenced less by
changes in interest rates and more by the financial and business position of the
issuing corporation when compared to Investment Grade Securities.
INVERSE FLOATERS. Inverse floating rate obligations ("Inverse Floaters") are
Fixed Income Securities which have coupon rates that vary inversely at a
multiple of a designated floating rate, such as LIBOR (London Inter-Bank Offered
Rate). Any rise in the reference rate of an Inverse Floater (as a consequence of
an increase in interest rates) causes a drop in the coupon rate while any drop
in the reference rate of an Inverse Floater causes an increase in the coupon
rate. Inverse Floaters may exhibit substantially greater price volatility than
fixed rate obligations having similar credit quality, redemption provisions and
maturity, and Inverse Floater CMOs exhibit greater price volatility than the
majority of mortgage pass-through securities or CMOs.
INVESTMENT GRADE SECURITIES. Investment Grade Securities are those rated by one
or more of the rating agencies in one of the four highest rating categories at
the time of purchase (e.g., AAA, AA, A or BBB by S&P or Fitch, or Aaa, Aa, A or
Baa by Moody's). Securities rated BBB or Baa represent the lowest of four levels
of Investment Grade Securities and are regarded as borderline between definitely
sound obligations and those in which the speculative element begins to
predominate.
LOAN PARTICIPATIONS AND ASSIGNMENTS. Loan Participations are loans or other
direct debt instruments which are interests in amounts owed by a corporate,
governmental or other borrower to another party. They may represent amounts owed
to lenders or lending syndicates, to suppliers of goods or services (trade
claims or other receivables), or to other parties. Direct debt instruments
involve the risk of loss in case of default or insolvency of the borrower.
Direct debt instruments may offer less legal protection in the event of fraud or
misrepresentation. In addition, Loan Participations involve a risk of insolvency
of the lending bank or other financial intermediary.
An Underlying Fund may also invest in loans in the form of assignments of all or
a portion of a loan ("Assignments"). When an Underlying Fund purchases
Assignments from lenders it will acquire direct rights against the borrower on
the loan. However, because Assignments are arranged through private negotiations
between potential assignees and potential assignors, the rights and obligations
acquired by an Underlying Fund as the purchaser of an Assignment may differ
from, and be more limited than, those held by the assigning lender.
MONEY MARKET INSTRUMENTS. The Money Market Instruments permitted for the
Underlying Funds include obligations of the U.S. Government and its agencies and
instrumentalities; obligations of foreign sovereignties; obligations of the
International Bank for Reconstruction and Development; other debt securities;
commercial paper, including bank obligations; certificates of deposit (including
Eurodollar certificates of deposit); and Repurchase Agreements.
MBSs. MBSs are securities which represent pools of mortgage loans made by
lenders, such as commercial banks, savings and loan associations, mortgage
bankers and others. The pools are assembled by various governmental,
government-related and private organizations. An Underlying Fund will invest in
securities issued by the Government National Mortgage Association ("GNMA"),
Federal Home Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage
Association ("FNMA"), other government agencies, and private issuers. It is
expected that the Underlying Fund's primary emphasis will be in MBSs issued by
the various government-related organizations. Due to the possibility that
prepayments on home mortgages will alter cash flow on MBSs, it is not possible
to determine in advance the actual final maturity date or average life.
MUNICIPALS. Municipal securities ("Municipals") are debt obligations issued by
local, state and regional governments that provide interest income that is
exempt from federal income taxes. Municipals include both municipal bonds (those
securities with maturities of five years or more) and municipal notes (those
securities with maturities of less than five years). Certain industrial
development bonds are also considered municipal bonds if their interest is
exempt from federal income taxes. Industrial development bonds are ordinarily
dependent on the credit quality of a private user, not the public issuer.
REPURCHASE AGREEMENTS. Repurchase Agreements are transactions in which a
Portfolio or an Underlying Fund purchases a security and simultaneously commits
to resell that security to the seller (a bank, broker or dealer) at a mutually
agreed upon date and price. The term of these agreements is usually from
overnight to one week, and never exceeds one year. Repurchase Agreements may be
viewed as a fully collateralized loan of money by the Underlying Fund to the
seller. The resale price reflects the purchase price plus an agreed upon market
rate of interest which is unrelated to the coupon rate or date of maturity of
the purchased security.
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SMBSs. Stripped Mortgage-Backed Securities ("SMBSs") are multi-class mortgage
securities. SMBSs may be issued by agencies or instrumentalities of the U.S.
Government and private originators of, or investors in, mortgage loans. SMBSs
are usually structured with two classes that receive different proportions of
the interest and principal distributions on a pool of mortgage assets. In some
cases, one class will receive all of the interest ("interest-only" or "IO
class"), while the other class will receive all of the principal
("principal-only" or "PO class"). The yield to maturity on IO classes and PO
classes is extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal repayments may have a material adverse effect on the portfolio yield
to maturity.
STRUCTURED INVESTMENTS. Structured Investments consist of a unit or units
representing an undivided interest(s) in assets held in a trust that is not an
investment company as defined in the 1940 Act.
TEMPORARY INVESTMENTS. During periods in which MSAM or MAS believes changes in
economic, financial or political conditions make it advisable, each Underlying
Fund may reduce its holdings for temporary defensive purposes and may invest in
certain short-term and medium-term debt securities or may hold cash. The
short-term and medium-term debt obligations in which an Underlying Fund may
invest consist of (a) obligations of the U.S. or foreign governments, their
respective agencies or instrumentalities; (b) Money Market Instruments; and (c)
Floaters and other instruments denominated in any currency issued by
international development agencies. Further, each Underlying MAS Fund may invest
in any Fixed Income Security that it is permitted to invest in without limit for
temporary defensive purposes.
U.S. GOVERNMENT SECURITIES. U.S. Government Securities are Fixed Income
Securities that are backed by the full faith and credit of the U.S. Government
as to the payment of both principal and interest. U.S. Government Securities may
include securities issued by the U.S. Treasury and securities issued by federal
agencies and U.S. Government sponsored instrumentalities.
ZERO COUPONS, PAY-IN-KIND SECURITIES OR DEFERRED PAYMENT SECURITIES. Zero
Coupons are Fixed Income Securities that do not make regular interest payments.
Instead, Zero Coupons are sold at substantial discounts from their face value.
The difference between a Zero Coupon's issue or purchase price and its face
value represents the imputed interest an investor will earn if the obligation is
held until maturity. However, Zero Coupon prices may also exhibit greater price
volatility than ordinary Fixed Income Securities because of the manner in which
their principal and interest are returned to the investor. Pay-In-Kind
Securities are securities that have interest payable by delivery of additional
securities. Upon maturity, the holder is entitled to receive the aggregate par
value of the securities. Deferred Payment Securities are securities that remain
Zero Coupons until a predetermined date, at which time the stated coupon rate
becomes effective and interest becomes payable at regular intervals.
FOREIGN INVESTMENT. Investment in securities and obligations of foreign issuers
and in foreign branches of domestic banks involves somewhat different investment
risks than those affecting obligations of U.S. issuers. There may be limited
publicly available information with respect to foreign issuers, and foreign
issuers are not generally subject to uniform accounting, auditing and financial
standards and requirements comparable to those applicable to U.S. companies.
There may also be less government supervision and regulation of foreign
securities exchanges, brokers and listed companies than in the United States.
Many foreign securities markets have substantially less volume than U.S.
national securities exchanges, and securities of some foreign issuers are less
liquid and more volatile than securities of comparable domestic issuers.
Brokerage commissions and other transaction costs on foreign securities
exchanges are generally higher than in the United States. Dividends and interest
paid by foreign issuers may be subject to withholding and other foreign taxes,
which may decrease the net return on Foreign Investments as compared to
dividends and interest paid by U.S. companies. Additional risks include future
political and economic developments, the possibility that a foreign jurisdiction
will impose or change withholding taxes on income payable with respect to
foreign securities, and the possible adoption of foreign governmental
restrictions such as exchange controls. These risks may be greater in the case
of Emerging Market Country Securities.
Investments in securities of foreign issuers are frequently denominated in
foreign currencies. Because a Portfolio may temporarily hold uninvested reserves
in bank deposits in foreign currencies, the value of the Underlying Fund's
assets, as measured in U.S. dollars, may be affected favorably or unfavorably by
changes in currency exchange rates and in exchange control regulations and an
Underlying Fund may incur costs in connection with conversions between various
currencies. Certain Underlying Funds may engage in Foreign Currency
Transactions, to control their exposure to foreign currency risks.
BRADY BONDS. Brady Bonds are Fixed Income Securities that are created through
the exchange of existing commercial bank loans to foreign entities for new
obligations in connection with debt restructuring. Brady Bonds have been issued
only in recent years and, accordingly, do not have a long payment history. They
may be collateralized or uncollateralized and issued in various currencies
(although most are U.S. dollar-denominated) and they are actively traded in the
over-the-counter secondary market.
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EMERGING MARKET COUNTRY SECURITIES. An Emerging Market Country Security is a
security issued by a company that has one or more of the following
characteristics: (i) its principal securities trading market is in an emerging
market; (ii) alone or on a consolidated basis it derives 50% or more of its
annual revenue from either goods produced, sales made or services performed in
emerging markets; or (iii) it is organized under the laws of, and has a
principal office in, an emerging market country.
Emerging market describes any country which is generally considered to be an
emerging or developing country by the international financial community such as
the International Bank for Reconstruction and Development (more commonly known
as the World Bank) and the International Finance Corporation. There are
currently over 130 countries which are generally considered to be emerging or
developing countries by the international financial community, approximately 40
of which currently have securities markets. Emerging markets can include every
nation in the world except the United States, Canada, Japan, Australia, New
Zealand and most nations located in Western Europe.
Investing in emerging market countries may entail purchasing securities issued
by or on behalf of entities that are insolvent, bankrupt, in default or
otherwise engaged in an attempt to reorganize or reschedule their obligations,
and in entities that have little or no proven credit rating or credit history.
With respect to any emerging market country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) that could affect adversely the economies of such countries or the value of
an Underlying Fund's investments in those countries. In addition, it may be
difficult to obtain and enforce a judgment in a court outside of the United
States.
Underlying Funds that invest in emerging markets may also be exposed to an extra
degree of custodial and/or market risk, especially where the securities
purchased are not traded on an official exchange or where ownership records
regarding the securities are maintained by an unregulated entity (or even the
issuer itself).
FOREIGN BONDS. Foreign Bonds are Fixed Income Securities denominated in foreign
currency and issued and traded primarily outside the United States, including:
(1) obligations issued or guaranteed by foreign national governments, their
agencies, instrumentalities, or political subdivisions; (2) Fixed Income
Securities issued, guaranteed or sponsored by supranational organizations
established or supported by several national governments, including the World
Bank, the European Community, the Asian Development Bank and others; (3)
non-government foreign corporate debt securities; (4) foreign MBSs and various
other MBSs and Asset-Backeds denominated in foreign currency; and (5) Brady
Bonds.
FOREIGN CURRENCY TRANSACTIONS. Underlying Funds investing in Foreign Bonds or
Foreign Equities will regularly purchase and sell securities denominated in
foreign currencies. To reduce the risks associated with investing in securities
denominated in foreign currencies, an Underlying Fund may also purchase or sell
foreign currency on a forward basis, enter into foreign currency futures
contracts and options on futures contracts and foreign currency options.
INVESTMENT FUNDS. Some emerging market countries have laws and regulations that
currently preclude direct investment in the securities of their companies.
However, indirect investment in the securities of companies listed and traded on
the stock exchanges in these countries is permitted by certain emerging market
countries through Investment Funds that have been specifically authorized. An
Underlying Fund may invest in these Investment Funds subject to the provisions
of the 1940 Act, as applicable, and other applicable laws. Certain Investment
Funds are advised by an Adviser. The Underlying Funds may, to the extent
permitted under the 1940 Act and other applicable law, invest in these
Investment Funds.
DERIVATIVES. The Underlying Funds are permitted to invest in various
Derivatives for both hedging and non-hedging purposes. Derivatives include
Options, Futures, Structured Notes, Caps, Floors, Collars and Swaps.
Additionally, the Underlying Funds may invest in other Derivatives that are
developed over time if their use would be consistent with the objectives of the
Underlying Funds.
CAPS, FLOORS AND COLLARS. The Underlying Funds may invest in Caps, Floors and
Collars, which are instruments analogous to Options. In particular, a Cap is the
right to receive the excess of a reference rate over a given rate and is
analogous to a put Option. A Floor is the right to receive the excess of a given
rate over a reference rate and is analogous to a call Option. Finally, a Collar
is an instrument that combines a Cap and a Floor. That is, the buyer of a Collar
buys a Cap and writes a Floor, and the writer of a Collar writes a Cap and buys
a Floor. The risks associated with Caps, Floors and Collars are similar to those
associated with Options. In addition, Caps, Floors and Collars are subject to
risk of default by the counterparty because they are privately negotiated
instruments.
FUTURES. The Underlying Funds may purchase and sell futures contracts and
options on futures contracts, including but not limited to securities index
futures, foreign currency exchange futures, interest rate futures contracts and
other financial futures (collectively, "Futures"). Futures contracts provide for
the sale by one party and purchase by another party of a specified amount of a
specific security, instrument or basket thereof, at a specific future date and
at a specified price. An option on a futures contract is a legal contract that
gives the holder the right to buy or sell
13
<PAGE>
a specified amount of futures contracts at a fixed or determinable price upon
the exercise of the option. Underlying Funds will maintain assets sufficient to
meet their obligations under futures contracts in a segregated account or will
otherwise comply with the SEC's requirements for asset coverage.
Gains and losses on futures contracts and options thereon depend on MSAM or
MAS's ability to predict correctly the direction of movements in securities
prices, interest rates and other economic factors. Other risks associated with
the use of futures and options are (i) imperfect correlation between the change
in market value of investments held by an Underlying Fund and the prices of
futures and options relating to investments purchased or sold by the Underlying
Fund, and (ii) possible lack of a liquid secondary market for a futures contract
and the resulting inability to close a futures position.
OPTIONS. Purchasing a put Option gives an Underlying Fund the right to sell a
specified security, currency or basket of securities or currencies at the
exercise price until the expiration of the Option. Purchasing a call Option
gives an Underlying Fund the right to purchase a specified security, currency or
basket of securities or currencies at the exercise price until the expiration of
the Option. An Underlying Fund also may write (i.e., sell) put and call Options
on investments held in its portfolio, as well as with respect to foreign
currency.
The primary risks associated with the use of Options are (i) imperfect
correlation between the change in market value of investments held, purchased or
sold by an Underlying Fund and the prices of Options relating to such
investments; (ii) possible lack of a liquid secondary market for an Option;
(iii) the risk that an option will expire worthless; (iv) the risk that the
issuer of an over-the-counter option will be unable to fulfill its obligation to
the portfolio due to bankruptcy or related circumstances; (v) the risk that
options may exhibit greater short-term price volatility than the underlying
security; and (vi) the risk that a portfolio may be forced to forego
participation in the appreciation of the value of underlying securities, futures
contracts or currency.
STRUCTURED NOTES. Structured Notes are Derivatives on which the amount of
principal repayment and/or interest payments is based upon the movement of one
or more factors. These factors include, but are not limited to, currency
exchange rates, interest rates (such as the prime lending rate and LIBOR) and
stock indices such as the S&P 500 Index. In some cases, the impact of the
movements of these factors may increase or decrease through the use of
multipliers or deflators. The use of Structured Notes allows an Underlying Fund
to tailor its investments to the specific risks and returns the Adviser and
Sub-Advisers wish to accept while avoiding or reducing certain other risks.
SWAPS. Swap Contracts ("Swaps") are Derivatives in the form of a contract or
other similar instrument in which two parties agree to exchange the returns
generated by a security, instrument, basket thereof or index for the returns
generated by another security, instrument, basket thereof or index. The payment
streams are calculated by reference to a specific security, index or instrument
and an agreed upon notional amount. The relevant indices include but are not
limited to, currencies, fixed interest rates, prices and total return on
interest rate indices, fixed income indices, stock indices and commodity indices
(as well as amounts derived from arithmetic operations on these indices).
The use of Swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If MSAM or MAS is incorrect in its forecasts of market
values, interest rates, and currency exchange rates, the investment performance
of the Underlying Funds would be less favorable than it would have been if this
investment technique were not used.
OTHER SECURITIES.
BORROWING AND OTHER FORMS OF LEVERAGE. Certain of the Underlying Funds are
authorized to borrow money from banks and other entities and may use the
proceeds of the borrowing for investment purposes or to pay dividends. Borrowing
will create the opportunity for increased net income but, at the same time, will
involve special risk considerations. Leverage that results from borrowing will
magnify declines as well as increases in the Underlying Fund's net asset value
per share and net yield.
LOANS OF PORTFOLIO SECURITIES. The Underlying Funds may lend securities to
brokers, dealers, domestic and foreign banks or other financial institutions for
the purpose of increasing its net investment income. These loans must be secured
continuously by cash or equivalent collateral, or by a letter of credit at least
equal to the market value of the securities loaned plus accrued interest or
income. There may be a risk of delay in recovery of the securities or even loss
of rights in the collateral should the borrower of the securities fail
financially.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED
SECURITIES. The Underlying Funds may invest in securities that are neither
listed on a stock exchange nor traded over-the-counter, including privately
placed securities. Such unlisted securities may involve a higher degree of
business and financial risk that can result in substantial losses.
As a general matter, an Underlying Fund may not invest more than 15% of its net
assets in illiquid securities, including securities for which there is no
readily available secondary market and securities that are restricted from sale
to the public without registration ("Restricted Securities") under the
Securities Act of 1933, as amended
14
<PAGE>
(the "1933 Act") and are deemed to be illiquid. However, the Underlying Funds
may invest in Restricted Securities that can be offered and sold to qualified
institutional buyers under Rule 144A under the 1933 Act ("Rule 144A Securities")
and are deemed to be liquid under guidelines adopted by the Underlying Fund's
Boards of Directors. These guidelines delegate to MSAM or MAS the daily function
of determining and monitoring the liquidity of Rule 144A Securities. Rule 144A
Securities may become illiquid if qualified institutional buyers are not
interested in acquiring the securities.
SHORT SALES. Certain of the Underlying Funds may from time to time sell
securities short, consistent with applicable legal requirements. A short sale is
a transaction in which the Underlying Fund sells securities it owns or has the
right to acquire at no added cost (i.e., "against the box") or does not own (but
has borrowed) in anticipation of a decline in the market price of the
securities. When the Underlying Fund makes a short sale, the proceeds it
receives from the sale will be held on behalf of a broker until the Underlying
Fund replaces the borrowed securities. The Underlying Fund may have to pay a
premium to borrow the securities and must pay any dividends or interest payable
on the securities until they are replaced.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. When-Issued and Delayed Delivery
Securities are securities purchased with payment and delivery taking place in
the future in order to secure what is considered to be an advantageous yield or
price at the time of the transaction. Delivery of and payment for these
securities may take as long as a month or more after the date of the purchase
commitment, but will take place no more than 120 days after the trade date. The
payment obligation and the interest rates that will be received are each fixed
at the time an Underlying Fund enters into the commitment and no interest
accrues to the Underlying Fund until settlement. Thus, it is possible that the
market value at the time of settlement could be higher or lower than the
purchase price if the general level of interest rates has changed.
UNDERLYING EQUITY FUND. An Underlying Equity Fund is an Underlying Fund that
invests primarily in Equity Securities of U.S or foreign issuers.
UNDERLYING FIXED INCOME FUND. An Underlying Fixed Income Fund is an Underlying
Fund that invests primarily in Fixed Income Securities of U.S or foreign
issuers.
FUNDAMENTAL INVESTMENT LIMITS
The investment objective of each Portfolio discussed under "The Portfolios"
above is a fundamental policy, that is, a policy subject to change only by
shareholder approval. All policies stated throughout this Prospectus, other than
those identified as fundamental, can be changed without shareholder approval.
For additional fundamental and non-fundamental investment limits, see
"Investment Limitations" in the SAI.
MANAGEMENT OF THE FUND
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK. The Fund was organized as a Maryland Corporation
on May 20, 1997. The Articles of Incorporation currently permit the Fund to
issue three billion shares of common stock, par value $.001 per share. Pursuant
to the Fund's By-Laws, the Board of Directors may increase the number of shares
the Fund is authorized to issue without the approval of the shareholders of the
Fund. The Board of Directors has the power to designate one or more classes of
shares of common stock and to classify and reclassify only unissued shares with
respect to such classes. The shares of common stock of each Portfolio are
currently classified into two classes, the Class A shares and the Class B
shares.
The shares of each Portfolio, when issued, will be fully paid, nonassessable,
fully transferrable and redeemable at the option of the holder. The shares have
no preference as to conversion, exchange, dividends, retirement or other
features and have no pre-emptive rights. The shares of each Portfolio have
non-cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election of Directors can elect 100% of the Directors
if they choose to do so. Persons or organizations owning 25% or more of the
outstanding shares of a Portfolio may be presumed to "control" (as defined in
the 1940 Act) such Portfolio.
BOARD OF DIRECTORS. Pursuant to the Fund's Articles of Incorporation, the Board
of Directors decides upon matters of general policy and reviews the actions of
the Fund's Adviser, Administrator, Distributor and other service providers. The
majority of the Fund's Directors are not affiliated with MSAM, any of its
affiliates, any of the other companies that provide services to the Fund or any
of their affiliates. The officers of the Fund conduct and supervise its daily
business operations.
REPORTS TO SHAREHOLDERS. The Fund will send to its shareholders annual and
semi-annual reports. The financial statements appearing in annual reports are
audited by independent accountants. Monthly unaudited portfolio data is also
available from the Fund upon request.
SHAREHOLDER MEETINGS. The Fund will generally not hold annual shareholder
meetings, but may call special meetings when required by law, when requested by
a sufficient number of shareholders or for other reasons.
15
<PAGE>
INVESTMENT MANAGEMENT
INVESTMENT ADVISER. MSAM, as Adviser, allocates the Portfolios' investments in
the Underlying Funds within the ranges set forth herein. MSAM does not receive a
fee for serving as investment adviser to the Portfolios. MSAM also advises
certain of the Underlying Funds. The remaining Underlying Funds are advised by
MAS.
MSAM, with principal offices at 1221 Avenue of the Americas, New York, New York
10020, conducts a worldwide investment management business, providing a broad
range of portfolio management services to customers in the United States and
abroad and serves as investment adviser to numerous open-end and closed-end
investment companies. MAS, with principal offices at One Tower Bridge, West
Conshohocken, Pennsylvania 19428, provides investment advisory services to
employee benefit plans, endowment funds, foundations and other institutional
investors, and serves as investment adviser to several open-end investment
companies. MSAM and MAS are both registered investment advisers under the
Investment Advisers Act of 1940, as amended, and MSAM and MAS are both
subsidiaries, and part of the worldwide investment advisory business, of Morgan
Stanley, Dean Witter, Discover & Co., a global financial services company. As of
, 1997, MSAM and MAS, together with their other affiliated investment
advisory companies, had assets under management, including assets under
fiduciary advisory control, totaling approximately $ billion. See "Management
of the Fund" in the SAI.
PORTFOLIO MANAGER. The following individual has primary responsibility for the
Portfolios.
FRANCINE J. BOVICH. Francine Bovich joined MSAM as a Principal in 1993. She is
responsible for product development, portfolio management and communication of
MSAM's asset allocation strategy to institutional investor clients. Previously,
Ms. Bovich was a Principal and Executive Vice President of Westwood Management
Corp. She holds a B.A. in Economics from Connecticut College and an M.B.A. in
Finance from New York University. Ms. Bovich has had primary responsibility for
managing the Portfolio's assets since inception.
OTHER SERVICES
DISTRIBUTOR. Morgan Stanley & Co. Incorporated ("Morgan Stanley") serves as the
exclusive Distributor of the shares of the Fund. Under its Distribution
Agreement with the Fund, Morgan Stanley sells shares of each Portfolio upon the
terms and at the current offering price described in this Prospectus. Morgan
Stanley is not obligated to sell any certain number of shares of any Portfolio.
The Portfolios currently offer only the classes of shares offered by this
Prospectus. The Portfolios may in the future offer one or more classes of shares
with features, distribution expenses or other expenses that are different from
those of the classes currently offered.
The Fund has adopted a Plan of Distribution with respect to the Class B shares
for each Portfolio pursuant to Rule 12b-1 under the 1940 Act (each, a "Plan").
Under each Plan, the Distributor is entitled to receive from the Portfolios a
shareholder servicing fee, which is accrued daily and paid quarterly, of 0.25%
of the Class B shares' average daily net assets on an annualized basis. The
Distributor expects to compensate plan administrators for services provided to
various retirement and deferred compensation plans. The Distributor may, in its
discretion, voluntarily waive from time to time all or any portion of its
shareholder servicing fee and each of the Distributor and the Adviser is free to
make additional payments out of its own assets to promote the sale of Fund
shares, including payments that compensate financial institutions for
distribution services or shareholder services.
ADMINISTRATION. The Adviser also provides administrative services to the Fund,
subject to the supervision of the officers and the Board of Directors of the
Fund. The Fund pays the Adviser a monthly fee which on an annual basis equals
0.15% of the average daily net assets of each Portfolio. The Chase Manhattan
Bank ("Chase") provides certain administrative services to the Fund through its
corporate affiliate, Chase Global Funds Services Company ("CGFSC"). The Adviser
supervises and monitors administrative services provided by CGFSC and
compensates CGFSC. Their services are also subject to the supervision of the
Board of Directors of the Fund. CGFSC's business address is 73 Tremont Street,
Boston, Massachusetts 02108-3913.
CUSTODIAN. Chase serves as the Custodian of the securities and cash of the
Portfolios. Chase is not an affiliate of either MSAM or Morgan Stanley.
DIVIDEND DISBURSING AND TRANSFER AGENT. CGFSC acts as dividend disbursing and
transfer agent for the Fund.
INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP serves as independent accountants
for the Fund and will audit the annual financial statements of each Portfolio.
LEGAL COUNSEL. Morgan, Lewis & Bockius LLP serves as legal counsel to the Fund.
16
<PAGE>
FUND EXPENSES
The Portfolios pay fees and other costs related to their daily operations.
Expenses paid out of a Portfolio's assets are reflected in its share price. Each
Portfolio pays an administration fee to MSAM for managing its business affairs.
MSAM pays fees to affiliates who provide assistance with these services. Each
Portfolio also pays other expenses, which are explained below. MSAM may, from
time to time, reduce its fees or reimburse the Portfolios for expenses above a
specified limit. These fee reductions or expense reimbursements, which may be
terminated at any time without notice, can decrease a Portfolio's expenses and
boost its performance.
OTHER EXPENSES. Each Portfolio pays all expenses not assumed by MSAM. Such
expenses include or could include investment-related expenses, such as brokers'
commissions, transfer taxes and fees related to the purchase, sale, or loan of
securities; fees and expenses for Directors not affiliated with MSAM; fees and
expenses of its independent accountants and legal counsel; costs of Directors
and shareholder meetings; Securities and Exchange Commission ("SEC") fees;
expenses of preparing and filing registration statements; the cost of providing
proxy statements, prospectuses and statements of additional information to
existing shareholders; expenses of preparing and printing the annual and
semiannual shareholder reports; bank transaction charges and certain custodians'
fees and expenses; federal, state or local income or other taxes; costs of
maintaining the Fund's corporate existence; membership fees for the Investment
Company Institute and similar organizations; fidelity bond and Directors'
liability insurance premiums; and any extraordinary expenses such as
indemnification payments or damages awarded in litigation or settlements made.
UNDERLYING FUND EXPENSES. Each Portfolio intends to invest primarily in
Underlying Funds. The Portfolios' shareholders will not only bear their
proportionate share of the expenses of the Portfolios, but will also indirectly
bear similar expenses of the Underlying Funds. MSAM will allocate the
Portfolios' investments in Underlying Funds in the manner believed to best
enable each Portfolio to meet its investment objective. Because the advisory
fees paid to MSAM or MAS by the Underlying Funds vary, however, the fees paid to
MSAM or MAS would increase if MSAM allocated a greater portion of the
Portfolios' investments to Underlying Funds with higher advisory fees. Set forth
below for each of the Underlying Funds in which the Portfolios initially intend
to invest are the advisory fees, other expenses and total operating expenses (i)
of the MSIF Underlying Funds for the fiscal year ended December 31, 1996; and
(ii) of the MAS Underlying Funds for the fiscal year ended September 30, 1996.
<TABLE>
<CAPTION>
TOTAL
ADVISORY OTHER OPERATING
UNDERLYING FUND FEE EXPENSES EXPENSES
- ----------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
U.S. Equity Funds:
MSIF Equity Growth Portfolio 0.52% 0.28% 0.80%*
MSIF U.S. Equity Plus Portfolio+ 0.35% 0.45% 0.80%*
MSIF U.S. Real Estate Portfolio 0.65% 0.35% 1.00%*
MAS Mid Cap Growth Portfolio 0.500% 0.104% 0.604%
MAS Mid Cap Value Portfolio 0.564% 0.318% 0.882%*
MAS Value Portfolio 0.500% 0.108% 0.608%
International Equity Funds:
MSIF Active Country Allocation
Portfolio 0.36% 0.44% 0.80%*
MSIF Asian Equity Portfolio 0.60% 0.40% 1.00%*
MSIF Emerging Markets Portfolio 1.25% 0.49% 1.74%*
MSIF European Equity Portfolio 0.64% 0.36% 1.00%*
MSIF International Equity
Portfolio 0.78% 0.22% 1.00%*
MSIF International Magnum
Portfolio 0.26% 0.74% 1.00%*
MSIF Japanese Equity Portfolio 0.73% 0.27% 1.00%*
MSIF Latin American Portfolio 0.62% 1.08% 1.70%
MAS International Equity
Portfolio 0.500% 0.190% 0.690%
U.S. Fixed Income Funds:
MSIF Fixed Income Portfolio 0.20% 0.25% 0.45%*
MAS Fixed Income Portfolio 0.375% 0.108% 0.483%
MAS High Yield Portfolio 0.375% 0.116% 0.491%
MAS Intermediate Duration
Portfolio 0.244% 0.314% 0.558%*
MAS Limited Duration Portfolio 0.300% 0.126% 0.426%*
MAS Mortgage-Backed Securities
Portfolio 0.335% 0.165% 0.500%*
International Fixed Income Fund:
MAS International Fixed Income
Portfolio 0.375% 0.159% 0.534%
</TABLE>
- ------------
* MSAM and MAS each have voluntarily agreed to a reduction in the fees payable
to them and/or to reimburse certain Underlying Funds, if necessary, if payment
of advisory fees would cause the total annual operating expenses of these
Underlying Funds to exceed certain maximums. Each of MSAM and MAS reserve the
right to terminate any of their fee waivers and/or expense reimbursements at
any time in their sole discretion.
+ Estimated.
PERFORMANCE OF THE PORTFOLIOS
Each Portfolio's total return and yield may be quoted in advertising.
Performance is based on historical results and is not intended to indicate
future performance of the Portfolios.
TOTAL RETURN. Total return is the change in value of an investment in a
Portfolio over a given period, assuming reinvestment of any dividends and
capital gains. A CUMULATIVE TOTAL RETURN reflects actual performance over a
stated period of time. An AVERAGE ANNUAL TOTAL RETURN is a hypothetical rate of
return that, if achieved annually, would have produced the same cumulative total
return if performance had been constant over the entire period. Average annual
total returns smooth out variations in performance; they are not the same as
actual year-by-year results.
Average annual total returns covering periods of less than one year assume that
performance will remain constant for the rest of the year.
YIELD. Yield refers to the income generated by an investment in a Portfolio
over a given period of time, expressed as an annual percentage rate. When a
yield assumes that income is reinvested, it is called an effective yield.
17
<PAGE>
PERFORMANCE OF THE UNDERLYING FUNDS
MSAM and MAS manage portfolios of MSIF and MAS Funds, respectively, which serve
as the Underlying Funds of the Portfolios.
Past investment performance of the Underlying Funds, as shown in the table
below, is provided to indicate the experience of MSAM and MAS in managing the
Underlying Funds and may be relevant to your consideration of the Portfolios.
However, the past investment performance of the Underlying Funds should not be
considered to be indicative of future performance of the Underlying Funds or the
Portfolios. Investors should consider that, because each Portfolio will invest
in varying combinations of Underlying Funds, the performance of a Portfolio will
reflect the combined performance of the Underlying Funds in which it invests and
will be affected by the varying allocation of investments in Underlying Funds.
Moreover, in addition to the expenses borne by each Underlying Fund, the
Portfolios will incur their own direct expenses. Accordingly, the investment
performance of the Portfolios will be less than the weighted average of the
returns of the Underlying Funds in which they invest.
<TABLE>
<CAPTION>
Average Average
Total Return Total Return Total Return Annual Total Annual Total Average
One Year Five Years Ten Years Return Five Return Ten Annual Total
Inception Ended Ended Ended Years Ended Years Ended Return Since
Fund Name Date 12/31/96+ 12/31/96+ 12/31/96+ 12/31/96+ 12/31/96+ Inception+
- ------------------------------ --------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. EQUITY FUNDS:
MSIF Equity Growth
Portfolio................... 4/2/91 30.97% 119.19% NA 16.99% NA 17.06%
MSIF U.S. Equity Plus
Portfolio................... NA NA NA NA NA NA NA
MSIF U.S. Real Estate
Portfolio................... 2/24/95 39.56% NA NA NA NA 32.73%
MAS Mid Cap Growth
Portfolio................... 3/30/90 18.79% 86.31% NA 13.25% NA 19.11%
MAS Mid Cap Value Portfolio... 12/30/94 40.77% NA NA NA NA 36.62%
MAS Value Portfolio........... 11/5/84 27.63% 140.12% 333.56% 19.15% 15.80% 17.57%
INTERNATIONAL EQUITY FUNDS:
MSIF Active Country Allocation
Portfolio................... 1/17/92 9.71% NA NA NA NA 8.71%
MSIF Asian Equity Portfolio... 7/1/91 3.49% 142.14% NA 19.35% NA 18.28%
MSIF Emerging Markets
Portfolio................... 9/25/92 12.19% NA NA NA NA 12.93%
MSIF European Equity
Portfolio................... 4/2/93 22.29% NA NA NA NA 19.62%
MSIF International Equity
Portfolio................... 8/4/89 19.64% 113.75% NA 16.41% NA 11.96%
MSIF International Magnum
Portfolio................... 3/15/96 8.25%* NA NA NA NA NA
MSIF Japanese Equity
Portfolio................... 4/25/94 (1.40)% NA NA NA NA (2.51)%
MSIF Latin American
Portfolio................... 1/18/95 48.77% NA NA NA NA 16.98%
MAS International Equity
Portfolio................... 11/25/88 10.38% 45.17% NA 7.74% NA 8.22%
U.S. FIXED INCOME FUNDS:
MSIF Fixed Income Portfolio... 5/15/91 4.61% 40.26% NA 7.00% NA 8.35%
MAS Fixed Income Portfolio.... 11/14/84 7.36% 49.18% 143.25% 8.33% 9.30% 11.03%
MAS High Yield Portfolio...... 2/28/84 15.29% 96.04% NA 14.41% NA 11.66%
MAS Intermediate Duration
Portfolio................... 10/3/94 5.94% NA NA NA NA 9.12%
MAS Limited Duration
Portfolio................... 3/31/92 5.27% NA NA NA NA 5.91%
MAS Mortgage-Backed Securities
Portfolio................... 1/31/92 5.78% NA NA NA NA 7.17%
INTERNATIONAL FIXED INCOME
FUND:
MAS International Fixed Income
Portfolio................... 4/29/94 6.20% NA NA NA NA 9.87%
</TABLE>
- ----------
* Cumulative (unannualized) total return since inception.
+ Performance information is for the Class A shares of the investment
portfolios of MSIF and the Institutional Class shares of the investment
portfolios of MAS Funds. Note that all performance numbers are net of fee
waivers and expense reimbursements.
18
<PAGE>
ACCOUNT POLICIES
DISTRIBUTIONS AND TAXES
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action.
No attempt has been made to present a detailed explanation of the federal,
state, or local income tax treatment of the Portfolio or its shareholders.
Accordingly, shareholders are urged to consult their tax advisers regarding
specific questions as to federal, state and local income taxes.
Each Portfolio is treated as a separate entity for federal income tax purposes
and is not combined with the Fund's other portfolios. Each Portfolio intends to
qualify for the special tax treatment afforded regulated investment companies
under Subchapter M of the Code, so that each Portfolio will be relieved of
federal income tax on that part of its net investment income and net capital
gain that is distributed to shareholders.
Each Portfolio intends to distribute substantially all of its taxable net
investment income (including, for this purpose, the excess of net short-term
capital gain over net long-term capital loss) to shareholders. Dividends from
each Portfolio's net investment income are taxable to shareholders as ordinary
income, whether received in cash or in additional shares. Such dividends paid by
each Portfolio may qualify for the 70% dividends-received deduction for
corporate shareholders to the extent of qualifying dividend income received by
each Portfolio from U.S. corporations. Each Portfolio will report annually to
its shareholders the amount of dividend income qualifying for such treatment.
Distributions of net capital gains (the excess of net long-term capital gain
over net short-term capital loss) are taxable to shareholders as long-term
capital gain, regardless of how long the shareholder has held each Portfolio's
shares. Each Portfolio will send reports annually to shareholders of the federal
income tax status of all distributions made during the preceding year.
Each Portfolio intends to make sufficient distributions or deemed distributions
of its ordinary income and capital gain net income (the excess of short-term and
long-term capital gain over short-term and long-term capital loss, including any
available capital loss carryforwards), prior to the end of each calendar year to
avoid liability for federal excise tax.
Dividends and other distributions declared by each Portfolio in October,
November or December of any year and payable to shareholders of record on a date
in such month will be deemed to have been paid by each Portfolio and received by
the shareholders in that year if the distributions are paid by each Portfolio at
any time during the following January.
Each Portfolio may be required to withhold and remit to the U.S. Treasury 31% of
any dividends, capital gains distributions and redemption proceeds paid to any
individual or certain other non-corporate shareholder (1) who has failed to
provide a correct taxpayer identification number (generally an individual's
social security number or non-individual's employer identification number) on
the Application Form, (2) who is subject to backup withholding by the Internal
Revenue Service, or (3) who has not certified to the Fund that such shareholder
is not subject to backup withholding. This backup withholding is not an
additional tax, and any amounts withheld may be credited against the
shareholder's ultimate U.S. tax liability.
The sale, redemption or exchange of shares will result in taxable gain or loss
to the selling, redeeming or exchanging shareholder, depending upon whether the
fair market value of the sale, redemption or exchange proceeds exceed or is less
than the shareholder's adjusted basis in the sold, redeemed or exchanged shares.
If capital gain distributions have been made with respect to shares that are
sold at a loss after being held for six months or less, then the loss is treated
as a long-term capital loss to the extent of the capital gain distributions.
Conversion of shares between classes should not be a taxable event to the
Shareholder.
IRAs and participants in tax-qualified retirement plans generally will not be
subject to federal tax liability on either dividend and capital gain
distributions from the Portfolios or redemption of shares of the Portfolios.
Rather, participants in such plans will be taxed when they begin taking
distributions from their IRAs and/or the plans. There are various restrictions
under the Code on eligibility, contributions and withdrawals, depending on the
type of tax-deferred account or tax-qualified retirement plan. The rules
governing tax-deferred accounts and tax-qualified retirement plans are complex,
and failure to comply with the governing rules and regulations may result in a
substantial cost to you, including the loss of tax advantages and the imposition
of additional taxes and penalties by the IRS. You should consult with a tax
professional on the specific rules governing your own plan.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE
TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE PORTFOLIO.
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TRANSACTION DETAILS
The Portfolios are open for business each day the New York Stock Exchange
("NYSE") is open. Each Portfolio's NAV is determined as of the close of business
of the NYSE (normally 4:00 p.m. Eastern Time) on each day that the NYSE is open
for business. The NYSE is currently scheduled to be closed on New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day, and on the
preceding Friday or subsequent Monday when any of these holidays falls on a
Saturday or Sunday, respectively.
Each Portfolio's NAV is the value of a single share. The NAV is computed by
adding the value of the Portfolio's investments, cash and other assets,
subtracting its liabilities, and then dividing the result by the number of
shares outstanding.
Each Portfolio's investments are valued primarily on the basis of the NAVs of
the Underlying Funds and market quotations. If quotations are not readily
available or if the values have been materially affected by events occurring
after the closing of a foreign market, assets are valued by a method that the
Fund's Board of Directors believes accurately reflects fair value.
Each Portfolio's offering price (price to buy one share) and redemption price
(price to sell one share) are its NAV.
Each Portfolio reserves the right to suspend the offering of shares for a period
of time. Each Portfolio also reserves the right to reject any specific order.
Purchase orders may be refused if, in the Adviser's opinion, they would disrupt
management of a Portfolio.
Although the legal rights of Class A and Class B shares are identical, the
different expenses borne by each class will result in different net asset values
and dividends. The net asset value of Class B shares will generally be lower
than the net asset value of Class A shares as a result of the shareholder
servicing fees charged to Class B shares. It is expected, however, that the net
asset value per share of the two classes will tend to converge immediately after
the recording of dividends, which will differ by approximately the amount of the
distribution expense accrual differential between the classes.
In the interest of economy and convenience, and because of the operating
procedures of the Fund, certificates representing shares of the Portfolio will
not be issued. All shares purchased are confirmed to you and credited to your
account on the Fund's books maintained by the Adviser or its agents. You will
have the same rights and ownership with respect to such shares as if
certificates had been issued.
INVESTMENTS AND REDEMPTIONS
Class A and Class B shares of each Portfolio may be purchased, without sales
commission, at the net asset value per share next determined after receipt of
the purchase order by the Portfolio. Investors in Class B shares will be subject
to an additional Rule 12b-1 fee at the annual rate of 0.25% of the average daily
value of their shares. This additional fee will be paid by each Portfolio to the
Distributor to compensate the Distributor for certain shareholder services
provided or caused to be provided by the Distributor to Class B share investors.
The Distributor expects to compensate plan administrators for services provided
to various retirement and deferred compensation plans in connection with
investments by such plans in Class B shares. Only those investors which require
an increased level of shareholder services will be issued Class B shares. The
Fund's determination of an investor's eligibility to purchase shares of a given
class will take precedence over the investor's selection of a class.
Shares of the Portfolios are currently offered only to participants in various
retirement and deferred compensation plans whose plan sponsors or plan
administrators have made arrangements with the Fund to offer such shares to
participants. Such plan participants should refer to materials provided by their
plan sponsor or plan administrator for information on how to invest in and
redeem shares of the Portfolios.
Plan sponsors and plan administrators who have made arrangements with the Fund
will receive orders from their plan participants to purchase or redeem shares of
the Portfolios, generally on each business day. That night, all orders received
by that plan sponsor or plan administrator on that business day are aggregated,
and the plan sponsor or plan administrator places a net purchase or redemption
order for shares of the Portfolios on the morning of the next business day.
These orders are normally executed at the NAV that was computed for each
Portfolio at the close of the previous business day. In some cases, however, a
plan sponsor's or plan administrator's order may be executed at the NAV next
computed after the order is actually transmitted to the Fund.
Redemption proceeds will normally be wired to the plan sponsor or plan
administrator on the next business day after receipt of the redemption
instructions by the Fund, but in no event later than seven days following
receipt of such instructions. The Fund may suspend redemptions or postpone
payment dates on days when the NYSE is closed (other than weekends or holidays),
when trading on the NYSE is restricted or as permitted by the SEC.
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MORGAN STANLEY STRATEGIC ADVISER FUND, INC.
P.O. BOX 2798, BOSTON, MA 02208-2798
STATEMENT OF ADDITIONAL INFORMATION
Morgan Stanley Strategic Adviser Fund, Inc. (the "Fund") is a no-load, open-end
management investment company with Class A and Class B shares of three series
("Portfolios"). Each Portfolio offers to investors a distinct risk/return
profile by investing primarily in different combinations of Class A shares of
various investment portfolios of Morgan Stanley Institutional Fund, Inc. and
Institutional Class shares of various investment portfolios of MAS Funds
("Underlying Funds"). Class A and Class B shares of each Portfolio are offered
with no sales charge, exchange or redemption fee. The Portfolios are advised by
Morgan Stanley Asset Management Inc. ("MSAM" or the "Adviser"). Morgan Stanley &
Co. Incorporated ("Morgan Stanley") is the distributor of the Fund's shares. The
Underlying Funds are managed by either MSAM or Miller Anderson & Sherrerd, LLP
("MAS"), an affiliate of MSAM.
This Statement of Additional Information addresses information about the Fund
applicable to each of the Portfolios and certain information regarding the
Underlying Funds. The Fund was incorporated under the laws of the State of
Maryland on May 20, 1997. The Fund has filed a registration statement with the
Securities and Exchange Commission (the "SEC") registering itself as an open-end
management investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"), and its shares under the Securities Act of 1933, as
amended (the "1933 Act").
This Statement of Additional Information is not a prospectus, but should be read
in conjunction with the prospectus for the Fund's Portfolios (the "Prospectus").
This Statement of Additional Information is incorporated by reference into the
Prospectus in its entirety. To obtain the Prospectus, please contact the Fund.
STATEMENT OF ADDITIONAL INFORMATION DATED _________, 1997 RELATING TO PROSPECTUS
DATED _________, 1997.
TABLE OF CONTENTS PAGE
----
THE UNDERLYING FUNDS 2
SECURITIES AND INVESTMENT
TECHNIQUES 2
CERTAIN FEDERAL INCOME TAX CONSEQUENCES 19
PURCHASE OF SHARES 21
REDEMPTION OF SHARES 21
INVESTMENT LIMITATIONS 21
DETERMINING MATURITIES OF CERTAIN
INSTRUMENTS 22
MANAGEMENT OF THE FUND 23
PORTFOLIO TRANSACTIONS 27
PERFORMANCE INFORMATION 27
GENERAL INFORMATION 33
DESCRIPTION OF CERTAIN SECURITIES
RATINGS 34
FINANCIAL STATEMENTS 35
APPENDIX A
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THE UNDERLYING FUNDS
Each Portfolio intends to invest primarily in shares of Underlying Funds, which
are investment portfolios of Morgan Stanley Institutional Fund, Inc. ("MSIF") or
MAS Funds and are advised by MSAM or MAS, respectively. The Portfolios currently
intend to invest in various combinations of the following Underlying Funds:
EQUITY:
U.S. Equity Funds:
MSIF Equity Growth Portfolio
MSIF U.S. Equity Plus Portfolio
MSIF U.S. Real Estate Portfolio
MAS Mid Cap Growth Portfolio
MAS Mid Cap Value Portfolio
MAS Value Portfolio
International Equity Funds:
MSIF Active Country Allocation Portfolio
MSIF Asian Equity Portfolio
MSIF Emerging Markets Portfolio
MSIF European Equity Portfolio
MSIF International Equity Portfolio
MSIF International Magnum Portfolio
MSIF Japanese Equity Portfolio
MSIF Latin American Portfolio
MAS International Equity Portfolio
FIXED INCOME:
U.S. Fixed Income Funds:
MSIF Fixed Income Portfolio
MAS Fixed Income Portfolio
MAS High Yield Portfolio
MAS Intermediate Duration Portfolio
MAS Limited Duration Portfolio
MAS Mortgage-Backed Securities Portfolio
International Fixed Income Funds:
MAS International Fixed Income Portfolio
The Portfolios, at the discretion of the Adviser and without shareholder
approval, reserve the right to invest in additional Underlying Funds that are
currently offered or may be offered in the future. A complete listing of
Underlying Funds currently available for investment by the Portfolios, along
with their investment objectives, is included in Appendix A to this Statement of
Additional Information.
SECURITIES AND INVESTMENT TECHNIQUES
The following discussion of certain securities and investment techniques
supplements the discussion of investment policies, securities and investment
techniques of the Underlying Funds set forth in the Fund's Prospectus:
EQUITY SECURITIES
DEPOSITARY RECEIPTS. Depositary Receipts are Equity Securities representing
ownership interests in securities of foreign companies and include American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and Global
Depositary Receipts ("GDRs"). Depositary Receipts are not necessarily
denominated in the same currency as the underlying securities. ADRs are
dollar-denominated Depositary Receipts typically issued by a U.S. financial
institution which evidence ownership interests in a security or pool of
securities issued by a foreign issuer. ADRs are listed and traded in the United
States. GDRs, EDRs and other types of Depositary Receipts are typically issued
by foreign banks or trust companies, although they also may be issued by U.S.
financial institutions, and evidence ownership interests in a security or pool
of securities issued by either a foreign or a U.S. corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities market and Depositary Receipts in bearer form are designed for use in
securities markets outside the United States.
FIXED INCOME SECURITIES
The value of Fixed Income Securities held by each Underlying Fund generally will
vary inversely to changes in prevailing interest rates. Each Underlying Fund's
investments in fixed rate Fixed Income Securities with longer terms to maturity
are subject to greater volatility than the Underlying Fund's investments in
shorter-term obligations. Debt obligations acquired at a discount are subject to
greater fluctuations of market value in response to changing interest rates than
debt obligations of comparable maturities which are not subject to such
discount. Most Fixed Income Securities provide interest (coupon) payments in
addition to a final (par) payment at maturity. Some securities also have call
provisions. Depending on the relative magnitude of these payments and the nature
of the call provisions, the market values of Fixed Income Securities may respond
differently to changes in the level and structure of interest rates.
One of the strategies MSAM and MAS may use to manage the Underlying Funds'
investments in Fixed Income Securities is Duration management. Duration is a
measure of the expected life of a Fixed Income Security on a present value basis
that was developed as a more precise alternative to the concept of
term-to-maturity. Underlying Funds investing in Fixed Income Securities actively
manage their portfolio maturity and duration in anticipation of cyclical
interest rate changes. Adjustments are not made in an effort to capture
short-term, day-to-day movements in the market, but instead are implemented in
anticipation of
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longer-term shifts in the levels of interest rates. Adjustments made to shorten
Portfolio maturity and duration are made to limit capital losses during periods
when interest rates are expected to rise. Conversely, adjustments made to
lengthen maturity and duration are intended to produce capital appreciation in
periods when interest rates are expected to fall. The foundation for maturity
and duration strategy lies in analysis of the U.S. and global economies,
focusing on levels of real interest rates, monetary and fiscal policy actions,
and cyclical indicators.
Duration incorporates a Fixed Income Security's yield, coupon interest payments,
final maturity and call features into one measure. Duration takes the length of
the time intervals between the present time and the time that the interest and
principal payments are scheduled or, in the case of a callable bond, expected to
be received, and weights them by the present values of the cash to be received
at each future point in time. For any Fixed Income Security with interest
payments occurring prior to the payment of principal, duration is always less
than maturity. In general, all other factors being the same, the lower the
stated or coupon rate of interest of a Fixed Income Security, the longer the
duration of the security; conversely, the higher the stated or coupon rate of
interest of a Fixed Income Security, the shorter the duration of the security.
However, there are some situations where even the standard duration calculation
does not properly reflect the interest rate exposure of a security. For example,
floating rate securities often have final maturities of ten or more years;
however, their interest rate exposure corresponds to the frequency of the coupon
reset. Another example where the interest rate exposure is not properly captured
by duration is the case of mortgage pass-through securities. The stated final
maturity of such securities is generally 30 years, but current prepayment rates
are more critical in determining the securities' interest rate exposure. In
these and other similar situations, MSAM or MAS's analysis of interest rate
exposure incorporates the economic life of a security.
BRADY BONDS. Certain Underlying Funds may invest in Fixed Income Securities
customarily referred to as "Brady Bonds," which are created through the exchange
of existing commercial bank loans to foreign entities for new obligations in
connection with debt restructuring under a plan introduced by former U.S.
Secretary of the Treasury Nicholas F. Brady. Brady Bonds have been issued only
in recent years, and, accordingly, do not have a long payment history. They may
be collateralized or uncollateralized and issued in various currencies (although
most are U.S. dollar-denominated) and they are actively traded in the
over-the-counter secondary market. An Underlying Fund may purchase Brady Bonds
either in the primary or secondary markets. The price and yield of Brady Bonds
purchased in the secondary market will reflect the market conditions at the time
of purchase, regardless of the stated face amount and the stated interest rate.
With respect to Brady Bonds with no or limited collateralization, each
Underlying Fund will rely for payment of interest and principal primarily on the
willingness and ability of the issuing government to make payment in accordance
with the terms of the bonds.
U.S. dollar-denominated, collateralized Brady Bonds may be fixed rate par bonds
or floating rate discount bonds and are generally collateralized in full as to
principal due at maturity by U.S. Treasury zero coupon obligations which have
the same maturity as the Brady Bonds. Interest payments on these Brady Bonds
generally are collateralized by cash or securities in an amount that, in the
case of fixed rate bonds, is equal to at least one year of rolling interest
payments or, in the case of floating rate bonds, initially is equal to at least
one year's rolling interest payments based on the applicable interest rate at
that time and is adjusted at regular intervals thereafter. Certain Brady Bonds
are entitled to "value recovery payments" in certain circumstances, which in
effect constitute supplemental interest payments but generally are not
collateralized. Brady Bonds are often viewed as having three or four valuation
components: (i) the collateralized repayment of principal at final maturity;
(ii) the collateralized interest payments; (iii) the uncollateralized interest
payments; and (iv) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). In the event of
a default with respect to collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held to the scheduled maturity of the
defaulted Brady Bonds by the collateral agent, at which time the face amount of
the collateral will equal the principal payments which would have then been due
on the Brady Bonds in the normal course. In addition, in light of the residual
risk of the Brady Bonds and, among other factors, the history of defaults with
respect to commercial bank loans by public and private entities of countries
issuing Brady Bonds, investments in Brady Bonds should be viewed as speculative.
CASH EQUIVALENTS. Cash Equivalents are short-term Fixed Income Securities
comprising:
(1) Time deposits, certificates of deposit (including marketable variable rate
certificates of deposit) and bankers' acceptances issued by a commercial bank or
savings and loan association. Time deposits are non-negotiable deposits
maintained in a banking institution for a specified period of time at a stated
interest rate. Certificates of deposit are negotiable short-term obligations
issued by commercial banks or savings and loan associations against funds
deposited in the issuing institution. Variable rate certificates of deposit are
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certificates of deposit on which the interest rate is periodically adjusted
prior to their stated maturity based upon a specific market rate. A bankers'
acceptance is a time draft drawn on a commercial bank by a borrower, usually in
connection with an international commercial transaction (to finance the import,
export, transfer or storage of goods).
Underlying Funds may invest in obligations of U.S. banks, obligations of foreign
branches of U.S. banks ("Eurodollars") and obligations of U.S. branches of
foreign banks ("Yankee dollars"). Investments in Eurodollars and Yankee dollars
involve some of the same risks of investing in international securities that are
discussed in "Foreign Investment" below.
Underlying Funds will not invest in any security issued by a commercial bank
unless (i) the bank has total assets of at least $1 billion, or the equivalent
in other currencies, or, in the case of domestic banks which do not have total
assets of at least $1 billion, the aggregate investment made in any one such
bank is limited to $100,000 and the principal amount of such investment is
insured in full by the Federal Deposit Insurance Corporation ("FDIC"), (ii) in
the case of a U.S. bank, it is a member of the FDIC, and (iii) in the case of a
foreign branch of a U.S. bank, the security is deemed to be of an investment
quality comparable with other Fixed Income Securities which may be purchased by
the Underlying Fund.
(2) Commercial paper rated at time of purchase by one or more NRSROs in one
of their two highest categories, (e.g., A-1 or A-1+ by the Standard & Poor's
Rating Group ("S&P" or Prime 1 by Moody's Investors Service, Inc.
("Moody's") or, if not rated, issued by a corporation having an outstanding
unsecured debt issue rated high-grade by an NRSRO (e.g., A or better by
Moody's, S&P, or Fitch Investors Service, Inc. ("Fitch")).
(3) Short-term corporate obligations rated high-A or better by Moody's, S&P, or
Fitch.
(4) U.S. Governments and Agencies.
(5) Repurchase Agreements collateralized by securities listed above.
EURODOLLAR AND YANKEE DOLLAR OBLIGATIONS. The Underlying Funds may invest in
Eurodollar and Yankee dollar obligations. Eurodollar bank obligations are
dollar-denominated certificates of deposit and time deposits issued outside the
U.S. capital markets by foreign branches of U.S. banks and by foreign banks.
Yankee dollar bank obligations are dollar-denominated obligations issued in the
U.S. capital markets by foreign banks.
Eurodollar and Yankee dollar obligations are subject to the same risks that
pertain to domestic issues, notably credit risk, market risk and liquidity risk.
Additionally, Eurodollar (and to a limited extent, Yankee dollar) obligations
are subject to certain sovereign risks. One such risk is the possibility that a
sovereign country might prevent capital, in the form of dollars, from flowing
across their borders. Other risks include adverse political and economic
developments; the extent and quality of government regulation of financial
markets and institutions; the imposition of foreign withholding taxes; and the
expropriation or nationalization of foreign issuers.
LOAN PARTICIPATIONS AND ASSIGNMENTS. The Underlying Funds may invest in loans
and other direct debt instruments which are interests in amounts owed by
corporate, governmental or other borrowers ("Loans") from third parties
("Lenders"). They may represent amounts owed to lenders or lending syndicates,
to suppliers of goods or services (trade claims or other receivables), or to
other parties. An Underlying Fund's investments in Loans are expected in most
instances to be in the form of participations in Loans ("Participations") and
assignments of all or portions of Loans ("Assignments") from third parties. Each
Underlying Fund's investment in Participations typically will result in each
Underlying Fund having a contractual relationship only with the Lender and not
with the borrower. Each Underlying Fund will have the right to receive payments
of principal, interest and any fees to which it is entitled only from the Lender
selling the Participation and only upon receipt by the Lender of the payments
from the borrower. In connection with purchasing Participations, each Underlying
Fund generally will have no right to enforce compliance by the borrower with the
terms of the loan agreement relating to the Loan, nor any rights of set-off
against the borrower, and each Underlying Fund may not directly benefit from any
collateral supporting the Loan in which it has purchased the Participation. As a
result, each Underlying Fund may be subject to the credit risk of both the
borrower and the Lender that is selling the Participation. In the event of the
insolvency of the Lender selling a Participation, each Underlying Fund may be
treated as a general creditor of the Lender and may not benefit from any set-off
between the Lender and the borrower. Certain Participations may be structured in
a manner designed to avoid purchasers of Participations being subject to the
credit risk of the Lender with respect to the Participation, but even under such
a structure, in the event of the Lender's insolvency, the Lender's servicing of
the Participation may be delayed and the assignability of the Participation
impaired. Each Underlying Fund will acquire Participations only if the Lender
interpositioned between the Underlying Fund and the borrower is determined by
MSAM or MAS to be creditworthy. Certain Underlying Funds that invest in foreign
securities may invest in fixed and floating rate Loans arranged through private
negotiations between an issuer of sovereign debt obligations and one or more
financial institutions.
When an Underlying Fund purchases Assignments from Lenders it will acquire
direct rights against the borrower on the Loan. Because Assignments are arranged
through private negotiations between potential assignees and potential
assignors, however, the rights and obligations
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acquired by each Underlying Fund as the purchaser of an Assignment may differ
from, and be more limited than, those held by the assigning Lender. The
assignability of certain sovereign debt obligations is restricted by the
governing documentation as to the nature of the assignee such that the only way
in which an Underlying Fund may acquire an interest in a loan is through a
Participation and not an Assignment. An Underlying Fund may have difficulty
disposing of Assignments and Participations because to do so it will have to
assign such securities to a third party. Because there is no liquid market for
such securities, the Underlying Funds anticipate that such securities could be
sold only to a limited number of institutional investors. The lack of a liquid
secondary market may have an adverse impact on the value of such securities and
each Underlying Fund's ability to dispose of particular Assignments or
Participations when necessary to meet each Underlying Fund's liquidity needs or
in response to a specific economic event such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary market for
Assignments and Participations also may make it more difficult for each
Underlying Fund to assign a value to these securities for purposes of valuing
the Underlying Fund's securities and calculating its net asset value.
Direct debt instruments involve the risk of loss in case of default or
insolvency of the borrower. Direct debt instruments may offer less legal
protection to an Underlying Fund in the event of fraud or misrepresentation and
may involve a risk of insolvency of the lending bank or other financial
intermediary. Direct debt instruments may also include standby financing
commitments that obligate the investing Underlying Fund to supply additional
cash to the borrower on demand. Further, Participations involving emerging
market country issuers may relate to Loans as to which there has been or
currently exists an event of default or other failure to make payment when due,
and may represent amounts owed to financial institutions that are themselves
subject to political and economic risks, including the risk of currency
devaluation, expropriation, or failure. Such Participations present additional
risk of default or loss.
MORTGAGE RELATED SECURITIES. Mortgage related securities are securities that,
directly or indirectly, represent a participation in, or are secured by and
payable from, mortgage loans on real property. Mortgage related securities
include Collateralized Mortgage Obligations and Mortgage-Backed Securities
issued or guaranteed by agencies or instrumentalities of the U.S. Government or
by private sector entities. At times it is anticipated that a substantial
portion of an Underlying Fixed Income Fund's assets may be invested in mortgage
related securities.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized Mortgage Obligations
("CMOs") are debt obligations or multiclass pass-through certificates issued by
agencies or instrumentalities of the U.S. government or by private originators
or investors in mortgage loans. They are backed by Mortgage-Backed Securities
(discussed below) or whole loans (all such assets, the "Mortgage Assets") and
are evidenced by a series of bonds or certificates issued in multiple classes.
In a CMO, a series of bonds or certificates are issued in multiple classes. Each
class of a CMO, often referred to as a "tranche," may be issued with a specific
fixed or floating coupon rate and has a stated maturity or final scheduled
distribution date. The principal and interest on the underlying Mortgage Assets
may be allocated among the several classes of a series of CMOs in many ways.
Interest is paid or accrues on CMOs on a monthly, quarterly or semi-annual
basis.
CMOs may be issued by agencies or instrumentalities of the U.S. Government, or
by private originators of, or investors in, mortgage loans, including savings
and loan associations, mortgage bankers, commercial banks, investment banks and
special purpose subsidiaries of the foregoing. CMOs that are issued by private
sector entities and are backed by assets lacking a guarantee of an entity having
the credit status of a governmental agency or instrumentality are generally
structured with one or more types of credit enhancement as described below. An
issuer of CMOs may elect to be treated, for federal income tax purposes, as a
Real Estate Mortgage Investment Conduit (a "REMIC"). An issuer of CMOs issued
after 1991 must elect to be treated as a REMIC or it will be taxable as a
corporation under rules regarding taxable mortgage pools.
The principal of and interest on the Mortgage Assets may be allocated among the
several classes of a CMO in many ways. The general goal in allocating cash flows
on Mortgage Assets to the various classes of a CMO is to create certain tranches
on which the expected cash flows have a higher degree of predictability than the
underlying Mortgage Assets. As a general matter, the more predictable the cash
flow is on a particular CMO tranche, the lower the anticipated yield will be on
that tranche at the time of issuance relative to prevailing market yields on
Mortgage Assets. As part of the process of creating more predictable cash flows
on certain tranches of a CMO, one or more tranches generally must be created
that absorb most of the changes in the cash flows on the underlying Mortgage
Assets. The yields on these tranches are generally higher than prevailing market
yields on other mortgage related securities with similar average lives.
Principal prepayments on the underlying Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final scheduled
distribution dates. Because of the uncertainty of the cash flows on these
tranches, the market prices of and yields on these tranches are more volatile.
In addition, some inverse floating rate
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obligation CMOs exhibit extreme sensitivity to changes in prepayments. As a
result, the yield to maturity of these CMOs is sensitive not only to changes in
interest rates, but also to changes in prepayment rates on the related
underlying mortgage assets.
Included within the category of CMOs are PAC Bonds. PAC Bonds are a type of CMO
tranche or series designed to provide relatively predictable payments of
principal provided that, among other things, the actual prepayment experience on
the underlying mortgage loans falls within a predefined range. If the actual
prepayment experience on the underlying mortgage loans is at a rate faster or
slower than the predefined range or if deviations from other assumptions occur,
principal payments on the PAC Bond may be earlier or later than predicted. The
magnitude of the predefined range varies from one PAC Bond to another; a
narrower range increases the risk that prepayments on the PAC Bond will be
greater or smaller than predicted. Because of these features, PAC Bonds
generally are less subject to the risks of prepayment than are other types of
mortgage related securities.
MORTGAGE-BACKED SECURITIES. With Mortgage-Backed Securities ("MBSs"), many
mortgagees' monthly payments to his or her lending institution are pooled
together and passed through to investors such as an Underlying Fund. The pools
are assembled by various governmental, Government-related and private
organizations. An Underlying Fund may invest in securities issued or guaranteed
by Government National Mortgage Association ("GNMA" or "Ginnie Mae"), Federal
Home Loan Mortgage Corporation ("FHLMC" or "Freddie Mac"), Federal National
Mortgage Association ("FNMA" or "Fannie Mae"), private issuers and other
government agencies. There can be no assurance that the private issuers can meet
their obligations under the policies. MBSs issued by non-agency issuers, whether
or not such securities are subject to guarantees, may entail greater risk. If
there is no guarantee provided by the issuer, MBSs purchased by an Underlying
Fund will be those which at the time of purchase are rated investment grade by
one or more nationally recognized statistical rating organization ("NRSRO"),
or, if unrated, are deemed by MSAM or MAS to be of comparable quality.
MBSs are issued or guaranteed by private sector originators of or investors
in mortgage loans and are structured similarly to governmental pass-through
securities. Because private pass-throughs typically lack a guarantee by an
entity having the credit status of a governmental agency or instrumentality,
they are generally structured with one or more types of credit enhancement
described below. FNMA and FHLMC obligations are not backed by the full faith
and credit of the U.S. Government as GNMA certificates are, but FNMA and
FHLMC securities are supported by the instrumentalities' right to borrow from
the United States Treasury. Each of GNMA, FNMA and FHLMC guarantees timely
distributions of interest to certificate holders. Each of GNMA and FNMA also
guarantees timely distributions of scheduled principal. FHLMC has in the past
guaranteed only the ultimate collection of principal of the underlying
mortgage loan; however, FHLMC has now issued MBSs (FHLMC Gold PCS) which also
guarantee timely payment of monthly principal reductions. Resolution Funding
Corporation ("REFCORP") obligations are backed, as to principal payments, by
zero coupon U.S. Treasury bonds, and as to interest payment, ultimately by
the U.S. Treasury. Obligations issued by such U.S. Governmental agencies and
instrumentalities are described more fully below.
There are two methods of trading MBSs. A specified pool transaction is a trade
in which the pool number of the security to be delivered on the settlement date
is known at the time the trade is made. This is in contrast with the typical MBS
transaction, called a TBA (to be announced) transaction, in which the type of
MBS to be delivered is specified at the time of trade but the actual pool
numbers of the securities that will be delivered are not known at the time of
the trade. The pool numbers of the pools to be delivered at settlement will be
announced shortly before settlement takes place. The terms of the TBA trade may
be made more specific if desired. Generally, agency pass-through MBSs are traded
on a TBA basis.
Like Fixed Income Securities in general, MBSs will generally decline in price
when interest rates rise. Due to prepayment risk, rising interest rates also
tend to discourage refinancings of home mortgages, with the result that the
average life of MBSs held by an Underlying Fund may be lengthened. This
extension of average life causes the market price of the MBSs to decrease
further than if their average lives were fixed. However, when interest rates
fall, mortgages may not enjoy as large a gain in market value due to prepayment
risk because additional mortgage prepayments must be reinvested at lower
interest rates. Faster prepayment will shorten the average life and slower
prepayments will lengthen it. However, it is possible to determine what the
range of that movement could be and to calculate the effect that it will have on
the price of the MBS. In selecting these MBSs, MSAM or MAS will look for
those that offer a higher yield to compensate for any variation in average
maturity. If the underlying mortgage assets experience greater than anticipated
prepayments of principal, an Underlying Fund may fail to fully recoup its
initial investment in these securities, even if the security is in one of the
highest rating categories. An Underlying Fund may invest, without limit, in MBSs
issued by private issuers when MSAM or MAS deems that the quality of the
investment, the quality of the issuer, and market conditions warrant such
investments. Securities issued by private issuers will be rated investment grade
by Moody's or S&P or be deemed by MSAM or MAS to be of comparable investment
quality.
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FANNIE MAE CERTIFICATES. Fannie Mae is a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act of 1938. The obligations of Fannie Mae are not backed by
the full faith and credit of the U.S. Government.
Each Fannie Mae Certificate represents a pro rata interest in one or more pools
of mortgage loans insured by the Federal Housing Administration under the
Housing Act, or Title V of the Housing Act of 1949 ("FHA Loans"), or guaranteed
by the Department of Veterans Affairs under the Servicemen's Readjustment Act of
1944, as amended ("VA Loans") or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed rate level payment mortgage loans; (ii) fixed rate
growing equity mortgage loans; (iii) fixed rate graduated payment mortgage
loans; (iv) variable rate California mortgage loans; (v) other adjustable rate
mortgage loans; and (vi) fixed rate and adjustable mortgage loans secured by
multi-family projects.
FREDDIE MAC CERTIFICATES. Freddie Mac is a corporate instrumentality of the
United States created pursuant to the Emergency Home Finance Act of 1970, as
amended (the "FHLMC Act"). The obligations of Freddie Mac are obligations solely
of Freddie Mac and are not backed by the full faith and credit of the U.S.
Government.
Freddie Mac Certificates represent a pro rata interest in a group of mortgage
loans (a "Freddie Mac Certificate group") purchased by Freddie Mac. The mortgage
loans underlying the Freddie Mac Certificates consist of fixed rate or
adjustable rate mortgage loans with original terms to maturity of between ten
and thirty years, substantially all of which are secured by first liens on one-
to four-family residential properties or multi-family projects. Each mortgage
loan must meet the applicable standards set forth in the FHLMC Act. A Freddie
Mac Certificate group may include whole loans, participation interests in whole
loans and undivided interests in whole loans and participations comprising
another Freddie Mac Certificate group.
GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate instrumentality
of the United States within the Department of Housing and Urban Development. The
National Housing Act of 1934, as amended (the "Housing Act"), authorizes Ginnie
Mae to guarantee the timely payment of the principal of and interest on
certificates that are based on and backed by a pool of FHA Loans, VA Loans or by
pools of other eligible mortgage loans. The Housing Act provides that the full
faith and credit of the U.S. Government is pledged to the payment of all amounts
that may be required to be paid under any guaranty. In order to meet its
obligations under such guaranty, Ginnie Mae is authorized to borrow from the
U.S. Treasury with no limitations as to amount.
Each Ginnie Mae Certificate represents a pro rata interest in one or more of the
following types of mortgage loans: (i) fixed rate level payment mortgage loans;
(ii) fixed rate graduated payment mortgage loans; (iii) fixed rate growing
equity mortgage loans; (iv) fixed rate mortgage loans secured by manufactured
(mobile) homes; (v) mortgage loans on multi-family residential properties under
construction; (vi) mortgage loans on completed multi-family projects; (vii)
fixed rate mortgage loans as to which escrowed funds are used to reduce the
borrower's monthly payments during the early years of the mortgage loans
("buydown" mortgage loans); (viii) mortgage loans that provide for adjustments
in payments based on periodical changes in interest rates or in other payment
terms of the mortgage loans; and (ix) mortgage-backed serial notes. All of these
mortgage loans will be FHA Loans or VA Loans and, except as otherwise specified
above, will be fully-amortizing loans secured by first liens on one- to
four-family housing units.
CREDIT ENHANCEMENT. Mortgage related securities are often backed by a pool of
assets representing the obligations of a number of different parties. To lessen
the effect of failure by obligors on underlying assets to make payments, such
securities may contain elements of credit support. Such credit support falls
into two categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection generally refers to the provision of advances, typically by
the entity administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties (referred
to herein as "third party credit support"), through various means of structuring
the transaction or through a combination of such approaches.
The ratings of mortgage related securities for which third party credit
enhancement provides liquidity protection or protection against losses from
default are generally dependent upon the continued creditworthiness of the
provider of the credit enhancement. The ratings of such securities could be
subject to reduction in the event of deterioration in the creditworthiness of
the credit enhancement provider even in cases where the delinquency and loss
experience on the underlying pool of assets is better than expected.
Examples of credit support arising out of the structure of
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the transaction include "senior-subordinated securities" (multiple class
securities with one or more classes subordinate to other classes as to the
payment of principal and interest thereon, with defaults on the underlying
assets being borne first by the holders of the most subordinated class),
creation of "reserve funds" (where cash or investments, sometimes funded from a
portion of the payments on the underlying assets, are held in reserve against
future losses) and "over-collateralization" (where the scheduled payments on, or
the principal amount of, the underlying assets exceed those required to make
payment of the securities and pay any servicing or other fees). The degree of
credit support provided for each security is generally based on historical
information with respect to the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that which is anticipated
could adversely affect the return on an investment in such a security.
REPURCHASE AGREEMENTS. Each Underlying Fund may invest in Repurchase Agreements
collateralized by liquid, unencumbered assets, the value of which is marked to
market daily. Repurchase Agreements are transactions by which an Underlying Fund
purchases a security and simultaneously commits to resell that security to the
seller (a bank or securities dealer) at an agreed upon price on an agreed upon
date (usually within seven days of purchase). The resale price reflects the
purchase price plus an agreed upon market rate of interest which is unrelated to
the coupon rate or date of maturity of the purchased security. In these
transactions, the securities purchased by an Underlying Fund have a total value
in excess of the value of the Repurchase Agreement and are held by the
Underlying Fund's custodian bank until repurchased. Such agreements permit an
Underlying Fund to keep all its assets at work while retaining "overnight"
flexibility in pursuit of investments of a longer-term nature. MSAM, MAS and the
Underlying Fund's administrator will continually monitor the value of the
underlying securities to ensure that their value always equals or exceeds the
repurchase price.
The use of Repurchase Agreements involves certain risks. For example, if the
seller of the agreements defaults on its obligation to repurchase the underlying
securities at a time when the value of these securities has declined, an
Underlying Fund may incur a loss upon disposition of them. If the seller of the
agreement becomes insolvent and subject to liquidation or reorganization under
the Bankruptcy Code or other laws, a bankruptcy court may determine that the
underlying securities are collateral not within the control of an Underlying
Fund and therefore subject to sale by the trustee in bankruptcy. Finally, it is
possible that an Underlying Fund may not be able to substantiate its interest in
the underlying securities. While the Fund's management acknowledges these risks,
it is expected that they can be controlled through stringent security selection
criteria and careful monitoring procedures.
U.S. GOVERNMENT SECURITIES. The term "U.S. Government securities" refers to a
variety of securities which are issued or guaranteed by the U.S. Government, and
by various instrumentalities which have been established or sponsored by the
U.S. Government.
U.S. Treasury securities are backed by the "full faith and credit" of the United
States. Securities issued or guaranteed by Federal agencies and U.S. Government
sponsored instrumentalities may or may not be backed by the full faith and
credit of the United States. In the case of securities not backed by the full
faith and credit of the United States, the investor must look principally to the
agency or instrumentality issuing or guaranteeing the obligation for ultimate
repayment, and may not be able to assert a claim against the United States
itself in the event the agency or instrumentality does not meet its commitment.
Agencies which are backed by the full faith and credit of the United States
include the Export-Import Bank, Farmers Home Administration, Federal Financing
Bank, and others. Certain agencies and instrumentalities, such as GNMA, are, in
effect, backed by the full faith and credit of the United States through
provisions in their charters that they may make "indefinite and unlimited"
drawings on the Treasury, if needed to service debt. Debt from certain other
agencies and instrumentalities, including the Federal Home Loan Bank and FNMA,
are not guaranteed by the United States, but those institutions are protected by
the discretionary authority for the U.S. Treasury to purchase certain amounts of
their securities to assist the institution in meeting its debt obligations.
However, the U.S. Treasury has no lawful obligation to assume the financial
liabilities of these agencies or others. Finally, other agencies and
instrumentalities, such as the Farm Credit System and FHLMC, are federally
chartered institutions under Government supervision, but their debt securities
are backed only by the creditworthiness of those institutions, not the U.S.
Government.
Some of the U.S. Government agencies that issue or guarantee securities include
the Export-Import Bank of the United States, Farmers Home Administration,
Federal Housing Administration, Maritime Administration, Small Business
Administration, and the Tennessee Valley Authority.
An instrumentality of the U.S. Government is a Government agency organized under
Federal charter with Government supervision. Instrumentalities issuing or
guaranteeing securities include, among others, Federal Home Loan Banks, the
Federal Land Banks, Central Bank for Cooperatives, Federal Immediate Credit
Banks, and
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FNMA.
ZERO COUPONS. The Underlying Funds may invests in zero coupon bonds ("Zero
Coupons"). Zero Coupons have been stripped of their unmatured interest coupons,
or the coupons themselves, but may also be receipts or certificates representing
interest in such stripped debt obligations and coupons. With respect to U.S.
Governments, as defined in the Prospectus, the timely payment of coupon interest
and principal on these instruments remains guaranteed by the full faith and
credit of the U.S. Government.
Zero Coupons do not pay interest. Instead, a Zero Coupon is issued at a
substantial discount to its "face value" (what it will be worth at maturity).
The difference between the security's issue or purchase price and its face value
represents the accreted interest an investor will earn if the security is held
until maturity. For tax purposes, a portion of this accreted interest is deemed
to be income received by Zero Coupon bondholders each year. The Underlying
Funds, which expect to qualify as regulated investment companies, intend to pass
along such interest as a component of an Underlying Fund's distributions of net
investment income.
Zero Coupons may offer investors the opportunity to earn higher yields than
those available on U.S. Treasury bonds of similar maturity. However, Zero Coupon
prices may also exhibit greater price volatility than ordinary Fixed Income
Securities because of the manner in which their principal and interest is
returned to the investor.
With respect to U.S. Government Securities, Zero Coupons are sold under a
variety of different names, such as: Certificate of Accrual on Treasury
Securities (CATS), Treasury Receipts (TRs), Separate Trading of Registered
Interest and Principal of Securities (STRIPS) and Treasury Investment Growth
Receipts (TIGERS).
FOREIGN INVESTMENT
Certain of the Underlying Funds will invest in securities of foreign issuers.
Investors should recognize that investing in such foreign securities involves
certain special considerations which are not typically associated with investing
in U.S. issuers. As foreign issuers are not generally subject to uniform
accounting, auditing and financial reporting standards and may have policies
that are not comparable to those of domestic issuers, there may be less
information available about certain foreign companies than about domestic
issuers. Securities of some foreign issuers are generally less liquid and more
volatile than securities of comparable domestic issuers. There is generally less
government supervision and regulation of stock exchanges, brokers and listed
issuers than in the U.S. In addition, with respect to certain foreign countries,
there is the possibility of expropriation or confiscatory taxation, political or
social instability, or diplomatic developments which could affect U.S.
investments in those countries.
Although the Underlying Funds will endeavor to achieve the most favorable
execution costs in their portfolio transactions, fixed commissions on many
foreign stock exchanges are generally higher than negotiated commissions on U.S.
exchanges.
Certain foreign governments levy withholding or other taxes on dividend and
interest income. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from investments in such countries. Neither an Underlying
Fund nor the Portfolios may be able to claim a credit for U.S. tax purposes with
respect to any such foreign taxes.
Prior governmental approval for Foreign Investments may be required under
certain circumstances in some emerging countries, and the extent of Foreign
Investment in certain Fixed Income Securities and domestic companies may be
subject to limitation in other emerging countries. Foreign ownership limitations
also may be imposed by the charters of individual companies in emerging
countries to prevent, among other concerns, violation of Foreign Investment
limitations. Repatriation of investment income, capital and the proceeds of
sales by foreign investors may require governmental registration and/or approval
in some emerging countries. An Underlying Fund could be adversely affected by
delays in, or a refusal to grant, any required governmental registration or
approval for such repatriation. Any investment subject to such repatriation
controls will be considered illiquid if it appears reasonably likely that this
process will take more than seven days.
EMERGING MARKET COUNTRY SECURITIES. MSAM and MAS's approach to investing in
Emerging Market Country Securities is based on their evaluation of both
short-term and long-term international economic trends and the relative
attractiveness of emerging markets and individual emerging market securities.
The Underlying Funds' definition of Emerging Market Country Equity Securities or
Fixed Income Securities includes securities of companies that may have
characteristics and business relationships common to companies in a country or
countries other than an emerging market country. As a result, the value of the
securities of such companies may reflect economic and market forces applicable
to other countries, as well as to an emerging market country. MSAM and MAS
believe, however, that investment in such companies will be appropriate because
each Underlying Fund will invest only in those companies which, in its view,
have sufficiently strong exposure to economic and market forces in an emerging
market country such that their value will tend to reflect developments in such
emerging market country to a
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greater extent than developments in another country or countries. For example,
these Underlying Funds may invest in companies organized and located in
countries other than an emerging market country, including companies having
their entire production facilities outside of an emerging market country, when
securities of such companies meet one or more elements of the Underlying Fund's
definition of an Emerging Market Country Equity Security or Fixed Income
Security and so long as MSAM or MAS believe at the time of investment that the
value of the company's securities will reflect principally conditions in such
emerging market country. MSAM or MAS will base determinations as to eligibility
on publicly available information and inquiries made to the companies.
The economies of individual emerging market countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product, rate of inflation, currency depreciation, capital reinvestment,
resource self-sufficiency and balance of payments position. Further, the
economies of developing countries generally are heavily dependent upon
international trade and, accordingly, have been, and may continue to be,
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been, and may
continue to be, adversely affected by economic conditions in the countries with
which they trade.
Investments in emerging market country government Fixed Income Securities
involve special risks. Certain emerging market countries have historically
experienced, and may continue to experience, high rates of inflation, high
interest rates, exchange rate fluctuations, large amounts of external debt,
balance of payments and trade difficulties and extreme poverty and unemployment.
The issuer or governmental authority that controls the repayment of an emerging
market country's debt may not be able or willing to repay the principal and/or
interest when due in accordance with the terms of such debt. As a result of the
foregoing, a government obligor may default on its obligations. If such an event
occurs, the Underlying Fund may have limited legal recourse against the issuer
and/or guarantor. Remedies must, in some cases, be pursued in the courts of the
defaulting party itself, and the ability of the holder of foreign government
Fixed Income Securities to obtain recourse may be subject to the political
climate in the relevant country. In addition, no assurance can be given that the
holders of commercial bank debt will not contest payments to the holders of
other foreign government debt obligations in the event of default under their
commercial bank loan agreements.
FOREIGN CURRENCY TRANSACTIONS. The U.S. dollar value of the assets of the
Underlying Funds may be affected favorably or unfavorably by changes in foreign
currency exchange rates and exchange control regulations, and an Underlying Fund
may incur costs in connection with conversions between various currencies. The
Underlying Funds will conduct their foreign currency exchange transactions
either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market, or through entering into forward contracts to purchase
or sell foreign currencies ("Forwards" or "forward contracts") and foreign
currency futures contracts.
A forward contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
The Underlying Funds generally will not enter into a forward contract with a
term greater than one year. A forward contract generally has no deposit
requirement, and no commissions are charged at any stage for such trades.
The Underlying Funds may enter into forward contracts in several circumstances.
When an Underlying Fund enters into a contract for the purchase or sale of a
security denominated in a foreign currency, or when an Underlying Fund
anticipates the receipt in a foreign currency of dividends or interest payments
on a security which it holds, the Underlying Fund may desire to "lock-in" the
U.S. dollar price of the security or the U.S. dollar equivalent of such dividend
or interest payment, as the case may be. By entering into a forward contract for
a fixed amount of dollars, for the purchase or sale of the amount of foreign
currency involved in the underlying transactions, each Underlying Fund will be
able to protect itself against a possible loss resulting from an adverse change
in the relationship between the U.S. dollar and the subject foreign currency
during the period between the date on which the security is purchased or sold,
or on which the dividend or interest payment is declared, and the date on which
such payments are made or received.
Additionally, when any of the Underlying Funds anticipates that the currency of
a particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract for a fixed amount of dollars, to
sell the amount of foreign currency approximating the value of some or all of
such Underlying Fund's securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved generally will not be possible since the future value of securities in
foreign currencies will change as a consequence of market movements in the value
of these securities between the date on which the forward contract is entered
into and the date it matures. The projection of short-term currency market
movement is
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extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. None of the Underlying Funds intend to enter into
such forward contracts to protect the value of portfolio securities on a
continuous basis.
An Underlying Fund may also combine forward contracts with investments in
securities denominated in other currencies in order to achieve desired credit
and currency exposures. Such combinations are generally referred to as synthetic
securities. For example, in lieu of purchasing a foreign Fixed Income Security,
an Underlying Fund may purchase a U.S. dollar-denominated security and at the
same time enter into a forward contract to exchange U.S. dollars for the
contract's underlying currency at a future date. By matching the amount of U.S.
dollars to be exchanged with the anticipated value of the U.S.
dollar-denominated security, an Underlying Fund may be able to lock in the
foreign currency value of the security and adopt a synthetic investment position
reflecting the credit quality of the U.S. dollar-denominated security. There is
a risk in adopting a synthetic investment position to the extent that the value
of a security denominated in U.S. dollars or other foreign currency is not
exactly matched with an Underlying Fund's obligation under the forward contract.
On the date of maturity, an Underlying Fund may be exposed to some risk of loss
from fluctuations in that currency. Although MSAM or MAS will attempt to hold
such mismatching to a minimum, there can be no assurance that they will be able
to do so. When an Underlying Fund enters into a forward contract for purposes of
creating a synthetic security, it will generally be required to hold liquid
assets in a segregated account with a daily value at least equal to its
obligation under the forward contract.
Under normal circumstances, consideration of the prospect for currency parities
will be incorporated into the long-term investment decisions made with regard to
overall diversification strategies. However, MSAM and MAS believe that it is
important to have the flexibility to enter into such forward contracts when they
determine that the best interests of each Underlying Fund will thereby be
served. Except under circumstances where a segregated account is not required
under the 1940 Act or the rules adopted thereunder, the Underlying Fund's
custodian will place liquid, unencumbered assets, the value of which is marked
to market daily, into a segregated account of an Underlying Fund in an amount
equal to the value of such Underlying Fund's total assets committed to the
consummation of forward contracts. If the value of the securities placed in the
segregated account declines, additional cash or securities will be placed in the
account on a daily basis so that the value of the account will be equal to the
amount of such Underlying Fund's commitments with respect to such Forwards.
At the maturity of a forward contract, a Portfolio may either accept or make
delivery of the currency specified in the contract or, prior to maturity, enter
into a closing purchase transaction involving the purchase or sale of an
offsetting contract. Closing purchase transactions with respect to Forwards are
usually effected with the currency trader who is a party to the original forward
contract. An Underlying Fund will only enter into such a forward contract if it
is expected that there will be a liquid market in which to close out such
contract. There can, however, be no assurance that such a liquid market will
exist in which to close a forward contract, in which case the Underlying Fund
may suffer a loss.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly, it
may be necessary for an Underlying Fund to purchase additional foreign currency
on the spot market (and bear the expense of such purchase) if the market value
of the security is less than the amount of foreign currency that such Underlying
Fund is obligated to deliver and if a decision is made to sell the security and
make delivery of the foreign currency.
If an Underlying Fund retains the portfolio security and engages in an
offsetting transaction, such Underlying Fund will incur a gain or a loss (as
described below) to the extent that there has been movement in forward contract
prices. Should Forward prices decline during the period between an Underlying
Fund entering into a forward contract for the sale of a foreign currency and the
date it enters into an offsetting contract for the purchase of the foreign
currency, such Underlying Fund will realize a gain to the extent that the price
of the currency it has agreed to sell exceeds the price of the currency it has
agreed to purchase. Should Forward prices increase, such Underlying Fund would
suffer a loss to the extent that the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
The Underlying Funds are not required to enter into such transactions with
regard to their foreign currency-denominated securities. It also should be
realized that this method of protecting the value of portfolio securities
against a decline in the value of a currency does not eliminate fluctuations in
the underlying prices of the securities. It simply establishes a rate of
exchange which one can achieve at some future point in time. Additionally,
although forward contracts tend to minimize the risk of loss due to a decline in
the value of the hedged currency, at the same time, they tend to limit any
potential gain which might result should the value of such currency increase.
The Underlying Funds may also use foreign currency futures contracts and options
on foreign currency futures contracts for purposes similar to those described
for Forwards. Foreign currency futures contracts traded in the United States are
traded on regulated futures exchanges.
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An Underlying Fund will incur brokerage fees when it purchases or sells foreign
currency futures contracts and it will be required to maintain margin deposits.
Parties to a foreign currency futures contract must make initial margin deposits
to secure performance of the contract, which generally range from 2% to 5% of
the contract price. There also are requirements to make "variation" margin
deposits as the value of the futures contract fluctuates. Foreign currency
futures contracts and options on foreign currency futures contracts will be used
only as a protective measure against the effects of fluctuating rates of
currency exchange and exchange control regulations. While foreign currency
futures contracts and options on foreign currency futures contracts may limit
losses to the Underlying Fund as a result of exchange rate fluctuation, they
will also limit any gains that may otherwise have been realized.
SPECIAL RISKS ASSOCIATED WITH FORWARD CONTRACTS, FOREIGN CURRENCY FUTURES
CONTRACTS AND OPTIONS THEREON AND OPTIONS ON FOREIGN CURRENCIES. Transactions in
forward contracts, as well as foreign currency futures contracts and options
thereon, are subject to the risk of governmental actions affecting trading in or
the prices of currencies underlying such contracts, which could restrict or
eliminate trading and could have a substantial adverse effect on the value of
positions held by each Underlying Fund permitted to engage in such hedging
transactions. In addition, the value of such positions could be adversely
affected by a number of other complex political and economic factors applicable
to the countries issuing the underlying currencies.
Furthermore, unlike trading in most other types of instruments, there is no
systematic reporting of last sale information with respect to the foreign
currencies underlying forward contracts, futures contracts and options. As a
result, the available information on which an Underlying Fund's trading systems
will be based may not be as complete as the comparable data on which such
Underlying Fund makes investment and trading decisions in connection with other
securities and transactions. Moreover, because the foreign currency market is a
global, twenty-four hour market, events could occur on that market which will
not be reflected in the Forward, futures or options markets until the following
day, thereby preventing an Underlying Fund from responding to such events in a
timely manner.
Settlements of over-the-counter forward contracts or of the exercise of foreign
currency options generally must occur within the country issuing the underlying
currency, which in turn requires parties to such contracts to accept or make
delivery of such currencies in conformity with any United States or foreign
restrictions and regulations regarding the maintenance of foreign banking
relationships, fees, taxes or other charges.
Unlike currency futures contracts and exchange-traded options, options on
foreign currencies and forward contracts are not traded on contract markets
regulated by the Commodity Futures Trading Commission ("CFTC"), a U.S.
government agency or (with the exception of certain foreign currency options)
the SEC. In an over-the-counter trading environment, many of the protections
associated with transactions on exchanges will not be available. For example,
there are no daily price fluctuation limits, and adverse market movements could
therefore continue to an unlimited extent over a period of time. Although the
purchaser of an option cannot lose more than the amount of the premium plus
related transaction costs, this entire amount could be lost. Moreover, an option
writer could lose amounts substantially in excess of its initial investment due
to the margin and collateral requirements associated with such option positions.
Similarly, there is no limit on the amount of potential losses on forward
contracts to which an Underlying Fund is a party.
In addition, over-the-counter transactions can only be entered into with a
financial institution willing to take the opposite side, as principal, of an
Underlying Fund's position unless the institution acts as broker and is able to
find another counterparty willing to enter into the transaction with such
Underlying Fund. Where no such counterparty is available, it will not be
possible to enter into a desired transaction. There also may be no liquid
secondary market in the trading of over-the-counter contracts, and an Underlying
Fund may be unable to close out options purchased or written, or forward
contracts entered into, until their exercise, expiration or maturity. This in
turn could limit an Underlying Fund's ability to realize profits or to reduce
losses on open positions and could result in greater losses.
Furthermore, over-the-counter transactions are not backed by the guarantee of an
exchange's clearing corporation. An Underlying Fund will therefore be subject to
the risk of default by, or the bankruptcy of, the financial institution serving
as its counterparty. One or more of such institutions also may decide to
discontinue its role as market-maker in a particular currency, thereby
restricting an Underlying Fund's ability to enter into desired hedging
transactions. An Underlying Fund will enter into over-the-counter transactions
only with parties whose creditworthiness has been reviewed and found
satisfactory by MSAM or MAS.
Over-the-counter options on foreign currencies, like exchange-traded commodity
futures contracts and commodity option contracts, are within the exclusive
regulatory jurisdiction of the CFTC. The CFTC currently permits the trading of
such options, but only subject to a number of conditions regarding the
commercial purpose of the purchaser of such options. Forward contracts and
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currency swaps are not presently subject to regulation by the CFTC, although the
CFTC may in the future assert or be granted authority to regulate such
instruments. In such event, an Underlying Fund's ability to utilize forward
contracts and currency swaps in the manner set forth above and in the Prospectus
could be restricted.
Options on foreign currencies traded on a national securities exchange are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency options positions entered into on a national securities
exchange are cleared and guaranteed by The Options Clearing Corporation ("OCC"),
thereby reducing the risk of counterparty default. Further, a liquid secondary
market in options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting an
Underlying Fund to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described
above, as well as the risks regarding adverse market movements, margining of
options written, the nature of the foreign currency market, possible
intervention by governmental authorities and the effect of other political and
economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example,
exercise and settlement of such options must be made exclusively through OCC,
which has established banking relationships in applicable foreign countries for
this purpose. As a result, OCC may, if it determines that foreign governmental
restrictions or taxes would prevent the orderly settlement of foreign currency
option exercises, or would result in undue burdens on OCC or its clearing
member, impose special procedures for exercise and settlement, such as technical
changes in the mechanics of delivery of currency, the fixing of dollar
settlement prices or prohibitions on exercise.
DERIVATIVES
Each of the Underlying Funds may use Derivatives under a number of different
circumstances to further their investment objectives. The Underlying Funds may
use Derivatives when doing so provides more liquidity than the direct purchase
of the securities underlying such Derivatives. For example, an Underlying Fund
may purchase Derivatives to quickly gain exposure to a market in response to
changes in the Underlying Fund's asset allocation policy or upon the inflow of
investable cash when the Derivative provides greater liquidity than the
underlying securities market. An Underlying Fund may also use Derivatives when
it is restricted from directly owning the underlying securities due to foreign
investment restrictions or other reasons or when doing so provides a price
advantage over purchasing the underlying securities directly, either because of
a pricing differential between the Derivatives and securities markets or because
of lower transaction costs associated with the Derivatives transaction.
Derivatives may also be used by an Underlying Fund for hedging purposes and
under other circumstances in which an Underlying Fund's portfolio managers
believe it advantageous to do so consistent with the Underlying Fund's
investment objective. The Underlying Funds will not, however, use Derivatives in
a manner that creates leverage, except to the extent that the use of leverage is
expressly permitted by a particular Underlying Fund's investment policies, and
then only in a manner consistent with such policies. Some of the Derivatives in
which the Underlying Funds may invest and the risks related thereto are
described in more detail below.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Underlying Funds
generally may enter into futures contracts and options on futures contracts for
the purpose of remaining fully invested and reducing transactions costs and for
a number of more specialized purposes. The Underlying Funds may sell securities
index futures contracts and/or options thereon in anticipation of or during a
market decline to attempt to offset the decrease in market value of investments
in its portfolio, or purchase securities index futures in order to gain market
exposure. The Underlying Funds may engage in transactions in interest rate
futures transactions involving an obligation to purchase or sell a specific debt
security, instrument or basket thereof at a specified future date at a specified
price to hedge their holdings of debt instruments against future changes in
interest rates. The value of the contract rises and falls inversely with changes
in interest rates. The Underlying Funds may enter into financial futures
contracts relating to financial instruments, such as U.S. Government Securities,
foreign currencies, and certificates of deposit involving an obligation to
purchase or sell a specific security, instrument or basket thereof at a
specified future date at a specified price. Like interest rate futures
contracts, the value of financial futures contracts rises and falls inversely
with changes in interest rates. The Underlying Funds may also enter into futures
contracts for hedging purposes. Futures contracts provide for the future sale by
one party and purchase by another party of a specified amount of a specific
security at a specified future time and at a specified price. Futures contracts,
which are standardized as to maturity date and underlying financial instrument,
are traded on national futures exchanges. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the CFTC.
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Although futures contracts by their terms call for actual delivery or acceptance
of the underlying securities or currencies, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery.
Closing out an open futures position is done by taking an opposite position
("buying" a contract which has previously been "sold" or "selling" a contract
previously "purchased") in an identical contract to terminate the position.
Brokerage commissions are incurred when a futures contract is bought or sold.
Futures contracts on securities indices or other indices do not require the
physical delivery of securities, but merely provide for profits and losses
resulting from changes in the market value of a contract to be credited or
debited at the close of each trading day to the respective accounts of the
parties to the contract. On the contract's expiration date a final cash
settlement occurs and the futures position is simply closed out. Changes in the
market value of a particular futures contract reflect changes in the level of
the index on which the futures contract is based.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold for prices that
may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is marked
to market daily. If the futures contract price changes to the extent that the
margin on deposit does not satisfy margin requirements, payment of an additional
"variation" margin will be required. Conversely, a change in the contract value
may reduce the required margin, resulting in a repayment of excess margin to the
contract holder. Variation margin payments are made to and from the futures
broker for as long as the contract remains open. The Underlying Funds expect to
earn interest income on their margin deposits. With respect to each long
position in a futures contract or option thereon, the underlying commodity value
of such contract will always be covered by cash and cash equivalents set aside
plus accrued profits held at the futures commission merchant.
The Underlying Funds may purchase and write call and put options on futures
contracts which are traded on a U.S. exchange and enter into closing
transactions with respect to such options to terminate an existing position. In
addition, an Underlying Fund may purchase and write call and put options on
futures that are traded on an international exchange, traded over-the-counter or
which are synthetic options or futures or equity swaps, and may enter into
closing transactions with respect to such options to terminate an existing
position. An option on a futures contract gives the purchaser the right (in
return for the premium paid) to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the term of the option. Upon
exercise of the option, the accumulated balance in the writer's futures margin
account is delivered to the option holder, which represents the amount by which
the market price of the futures contract at the time of exercise exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract.
The Underlying Funds will purchase and write options on futures contracts for
identical purposes to those set forth above for the purchase of a futures
contract (purchase of a call option or sale of a put option) and the sale of a
futures contract (purchase of a put option or sale of a call option), or to
close out a long or short position in futures contracts.
Traders in futures contracts may be broadly classified as either "hedgers" or
"speculators". Hedgers use the futures markets primarily to offset unfavorable
changes in the value of securities otherwise held for investment purposes or
expected to be acquired by them. Speculators are less inclined to own the
underlying securities with futures contracts which they trade, and use futures
contracts with the expectation of realizing profits from market fluctuations.
Although techniques other than the sale and purchase of futures contracts could
be used to control the Underlying Funds' exposure to market fluctuations, the
use of futures contracts may be a more effective means of hedging this exposure.
While the Underlying Funds will incur commission expenses in both opening and
closing out futures positions, these costs are lower than transaction costs
incurred in the purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. Regulations of the CFTC applicable
to the Underlying Funds permit the use of futures transactions for bona fide
hedging purposes without regard to the percentage of assets committed to futures
margins and for options premiums. Under rules adopted by the CFTC, the
Underlying Funds may enter into futures contracts and options thereon for both
hedging and non-hedging purposes, provided that not more than 5% of such
Underlying Fund's total assets at the time of entering the transaction are
required as margin and option premiums to secure obligations under such
contracts
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relating to non-hedging activities. An MSIF Underlying Fund will limit its use
of futures contracts and other Derivatives for non-hedging purposes to 331/3% of
its total assets measured by the aggregate notional amount of its outstanding
Derivatives instruments. An MAS Underlying Fund will not enter into futures
contracts to the extent that its outstanding obligations to purchase securities
under these contracts in combination with its outstanding obligations with
respect to options transactions would exceed 50% of its total assets. The risk
that an Underlying Fund will be unable to close out a futures position or
options contract will be minimized by only entering into futures contracts or
options transactions for which there appears to be a liquid exchange or
secondary market. The risk of loss in trading on futures contracts in some
strategies can be substantial, due both to the low margin deposits required and
the extremely high degree of leverage involved in futures pricing. The
Underlying Funds will maintain assets sufficient to meet their respective
obligations under such contracts in a segregated account with the custodian bank
or will otherwise comply with the SEC's position on asset coverage.
RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contracts at any specific time. Thus, it may
not be possible to close a futures position. In the event of adverse price
movements, the Underlying Funds would continue to be required to make daily cash
payments to maintain their required margin. In such situations, if an Underlying
Fund has insufficient cash, it may have to sell portfolio securities to meet its
daily margin requirement at a time when it may be disadvantageous to do so. In
addition, an Underlying Fund may be required to make delivery of the instruments
underlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on an Underlying Fund's
ability to effectively hedge. There currently are limited securities index
futures and options on such futures in many countries, particularly emerging
countries. The nature of the strategies adopted by MSAM or MAS, and the extent
to which those strategies are used, may depend on the development of such
markets.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if, at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. However, because the Underlying
Funds may engage in futures strategies only for hedging purposes, MSAM and MAS
do not believe that the Underlying Funds are subject to the risks of loss
frequently associated with futures transactions. An Underlying Fund would
presumably have sustained comparable losses if, instead of the futures contract,
it had invested in the underlying security or currency and sold it after the
decline.
Utilization of futures transactions by the Underlying Funds does involve the
risk of imperfect or no correlation where the securities underlying futures
contracts have different maturities than the portfolio securities or currencies
being hedged. It is also possible that an Underlying Fund could both lose money
on futures contracts and also experience a decline in value of its portfolio
securities. There is also the risk of loss by an Underlying Fund of margin
deposits in the event of bankruptcy of a broker with whom the Underlying Fund
has an open position in a futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses.
OPTIONS. The Underlying Funds may seek to increase their returns or may hedge
their portfolio investments through options transactions with respect to
securities, instruments, indices or baskets thereof in which such Underlying
Funds may invest, as well as with respect to foreign currency. Additional
information with respect to option transactions is set forth below. Call and put
options on Equity Securities are listed on various U.S. and foreign securities
exchanges ("listed options") and are written in over-the-counter transactions
("OTC "). The Underlying Funds may engage in transactions in options which are
traded on recognized exchanges or over-the-counter. There
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currently are limited options markets in many countries, particularly emerging
countries such as Latin American countries, and the nature of the strategies
adopted by MSAM or MAS and the extent to which those strategies are used will
depend on the development of such option markets.
Listed options are issued or guaranteed by the exchange on which they trade or
by a clearing corporation, such as OCC in the United States. Ownership of a
listed call option gives the fund the right to buy from the clearing corporation
or exchange, the underlying security covered by the option at the stated
exercise price (the price per unit of the underlying security or currency) by
filing an exercise notice prior to the expiration date of the option. The writer
(seller) of the option would then have the obligation to sell to the clearing
corporation or exchange, the underlying security or currency at that exercise
price prior to the expiration date of the option, regardless of its current
market price. Ownership of a listed put option would give an Underlying Fund the
right to sell the underlying security or currency to the clearing corporation or
exchange at the stated exercise price. Upon notice of exercise of the put
option, the writer of the option would have the obligation to purchase the
underlying security from the clearing corporation or exchange at the exercise
price.
OTC options are purchased from or sold (written) to dealers or financial
institutions which have entered into direct agreements with each Underlying
Fund. With OTC options, such variables as expiration date exercise price and
premium will be agreed upon between each Underlying Fund and the transactions
dealer, without the intermediary of a third party such as a clearing corporation
or exchange. If the transacting dealer fails to make or take delivery of the
securities underlying an option it has written, in accordance with the terms of
that option, each Underlying Fund would lose the premium paid for the option as
well as any anticipated benefit of the transaction.
COVERED CALL WRITING. Each of the Underlying Funds may write (i.e., sell)
covered call options on portfolio securities. By doing so, the Underlying Fund
would become obligated during the term of the option to deliver the securities
underlying the option should the option holder choose to exercise the option
before the option's termination date. In return for the call it has written,
each Underlying Fund will receive from the purchaser (or option holder) a
premium which is the price of the option, less a commission charged by a broker.
Each Underlying Fund will keep the premium regardless of whether the option is
exercised. The Underlying Funds may only write options that are "covered." A
covered call option means that so long as the Underlying Fund is obligated as
the writer of the option, it will earmark or segregate sufficient liquid assets
to cover its obligations under the option or own (i) the underlying security or
instrument subject to the option, (ii) securities or instruments convertible or
exchangeable without the payment of any consideration into the security or
instrument subject to the option, or (iii) a call option on the same underlying
security with a strike price no higher than the price at which the underlying
instrument was sold pursuant to a short option position. When the Underlying
Fund writes covered call options, it augments its income by the premiums
received and is thereby hedged to the extent of that amount against a decline in
the price of the underlying securities and the premiums received will offset a
portion of the potential loss incurred by the Underlying Fund if the securities
underlying the options are ultimately sold by the Underlying Fund at a loss.
However, during the option period, each Underlying Fund has, in return for the
premium on the option, given up the opportunity for capital appreciation above
the exercise price should the market price of the underlying security increase,
but has retained the risk of loss should the price of the underlying security
decline. The size of premiums will fluctuate with varying market conditions.
COVERED PUT WRITING. Each of the Underlying Funds may write covered put options
on portfolio securities. By doing so, the Underlying Fund incurs an obligation
to buy the security 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 (certain listed and OTC options written by the Underlying Fund will be
exercisable by the purchaser only on a specific date). Generally, a put option
is "covered" if the Underlying Fund maintains in a segregated account an amount
of cash, U.S. Government Securities or other high grade debt obligations equal
to the exercise price of the option or if the Underlying Fund holds a put option
on the same underlying security with a similar or higher exercise price.
Each of the Underlying Funds will write put options (i) to receive the premiums
paid by purchasers; (ii) when MSAM or MAS wishes to purchase the security
underlying the option at a price lower than its current market price, in which
case it will write the covered put at an exercise price reflecting the lower
purchase price sought; and (iii) to close out a long put option position.
PURCHASE OF PUT AND CALL OPTIONS. Each of the Underlying Funds may purchase
listed or OTC put or call options on its portfolio securities. When each
Underlying Fund purchases a call option it acquires the right to purchase a
designated security at a designated price (the "exercise price"), and when each
Underlying Fund purchases a put option it acquires the right to sell a
designated security at the exercise price, in each case on or before a specified
date (the "termination date"), usually not more than nine months from the date
the option is issued.
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Each Underlying 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. Each Underlying Fund may purchase put options on
securities which it holds in its portfolio only to protect itself against a
decline in the value of the security. If the value of the underlying security
were to fall below the exercise price of the put purchased in an amount greater
than the premium paid for the option, each Underlying Fund would incur no
additional loss. Each Underlying Fund may also purchase put options to close out
written put positions in a manner similar to call option closing purchase
transactions.
The amount each Underlying Fund pays to purchase an option is called a
"premium," and the risk assumed by the Underlying Fund when it purchases an
option is the loss of this premium. Because the price of an option tends to move
with that of its underlying security, if an Underlying Fund is to make a profit,
the price of the underlying security must change and the change must be
sufficient to cover the premium and commissions paid. A price change in the
security underlying the option does not assure a profit since prices in the
options market may not always reflect such a change.
STRUCTURED SECURITIES. The Underlying Funds may invest a portion of their assets
in interests in entities organized and operated solely for the purpose of
restructuring the investment characteristics of sovereign debt obligations. This
type of restructuring involves the deposit with or purchase by an entity, such
as a corporation or trust, of specified instruments (such as commercial bank
loans or Brady Bonds) and the issuance by that entity of one or more classes of
securities ("Structured Securities") backed by, or representing interests in,
the underlying instruments. The cash flow on the underlying instruments may be
apportioned among the newly issued Structured Securities to create securities
with different investment characteristics such as varying maturities, payment
priorities and interest rate provisions, and the extent of the payments made
with respect to Structured Securities is dependent on the extent of the cash
flow on the underlying instruments. Because Structured Securities of the type in
which each Underlying Fund anticipates it will invest typically involve no
credit enhancement, their credit risk generally will be equivalent to that of
the underlying instruments. Each Underlying Fund is permitted to invest in a
class of Structured Securities that is either subordinated or unsubordinated to
the right of payment of another class. Subordinated Structured Securities
typically have higher yields and present greater risks than unsubordinated
Structured Securities. Certain issuers of Structured Securities may be deemed to
be "investment companies" as defined in the 1940 Act. As a result, each
Underlying Fund's investment in these Structured Securities may be limited by
restrictions contained in the 1940 Act. Structured Securities are typically sold
in private placement transactions, and there currently is no active trading
market for Structured Securities.
SWAP CONTRACTS. The Underlying Funds may enter into swap contracts. A swap is an
agreement to exchange the return generated by one instrument for the return
generated by another instrument. The payment streams are calculated by reference
to a specified index and agreed upon notional amount. The term "specified index"
includes currencies, fixed interest rates, prices, total return on interest rate
indices, fixed income indices, stock indices and commodity indices (as well as
amounts derived from arithmetic operations on these indices). For example, an
Underlying Fund may agree to swap the return generated by a fixed income index
for the return generated by a second fixed income index. The currency swaps in
which the Underlying Funds may enter will generally involve an agreement to pay
interest streams in one currency based on a specified index in exchange for
receiving interest streams denominated in another currency. Such swaps may
involve initial and final exchanges that correspond to the agreed upon notional
amount.
The swaps in which the Underlying Funds may engage also include rate caps,
floors and collars under which one party pays a single or periodic fixed
amount(s) (or premium), and the other party pays periodic amounts based on the
movement of a specified index. Swaps do not involve the delivery of securities,
other underlying assets, or principal. Accordingly, the risk of loss with
respect to swaps is limited to the net amount of payments that an Underlying
Fund is contractually obligated to make. If the other party to a swap defaults,
an Underlying Fund's risk of loss consists of the net amount of payments that an
Underlying Fund is contractually entitled to receive. Currency swaps usually
involve the delivery of the entire principal value of one designated currency in
exchange for the other designated currency. Therefore, the entire principal
value of a currency swap is subject to the risk that the other party to the swap
will default on its contractual delivery obligations. If there is a default by
the counterparty, the Underlying Funds may have contractual remedies pursuant to
the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid.
Swaps that include caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than "traditional" swaps.
An Underlying Fund's obligations under a swap agreement will be accrued daily
(offset against any amounts owing to the Underlying Fund) and any accrued but
unpaid net
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amounts owed to a swap counterparty will be covered by the maintenance of a
segregated account consisting of unencumbered liquid assets, to avoid any
potential leveraging of the Underlying Fund. To the extent that these swaps,
caps, floors, and collars are entered into for hedging purposes, MSAM and MAS
believe such obligations do not constitute "senior securities" under the 1940
Act and, accordingly, will not treat them as being subject to an Underlying
Fund's borrowing restrictions. The Underlying Funds may enter into OTC
Derivatives transactions (swaps, caps, floors, puts, etc., but excluding foreign
exchange contracts) with counterparties that are approved by MSAM or MAS in
accordance with guidelines established by the Underlying Funds' Boards of
Directors. These guidelines provide for a minimum credit rating for each
counterparty and various credit enhancement techniques (for example,
collateralization of amounts due from counterparties) to limit exposure to
counterparties that have a rating below AA.
The use of swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If MSAM or MAS is incorrect in its forecasts of market
values, interest rates, and currency exchange rates, the investment performance
of the Underlying Funds would be less favorable than it would have been if this
investment technique were not used.
OTHER SECURITIES
BORROWING AND OTHER FORMS OF LEVERAGE. Certain of the Underlying Funds are
permitted to borrow money for investment purposes. Borrowing for investment
purposes creates leverage which is a speculative characteristic. Although these
Underlying Funds are authorized to borrow, they will do so only when MSAM or MAS
believes that borrowing will benefit the Underlying Fund after taking into
account considerations such as the costs of borrowing and the likely investment
returns on securities purchased with borrowed monies.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX. The MSIF International
Magnum Portfolio uses the Morgan Stanley Capital International EAFE (Europe,
Australia and the Far East) Index (the "EAFE Index") as a tool for investment
decisions. The investment objective of the MSIF International Magnum
Portfolio is to provide long-term capital appreciation. The MSIF
International Magnum Portfolio seeks to achieve its objective by investing
primarily in Equity Securities of non-U.S. issuers domiciled in EAFE
countries (defined below). After establishing regional allocation strategies,
MSAM selects Equity Securities among issuers of a region. The MSIF
International Magnum Portfolio invests in countries comprising the EAFE Index
(each, an "EAFE country").
The EAFE Index is one of seven international indices, twenty national indices
and thirty-eight international industry indices making up the Morgan Stanley
Capital International Indices. The EAFE Index is based on the share prices of
1,066 companies listed on the stock exchanges of Europe, Australia, New
Zealand and the Far East. "Europe" includes Austria, Belgium, Denmark,
Finland, France, Germany, Italy, the Netherlands, Norway, Spain, Sweden,
Switzerland and the United Kingdom. "Far East" includes Japan, Hong Kong and
Singapore/Malaysia.
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED SECURITIES.
The Underlying Funds may invest in securities that are neither listed on a stock
exchange nor traded over-the-counter, including privately placed securities. As
a result of the absence of a public trading market for these securities, they
may be less liquid than publicly traded securities. Although these securities
may be resold in privately negotiated transactions, the prices realized from
these sales could be less than those originally paid by the Underlying Fund or
less than what may be considered the fair value of such securities. Furthermore,
companies whose securities are not publicly traded may not be subject to the
disclosure and other investor protection requirements which might be applicable
if their securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Underlying Fund may be required to bear the expenses of
registration.
SECURITIES LENDING. Each Underlying Fund may lend its investment securities to
qualified institutional investors who need to borrow securities in order to
complete certain transactions, such as covering short sales, avoiding failures
to deliver securities or completing arbitrage operations. By lending its
investment securities, an Underlying Fund attempts to increase its net
investment income through the receipt of interest on the loan. Any gain or loss
in the market price of the securities loaned that might occur during the term of
the loan would be for the account of the Underlying Fund. Each Underlying Fund
may lend its investment securities to qualified brokers, dealers, domestic and
foreign banks or other financial institutions, so long as the terms, structure
and the aggregate amount of such loans are not inconsistent with the 1940 Act or
the Rules and Regulations or interpretations of the SEC thereunder, which
currently require that (a) the borrower pledge and maintain with the Underlying
Fund collateral consisting of liquid, unencumbered assets having a value at all
times not less than 100% of the value of the securities loaned, (b) the borrower
add to such collateral whenever the price of the securities loaned rises (i.e.,
the borrower "marks to the market" on a daily basis), (c) the loan be made
subject to termination by the Underlying Fund at any time, and (d) the
Underlying Fund receive reasonable interest on the loan (which may include the
Underlying Fund investing any
18
<PAGE>
cash collateral in interest bearing short-term investments), any distributions
on the loaned securities and any increase in their market value. There may be
risks of delay in recovery of the securities or even loss of rights in the
collateral should the borrower of the securities fail financially. However,
loans will only be made to borrowers deemed by MSAM or MAS to be of good
standing and when, in the judgment of MSAM or MAS, the consideration which can
be earned currently from such securities loans justifies the attendant risk. All
relevant facts and circumstances, including the creditworthiness of the broker,
dealer or institution, will be considered in making decisions with respect to
the lending of securities, subject to review by the Board of Directors of the
Underlying Fund.
At the present time, the staff of the SEC does not object if an investment
company pays reasonable negotiated fees in connection with loaned securities, so
long as such fees are set forth in a written contract and approved by the
investment company's Board of Directors. In addition, voting rights may pass
with the loaned securities, but if a material event will occur affecting an
investment on loan, the loan must be called and the securities voted.
SHORT SALES. The Underlying Funds may from time to time sell securities short
consistent with applicable legal requirements. A short sale is a transaction in
which the Underlying Fund would sell securities it owns or has the right to
acquire at no added cost (i.e., "against the box") or does not own (but has
borrowed) in anticipation of a decline in the market price of the securities.
When the Underlying Fund makes a short sale of borrowed securities, the proceeds
it receives from the sale will be held on behalf of a broker until the
Underlying Fund replaces the borrowed securities. To deliver the securities to
the buyer, the Underlying Fund will need to arrange through a broker to borrow
the securities and, in so doing, the Underlying Fund will become obligated to
replace the securities borrowed at their market price at the time of
replacement, whatever that price may be. The Underlying Fund may have to pay a
premium to borrow the securities and must pay any dividends or interest payable
on the securities until they are replaced.
The Underlying Fund's obligation to replace the securities borrowed in
connection with a short sale will be secured by collateral deposited with the
broker that consists of liquid unencumbered assets. In addition, if the short
sale is not "against the box," the Underlying Fund will place in a segregated
account with its custodian, or designated sub-custodian, an amount of
unencumbered liquid assets equal to the difference, if any, between (1) the
market value of the securities sold at the time they were sold short and (2) any
unencumbered liquid assets deposited as collateral with the broker in connection
with the short sale (not including the proceeds of the short sale). Until it
replaces the borrowed securities, the Underlying Fund will maintain the
segregated account daily at a level so that (1) the amount deposited in the
account plus the amount deposited with the broker (not including the proceeds
from the short sale) will equal the current market value of the securities sold
short and (2) the amount deposited in the account plus the amount deposited with
the broker (not including the proceeds from the short sale) will not be less
than the market value of the securities at the time they were sold short.
Short sales by the Underlying Fund involve certain risks and special
considerations. Possible losses from short sales differ from losses that could
be incurred from a purchase of a security, because losses from short sales may
be unlimited, whereas losses from purchases can equal only the total amount
invested.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of certain federal income tax consequences is based on
the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
issued thereunder as in effect on the date of this Statement of Additional
Information. New legislation, as well as administrative changes or court
decisions, may significantly change the conclusions expressed herein, and may
have a retroactive effect with respect to the transactions contemplated herein.
Each Portfolio within the Fund is generally treated as a separate corporation
for federal income tax purposes, and thus the provisions of the Code generally
will be applied to each Portfolio separately, rather than to the Fund as a
whole.
The Fund intends that each of its Portfolios qualify and elect to be treated for
each taxable year as a regulated investment company ("RIC") under Subchapter M
of the Code. Accordingly, each Portfolio must, among other things, (a) derive at
least 90% of its gross income each taxable year from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of stock, securities or foreign currencies, and certain other
related income, including, generally, certain gains from options, futures and
forward contracts; (b) derive less than 30% of its gross income each taxable
year from the sale or other disposition of the following items if held less than
three months (i) stock or securities, (ii) options, futures or forward contracts
(other than options, futures or forward contracts on foreign currencies), and
(iii) foreign currencies (or options, futures, or forward contracts on foreign
currencies) that are not directly related to the Portfolio's principal business
of investing in stocks
19
<PAGE>
or securities (or options or futures with respect to stock or securities) (the
"short-short test"), and (c) diversify its holdings so that, at the end of each
fiscal quarter of the Portfolio's taxable year, (i) at least 50% of the market
value of the Portfolio's total assets is represented by cash and cash items,
United States Government securities, securities of other RICs, and other
securities, with such other securities limited, in respect to any one issuer, to
an amount not greater than 5% of the value of the Portfolio's total assets or
10% of the outstanding voting securities of such issuer, and (ii) not more than
25% of the value of its total assets is invested in the securities (other than
United States Government securities or securities of other RICs) of any one
issuer or two or more issuers which the Portfolio controls and which are engaged
in the same, similar, or related trades or business. For purposes of the 90% of
gross income requirement described above, foreign currency gains which are not
directly related to a Portfolio's principal business of investing in stock or
securities (or options or futures with respect to stock or securities) may be
excluded from income that qualifies under the 90% requirement.
In addition to the requirements described above, in order to qualify as a RIC,
each Portfolio must distribute at least 90% of each Portfolio's net investment
income (which generally includes dividends, taxable interest, and the excess of
net short-term capital gains over net long-term capital losses less operating
expenses) and at least 90% of its net tax-exempt interest income, if any, to
shareholders. If a Portfolio meets all of the RIC requirements, it will not be
subject to federal income tax on any of its net investment income or capital
gains that it distributes to shareholders.
If a Portfolio fails to qualify as a RIC for any year, all of its income will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to
shareholders as ordinary dividends to the extent of the Portfolio's accumulated
earnings and profits. Such distributions will be eligible for the corporate
dividends received deduction.
The Code imposes a non-deductible 4% excise tax on regulated investment
companies that do not distribute in each calendar year an amount equal to 98% of
their ordinary income for the calendar year plus 98% of their capital gain net
income for the one-year period ending on October 31 of such calendar year. The
excise tax is imposed on the undistributed part of this required distribution.
In addition, the balance of such income must be distributed during the next
calendar year to avoid liability for the excise tax in that year. For the
foregoing purposes, a company is treated as having distributed any amount on
which it is subject to income tax for any taxable year ending in such calendar
year. For purposes of the excise tax, a regulated investment company must reduce
its capital gain net income by the amount of any net ordinary loss for the
calendar year (but only to the extent the capital gain net income for the
one-year period ending on October 31 exceeds the net capital gains for such
period). Because each Portfolio intends to distribute all of its income
currently (or to retain, at most, its "net capital gains" and pay tax thereon),
no Portfolio anticipates incurring any liability for this excise tax. However, a
Portfolio may, in certain circumstances, be required to liquidate portfolio
investments in order to make sufficient distributions to avoid excise tax
liability. The liquidation of investments in such circumstances may affect the
ability of the Portfolio to satisfy the Short-Short Gain Test.
Dividends declared by a Portfolio in October, November, or December of any year
and payable to shareholders of record on a date in such month will be deemed to
have been paid by the Portfolio and received by the shareholders on December 31
of that year if paid by the Portfolio at any time during the following January.
Short sales engaged in by a Portfolio may reduce the holding period of property
held by a Portfolio which is substantially identical to the property sold short.
This rule may make it more difficult for the Portfolio to satisfy the
short-short test. This rule may also have the effect of converting capital gains
recognized by the Portfolio from long-term to short-term as well as converting
capital losses recognized by the Underlying Fund from short-term to long- term.
STATE AND LOCAL
Rules of state and local taxation of dividends and capital gains distributions
from a RIC may be different from the rules of federal income taxation described
above. Shareholders are urged to consult their own tax advisers as to the
consequences of federal, state, local, and foreign tax rules affecting an
investment in a Portfolio.
FOREIGN INVESTMENTS
Gains or losses attributable to foreign currency contracts, or to fluctuations
in exchange rates that occur between the time an Underlying Fund accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Underlying Fund actually
collects such receivables or pays such liabilities are treated as ordinary
income or ordinary loss to the Underlying Fund. Similarly, gains or losses on
disposition of debt securities denominated in a foreign currency attributable to
fluctuations in the value of the foreign currency between the date of
acquisition of the security and the date of disposition also are treated as
ordinary gain or loss to the Underlying Fund. These gains
20
<PAGE>
or losses increase or decrease the amount of an Underlying Fund's net investment
income available to be distributed to its shareholders as ordinary income.
Each Underlying Fund that invests in foreign securities may be subject to
foreign withholding taxes with respect to its dividend and interest income from
foreign countries, and an Underlying Fund may be subject to foreign income taxes
with respect to other income. Because not more than 50% in value of an
Underlying Fund's total assets at the close of the taxable year consists of
stock or securities of foreign corporations, a Portfolio may not elect to treat
foreign income taxes imposed on an Underlying Fund for United States federal
income tax purposes as paid directly by its shareholders.
PURCHASE OF SHARES
The purchase price of each Portfolio of the Fund is the net asset value next
determined after the order is received. For each Portfolio of the Fund, an order
received prior to the regular close of the New York Stock Exchange (the "NYSE")
will be executed at the price computed on the date of receipt; and an order
received after the regular close of the NYSE will be executed at the price
computed on the next day the NYSE is open as long as the Fund's transfer agent
receives payment by check or in Federal Funds prior to the regular close of the
NYSE on such day. Shares of the Fund may be purchased on any day the NYSE is
open. The NYSE will be closed on the following days: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day, and on the preceding Friday
or subsequent Monday when any of these holidays falls on a Saturday or Sunday,
respectively.
Each Portfolio reserves the right in its sole discretion to suspend the offering
of its shares and to reject purchase orders when in the judgment of management
such rejection is in the best interest of the Portfolio.
REDEMPTION OF SHARES
REDEMPTIONS. Each Portfolio may suspend redemption privileges or postpone the
date of payment (i) during any period that the NYSE is closed, or trading on the
NYSE is restricted as determined by the SEC, (ii) during any period when an
emergency exists as defined by the rules of the SEC as a result of which it is
not reasonably practicable for a Portfolio to dispose of securities owned by it,
or fairly to determine the value of its assets, and (iii) for such other periods
as the Commission may permit.
DISTRIBUTIONS IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the shareholders of a Portfolio to make a
redemption payment wholly in cash, and subject to applicable agreements with
entities qualified under qualified pension and profit sharing plans, the Fund
may pay any portion of a redemption by distribution in kind of portfolio
securities in lieu of cash. Securities issued in a distribution in kind will be
readily marketable, although shareholders receiving distributions in kind may
incur brokerage commissions when subsequently redeeming shares of those
securities.
INVESTMENT LIMITATIONS
FUNDAMENTAL LIMITATIONS
Each Portfolio has adopted the following restrictions, which are fundamental
policies and may not be changed without the approval of the lesser of: (1) at
least 67% of the voting securities of the Portfolio present at a meeting if the
holders of more than 50% of the outstanding voting securities of the Portfolio
are present or represented by proxy, or (2) more than 50% of the outstanding
voting securities of the Portfolio. Each Portfolio of the Fund will not:
(1) purchase or sell physical commodities, unless acquired as a result of
ownership of securities or other instruments, except this shall not prevent a
Portfolio from purchasing or selling futures contracts or options thereon or
from investing in securities or other instruments backed by physical
commodities;
(2) purchase or sell real estate, although it may purchase or sell securities
of companies that deal in real estate and may purchase and sell securities that
are secured by interests in real estate;
(3) lend any security or make any other loan if, as a result, more than 331/3%
of its total assets would be lent to other parties, but this limitation does not
apply to purchases of debt securities or repurchase agreements;
(4) except with respect to the shares of Underlying Funds, (i) purchase more
than 10% of any class of the outstanding voting securities of any issuer or
(ii) purchase securities of an issuer (except obligations of the U.S. Government
and its agencies and instrumentalities) if as a result, with respect to 75% of
its total assets, more than 5% of the Portfolio's total assets, at market value,
would be invested in the securities of such issuer;
(5) issue senior securities or borrow money, except from banks in an amount
not in excess of 331/3% of its total assets (including the amount borrowed) less
liabilities;
21
<PAGE>
(6) underwrite securities issued by others, except to the extent that a
Portfolio may be considered an underwriter within the meaning of the 1933 Act
in the disposition of restricted securities; and
(7) acquire any securities of companies within one industry if, as a result
of such acquisition, more than 25% of the value of the Portfolio's total
assets would be invested in securities of companies within such industry;
provided, that (i) each Portfolio may invest up to 100% of its assets in
shares of investment companies, and (ii) there shall be no limitation on the
purchase of obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities.
NON-FUNDAMENTAL LIMITATIONS
In addition, each Portfolio of the Fund has adopted non-fundamental investment
limitations as stated below. Such limitations may be changed without shareholder
approval. Each Portfolio of the Fund will not:
(1) sell short (other than "against the box") unless the Portfolio's obligation
is covered by unencumbered liquid assets in a segregated account and by
collateral held by the lending broker; provided that transactions in futures
contracts and options are not deemed to constitute selling securities short;
(2) invest for the purpose of exercising control over management of any
company;
(3) invest its assets in securities of any investment company except for
shares of the Underlying Funds, and as otherwise may be permitted by the
1940 Act;
(4) invest more than an aggregate of 15% of the net assets of the Portfolio,
determined at the time of investment, in illiquid securities;
(5) make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements) that are publicly distributed,
and (ii) by lending its portfolio securities to banks, brokers, dealers and
other financial institutions so long as such loans are not inconsistent with
the 1940 Act or the Rules and Regulations or interpretations of the SEC
thereunder; and
(6) purchase on margin, except for use of short-term credit as may be necessary
for the clearance of purchases and sales of securities, but it may make margin
deposits in connection with transactions in options, futures, and options on
futures.
The percentage limitations contained in these restrictions apply at the time of
purchase of securities. Future Portfolios of the Fund may adopt different
limitations.
Notwithstanding the foregoing fundamental and non-fundamental investment
restrictions, the Underlying Funds in which the Portfolios invest have adopted
certain investment limitations which may be more or less restrictive than those
listed above, thereby permitting a Portfolio to engage in investment strategies
indirectly that are prohibited under the fundamental and non-fundamental
investment limitations listed above. The investment limitations of an Underlying
Fund are located in the Statement of Additional Information for such
Underlying Fund.
DETERMINING MATURITIES OF CERTAIN INSTRUMENTS
Generally, the maturity of a portfolio instrument shall be deemed to be the
period remaining until the date noted on the face of the instrument as the date
on which the principal amount must be paid, or in the case of an instrument
called for redemption, the date on which the redemption payment must be made.
However, instruments having variable or floating interest rates or demand
features may be deemed to have remaining maturities as follows: (a) a government
obligation with a variable rate of interest readjusted no less frequently than
annually may be deemed to have a maturity equal to the period remaining until
the next readjustment of the interest rate; (b) an instrument with a variable
rate of interest, the principal amount of which is scheduled on the face of the
instrument to be paid in one year or less, may be deemed to have a maturity
equal to the period remaining until the next readjustment of the interest rate;
(c) an instrument with a variable rate of interest that is subject to a demand
feature may be deemed to have a maturity equal to the longer of the period
remaining until the next readjustment of the interest rate or the period
remaining until the principal amount can be recovered through demand; (d) an
instrument with a floating rate of interest that is subject to a demand feature
may be deemed to have a maturity equal to the period remaining until the
principal amount can be recovered through demand; and (e) a repurchase agreement
may be deemed to have a maturity equal to the period remaining until the date on
which the repurchase of the underlying securities is scheduled to occur, or
where no date is
22
<PAGE>
specified, but the agreement is subject to demand, the notice period applicable
to a demand for the repurchase of the securities. In addition, for securities
that are subject to prepayments, the weighted average life of the security will
be used in the weighted average maturity calculation instead of the stated
maturity date on the instrument. The weighted average life of a security takes
into consideration the impact of prepayments on the length of time the security
will be outstanding and typically indicates an actual maturity that is shorter
than the maturity date stated on the face of the instrument.
MANAGEMENT OF THE FUND
OFFICERS AND DIRECTORS
The Fund's officers, under the supervision of the Board of Directors, manage the
day-to-day operations of the Fund. The Directors set broad policies for the Fund
and choose its officers. Directors and officers of the Fund are also directors
and officers of some or all of the other investment companies managed,
administered, advised or distributed by Morgan Stanley Asset Management Inc.,
Miller Anderson & Sherrerd, LLP or their affiliates. Two Directors and all of
the officers of the Fund are directors, officers or employees of the Fund's
advisers, distributor or administrators. The other Directors have no affiliation
with the Fund's advisers, distributor or administrators. A list of the Directors
and officers of the Fund and a brief statement of their present positions and
principal occupations during the past five years is set forth below:
<TABLE>
<CAPTION>
Name, Address and
Date of Birth Position with Fund Principal Occupation During Past Five Years
----------------- ------------------ -------------------------------------------
<S> <C> <C>
Barton M. Biggs* Chairman and Director Chairman, Director and Managing Director of Morgan
1221 Avenue of the Americas Stanley Asset Management Inc. and Morgan Stanley Asset
New York, NY 10020 Management Limited; Managing Director of Morgan
11/26/32 Stanley & Co. Incorporated; Director of VK/AC Holdings,
Inc.; Director of the Rand McNally Company; Member of
the Yale Development Board; Chairman and Director of
various investment companies managed by Morgan Stanley
Asset Management Inc.
Michael F. Klein* Director and President Principal of Morgan Stanley & Co. Incorporated and
1221 Avenue of the Americas Morgan Stanley Asset Management Inc.; President and
New York, NY 10020 Director of three investment companies and Officer of
12/12/58 various other investment companies managed by Morgan
Stanley Asset Management Inc. Previously practiced
law with the New York law firm of Rogers & Wells.
23
<PAGE>
<CAPTION>
Name, Address and
Date of Birth Position with Fund Principal Occupation During Past Five Years
----------------- ------------------ -------------------------------------------
<S> <C> <C>
John D. Barrett, II Director Chairman and Director of Barrett Associates,
521 Fifth Avenue Inc.(investment counseling); Director of the
New York, NY 10135 AshforthCompany (real estate); Director of
8/21/35 Morgan Stanley Universal Funds, Inc. and
Morgan Stanley Institutional Fund, Inc.
Gerard E. Jones Director Partner in Richards & O'Neil LLP (law firm); Director
43 Arch Street of Morgan Stanley Universal Funds, Inc. and Morgan
Greenwich, CT 06830 Stanley Institutional Fund, Inc.
1/23/37
Andrew McNally IV Director Chairman and Chief Executive Officer of Rand McNally
8255 North Central Company (publishing); Director of Allendale Insurance
Park Avenue Co., Mercury Finance (consumer finance); Zenith
Skokie, IL 60076 Electronics, Hubbell, Inc. (industrial electronics);
11/11/39 Director of Morgan Stanley Universal Funds, Inc.
and Morgan Stanley Institutional Fund, Inc.
Samuel T. Reeves Director Chairman of the Board and CEO, Pinacle Trading L.L.C.
8211 North Fresno Street (investments); Director, Pacific Gas and Electric and
Fresno, CA 93720 PG&E Enterprises (utilities); Director of Morgan
7/28/34 Stanley Universal Funds, Inc. and Morgan Stanley
Institutional Fund, Inc.
Fergus Reid Director Chairman and Chief Executive Officer of LumeLite
85 Charles Colman Blvd Corporation (injection molding); Trustee and Director
Pawling, NY 12564 of Vista Mutual Fund Group; Director of Morgan Stanley
8/12/32 Universal Funds, Inc. and Morgan Stanley Institutional
Fund, Inc.
Frederick O. Robertshaw Director Of Counsel, Copple, Chamberlin & Boehm, P.C.;
2800 North Central Avenue Formerly, Of Counsel, Bryan, Cave LLP (law firms);
Phoenix, AZ 85004 Director of Morgan Stanley Universal Funds, Inc.
1/24/34 and Morgan Stanley Institutional Fund, Inc.
Harold J. Schaaff, Jr.* Vice President Principal of Morgan Stanley & Co. Incorporated and
1221 Avenue of the Americas Morgan Stanley Asset Management Inc.; General Counsel
New York, NY 10020 and Secretary of Morgan Stanley Asset Management Inc.;
6/10/60 Vice President of various investment companies managed
by Morgan Stanley Asset Management Inc.
Joseph P. Stadler* Vice President Vice President of Morgan Stanley & Co. Incorporated
1221 Avenue of the Americas and Morgan Stanley Asset Management Inc.; Previously
New York, NY 10020 with Price Waterhouse LLP (accounting); Vice President
6/7/54 of various investment companies managed by Morgan
Stanley Asset Management Inc.
24
<PAGE>
<CAPTION>
Name, Address and
Date of Birth Position with Fund Principal Occupation During Past Five Years
----------------- ------------------ -------------------------------------------
<S> <C> <C>
Valerie Y. Lewis* Secretary Vice President of Morgan Stanley & Co. Incorporated
1221 Avenue of the Americas and Morgan Stanley Asset Management Inc.; Previously
New York, NY 10020 with Citicorp (banking); Secretary of various
3/26/56 investment companies managed by Morgan Stanley Asset
Management Inc.
Joanna Haigney Treasurer Assistant Vice President, Senior Manager of Fund
73 Tremont Street Administration and Compliance Services, Chase Global
Boston, MA 02108-3913 Funds Services Company; Treasurer of various
10/10/66 investment companies managed by Morgan Stanley Asset
Management Inc. Previously with Coopers & Lybrand LLP.
Rene J. Feuerman Assistant Treasurer Manager of Fund Administration and Compliance
73 Tremont Street Services, Chase Global Funds Services Company;
Boston, MA 02108-3913 Previously Fund Administrator and Senior Fund
1/25/67 Accountant, Chase Global Funds Services Company.
</TABLE>
- -----------
* "Interested Person" within the meaning of the 1940 Act.
REMUNERATION OF DIRECTORS AND OFFICERS
Members of the Board of Directors of the Fund do not receive compensation for
serving as Directors of the Fund. However, members of the Board of Directors who
are not "interested persons" within the meaning of the 1940 Act ("Noninterested
Directors") are also members of the boards of directors of certain other
investment companies advised by MSAM or MAS (or by affiliated companies),
including certain Underlying Funds (such other investment companies are
referred to as the "Fund Complex"), and receive compensation from such other
investment companies in the Fund Complex. Accordingly, as shareholders of the
Underlying Funds, the Portfolios will indirectly bear their proportionate
share of Directors' compensation paid by the Fund Complex. The open-end
investment companies in the Fund Complex pay each of the Noninterested
Directors an annual aggregate compensation of $65,000, plus out-of-pocket
expenses, and pay each of the Noninterested Directors on the Board Audit
Committees additional annual aggregate compensation of $10,000 for serving on
such committees. The aggregate of such compensation for each Noninterested
Director is allocated among the open-end investment companies in direct
proportion to their respective average annual net assets. Column (2) in the
following table sets forth that no compensation was paid by the Fund to any
Director for serving as a Director of the Fund. Column (5) in the table sets
forth aggregate compensation paid by the Fund Complex to each Director during
the fiscal year ended December 31, 1996. Compensation amounts do not include
reimbursements of out-of-pocket expenses. Directors who are officers or
otherwise "interested persons" receive no remuneration for their services as
Directors.
COMPENSATION TABLE
<TABLE>
<CAPTION>
(3) (4)
Pension or Estimated (5)
(2) Retirement Annual Total Compensation
Aggregate Benefits Accrued Benefits From Fund and Fund
(1) Compensation as Part of Fund Upon Complex Paid to
Name of Director From Fund Expenses Retirement Directors(a)
---------------- ------------ ---------------- ---------- ------------------
<S> <C> <C> <C> <C>
Barton M. Biggs $ 0 $ 0 $ 0 $ 0
Michael F. Klein 0 0 0 0
John D. Barrett, II(b) 0 0 0 68,777(c)
25
<PAGE>
<CAPTION>
(3) (4)
Pension or Estimated (5)
(2) Retirement Annual Total Compensation
Aggregate Benefits Accrued Benefits From Fund and Fund
(1) Compensation as Part of Fund Upon Complex Paid to
Name of Director From Fund Expenses Retirement Directors(a)
---------------- ------------ ---------------- ---------- ------------------
<S> <C> <C> <C> <C>
Gerard E. Jones(b) 0 0 0 75,877(c)(d)
Andrew McNally, IV 0 0 0 63,195(c)
Samuel T. Reeves 0 0 0 61,331(c)
Fergus Reid(b) 0 0 0 77,220(c)(d)
Frederick O. Robertshaw 0 0 0 58,777(c)
</TABLE>
- -----------
(a) Amounts include $24,657, $24,657 and $28,450 of deferred compensation for
Messrs. McNally, Reeves and Reid, respectively.
(b) Member of Audit Committee of the Board of Directors of the Fund.
(c) Number of other investment companies in Fund Complex from whom Director is
expected to receive compensation: Mr. Barrett--2; Mr. Jones--3; Mr.
McNally--2; Mr. Reeves--2; Mr. Reid--3; Mr. Robertshaw--2.
(d) Includes amounts paid for service as Director of a closed-end investment
company in the Fund Complex, in addition to amounts paid by the open-end
investment companies.
INVESTMENT ADVISORY AND ADMINISTRATIVE AGREEMENTS
MSAM is a wholly owned subsidiary of Morgan Stanley, Dean Witter, Discover & Co.
("MSDWD"). The principal offices of MSAM are at 1221 Avenue of the Americas, New
York, New York 10020. MSAM receives no compensation for advisory services to the
Portfolios.
Pursuant to a separate Administration agreement with the Fund, MSAM provides
administrative services to the Portfolios. For its services under the
Administration agreement, the Fund pays MSAM a monthly fee which on an annual
basis equals 0.15% of 1% of the average daily net assets of each Portfolio.
Under a Sub-Administration Agreement between MSAM and The Chase Manhattan Bank
("Chase"), Chase Global Funds Services Company ("Chase Global," a corporate
affiliate of Chase) provides certain administrative services to the Fund. Chase
Global's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913.
DISTRIBUTION OF FUND SHARES
Under a Distribution Agreement with the Fund, Morgan Stanley & Co. Incorporated
("Morgan Stanley"), a wholly owned subsidiary of MSDWD, serves as exclusive
distributor of the Portfolios and sells shares of each Portfolio on the terms
described in the Fund's Prospectus.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule 17j-1
of the 1940 Act which incorporates the Code of Ethics of MSAM (together, the
"Codes"). The Codes restrict the personal investing activities of all employees
of MSAM and, as described below, impose additional, more onerous, restrictions
on the Fund's investment personnel.
The Codes require that all employees of MSAM preclear any personal securities
investment (with limited exceptions, such as government securities). The
preclearance requirement and associated procedures are designed to identify any
substantive prohibition or limitation applicable to the proposed investment. The
substantive restrictions applicable to all employees of
26
<PAGE>
MSAM include a ban on acquiring any securities in an initial public
offering and a prohibition from profiting on short-term trading in securities.
In addition, no employee may purchase or sell any security that at the time is
being purchased or sold (as the case may be), or to the knowledge of the
employee is being considered for purchase or sale, by any fund advised by MSAM.
Furthermore, the Codes provide for trading "blackout periods" that prohibit
trading by investment personnel of the Fund within periods of trading by the
Fund in the same (or equivalent) security.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of _________, 1997, the following persons were record or beneficial
owners of 5% or more of the outstanding shares of the Portfolios:
<TABLE>
<CAPTION>
PERCENT OF
OUTSTANDING
PORTFOLIO NAME OF BENEFICIAL OWNER SHARES
- --------- ------------------------ -----------
<S> <C> <C>
Strategic Adviser Conservative Portfolio Morgan Stanley, Dean Witter, Discover & Co. 100%
1585 Broadway
New York, NY 10036
Strategic Adviser Moderate Portfolio Morgan Stanley, Dean Witter, Discover & Co. 100%
1585 Broadway
New York, NY 10036
Strategic Adviser Aggressive Portfolio Morgan Stanley, Dean Witter, Discover & Co. 100%
1585 Broadway
New York, NY 10036
</TABLE>
MSDWD has voting power with respect to the voting securities in its
ownership. Consequently, under the 1940 Act, MSDWD may be deemed to be a
controlling person of the Portfolio.
To the best knowledge of the Fund, MSDWD's ownership of such securities is for
investment only, not for the purposes of control, but may materially affect the
voting rights of other shareholders.
PORTFOLIO TRANSACTIONS
The Portfolios will invest primarily in shares of the Underlying Funds. Orders
for transactions in the Underlying Funds will be placed with Morgan Stanley or
MAS Fund Distribution, Inc., the distributors for MSIF and MAS Funds,
respectively. Morgan Stanley also acts as distributor for the Portfolios.
PORTFOLIO TURNOVER
Each Portfolio's turnover rate for a year is calculated by dividing the lesser
of the value of the purchases or sales for the year by the average monthly
market value of the Portfolio for the year. The rate of portfolio turnover will
not be a limiting factor when a Portfolio deems it appropriate to purchase or
sell shares of the Underlying Funds or other portfolio securities. However, the
U.S. federal tax requirement that a Portfolio derive less than 30% of its gross
income from the sale or disposition of securities held less than three months
may limit a Portfolio's ability to dispose of its securities.
PERFORMANCE INFORMATION
The Fund may from time to time quote various performance figures to illustrate a
Portfolio's past performance.
Performance quotations by investment companies are subject to rules adopted by
the SEC, which require the use of standardized performance quotations. In the
case of total return, non-standardized performance quotations may be furnished
by the Fund but must be accompanied by certain standardized performance
information computed as required by the SEC. Current yield and average annual
compounded total return quotations used by the Fund are based on the
standardized methods of computing performance mandated by the SEC. An
explanation of those and other methods used by the Fund to compute or express
performance follows.
TOTAL RETURN
From time to time each Portfolio may advertise total return for the shares of
the Portfolio. Total return figures are based on historical earnings and are not
intended to indicate future performance. The average annual total return is
determined by finding the average annual compounded rates of return over 1-, 5-,
and 10-year periods (or over the life of the Portfolio) that would equate an
initial hypothetical $1,000 investment to its ending redeemable value. The
calculation assumes that all dividends and distributions are reinvested when
paid. The quotation
27
<PAGE>
assumes the amount was completely redeemed at the end of each 1-, 5-, and
10-year period (or over the life of the Portfolio) and the deduction of all
applicable Fund expenses on an annual basis.
These total returns are calculated according to the following formula:
P(1 + T)/n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of hypothetical $1,000 payment made at the
beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or
10-year periods (or fractional portion thereof).
CALCULATION OF YIELD
From time to time certain of the Portfolios may advertise yield.
Current yield reflects the income per share earned by a Portfolio's investments.
Current yield is determined by dividing the net investment income per share
earned during a 30-day base period by the maximum offering price per share on
the last day of the period and annualizing the result. Expenses accrued for the
period include any fees charged to all shareholders during the base period.
Yield is obtained using the following formula:
6
Yield = 2[(a--b + 1) --1]
--------
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that were
entitled to receive income distributions
d = the maximum offering price per share on the last day of the period.
COMPARISONS
To help investors better evaluate how an investment in a Portfolio might satisfy
their investment objective, advertisements regarding the Fund may discuss
various measures of Fund performance as reported by various financial
publications. Advertisements may also compare performance (as calculated above)
to performance as reported by other investments, indices and averages. The
following publications may be used:
(a) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc.
analyzes price, current yield, risk, total return and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
(b) Financial publications: Business Week, Changing Times, Financial World,
Forbes, Fortune, Money, Barron's, Consumer's Digest, Financial Times, Global
Investor, Investor's Daily, Lipper Analytical Services, Inc., Morningstar, Inc.,
New York Times, Personal Investor, Wall Street Journal and Weisenberger
Investment Companies Service--publications that rate fund performance over
specified time periods.
(c) Financial Times Actuaries World Ex U.S. Index -- The FT-A World EX U.S.
Index is a capitalization-weighted price index, expressed in dollars, after
dividend withholding taxes, of foreign stock prices. This index is
calculated daily and reflects price changes in 24 major foreign equity
markets. It is jointly compiled by the Financial Times, Ltd., Goldman Sachs
& Co., and Country NatWest/Wood Mackenzie in conjunction with the Institute
of Actuaries and the Faculty of Actuaries.
(d) Historical data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch, Pierce,
Fenner & Smith, Lehman Brothers and Bloomberg L.P.
(e) Lipper Analytical Services--Mutual Fund Performance Analysis and
Lipper--Fixed Income Fund Performance Analysis--measures total return and
average current yield for the mutual fund industry. Ranks individual mutual fund
performance over specified time periods, assuming reinvestment of all
distributions, exclusive of any applicable sales charges.
(f) CS Mutual Fund Source Book, published by Morningstar, Inc.--analyzes
price, yield, risk and total return for equity funds.
28
<PAGE>
(g) (CS) Savings and Loan Historical Interest Rates--as published in the U.S.
Savings & Loan League Fact Book.
(h) Stocks, Bonds, Bills and Inflation, published by Hobson
Associates--historical measure of yield, price and total return for common and
small company stock, long-term government bonds, U.S. Treasury bills and
inflation.
The following indices and averages may also be used:
(a) Composite Indices--70% Standard & Poor's 500 Stock Index and 30% NASDAQ
Industrial Index; 35% Standard & Poor's 500 Stock Index and 65% Salomon Brothers
High Grade Bond Index; and 65% Standard & Poor's 500 Stock Index and 35% Salomon
Brothers High Grade Bond Index.
(b) Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics--a statistical measure of change, over time, in the
price of goods and services in major expenditure groups.
(c) Donoghue's Money Fund Average--an average of all major money market fund
yields, published weekly for 7 and 30-day yields.
(d) Dow Jones Composite Average or its component averages--an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial
Average), 15 utilities company stocks and 20 transportation stocks. Comparisons
of performance assume reinvestment of dividends.
(e) EMBI+ -- Expanding on the EMBI, which includes all Bradys, the EMBI+
includes a broader group of Brady Bonds, loans, Eurobonds and the U.S. Dollar
local markets instruments. A more comprehensive benchmark than the EMBI, the
EMBI+ is not, however, intended to replace the EMBI but rather to complement it.
The EMBI continues to represent the most liquid, most easily traded segment of
the market, including more of the assets that investors typically hold in their
portfolios. Both of these indices are published daily.
(f) CS First Boston High Yield Index--generally includes over 180 issues with
an average maturity range of seven to ten years with a minimum capitalization of
$100 million. All issues are individually trader-priced monthly.
(g) CS First Boston Upper/Middle Tier High Yield Index--an unmanaged index of
bonds rated B to BBB.
(h) Goldman Sachs 100 Convertible Bond Index--currently includes 67 bonds and
33 preferred stocks. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
(i) IFC Global Total Return Composite Index--an unmanaged index of common
stocks and includes 18 developing countries in Latin America, East and South
Asia, Europe, the Middle East and Africa (net of dividends reinvested).
(j) Indata Balanced-Median Index--an unmanaged index and includes an asset
allocation of 2.5% cash, 38.2% bonds and 59.3% equity based on $52.6 billion in
assets among 579 portfolios for the year ended December 31, 1996 (assumes
dividends reinvested).
(k) Indata Equity-Median Stock Index--an unmanaged index which includes an
average asset allocation of 7.4% cash and 92.6% equity based on $464.9 billion
in assets among 1,277 portfolios for the year ended December 31, 1996.
(l) International Finance Corporation Emerging Markets Index-- an index
designed to measure the total return in either U.S. or local currency terms of
developing markets as defined by the World Bank. The selection of stocks is
made based on size, liquidity and industry. The weight given to any stock is
determined by its market capitalization.
(m) J.P. Morgan Emerging Markets Bond Index--a market-weighted index composed
of all Brady bonds outstanding and includes Argentina, Brazil, Bulgaria, Mexico,
Nigeria, the Philippines, Poland and Venezuela.
(n) J.P. Morgan Emerging Markets Bond Index Plus--The Emerging Markets Bond
Index Plus (EMBI+) reflects total returns for external debt instruments which
have been traded in the emerging markets. Brady bonds are included among such
instruments, as well as Eurobonds, loans, and US dollar denominated local market
instruments. Countries included in the index are Argentina, Brazil, Bulgaria,
Ecuador, Mexico, Morocco, Nigeria, Panama, Peru, the Philippines, Poland,
Russia, South Africa, and Venezuela. The EMBI+ is an expansion of the JP Morgan
EMBI, which only tracks Brady bonds.
(o) J.P. Morgan Traded Global Bond Index--an unmanaged index of securities
which includes Australia, Belgium, Canada, Denmark, France, Germany, Italy,
Japan, The Netherlands, Spain, Sweden, United Kingdom and the United States.
(p) J.P. Morgan Traded Government Bond Index -- designed to provide a
comprehensive measure of total return performance of the domestic Government
bond
29
<PAGE>
market of 13 countries. The index is maintained by J.P. Morgan Securities, Inc.
and includes only liquid assets.
(q) Lehman Brothers 5-Year Municipal Bond Index-- a total return performance
benchmark for the intermediate investment grade tax exempt bond market. The
Index includes general obligation bonds, revenue bonds, insured bonds and
prefunded bonds with maturities between 4 and 6 years.
(r) Lehman Brothers 7-Year Municipal Bond Index--an unmanaged index which
consists of investment grade bonds with maturities between 6-8 years rated
Baa or better. All bonds have been taken from deals done within the last 5
years, with assets of $50 million or greater.
(s) Lehman Brothers 10-Year Municipal Bond Index--a total return
performance benchmark for the long term, investment grade tax-exempt bond
market. The index includes general obligation bonds, revenue bonds, insured
bonds and prefunded bonds with maturities between 8 and 12 years.
(t) Lehman Brothers Aggregate Bond Index--an unmanaged index made up of the
Government/Corporate Index, the Mortgage Backed Securities Index and the
Asset-Backed Securities Index.
(u) Lehman Brothers Government/Corporate Index--a combination of the
Government and Corporate Bond Indices. The Government Index includes public
obligations of the U.S. Treasury, issues of Government agencies and corporate
debt backed by the U.S. Government. The Corporate Bond Index includes fixed
rate nonconvertible corporate debt. Also included are Yankee Bonds and
nonconvertible debt issued or guaranteed by foreign or international governments
and agencies. All issues are investment grade (BBB) or higher, with maturities
of at least one year and an outstanding par value of at least $100 million for
U.S. Government issues and $25 million for others. Any security downgraded
during the month is held in the index until month-end and then removed. All
returns are market value weighted inclusive of accrued income.
(v) Lehman Brothers Intermediate Government/Corporate Index-- a combination
of the Government and Corporate Bond Indices. All issues are investment grade
(BBB) or higher, with maturities of one to ten years and an outstanding par
value of at least $100 million for U.S. Government issues and $25 million for
others. The Government Index includes public obligations of the U.S. Treasury,
issues of Government agencies, and corporate debt backed by the U.S. Government.
The Corporate Bond Index includes fixed rate nonconvertible corporate debt.
Also included are Yankee Bonds and nonconvertible debt issued or guaranteed by
foreign or international governments and agencies. Any security downgraded
during the month is held in the index until month-end and then removed. All
returns are market value weighted inclusive of accrued income.
(w) Lehman Brothers Long Municipal Bond Index -- a total return for the
long-term, investment-grade tax-exempt bond market for bonds. The index
includes municipal bonds with maturities of 22 years or more.
(x) Lehman Brothers LONG-TERM Treasury Bond Index--composed of all bonds
covered by the Lehman Brothers Treasury Bond Index with maturities of 10
years or greater.
(y) Lehman Brothers Mortgage-Backed Securities Index -- includes fixed rate
mortgage securities backed by GNMA, FHLMC and FNMA. Graduated Payment Mortgages
(GPMs) are included. All issues are AAA, with maturities on at least one year
and outstanding par values of at least $100 million. Returns are market value
weighted inclusive of accrued income.
(z) Lipper Capital Appreciation Index--a composite of mutual funds managed
for maximum capital gains.
(aa) Lipper Growth & Income Fund Index--a net asset value weighted index of
the 30 largest Funds within the Growth & Income investment objective. It is
calculated daily with adjustments for income dividends and capital gains
distribution as of the ex-dividend dates.
(bb) Lipper High Current Yield Fund Average--reports the average return of all
funds tracked by Lipper Analytical Services, Inc. classified as high yield
funds. The number of funds tracked varies. As a result, reported returns for
longer time periods do not always match the linked product of shorter period
returns.
(cc) Lipper Money Market Average-- reports the average return of all the Funds
tracked by Lipper Analytical Services, Inc., classified as money market Funds
for any given period. The number of Funds tracked varies. As a result,
reported returns for longer time periods do not always match the linked product
of shorter period returns.
(dd) Merrill Lynch Corporate & Government Bond Index--includes over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds. The Index is calculated
daily and will be used from time to time in performance comparison for partial
month periods.
(ee) Morgan Stanley Capital International Combined Far East Free ex-Japan
Index--a market-capitalization
30
<PAGE>
weighted index comprising stocks in Hong Kong, Indonesia, Korea, Malaysia,
Philippines, Singapore, Taiwan and Thailand. Korea is included in the MSCI
Combined Far East Free ex-Japan Index at 20% of its market capitalization.
(ff) Morgan Stanley Capital International EAFE Index--an arithmetic, market
value-weighted average of the performance of over 900 securities on the stock
exchanges of countries in Europe, Australia and the Far East.
(gg) Morgan Stanley Capital International EAFE-GDP Weighted Index--an
arithmetic average of the performance of over 900 securities listed on the stock
exchanges of countries in Europe, Australia and the Far East. The index is
weighted by the Gross Domestic Product of the various countries in the index.
(hh) Morgan Stanley Capital International Emerging Markets Free Index--a
capitalization weighted index of over 800 stocks from 17 different emerging
market countries.
(ii) Morgan Stanley Capital International Emerging Markets Global Latin
American Index--an unmanaged, arithmetic, market value-weighted average of the
performance of over 196 securities on the stock exchanges of Argentina, Brazil,
Chile, Colombia, Mexico, Peru and Venezuela (assumes reinvestment of dividends).
(jj) Morgan Stanley Capital International Europe Index-- an unmanaged index of
common stocks and includes 14 countries throughout Europe.
(kk) Morgan Stanley Capital International Japan Index--an unmanaged index of
common stocks.
(ll) Morgan Stanley Capital International Latin America Index--a broad-based
market capitalization-weighted composite index covering at least 60% of markets
in Mexico, Argentina, Brazil, Chile, Colombia, Peru and Venezuela (assumes
dividends reinvested).
(mm) Morgan Stanley Capital International World Index--an arithmetic, market
value-weighted average of the performance of over 1,470 securities listed on the
stock exchanges of countries in Europe, Australia, the Far East, Canada and the
United States.
(nn) Morgan Stanley Capital International World ex USA Index-- a
capitalization-weighted price index expressed in dollars. The index reflects
the performance of over 1,100 companies in 19 foreign countries in Europe,
Australia and the Far East.
(oo) NASDAQ Composite Index--an unmanaged index of common stocks.
(pp) NASDAQ Industrial Index--a capitalization-weighted index composed of more
than 3,000 domestic stocks taken from the following industry sectors:
agriculture, mining, construction, manufacturing, electronic components,
services and public administration enterprises. It is a value-weighted index
calculated on price change only and does not include income.
(qq) NASDAQ Industrials Index--a measure of all NASDAQ National Market System
issues classified as industrial based on Standard Industrial Classification
codes relative to a company's major source of revenue. The index is exclusive
of warrants, and all domestic common stocks traded in the regular NASDAQ market
which are not part of the NASDAQ National Market System. The NASDAQ Industrials
Index is value weighted.
(rr) National Association of Real Estate Investment Trusts ("NAREIT")
Index--an unmanaged market-weighted index of tax qualified REITs (excluding
healthcare REITs) listed on the New York Stock Exchange, American Stock Exchange
and the NASDAQ National Market System including dividends.
(ss) The New York Stock Exchange composite or component indices--unmanaged
indices of all industrial, utilities, transportation and finance company stocks
listed on the New York Stock Exchange.
(tt) Philadelphia Gold and Silver Index -- an unmanaged index comprised of
seven leading companies involved in the mining of gold and silver.
(uu) Russell 1000 Index --consists of the 1,000 largest of the 3,000 largest
stocks. Market capitalization is typically between $610 million and $85
billion. The list is rebalanced each year on June 30. If a stock is taken
over or goes bankrupt, it is not replaced until rebalancing. Therefore,
there can be fewer than 1,000 stocks in the Russell 1000 Index. The index is
an equity market capitalization weighted index available from Frank Russell &
Co. on a monthly basis.
(vv) Russell 1000 Growth Index--contains the securities of the Russell 1000
which possess an above-average growth orientation. These securities tend to
exhibit higher price-to-book and price-earnings ratios, lower dividend yields
and higher forecasted growth.
(ww) Russell 2000 Index--consists of the 2,000 smallest of the 3,000 largest
stocks. Market capitalization is typically between $610 million and $57
billion. The list is rebalanced each year on June 30. If a stock is taken
over
31
<PAGE>
or goes bankrupt, it is not replaced until rebalancing. Therefore, there can be
fewer than 2,000 stocks in the Russell 2000 Index. The index is an equity
market capitalization weighted index available from Frank Russell & Co. on a
monthly basis.
(xx) Russell 2000 Growth Index --comprised of those Russell 2000 Securities
with an above-average growth orientation. Here, securities tend to exhibit
higher price-to-book and price-earnings ratios, lower dividend yields and higher
forecasted growth than the value universe.
(yy) Russell 2500 Index--comprised of the bottom 500 stocks in the Russell
1000 Index which represents the universe of stocks from which most active money
managers typically select; and all the stocks in the Russell 2000 Index. The
largest security in the index has a market capitalization of approximately $1.3
billion.
(zz) Russell 3000 Index--a combination of the Russell 1000 Index and the
Russell 2000 Index.
(aaa) Salomon 1-3 Year Treasury / Government Sponsored Index--includes U.S.
Treasury and agency securities with maturities one year or greater and less than
three years. Securities with amounts outstanding of at least $25 million are
included in the index.
(bbb) Salomon 1-3 Year Treasury / Government Sponsored/Corporate
Index--includes U.S. Treasury, agency and investment grade (BBB or better)
securities with maturities one year or greater and less than three years.
Securities with amounts outstanding of at least $25 million are included in the
index.
(ccc) Salomon Broad Index--also known as the Salomon Broad Investment Grade
(BIG) Index, is a fixed income market capitalization-weighted index, including
U.S. Treasury, agency, mortgage and investment grade (BBB or better) corporate
securities with maturities of one year or longer and with amounts outstanding of
at least $25 million. The government index includes traditional agencies; the
mortgage index includes agency pass-throughs and FHA and GNMA project loans, the
corporate index includes returns for 17 industry sub-sectors. Securities
excluded from the Broad Index are floating/variable rate bonds, private
placements and derivatives (e.g., U.S. Treasury zeros, CMOs, mortgage strips).
Every issue is trader-priced at month-end and the index is published monthly.
(ddd) Salomon Brothers GNMA Index--includes pools of mortgages originated by
private lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
(eee) Salomon Brothers High Grade Corporate Bond Index--consists of publicly
issued, non-convertible corporate bonds rated AA or AAA. It is a value-weighted,
total return index, including approximately 800 issues with maturities of 12
years or greater.
(fff) Salomon Brothers Broad Investment Grade Bond Index--a market-weighted
index that contains approximately 4700 individually priced investment grade
corporate bonds rated BBB or better, U.S. Treasury/agency issues and mortgage
pass-through securities.
(ggg) Salomon High-Yield Market Index--includes public, non-convertible
corporate bond issues with at least one year remaining to maturity and $50
million in par amount outstanding which carry a below investment-grade quality
rating from either Standard & Poor's or Moody's rating services.
(hhh) Salomon Mortgage Index--includes agency pass-throughs (GNMA, FHLMC, FNMA)
and FHA and GNMA project loans. Pools with remaining terms shorter than 25
years are seasoned; pools with longer terms are classified as new. The index is
published monthly.
(iii) Salomon 1-3 Year Treasury Index--includes only U.S. Treasury Notes and
Bonds with maturities one year or greater and less than three years.
(jjj) Salomon World Government Bond Index--designed to provide a
comprehensive measure of total return performance of the domestic Government
bond market of thirteen countries. The index has been constructed with the
aim of choosing an "all inclusive" universe of institutionally traded fixed
rate bonds. The selection of security types to be included in the index is
made with the aim of being as comprehensive as possible, while satisfying the
criterion of reasonable availability to domestic and international
institutions and the existence of complete pricing and market profile data.
(kkk) Salomon World Government Bond Index ex U.S.-- designed to provide a
comprehensive measure of total return performance of the domestic government
bond markets of 12 countries outside the United States. The index has been
constructed with the aim of choosing "an
32
<PAGE>
inclusive" universe of institutionally traded fixed rate bonds. The selection
of security types to be included in the index is made with the aim of being as
comprehensive as possible, while satisfying the criterion of reasonable
availability to domestic and international institutions and the existence of
complete pricing and market profile data.
(lll) S&P/BARRA Mid Cap 400 Growth Index--constructed by dividing the stocks
in the S&P MidCap 400 Index according to a single attribute: price-to-book
ratios. The MidCap 400 Growth Index is composed of firms with higher
price-to-book ratios. Like the MidCap 400, the MidCap 400 Growth Index is
capitalization-weighted, meaning that each stock is weighted in the appropriate
index in proportion to its market value.
(mmm) S&P Ex South Africa Index--the same as the S&P 500 Index excluding
companies that are on the Investor Responsibility Research Center (IRRC) list of
companies doing business in South Africa. This index is maintained by Wilshire
Associates.
(nnn) Standard & Poor's 500 Stock Index or its component indices--unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
company stocks and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
(ooo) Standard & Poor's MidCap 400 Index--a market-value weighted index. The
companies chosen for the Index generally have market values between $800 million
and $3 billion, depending upon current equity market valuations and represent a
broad range of industry segments within the U.S. economy.
(ppp) Standard & Poor's Small Cap 600 Index--a capitalization-weighted index of
600 domestic stocks having market capitalizations which reside within the 50th
and the 83rd percentiles of the market capitalization of the entire stock
market, chosen for certain liquidity characteristics and for industry
representation.
(qqq) Wilshire 5000 Equity Index or its component indices--represents the
return on the market value of all common equity securities for which daily
pricing is available. Comparisons of performance assume reinvestment of
dividends.
In assessing such comparisons of performance an investor should keep in mind
that the composition of the investments in the reported indices and averages is
not identical to the composition of investments in the Fund's Portfolios, that
the averages are generally unmanaged, and that the items included in the
calculations of such averages may not be identical to the formula used by the
Fund to calculate its figures. In addition, there can be no assurance that the
Fund will continue this performance as compared to such other averages.
GENERAL PERFORMANCE INFORMATION
Each Portfolio's performance will fluctuate, unlike bank deposits or other
investments which pay a fixed yield for a stated period of time. Past
performance is not necessarily indicative of future return. Actual performance
will depend on such variables as portfolio quality, average portfolio maturity,
the type of portfolio instruments acquired, changes in interest rates, portfolio
expenses and other factors. Performance is one basis investors may use to
analyze a Portfolio as compared to other funds and other investment vehicles.
However, performance of other funds and other investment vehicles may not be
comparable because of the foregoing variables, and differences in the methods
used in valuing their portfolio instruments, computing net asset value and
determining performance.
From time to time, a Portfolio's performance may be compared to other
mutual funds tracked by financial or business publications and periodicals. For
example, a Portfolio may quote Morningstar, Inc. in its advertising materials.
Morningstar, Inc. is a mutual fund rating service that rates mutual funds on the
basis of risk-adjusted performance. Rankings that compare the performance of
the Funds to one another in appropriate categories over specific periods of time
may also be quoted in advertising.
Portfolio advertising may include data on historical returns of the capital
markets in the United States compiled or published by Ibbotson Associates of
Chicago, Illinois ("Ibbotson"), including returns on common stocks, small
capitalization stocks, long-term corporate bonds, intermediate-term government
bonds, long-term government bonds, Treasury bills, the U.S. rate of inflation
(based on the Consumer Price Index), and combinations of various capital
markets. The performance of these capital markets is based on the returns of
different indices. The Portfolios may use the performance of these capital
markets in order to demonstrate general risk-versus-reward investment scenarios.
Performance comparisons may also include the value of a hypothetical investment
in any of these capital markets. The risks associated with the security types
in any capital market may or may not correspond directly to those of the
Portfolios. The Portfolios may also compare their performance to that of other
compilations or indices that may be developed and made available in the future.
The Portfolios may include in advertisements, charts, graphs or drawings
which illustrate the potential risks and rewards of investment in various
investment vehicles, including but not limited to, foreign securities, stocks,
bonds, treasury bills and shares of a Portfolio. In addition, advertisements
may include a discussion of certain attributes or benefits to be derived by an
investment in a Portfolio and/or other mutual funds, shareholder profiles and
hypothetical investor scenarios, timely information on financial management, tax
and retirement planning and various investment alternatives. Advertisements may
include lists of representative Morgan Stanley clients. The Portfolios may also
from time to time include discussions or illustrations of the effects of
compounding in advertisements. "Compounding" refers to the fact that, if
dividends or other distributions on a Portfolio investment are reinvested by
being paid in additional Portfolio shares, any future income or capital
appreciation of a Portfolio would increase the value, not only of the original
investment in the Portfolio, but also of the additional Portfolio shares
received through reinvestment.
The Portfolios may include in its advertisements, discussions or
illustrations of the potential investment goals of a prospective investor
(including materials that describe general principles of investing, such as
asset allocation, diversification, risk tolerance, goal setting, questionnaires
designed to help create a personal financial profile, worksheets used to project
savings needs based on assumed rates of inflation and hypothetical rates of
return and action plans offering investment alternatives), investment management
techniques, policies or investment suitability of a Portfolio (such as value
investing, market timing, dollar cost averaging, asset allocation, constant
ratio transfer, automatic account rebalancing, the advantages and disadvantages
of investing in tax-deferred and taxable investments). Advertisements and sales
materials relating to a Portfolio may include information regarding the
background and experience of its portfolio managers; the resources, expertise
and support made available to the portfolio managers by Morgan Stanley; and the
portfolio managers' goals, strategies and investment techniques.
The Portfolios' advertisements may discuss economic and political
conditions of the United States and foreign countries, the relationship between
sectors of the U.S., a foreign, or the global economy and the U.S., a foreign,
or the global economy as a whole and the effects of inflation. The Portfolios
may include discussions and illustrations of the growth potential of various
global markets including, but not limited to, Africa, Asia, Europe, Latin
America, North America, South America, Emerging Markets and individual
countries. These discussions may include the past performance of the various
markets or market sectors; forecasts of population, gross national product and
market performance; and the underlying data which supports such forecasts. From
time to time, advertisements, sales literature, communications to shareholders
or other materials may summarize the substance of information contained in the
Portfolios' shareholder reports (including the investment composition of a
Portfolio), as well as the views of Morgan Stanley as to current market,
economic, trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to e of
relevance to a Portfolio.
The Portfolios may quote various measures of volatility and benchmark
correlation in advertising. The Portfolios may compare these measures to those
of other funds. Measures of volatility seek to compare the historical share
price fluctuations or total returns to those of a benchmark. Measures of
benchmark correlation indicate how valid a comparative benchmark may be.
Measures of volatility and correlation may be calculated using averages of
historical data. A Portfolio may also advertise its current interest rate
sensitivity, duration, weighted average maturity or similar maturity
characteristics.
The Portfolio may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a Portfolio at periodic intervals,
thereby purchasing fewer shares when prices are high and more shares when prices
are low. While such a strategy does not assure a profit or guard against loss
in a declining market, the investor's average cost per share can be lower than
if fixed numbers of shares are purchased at the same intervals. In evaluating
such a plan, investors should consider their ability to continue purchasing
shares during periods of low price levels.
GENERAL INFORMATION
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Fund's Articles of Incorporation currently permit the Directors to issue
three billion shares of common stock, par value $.001 per share, from an
unlimited number of classes ("Portfolios") of shares. Currently the Fund
consists of shares of three Portfolios.
When issued, the shares of each Portfolio of the Fund will be fully paid and
nonassessable, and have no preference as to conversion, exchange, dividends,
retirement or other features. The shares of each Portfolio of the Fund have
no pre-emptive rights. The shares of the Fund have non-cumulative voting
rights, which means that the holders of more than 50% of the shares voting
for the election of Directors can elect 100% of the Directors if they choose
to do so. A shareholder is entitled to one vote for each full share held (and
a fractional vote for each fractional share held), then standing in his name
on the books of the Fund.
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The Fund's policy is to distribute substantially all of each Portfolio's net
investment income, if any. The Fund may also distribute any net realized capital
gains in the amount and at the times that will avoid both income (including
taxable gains) taxes on it and the imposition of the federal excise tax on
income and capital gains (see discussion under "Taxes" in this Statement of
Additional Information). However, the Fund may also choose to retain net
realized capital gains and pay taxes on such gains. The amounts of any income
dividends or capital gains distributions cannot be predicted. Any dividend or
distribution paid by a Portfolio will have the effect of reducing the per
share net asset value of that Portfolio by the per share amount of the
dividend or distribution.
As set forth in the Prospectus, unless the shareholder elects otherwise in
writing, all dividends and capital gains distributions for a class of shares are
automatically received in additional shares of such class of that Portfolio of
the Fund at the net asset value as of the business day following the record
date. This automatic reinvestment of dividends and distributions will remain in
effect until the Fund is notified by the shareholder in writing at least three
days prior to the record date that either the Income Option (income dividends in
cash and capital gains distributions in additional shares at net asset value) or
the Cash Option
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(both income dividends and capital gains distributions in cash) has been
elected.
CUSTODY ARRANGEMENTS
Chase acts as the Fund's custodian. Chase is not affiliated with
Morgan Stanley.
DESCRIPTION OF CERTAIN SECURITIES RATINGS
DESCRIPTION OF COMMERCIAL PAPER--RATINGS
DESCRIPTION OF MOODY'S RATINGS OF STATE AND MUNICIPAL NOTES: Moody's ratings
for state and municipal notes and other short-term obligations are designated
Moody's Investment Grade ("MIG"). Symbols used are as follows: MIG-1--best
quality, enjoying strong protection from established cash flows of funds for
their servicing or from established broad-based access to the market for
refinancing, or both; MIG-2--high quality with margins of protection ample
although not so large as in the preceding group; MIG-3--favorable quality, with
all security elements accounted for but lacking the undeniable strength of the
preceding grades.
DESCRIPTION OF MOODY'S HIGHEST COMMERCIAL PAPER RATING: Prime-1 ("P1")--Judged
to be of the best quality. Their short-term debt obligations carry the smallest
degree of investment risk.
EXCERPT FROM S&P'S RATING OF MUNICIPAL NOTE ISSUES: SP-1+ --very strong
capacity to pay principal and interest; SP-2--strong capacity to pay principal
and interest.
Description of S&P's highest commercial paper ratings: A-1+ --this designation
indicates the degree of safety regarding timely payment is overwhelming.
A-1--this designation indicates the degree of safety regarding timely payment is
very strong.
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:
Aaa -- Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt-edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa -- Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as for Aaa securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds rated Baa are considered as medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba -- Bonds rated Ba are judged to have speculative elements. Their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B -- Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa -- Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
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Ca -- Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short-comings.
C -- Bonds rated C are the lowest-rated class of bonds and issues so rated can
be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Moody's applies numerical modifiers 1, 2 and 3, in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF S&P'S CORPORATE BOND RATINGS:
AAA -- Debt rated AAA has the highest rating assigned by S&P's to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher-rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB -- Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions that could lead to
inadequate capacity to meet timely interest and principal payments.
B -- Debt rated B has greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB- rating.
CCC -- Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.
CC -- Debt rated CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C -- The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed but debt service
payments are continued.
CI -- The rating CI is reserved for income bonds on which no interest is being
paid.
D -- Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating will also be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
FINANCIAL STATEMENTS
Because the Portfolios have only recently commenced operations, audited
financial statements for the Portfolios have not been included.
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APPENDIX A
The following is a list of the Underlying Funds which are investment portfolios
of MORGAN STANLEY INSTITUTIONAL FUND, INC., with their respective investment
objectives and a brief statement of their investment policies.
GLOBAL AND INTERNATIONAL EQUITY PORTFOLIOS:
The ACTIVE COUNTRY ALLOCATION PORTFOLIO seeks long-term capital appreciation by
investing in accordance with country weightings determined by MSAM in equity
securities of non-U.S. issuers which, in the aggregate, replicate broad country
indices.
The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of Asian issuers.
The CHINA GROWTH PORTFOLIO seeks to provide long-term capital appreciation by
investing primarily in equity securities of issuers in the People's Republic of
China, Hong Kong and Taiwan.
The EMERGING MARKETS PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of emerging country issuers.
The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of European issuers.
The GLOBAL EQUITY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of issuers throughout the world, including U.S.
issuers.
The GOLD PORTFOLIO seeks long-term capital appreciation by investing primarily
in equity securities of foreign and domestic issuers engaged in gold-related
activities.
The INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers.
The INTERNATIONAL MAGNUM PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers domiciled in EAFE
countries.
The INTERNATIONAL SMALL CAP PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of non-U.S. issuers with equity market
capitalizations of less than $1 billion.
The JAPANESE EQUITY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of Japanese issuers.
The LATIN AMERICAN PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of Latin American issuers and, from time to time,
debt securities issued or guaranteed by Latin American governments or
governmental entities.
U.S. EQUITY PORTFOLIOS:
The AGGRESSIVE EQUITY PORTFOLIO seeks capital appreciation by investing
primarily in corporate equity and equity-linked securities.
The EMERGING GROWTH PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small- to medium-sized
corporations.
The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of medium and large
capitalization companies.
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The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of small corporations.
The SMALL CAP VALUE EQUITY PORTFOLIO seeks high long-term total return by
investing in undervalued equity securities of small- to medium-sized companies.
The TECHNOLOGY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of companies that, in the opinion of MSAM, are
expected to benefit from their involvement in technology and technology-related
industries.
The U.S. EQUITY PLUS PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of issuers included in the S&P 500 Index.
The VALUE EQUITY PORTFOLIO seeks high total return by investing in equity
securities which MSAM believes to be undervalued relative to the stock market in
general at the time of purchase.
EQUITY AND FIXED INCOME PORTFOLIOS:
The BALANCED PORTFOLIO seeks high total return while preserving capital by
investing in a combination of undervalued equity securities and fixed income
securities.
FIXED INCOME PORTFOLIOS:
The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in debt securities of government, government-related and corporate
issuers located in emerging countries.
The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent with
the preservation of capital by investing in a diversified portfolio of fixed
income securities.
The GLOBAL FIXED INCOME PORTFOLIO seeks to produce an attractive real rate of
return while preserving capital by investing in fixed income securities of
issuers throughout the world, including U.S. issuers.
The HIGH YIELD PORTFOLIO seeks to maximize total return by investing in a
diversified portfolio of high yield fixed income securities that offer a yield
above that generally available on debt securities in the four highest rating
categories of the recognized rating services.
The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to produce as high a level of
current income as is consistent with the preservation of capital by investing
primarily in a variety of investment-grade mortgage-backed securities.
The MUNICIPAL BOND PORTFOLIO seeks to produce a high level of current income
consistent with preservation of principal by investing in municipal obligations,
the interest on which is exempt from federal income tax.
REAL ESTATE PORTFOLIOS:
The ASIAN REAL ESTATE PORTFOLIO seeks to provide long-term capital appreciation
by investing primarily in equity securities of companies in the Asian real
estate industry.
The EUROPEAN REAL ESTATE PORTFOLIO seeks to provide current income and long-term
capital appreciation by investing primarily in equity securities of companies in
the European real estate industry.
The U.S. REAL ESTATE PORTFOLIO seeks to provide above-average current income and
long-term capital appreciation by investing primarily in equity securities of
companies in the U.S. real estate industry, including real estate investment
trusts.
MONEY MARKET PORTFOLIOS:
The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve capital
while maintaining high levels of liquidity through investing in high quality
money market instruments with remaining maturities of one year or less.
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The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt income
and preserve capital while maintaining high levels of liquidity through
investing in high quality money market instruments with remaining maturities of
one year or less which are exempt from federal income tax.
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The following is a list of the Underlying Funds which are investment portfolios
of MAS FUNDS, INC., with their respective investment objectives and a brief
statement of their investment policies.
EQUITY PORTFOLIOS:
The EQUITY PORTFOLIO seeks to achieve above-average total return over a market
cycle of three to five years, consistent with reasonable risk, by investing
primarily in a diversified portfolio of common stocks of companies which are
deemed by MAS to have earnings growth potential greater than the economy in
general and greater than the expected rate of inflation.
The GROWTH PORTFOLIO seeks to achieve long-term capital growth by investing
primarily in a diversified portfolio of common stocks of larger size companies
that are deemed by MAS to offer long-term growth potential.
The INTERNATIONAL EQUITY PORTFOLIO seeks to achieve above-average total return
over a market cycle of three to five years, consistent with reasonable risk, by
investing primarily in a diversified portfolio of foreign equities.
The MID CAP GROWTH PORTFOLIO seeks to achieve long-term capital growth by
investing primarily in a diversified portfolio of common stocks of smaller and
medium size companies that are deemed by MAS to offer long-term growth
potential.
The MID CAP VALUE PORTFOLIO seeks to achieve above-average total return over a
market cycle of three to five years, consistent with reasonable risk, by
investing in common stocks with equity capitalizations in the range of the
companies represented in the S&P MidCap 400 Index which are deemed by MAS to be
relatively undervalued based on certain proprietary measures of value. The
portfolio will typically exhibit a lower price/earnings value ratio than the S&P
MidCap 400 Index.
The SMALL CAP VALUE PORTFOLIO (not currently offered to new investors) seeks to
achieve above-average total return over a market cycle of three to five years,
consistent with reasonable risk, by investing primarily in a diversified
portfolio of common stocks with equity capitalizations in the range of companies
represented in the Russell 2000 Index which are deemed by MAS to be relatively
undervalued based on certain proprietary measures of value. The portfolio will
typically exhibit lower price/earnings and price/book value ratios than the
Russell 2000.
The VALUE PORTFOLIO seeks to achieve above-average total return over a market
cycle of three to five years, consistent with reasonable risk, by investing
primarily in a diversified portfolio of common stocks which are deemed by MAS to
be relatively undervalued based on various measures such as price/earnings
ratios and price/book ratios.
FIXED-INCOME PORTFOLIOS:
The CASH RESERVES PORTFOLIO seeks to realize maximum current income, consistent
with preservation of capital and liquidity, by investing in a diversified
portfolio of money market instruments, cash equivalents and other short-term
securities having expected maturities of thirteen months or less. THE
PORTFOLIOS SEEKS TO MAINTAIN, BUT DOES NOT GUARANTEE, A CONSTANT NET ASSET VALUE
OF $1.00 PER SHARE.
The DOMESTIC FIXED INCOME PORTFOLIO seeks to achieve above-average total return
over a market cycle of three to five years, consistent with reasonable risk, by
investing in a diversified portfolio of U.S. Governments and other investment
grade fixed income securities of domestic issuers.
The FIXED INCOME PORTFOLIO seeks to achieve above-average total return over a
market cycle of three to five years, consistent with reasonable risk, by
investing primarily in a diversified portfolio of U.S. Governments, corporate
fixed income securities, mortgage securities, foreign bonds and other fixed
income securities and derivatives. The portfolio's average-weighted maturity
will ordinarily exceed five years.
The FIXED INCOME II PORTFOLIO seeks to achieve above-average total return over a
market cycle of three to five years, consistent with reasonable risk, by
investing primarily in a diversified portfolio of U.S. Governments and other
investment grade fixed income securities.
The GLOBAL FIXED INCOME PORTFOLIO seeks to achieve above-average total return
over a market cycle of three to five years, consistent with reasonable risk, by
investing primarily in high-grade fixed income securities, foreign bonds and
derivatives representing securities of United States and foreign issuers. The
portfolio's average weighted maturity will ordinarily exceed five years.
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The HIGH YIELD PORTFOLIO seeks to achieve above-average total return over a
market cycle of three to five years, consistent with reasonable risk, by
investing primarily in a diversified portfolio of high yield securities,
corporate fixed income securities and other fixed income securities (including
bonds rated below investment grade) and derivatives. The portfolio's average
weighted maturity will ordinarily exceed five years.
The INTERMEDIATE DURATION PORTFOLIO seeks to achieve above-average total return
over a market cycle of three to five years, consistent with reasonable risk, by
investing primarily in a diversified portfolio of U.S. Governments and
investment-grade corporate fixed income securities, mortgage securities, foreign
bonds and other fixed income securities and derivatives. The portfolio with
maintain an average duration of between two and five years.
The INTERNATIONAL FIXED INCOME PORTFOLIO seeks to achieve above-average total
return over a market cycle of three to five years, consistent with reasonable
risk, by investing primarily in high-grade foreign bonds and derivatives. The
portfolio's average weighted maturity will ordinarily exceed five years.
The LIMITED DURATION PORTFOLIO seeks to achieve above-average total return over
a market cycle of three to five years, consistent with reasonable risk, by
investing primarily in a diversified portfolio of U.S. Governments, mortgage
securities, investment-grade corporate fixed income securities and other fixed
income securities. The portfolio will maintain an average duration of between
one and three years.
The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks to achieve above-average total
return over a market cycle of three to five years, consistent with reasonable
risk, by investing primarily in a diversified portfolio of mortgage securities
and other fixed income securities and derivatives. The portfolio's average
weighted maturity will ordinarily exceed seven years.
The MUNICIPAL PORTFOLIO seeks to realize above-average total return over a
market cycle of three to five years, consistent with conservation of capital and
the realization of current income which is exempt from federal income tax, by
investing primarily in a diversified portfolio of municipal and other fixed
income securities and derivatives, including a limited percentage of bonds rated
below investment grade. The portfolio's average weighted maturity will
ordinarily be between five and ten years.
The PA MUNICIPAL PORTFOLIO seeks to realize above-average total return over a
market cycle of three to five years, consistent with the conservation of capital
and the realization of current income which is exempt from federal income tax
and Pennsylvania personal income tax by investing in a diversified portfolio of
Pennsylvania municipal and other fixed income securities and derivatives
including a limited percentage of bonds rated below investment grade. The
portfolio's average weighted maturity will ordinarily be between five and ten
years.
The SPECIAL PURPOSE FIXED INCOME PORTFOLIO seeks to achieve above-average total
return over a market cycle of three to five years, consistent with reasonable
risk, by investing primarily in a diversified portfolio of U.S. Governments,
corporate fixed income securities, mortgage securities, foreign bonds and other
fixed income securities and derivatives. The portfolio's average weighted
maturity will ordinarily exceed five years.
BALANCED PORTFOLIOS:
The BALANCED PORTFOLIO seeks to achieve above-average total return over a market
cycle of three to five years, consistent with reasonable risk, by investing in a
diversified portfolio of equity securities, fixed income securities and
derivatives. When MAS judges the relative outlook for the equity and
fixed-income markets to be neutral, the portfolio will be invested 60% in equity
securities and 40% in fixed-income securities. The asset mix is actively
managed by MAS, with equity securities ordinarily representing between 45% and
75% of the total investment. The average weighted maturity of the fixed-income
portion of the portfolio will ordinarily be greater than five years.
The MULTI-ASSET-CLASS PORTFOLIO seeks to achieve above-average total return over
a market cycle of three to five years, consistent with reasonable risk, by
investing primarily in a diversified portfolio of equity securities, fixed
income securities and high yield securities of United States and foreign issuers
and derivatives. The asset mix is actively managed by MAS.
The BALANCED PLUS PORTFOLIO seeks to achieve above-average total return over a
market cycle of three to five years, consistent with reasonable risk, by
investing in a diversified portfolio of common stocks of domestic and foreign
issuers and fixed income securities.
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ADVISORY PORTFOLIOS:
The ADVISORY FOREIGN FIXED INCOME PORTFOLIO seeks to achieve above-average total
return over a market cycle of three to five years, consistent with reasonable
risk, by investing primarily in high-grade foreign bonds and derivatives.
The ADVISORY MORTGAGE PORTFOLIO seeks to achieve returns consistent with returns
generated by the market for mortgage securities by investing primarily (at least
65% of its assets under normal circumstances) in mortgage securities. The
portfolio's average weighted maturity will ordinarily be greater than seven
years.
The EMERGING MARKETS PORTFOLIO seeks to achieve long-term capital growth by
investing primarily in common stocks of emerging market issuers.
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PART C
Morgan Stanley Strategic Adviser Fund, Inc.
Other Information
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
To be filed by Pre-Effective Amendment.
(B) EXHIBITS
1 Registrant's Articles of Incorporation are filed herewith.
2 Registrant's By-laws are filed herewith.
3 Not applicable.
4 Not applicable.
5 Form of Investment Advisory Agreement between Registrant and Morgan Stanley
Asset Management Inc. ("MSAM") with respect to the Strategic Adviser
Conservative, Strategic Adviser Moderate and Strategic Adviser Aggressive
Portfolios is filed herewith.
6 Form of Distribution Agreement between Registrant and Morgan Stanley & Co.
Incorporated is filed herewith.
7 Not applicable.
8 Form of Registrant's Custodian Agreement to be filed by amendment.
9 (a) Form of Administration Agreement between Registrant and Morgan Stanley
Asset Management Inc. is filed herewith.
(b) Form of Sub-Administration Agreement between Registrant and The Chase
Manhattan Bank to be filed by amendment.
10 Opinion of Counsel to be filed by amendment.
11 Consent of Independent Accountants is filed herewith.
12 Not applicable.
13 Not applicable.
14 Not applicable.
15 Form of Plan of Distribution pursuant to Rule 12b-1 for shares of the
Strategic Adviser Aggressive, Strategic Adviser Conservative and Strategic
Adviser Moderate Portfolios is filed herewith.
16 Not applicable.
18 Registrant's Rule 18f-3 Multiple Class Plan is filed herewith.
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24 Powers of Attorney are filed herewith.
27 Financial Data Schedules to be filed by amendment.
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
No person is controlled by or under common control with the
Registrant.
Item 26. NUMBER OF HOLDERS OF SECURITIES
The following information is given as of June 30, 1997
Number of
Title of Class Record Holders
-------------- --------------
Strategic Adviser Conservative Portfolio. . . . . . . . 0
Strategic Adviser Moderate Portfolio. . . . . . . . . . 0
Strategic Adviser Aggressive Portfolio. . . . . . . . . 0
Item 27. INDEMNIFICATION
Reference is made to Article SEVEN of the Registrant's Articles of
Incorporation. Insofar as indemnification for liability arising under the
Securities Act of 1933, as amended (the "1933 Act"), may be permitted to
directors, officers and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission (the "Commission") such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Reference is made to the caption "Management of the Fund--Investment
Adviser" in the Prospectus constituting Part A of this Registration Statement
and "Management of the Fund" in Part B of this Registration Statement.
Listed below are the officers and Directors of Morgan Stanley Asset
Management Inc.:
DIRECTORS:
James M. Allwin Director
Barton M. Biggs Director
Gordon S. Gray Director
Peter A. Nadosy Director
Dennis G. Sherva Director
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OFFICERS:
Barton M. Biggs Chairman, Managing Director
Peter A. Nadosy Vice Chairman, Managing Director
James M. Allwin President, Managing Director
John R. Alkire Managing Director (MSAM) - Tokyo
P. Dominic Caldecott Managing Director (MSAM) - UK
A. Macdonald Caputo Managing Director
Ean Wah Chin Managing Director (MSAM) - Singapore
Garry B. Crowder Managing Director
Madhav Dhar Managing Director
Kurt A. Feuerman Managing Director
Paul B. Ghaffari Managing Director
Gordon S. Gray Managing Director
Marianne Liang Hay Managing Director (MSAM) - UK
Gary D. Latainer Managing Director
Mahmoud A. Mamdani Managing Director
Robert L. Meyer Managing Director
Russell C. Platt Managing Director
Robert A. Sargent Managing Director (MSAM) - UK
Bidyut C. Sen Managing Director
Vinod R. Sethi Managing Director
Dennis G. Sherva Managing Director
James L. Tanner Managing Director (MSAM) - UK
Richard G. Woolworth, Jr. Managing Director
Debra M. Aaron Principal
Warren Ackerman III Principal
Robert E. Angevine Principal
Suzanne S. Akers Principal
Gerald P. Barth-Wehrenalp Principal
Theodore R. Bigman Principal
Francine J. Bovich Principal
Stuart J.M. Breslow Principal
Andrew C. Brown Principal (MSAM) - UK
Jeffrey P. Brown Principal
Frances Campion Principal (MSAM) - UK
Terence P. Carmichael Principal
Arthur Certosimo Principal
Stephen C. Cordy Principal
Jacqueline A. Day Principal (MSAM) - UK
Raye L. Dube Principal
Abigail Jones Feder Principal
Eugene Flood, Jr. Principal
Thomas C. Frame Principal
James Wayne Grisham Principal
Perry E. Hall II Principal
Ruth A. Hughes-Guden Principal
Margaret Kinsley Johnson Principal
Michael F. Klein Principal
Michael B. Kushma Principal
Khoon-Min Lim Principal
Marianne J. Lippmann Principal
Yvonne Longley Principal (MSAM) - UK
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<PAGE>
Andrew Mack Principal (MSAM) - UK
Gary J. Mangino Principal
Jeffrey Margolis Principal
M. Paul Martin Principal
Walter Maynard, Jr. Principal
Margaret P. Naylor Principal (MSAM) - UK
Yoshiro Okawa Principal (MSAM) - Tokyo
Christopher G. Petrow Principal
Narayan Ramachandran Principal
Gail Hunt Reeke Principal
Christine I. Reilly Principal
Stefano Russo Principal (MSAM) - Milan
Bruce R. Sandberg Principal
Kiat Seng Seah Principal (MSAM) - Singapore
Stephen C. Sexauer Principal
Robert M. Smith Principal
Kunihiko Sugio Principal (MSAM) - Tokyo
Anne D. Thievierge Principal
Philip W. Winters Principal
Alford E. Zick, Jr. Principal
Maryann Savadelis Agre Vice President
Peter Aliprantis Vice President
Jeffrey Alvino Vice President
Alistair Anderson Vice President
William S. Auslander Vice President
Kimberly L. Austin Vice President
Marshall T. Bassett Vice President
Christopher Blair Vice President
Richard Boon Vice President
Geraldine Boyle Vice President
Paul Boyne Vice President
L. Kenneth Brooks Vice President
Jonathan Paul Buckeridge Vice President (MSAM) - Melbourne
Carl Kuo-Wei Chien Vice President (MSAM) - Hong Kong
Lori A. Cohane Vice President
James Colmenares Vice President
Kate Cornish-Bowden Vice President (MSAM) - UK
Nikhil Dhaon Vice President
Christine H. du Bois Vice President
Richard S. Farden Vice President
Daniel E. Fox Vice President
Karen T. Frost Vice President (MSAM) - UK
Josephine M. Glass Vice President
Charles A. Golden Vice President
Dimitri Goulandris Vice President
James A. Grasselino Vice President
Kenneth John Greig Vice President (MSAM) - UK
Maureen A. Grover Vice President
Michael Hewett Vice President
Kenneth R. Holley Vice President
Holly D. Hopps Vice President
Etsuko Fuseya Jennings Vice President
Donald B. Johnston Vice President
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<PAGE>
Jaideep Khanna Vice President
Peter L. Kirby Vice President
George Koshy Vice President
Paul Koske Vice President
Daniel R. Lascano Vice President
Arthur J. Lev Vice President
Valerie Y. Lewis Vice President
Jane Likins Vice President (MSAM) - UK
William David Lock Vice President (MSAM) - UK
Gordon W. Loery Vice President
Paula J. Morgan Vice President (MSAM) - UK
Nancy Morton Vice President
Clare K. Mutone Vice President
Terumi Nagata Vice President (MSAM) - Tokyo
Bradley Okita Vice President
Martin O. Pearce Vice President
Alexander A. Pena Vice President
Anthony J. Pesce Vice President
David J. Polansky Vice President
Karen Post Vice President
Akash Prakash Vice President (MSAM) - Mumbai
Gregg A. Robinson Vice President
Gerald D. Rubin Vice President
Donald P. Ryan Vice President
Neil Siegel Vice President
Ashutosh Sinha Vice President
Andy B. Skov Vice President
Michael James Smith Vice President (MSAM) - UK
Kim I. Spellman Vice President
Joseph P. Stadler Vice President
Christian K. Stadlinger Vice President
Catherine Steinhardt Vice President
Ram K. Sundaram Vice President
Keiko Tamaki-Kuroda Vice President
Shunso Tatsumi Vice President
Louise Teeple Vice President
Joseph Y.S. Tern Vice President (MSAM) - Singapore
Landon Thomas Vice President
Richard Boon Hwee Toh Vice President (MSAM) - Singapore
K.N. Vaidyanathan Vice President (MSAM) - Bombay
Dennis J. Walsh Vice President
Jacob Walthour Vice President
Kevin V. Wasp Vice President
Patricia Woo Vice President
Harold J. Schaaff, Jr. Principal, General Counsel and Secretary
Eileen K. Murray Managing Director and Treasurer
Madeline D. Barkhorn Assistant Secretary
Charlene R. Herzer Assistant Secretary
In addition, MSAM acts as investment adviser to the following registered
investment companies: American Advantage International Equity Fund; The
Brazilian Investment Fund, Inc.; The Enterprise Group of
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<PAGE>
Funds, Inc. - Tax-Exempt Income Portfolio; Fortis Series Fund, Inc. - Global
Asset Allocation Series; Fountain Square International Equity Fund; General
American Capital Company; The Latin American Discovery Fund, Inc.; certain
portfolios of The Legends Fund, Inc.; The Malaysia Fund, Inc.; Morgan Stanley
Africa Investment Fund, Inc.; Morgan Stanley Asia-Pacific Fund, Inc.; Morgan
Stanley Emerging Markets Debt Fund, Inc.; Morgan Stanley Emerging Markets Fund,
Inc.; Morgan Stanley European Emerging Markets Fund, Inc.; all funds of the
Morgan Stanley Fund, Inc.; Morgan Stanley Global Opportunity Bond Fund, Inc.;
The Morgan Stanley High Yield Fund, Inc.; Morgan Stanley India Investment Fund,
Inc.; Morgan Stanley Fund, Inc.; Morgan Stanley Institutional Fund, Inc.; The
Pakistan Investment Fund, Inc.; PCS Cash Fund, Inc.; Principal Aggressive Growth
Fund, Inc.; Principal Asset Allocation Fund, Inc.; certain portfolios of Sun
America Series Trust; The Thai Fund, Inc. and The Turkish Investment Fund, Inc.
Item 29. PRINCIPAL UNDERWRITERS
Morgan Stanley & Co. Incorporated ("MS&Co.") is distributor for Morgan
Stanley Strategic Adviser Fund, Inc., Morgan Stanley Institutional Fund, Inc.
and Morgan Stanley Universal Funds, Inc. Van Kampen American Capital
Distributors, Inc. is distributor for Morgan Stanley Fund, Inc. The information
required by this Item 29 with respect to each Director and officer of MS&Co. is
incorporated by reference to Schedule A of Form BD filed by MS&Co. pursuant to
the Securities and Exchange Act of 1934, as amended (SEC File No. 8-15869).
Item 30. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts and other documents required by Section 31(a) under the
Investment Company Act of 1940, as amended, and the rules promulgated thereunder
are maintained in the physical possession of the Registrant; Registrant's
Transfer Agent, Chase Global Funds Services Company, P.O. Box 2798, Boston,
Massachusetts 02208-2798; and the Registrant's custodian banks, including
sub-custodians.
Item 31. MANAGEMENT SERVICES
MSAM has entered into a Chase Administration Agreement with The Chase
Manhattan Bank ("Chase") (which will be filed by amendment) pursuant to which
Chase will provide the following services to the Registrant: (i) managing,
administering and conducting the general business activities of the Registrant,
other than those which are contracted to third parties; (ii) providing personnel
and facilities to perform the foregoing; (iii) accounting services, including
the preparation of statements and reports; (iv) transfer agent services,
including processing correspondence from shareholders, recording transfers,
issuing stock certificates and handling checks; (v) handling dividends and
distributions, including disbursing, withholding and tax reporting; and (vi)
providing office facilities, statistical and research data, office supplies and
assisting the Registrant to comply with regulatory developments.
Item 32. UNDERTAKINGS
(a) Not applicable.
(b) Registrant undertakes to file a post-effective amendment containing
reasonably current financial statements, which need not be certified, for the
Strategic Adviser Conservative, Strategic Adviser Moderate and Strategic Adviser
Aggressive Portfolios, within four to six months from the effective date or this
Registration Statement or the commencement of operations of each such Investment
Fund, whichever is later.
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<PAGE>
(c) Registrant hereby undertakes to furnish to each prospective person to
whom a prospectus will be delivered a copy of Registrant's latest annual report
to shareholders, when such annual report is issued, containing information
called for by Item 5A of Form N-1A, upon request and without charge.
(d) Registrant hereby undertakes that whenever a Shareholder or
Shareholders who meet the requirements of Section 16(c) of the 1940 Act inform
the Board of Directors of his or their desire to communicate with other
Shareholders of the Fund, the Directors will inform such Shareholder(s) as to
the approximate number of Shareholders of record and the approximate costs of
mailing or afford said Shareholders access to a list of Shareholders.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant has duly caused
this Pre-Effective Amendment No. 1 to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of New York and State of New
York on the 28th day of July, 1997.
MORGAN STANLEY STRATEGIC ADVISER FUND, INC.
By: /s/ Michael F. Klein
-----------------------------
Michael F. Klein
President and Director
Pursuant to the requirements of the Securities Act of 1933 as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the date(s) indicated.
Signature Title(s) Date
- --------- -------- ----
/s/ Michael F. Klein Director, President, July 28, 1997
- --------------------------- (Principal Executive
Michael F. Klein Officer)
*/s/ Barton M. Biggs Director (Chairman) July 28, 1997
- ---------------------------
Barton M. Biggs
*/s/ John D. Barrett, II Director July 28, 1997
- ----------------------------
John D. Barrett, II
*/s/ Gerard E. Jones Director July 28, 1997
- ----------------------------
Gerard E. Jones
*/s/ Andrew McNally, IV Director July 28, 1997
- ----------------------------
Andrew McNally, IV
*/s/ Samuel T. Reeves Director July 28, 1997
- ----------------------------
Samuel T. Reeves
*/s/ Fergus Reid Director July 28, 1997
- ----------------------------
Fergus Reid
*/s/ Frederick O. Robertshaw Director July 28, 1997
- ----------------------------
Frederick O. Robertshaw
*/s/ Joanna M. Haigney Treasurer (Principal July 28, 1997
- ---------------------------- Accounting Officer)
Joanna M. Haigney
*By: /s/ Michael F. Klein
-----------------------
Michael F. Klein
Attorney-In-Fact
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
EX-99.B 1 Registrant's Articles of Incorporation are filed herewith.
EX-99.B 2 Registrant's By-laws are filed herewith.
3 Not applicable.
4 Not applicable.
EX-99.B 5 Form of Investment Advisory Agreement between Registrant and
Morgan Stanley Asset Management Inc. ("MSAM") with respect
to the Strategic Adviser Conservative, Strategic Adviser
Moderate and Strategic Adviser Aggressive Portfolios is
filed herewith.
EX-99.B 6 Form of Distribution Agreement between Registrant and Morgan
Stanley & Co. Incorporated is filed herewith.
7 Not applicable.
8 Form of Registrant's Custodian Agreement to be filed by
amendment.
EX-99.B 9(a) Form of Administration Agreement between Registrant and
Morgan Stanley Asset Management Inc. is filed herewith.
(b) Form of Sub-Adminisration Agreement between Registrant and
The Chase Manhattan Bank to be filed by amendment.
10 Opinion of Counsel to be filed by amendment.
EX-99.B 11 Consent of Independent Accountants is filed herewith.
12 Not applicable.
13 Not applicable
14 Not applicable.
EX-99.B 15 Form of Plan of Distribution pursuant to Rule 12b-1 for
shares of the Strategic Adviser Aggressive, Strategic
Adviser Conservative and Strategic Adviser Moderate
Portfolios is filed herewith.
16 Not applicable.
EX-99.B 18 Registrant's Rule 18f-3 Multiple Class Plan is filed
herewith.
EX-99.B 24 Powers of Attorney are filed herewith.
27 Financial Data Schedules to be filed by amendment.
<PAGE>
ARTICLES OF INCORPORATION
MORGAN STANLEY STRATEGIC ADVISER FUND, INC.
Morgan Stanley Strategic Adviser Fund, Inc., a Maryland corporation
having its principal office in Baltimore, Maryland and having its resident agent
located in Baltimore, Maryland (herein after called the "Corporation"), hereby
certifies to the State Department of Assessments and Taxation that:
FIRST: I, THE UNDERSIGNED, Timothy W. Levin, whose post office
address is 2000 One Logan Square, Philadelphia, Pennsylvania 19103, being at
least twenty-one years of age, do under and by virtue of the General Laws of the
State of Maryland authorizing the formation of corporations, associate myself as
incorporator with the intention of forming a corporation.
SECOND: The name of the Corporation is Morgan Stanley Strategic
Adviser Fund, Inc.
THIRD: The purpose for which the Corporation is formed is to act as
an open-end management investment company under the federal Investment Company
Act of 1940 as then in effect and the rules and regulations from time to time
promulgated and effective thereunder (referred to herein collectively as the
"Investment Company Act of 1940") and to exercise and enjoy all of the powers,
rights and privileges granted to, or conferred upon, corporations by the General
Laws of the State of Maryland now or hereafter in force.
FOURTH: The post office address of the principal office of the
Corporation in this State is 11 East Chase Street, Baltimore, Maryland 21202.
The name of the resident agent in this State is CSC-Lawyers Incorporating
Service Company, and the post office address of the resident agent is 11 East
Chase Street, Baltimore, Maryland 21202.
FIFTH: 1. The total number of shares of stock which the Corporation
shall have the authority to issue is three billion (3,000,000,000) shares of
stock, with a par value of one-tenth of one cent ($.001) per share to be known
and designated as Common Stock, such shares of Common Stock having an aggregate
par value of three million dollars ($3,000,000). The Board of Directors shall
have power and authority to increase or decrease, from time to time, the
aggregate number of shares of stock, or any class or series of stock, which the
Corporation shall have the authority to issue.
2. Subject to the provisions of these Articles of Incorporation, the
Board of Directors shall have the power to issue shares of Common Stock of the
Corporation from time to time, at prices not less than the net asset value or
par value thereof, whichever is greater, for such consideration as may be fixed
from time to time pursuant to the direction of the Board of Directors. All
stock shall be issued on a non-assessable basis.
<PAGE>
3. Pursuant to Section 2-105 of the Maryland General Corporation
Law, the Board of Directors of the Corporation shall have the power to designate
one or more classes of shares of Common Stock and separate series of shares
within each such class, to fix the number of shares in any such class or series
and to classify or reclassify any unissued shares with respect to such class or
series. Any such class or series (subject to any applicable rule, regulation or
order of the Securities and Exchange Commission or other applicable law or
regulation) shall have such preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications, terms and
conditions of redemption and other characteristics as the Board may determine in
the absence of contrary determination set forth herein. The aforesaid power
shall include the power to create, by classifying unissued shares in the
aforesaid manner, one or more classes or series in addition to those initially
designated as named below. Subject to such aforesaid power, the Board of
Directors has designated three portfolios of the Corporation. The names of such
classes and series and the number of shares of Common Stock classified and
allocated to these classes and series are as follows:
NUMBER OF SHARES OF COMMON
NAME OF CLASS NAME OF SERIES STOCK CLASSIFIED AND ALLOCATED
------------- -------------- ------------------------------
Strategic Adviser
Conservative Portfolio Class A 500,000,000
Strategic Adviser
Conservative Portfolio Class B 500,000,000
Strategic Adviser Moderate
Portfolio Class A 500,000,000
Strategic Adviser Moderate
Portfolio Class B 500,000,000
Strategic Adviser
Aggressive Portfolio Class A 500,000,000
Strategic Adviser
Aggressive Portfolio Class B 500,000,000
4. Each share of a class shall have equal rights with each other
share of that class with respect to the assets of the Corporation pertaining to
that class. The dividends payable to the holders of any class or series
(subject to any applicable rule, regulation or order of the Securities and
Exchange Commission or any other applicable law or regulation) shall be
determined by the Board and need not be individually declared, but may be
declared and paid in accordance with a formula adopted by the Board, whether or
not the amount of dividend or distribution so declared can be calculated at the
time of such declaration.
5. The holder of each share of stock of the Corporation shall be
entitled to one vote for each full share and a fractional vote for each
fractional share of stock, irrespective of the class or series, then outstanding
in his or her name in the books of the Corporation. On any matter submitted to
a vote of stockholders, all shares of the Corporation then issued and
outstanding and entitled to vote, irrespective of the class or series, shall be
voted in the aggregate and not by class or series except (1) when otherwise
expressly provided by the Maryland General
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<PAGE>
Corporation Law, or (2) when required by the Investment Company Act of 1940,
as amended, shares shall be voted by class or series and (3) when the matter
does not affect any interest of a particular class or series, then only
stockholders of such other class(es) or series whose interests may be
affected shall be entitled to vote thereon. Holders of shares of stock of the
Corporation shall not be entitled to cumulative voting in the election of
Directors or on any other matter.
6. All consideration received by the Corporation for the issue or
sale of stock of each class, together with all income, earnings, profits, and
proceeds thereof, including any proceeds derived from the sale, exchange or
liquidation thereof, and any funds or payments derived from any reinvestment
of such proceeds in whatever form the same may be, shall belong to the class
of shares of stock with respect to which such assets, payments or funds were
received by the Corporation for all purposes, subject only to the rights of
creditors, and shall be so handled upon the books of account of the
Corporation. Such assets, income, earnings, profits and proceeds thereof,
including any proceeds derived from the sale, exchange or liquidation thereof
and any assets derived from any reinvestment of such proceeds in whatever
form the same may be, are herein referred to as "assets belonging to" such
class.
7. The Board of Directors may from time to time declare and pay
dividends or distributions, in stock property or in cash, on any or all classes
of stock and to the stockholders of record as of such date as the Board of
Directors may determine, provided such dividends or distributions on shares of
any class of stock shall be paid only out of earnings, surplus, or other
lawfully available assets belonging to such class. Subject to the foregoing
proviso, the amount of any dividends or distributions and the payment thereof
shall be wholly in the discretion of the Board of Directors.
8. In the event of the liquidation or dissolution of the
Corporation, stockholders of each class shall be entitled to receive, as a
class, out of the assets of the Corporation available for distribution to
stockholders, but other than general assets, the assets belonging to such class
and the assets so distributable to the stockholders of any class shall be
distributed among such stockholders in proportion to the number of shares of
such class held by them and recorded on the books of the Corporation. In the
event that there are any general assets not belonging to any particular class of
stock and available for distribution, such distribution shall be made to the
holders of stock of all classes in proportion to the net asset value of the
respective class determined as hereinafter provided.
9. The assets belonging to any class of stock shall be charged with
the liabilities in respect to such class and shall also be charged with its
share of the general liabilities of the Corporation, in proportion to the net
asset value of the respective class determined as hereinafter provided. The
determination of the Board of Directors shall be conclusive as to the amount of
liabilities, including accrued expenses and reserves, as to the allocation of
the same as to a given class, and as to whether the same or general assets of
the Corporation are allocable to one or more classes.
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<PAGE>
10. The Board of Directors may provide for a holder of any class or
series of stock of the Corporation, who surrenders his certificate, if any, in
good form for transfer to the Corporation or, if the shares in question are not
represented by certificates, who delivers to the Corporation a written request
in good order signed by the shareholder to convert the shares in question on
such basis as the Board may provide, into shares of stock of any other class or
series of the Corporation.
11. Subject to subsection 12 below, the net asset value per share of
the Corporation's Common Stock shall be determined by adding the value of all
securities, cash and other assets of the Corporation pertaining to that class
subtracting the liabilities applicable to that class (or any series thereof),
allocating any general assets and general liabilities to that class and dividing
the net result by the number of shares of that class or series outstanding.
Subject to subsection 12 below, the value of the securities, cash and other
assets, and the amount and nature of liabilities, and the allocation thereof to
any particular class or series, shall be determined pursuant to procedures or
methods prescribed by or approved by the Board of Directors in its sole
discretion and shall be so determined at the time or times prescribed or
approved by the Board of Directors in its sole discretion.
12. The net asset value per share of the Corporation's Common Stock
for the purpose of issue, redemptions or repurchase of a share, shall be
determined in accordance with the Investment Company Act of 1940 and any other
applicable federal securities law or rule or regulation.
13. All shares now or hereafter authorized shall be subject to
redemption and redeemable at the option of the stockholder, in the sense used in
the General Corporation Law of the State of Maryland. Each holder of a share,
upon request to the Corporation accompanied by surrender of the appropriate
stock certificate or certificates, if any, in proper form for transfer, shall
be entitled to require the Corporation to redeem all or any part of the shares
standing in the name of such holder on the books of the Corporation at a
redemption price per share equal to the net asset value per share determined in
accordance with these Articles of Incorporation.
14. Notwithstanding subsection 13 above, (or any other provision of
these Articles of Incorporation), the Board of Directors of the Corporation may
suspend the right of the holders of shares to require the Corporation to redeem
such shares (or may suspend any voluntary purchase of such shares pursuant to
the provisions of these Articles of Incorporation) during any national financial
emergency.
For the purpose of these Articles of Incorporation, a "national
financial emergency" is defined as the whole or any part of any period (i)
during which the New York Stock Exchange is closed other than customary weekend
and holiday closing, (ii) during which trading on the New York Stock Exchange is
restricted, (iii) during which an emergency exists as a result of which disposal
by the Corporation of securities owned by such class is not reasonably
practicable or it is not reasonably practicable for the Corporation fairly to
determine the value of the net assets of such class, or (iv) during any other
period when the Securities and Exchange
-4-
<PAGE>
Commission (or any succeeding governmental authority) may for the protection
of security holders of the Corporation by order permit suspension of the
right of redemption or postponement of the date of payment on redemption,
provided that applicable rules and regulations of the Securities and Exchange
Commission (or any succeeding governmental authority) shall govern as to
whether the conditions under which (a) trading shall be deemed to be
restricted, and (b) an emergency shall be deemed to exist.
15. The Board of Directors may by resolution from time to time
authorize the repurchase by the Corporation, either directly or through an
agent, of shares upon such terms and conditions and for such consideration as
the Board of Directors shall deem advisable, out of funds legally available
therefor, at prices per share not in excess of the net asset value per share
determined in accordance with this Article and to take all other steps deemed
necessary or advisable in connection therewith.
16. Except as otherwise permitted by the Investment Company Act of
1940, payment of the redemption or repurchase of shares surrendered to the
Corporation for redemption pursuant to the provisions of subsection 12 or 18 of
this Article or for repurchase by the Corporation pursuant to the provisions of
subsection 15 of this Article shall be made by the Corporation within seven days
after surrender of such shares to the Corporation for such purpose. Any such
payment may be made in whole or in part in portfolio securities or in cash, as
the Board of Directors shall deem advisable, and no stockholder shall have the
right, other than as determined by the Board of Directors, to have his shares
redeemed or repurchased in portfolio securities.
17. In the absence of any specifications as to the purposes for which
shares are redeemed or repurchased by the Corporation, all shares so redeemed or
repurchased shall be deemed to be acquired for retirement in the sense
contemplated by the General Corporation Law of the State of Maryland. Shares
retired by redemption or repurchase shall thereafter have the status of
authorized but unissued shares.
18. All shares now or hereafter authorized shall be subject to
redemption and redeemable at the option of the Corporation. The Board of
Directors may by resolution from time to time authorize the Corporation to
require the redemption of all or any part of any outstanding shares, without the
vote or consent of stockholders (including through the establishment of uniform
standards with respect to the minimum net asset value of a stockholder account)
upon the sending of written notice thereof to each stockholder any of whose
shares are so redeemed and upon such terms and conditions as the Board of
Directors shall deem advisable, out of funds legally available therefore, at net
asset value per share determined in accordance with the provisions of this
Article and to take all other steps deemed necessary or advisable in connection
therewith. The Board of Directors may authorize the closing of those accounts
not meeting the specified minimum standards of net asset value by redeeming all
of the shares in such accounts.
-5-
<PAGE>
19. The holders of shares of Common Stock or other securities of the
Corporation shall have no preemptive rights to subscribe to new or additional
shares of its Common Stock or other securities.
SIXTH: The number of directors of the Corporation shall be three
provided, however, that the number of Directors may be increased or decreased in
accordance with the By-laws so long as the number is never less than three. The
names of the directors who shall act until the first annual meeting or until
their successors are duly chosen and qualify are: Michael F. Klein, Harold J.
Schaaff, Jr. and Joseph A. Messing.
SEVENTH: 1. A director or officer of the Corporation shall not be
liable to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director or officer, except to the extent such exemption
from liability or limitation thereof is not permitted by laws (including the
Investment Company Act of 1940) as currently in effect or as the same may
hereafter be amended.
No amendment, modification or repeal of this Section 1 shall adversely
affect any right to protection of a director or officer that exists at the time
of such amendment, modification or repeal.
2. The Corporation shall indemnify to the fullest extent permitted by
law (including the Investment Company Act of 1940) as currently in effect or as
the same may hereafter be amended, any person made or threatened to be made a
party to any action, suit or proceeding, whether criminal, civil, administrative
or investigative, by reason of the fact that such person or such person's
testator or intestate is or was a director or officer of the Corporation or
serves or served at the request of the Corporation any other enterprise as a
director or officer. To the fullest extent permitted by law (including the
Investment Company Act of 1940) as currently in effect or as the same may
hereafter be amended, expenses incurred by any such person in defending any such
action, suit or proceeding shall be paid or reimbursed by the Corporation
promptly upon receipt by it of an undertaking of such person to repay such
expenses if it shall ultimately be determined that such person is not entitled
to be indemnified by the Corporation. The rights provided to any person in this
Section 2 shall be enforceable against the Corporation by such person who shall
be presumed to have relied upon it in serving or continuing to serve as a
director or officer as provided above. No amendment of this Section 2 shall
impair the rights of any person arising at any time with respect to events
occurring prior to such amendment. For purposes of this Section 2, the term
"Corporation" shall include any predecessor of the Corporation and any
constituent corporation (including any constituent) absorbed by the Corporation
in a consolidation or merger; the term "other enterprise" shall include any
corporation, partnership, joint venture, trust or employee benefit plan; service
"at the request of the Corporation" shall include service as a director or
officer of the Corporation which imposes duties on, or involves services by,
such director or officer with respect to an employee benefit plan, its
participants or beneficiaries; any excise taxes assessed on a person with
respect to an employee benefit plan shall be deemed to be indemnifiable
expenses; and action by a person with respect to any employee benefit plan which
such person reasonably believes to be in
-6-
<PAGE>
the interest of the participants and beneficiaries of such plan shall be
deemed to be action not opposed to the best interests of the Corporation.
The provisions of this Section 2 shall be in addition to the other provisions
of this Article SEVENTH.
3. Nothing in this Article protects or purports to protect, any
director or officer against any liability to the Corporation or its security
holders to which he or she would otherwise be subject by reason of willful
malfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office.
4. Each section or portion thereof of this Article shall be deemed
severable from the remainder, and the invalidly of any such section or portion
shall not affect the validity of the remainder of this Article.
EIGHTH: The Board of Directors shall have the management and control
of the property, business and affairs of the Corporation and is hereby vested
with all the powers possessed by the Corporation itself so far as is not
inconsistent with law or these Articles of Incorporation. In furtherance and
without limitation of the foregoing provisions, it is expressly declared that,
subject to these Articles of Incorporation, the Board of Directors shall have
power:
1. To make, alter, amend or repeal from time to time the By-laws of
the Corporation except as such power may otherwise be limited in the By-laws.
2. To authorize the repurchase of shares in the open market or
otherwise, at prices not in excess of the net asset value of such shares
determined in accordance with Article FIFTH hereof, provided the Corporation has
assets legally available for such purpose, and to pay for such shares in cash,
securities or other assets then held or owned by the Corporation.
3. To fix an offering price for the shares of any class which shall
yield to the Corporation not less than the par value thereof, at which price the
shares of the Common Stock of the Corporation shall be offered for sale, and to
determine from time to time thereafter the offering price which shall yield to
the Corporation not less than the par value thereof from sales to the shares of
its Common Stock.
4. From time to time to determine whether and to what extent and at
what times and places and under what conditions and regulations the books and
accounts of the Corporation, or any of them other than the stock ledger, shall
be open to the inspection of the stockholders, and no stockholder shall have any
right to inspect any account or book or document of the Corporation, except as
conferred by law or authorized by resolution of the Board of Directors or of the
stockholders.
5. In addition to the powers and authorities granted herein and by
statue expressly conferred upon it, the Board of Directors is authorized to
exercise all such powers and do all acts and things as may be exercised or done
by the Corporation, subject, nevertheless, to
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the provisions of Maryland laws, of these Articles of Incorporation, and of
the By-Laws of the Corporation.
NINTH: The books of the Corporation may be kept (subject to any
provisions contained in applicable statutes) outside the State of Maryland at
such place or places as may be designed from time to time by the Board of
Directors or in the By-Laws of the Corporation. Election of directors need not
be by ballot unless the By-Laws of the Corporation shall so provide.
TENTH: 1. The presence in person or by proxy of the holders of
record of one-third of the shares issued and outstanding and entitled to vote
thereat shall constitute a quorum for the transaction of any business at all
meetings of the stockholders except as otherwise provided by law or in these
Articles of Incorporation.
2. On any given matter, the presence at any meeting, in person or by
proxy, of holders of record of less than one-third of the shares issued and
outstanding and entitled to vote threat shall not prevent action at such meeting
upon any other matter or matters which may properly come before the meeting, if
there shall be present thereat, in person or by proxy, holders of record of the
number of shares required for action in respect of such other matter or matters.
3. Notwithstanding any provision of Maryland law requiring more than
a majority vote of the Common Stock, or any class or series thereof, in
connection with any corporation action (including, but not limited to, the
amendment of these Articles of Incorporation), unless otherwise provided in
these Article of Incorporation the Corporation may take or authorize such action
upon the favorable vote of the holders of a majority of the outstanding shares
of Common Stock entitled to vote thereon.
ELEVENTH: All persons who shall acquire shares in the Corporation
shall acquire the same subject to the provisions of these Articles of
Incorporation.
TWELFTH: The Corporation reserves the right from time to time to
amend, alter, or repeal any of the provisions of these Articles of Incorporation
(including any amendment that changes the terms of any of the outstanding shares
by classification, reclassification or otherwise), and any contract rights, as
expressly set forth in these Articles of Incorporation, of any outstanding
shares, and to add or insert any other provisions that may, under the statutes
of the State of Maryland at the time in force, be lawfully contained in articles
of incorporation, and all rights at any time conferred upon the stockholders of
the Corporation by these Articles of Incorporation are subject to the provisions
of this Article TWELFTH.
The term "Articles of Incorporation" as used herein and in the By-laws
of the Corporation shall be deemed to mean these Articles of Incorporation as
from time to time amended and restated.
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IN WITNESS WHEREOF, the undersigned incorporator of MORGAN STANLEY STRATEGIC
ADVISER FUND, INC. has signed these Articles of Incorporation on this 20th day
of May, 1997.
MORGAN STANLEY STRATEGIC ADVISER FUND, INC.
By /s/ Timothy W. Levin
----------------------
Timothy W. Levin
Incorporator
Attest:
By /s/ Vicky M. Cotugno
----------------------
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CERTIFICATE
The undersigned Incorporator of MORGAN STANLEY STRATEGIC ADVISER FUND,
INC., who executed on behalf of said corporation the foregoing Articles of
Incorporation of which this certificate is made a part, hereby acknowledges, in
the name and on behalf of said corporation, the foregoing Articles of
Incorporation to be his act and further certifies that, to the best of his
knowledge, information and belief, the matters and facts set forth therein are
true in all material respects, under the penalties of perjury.
/s/ Timothy W. Levin
-------------------------
Timothy W. Levin
Incorporator
Dated: May 20, 1997
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BY-LAWS OF
MORGAN STANLEY STRATEGIC ADVISER FUND, INC.
(The "Corporation")
ARTICLE I
Fiscal Year and Offices
Section 1. FISCAL YEAR. Unless otherwise provided by resolution of the
Board of Directors the fiscal year of the Corporation shall begin on January 1
and end on the last day of December.
Section 2. RESIDENT AGENT AND PRINCIPAL OFFICE. The principal office of
the Corporation in Maryland shall be located at 11 East Chase Street, Baltimore,
Maryland 21202, and the name and address of its Resident Agent is CSC-Lawyers
Incorporating Service Company, 11 East Chase Street, Baltimore, Maryland, 21202.
Section 3. OTHER OFFICES. The Corporation shall also have a place of
business in New York, New York, and the Corporation shall have the power to open
additional offices for the conduct of its business in such places as the Board
of Directors may from time to time designate.
ARTICLE II
Meetings of Stockholders
Section 1. PLACE OF MEETING. Meetings of the Stockholders for the
election of Directors shall be held in such place as the Board of Directors may
by resolution establish. In the absence of any specific resolution, Annual
Meetings of Stockholders shall be held at the Corporation's place of business in
New York, New York. Meetings of Stockholders for any other purpose may be held
at such place and time as shall be fixed by resolution of the Board of Directors
and stated in the notice of the Meeting, or in a duly executed waiver of notice
thereof.
Section 2. ANNUAL MEETINGS. An annual meeting of the Stockholders of the
Corporation shall not be required to be held in any year in which Stockholders
are not required to elect directors under the Investment Company Act of 1940, as
amended (the "1940 Act"), even if the Corporation is holding a meeting of the
Stockholders. The Board of Directors may, in its discretion, hold a meeting to
be designated as the Annual Meeting of Stockholders any year where an election
of directors by Stockholders is not required under the 1940 Act. The date of an
Annual Meeting shall be set by appropriate resolution of the Board of Directors,
and Stockholders shall vote on the election of directors and transact any other
business as may properly be brought before the Annual Meeting.
Section 3. SPECIAL MEETINGS. Special Meetings of the Stockholders may be
called at any time by the Chairman of the Board or the President, or by a
majority of the Board of Directors, and shall be called by the Chairman of the
Board, President or Secretary upon written request of the holders of shares
entitled to cast not less than twenty-five percent of all the votes entitled to
be cast at such meeting provided that (a) such request shall state the purposes
of such meeting and the matters proposed to be acted on, and (b) the
Stockholders requesting such meeting shall have paid to the Corporation the
reasonably estimated cost of preparing and mailing the notice thereof, which the
Secretary shall determine and specify to such Stockholders. No Special Meeting
need be called to consider any matter which is substantially the same as a
matter voted on at any meeting of the Stockholders held during the preceding
twelve months.
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Section 4. NOTICE. Not more than ninety days, nor less than ten days
before the date of every Annual or Special Stockholders Meeting, the Secretary
shall cause to be mailed to each Stockholder entitled to vote at such meeting at
his or her address (as it appears on the records of the Corporation at the time
of mailing) written notice stating the time and place of the meeting and, in the
case of a Special Meeting of Stockholders, shall be limited to the purposes
stated in the notice. Notice of any Stockholders' meeting need not be given to
any Stockholder who shall sign a written waiver of such notice whether before or
after the time of such meeting, or to any Stockholder who shall attend such
meeting in person or by proxy. Notice of adjournment of a Stockholders' meeting
to another time or place need not be given, if such time and place are announced
at the meeting.
Section 5. RECORD DATE FOR MEETINGS. The Board of Directors may fix in
advance a date not more than ninety days, nor less than ten days, prior to the
date of any Annual or Special Meeting of the Stockholders as a record date for
the determination of the Stockholders entitled to receive notice of, and to vote
at any meeting and any adjournment thereof; and in such case such Stockholders
and only such Stockholders as shall be Stockholders of record on the date so
fixed shall be entitled to receive notice of and to vote at such meeting and any
adjournment thereof, as the case may be, notwithstanding any transfer of any
stock on the books of the Corporation after any such record date fixed as
aforesaid.
Section 6. QUORUM. At any meeting of Stockholders, the presence in person
or by proxy of the holders of one-third of all the votes entitled to be cast at
the meeting shall constitute a quorum for the transaction of business at the
meeting, except that where any provision of law or the Articles of Incorporation
require that the holders of any class of shares shall vote as a class, then
one-third of the aggregate number of shares of that class at the time
outstanding shall be necessary to constitute a quorum for the transaction of
such business. If, however, such quorum shall not be present or represented at
any meeting of the Stockholders, any officer entitled to preside at, or act as
Secretary of, such meeting, shall have the power to adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present or represented. At such adjourned meeting at which a
quorum shall be present or represented any business may be transacted which
might have been transacted at the meeting as originally notified.
Section 7. VOTING. Each Stockholder shall have one vote for each full
share and a fractional vote for each fractional share of stock having voting
power held by such Stockholder on the record date set pursuant to Section 5 on
each matter submitted to a vote at a meeting of Stockholders. Such vote may be
made in person or by proxy. If no record date has been fixed for the
determination of Stockholders, the record date for the determination of
Stockholders entitled to notice of or to vote at a meeting of Stockholders shall
be at the close of business (i) on the day on which notice of the meeting is
mailed or (ii) on the day 30 days before the meeting, whichever is the closer
date to the meeting. At all meetings of the Stockholders, a quorum being
present, all matters shall be decided by majority vote of the shares of stock
entitled to vote held by Stockholders present in person or by proxy, unless the
question is one which by express provision of the laws of the State of Maryland,
the 1940 Act, as from time to time amended, or the Articles of Incorporation, a
different vote is required, in which case such express provision shall control
the decision of such question. At all meetings of Stockholders, unless the
voting is conducted by inspectors, all questions relating to the qualification
of voters and the validity of proxies and the acceptance or rejection of votes
shall be decided by the Chairman of the meeting.
Section 8. VOTING - PROXIES. The right to vote by proxy shall exist only
if the instrument authorizing such proxy to act shall have been executed in
writing by the Stockholder himself or herself or by his or her attorney
thereunto duly authorized in writing. No proxy shall be voted on after eleven
months from its date unless it provides for a longer period. Each proxy shall
be in writing subscribed by the Stockholder or his or her duly authorized
attorney and shall be dated, but need not be sealed, witnessed or acknowledged.
A proxy with respect to stock held in the name of two or more persons shall be
valid if executed by one of them unless at or prior to exercise of such proxy
the Corporation received a specific written notice to the contrary from any one
of them. A
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proxy purporting to be executed by or on behalf of a Stockholder
shall be deemed valid unless challenged at or prior to its exercise.
Section 9. INSPECTORS. At any election of Directors, the Board of
Directors prior thereto may, or, if they have not so acted, the Chairman of the
meeting, may appoint one or more inspectors of election who shall first
subscribe an oath of affirmation to execute faithfully the duties of inspectors
at such election with strict impartiality and according to the best of their
ability, and shall after the election make a certificate of the result of the
vote taken. No candidate for the office of Director shall be appointed such
inspector.
Section 10. STOCK LEDGER AND LIST OF STOCKHOLDERS. It shall be the duty
of the Secretary or Assistant Secretary of the Corporation to cause an original
or duplicate stock ledger to be maintained at the office of the Corporation's
transfer agent. Such stock ledger may be in written form or any other form
capable of being converted into written form within a reasonable time for visual
inspection. Any one or more persons, each of whom has been a Stockholder of
record of the Corporation for more than six months next preceding such request,
who owns or own in the aggregate 5% or more of the outstanding capital stock of
the Corporation, may submit a written request to any officer of the Corporation.
Within 20 days after such a request, there shall be prepared and filed at the
Corporation's principal office a list containing the names and addresses of all
Stockholders of the Corporation and the number of shares of each class held by
each Stockholder, certified as correct by an officer of the Corporation, by its
stock transfer agent, or by its registrar.
Section 11. ACTION WITHOUT MEETING. Any action to be taken by
Stockholders may be taken without a meeting if all Stockholders entitled to vote
on the matter consent to the action in writing, and the written consents are
filed with the records of the meetings of Stockholders. Such consent shall be
treated for all purposes as a vote at a meeting.
ARTICLE III
Directors
Section 1. GENERAL POWERS. The business of the Corporation shall be under
the direction of its Board of Directors, which may exercise all powers of the
Corporation, except such as are by statute, or the Articles of Incorporation, or
by these By-Laws conferred upon or reserved to the Stockholders. All acts done
by any meeting of the Directors or by any person acting as a Director, so long
as his or her successor shall not have been duly elected or appointed, shall,
notwithstanding that it be afterwards discovered that there was some defect in
the election of the Directors or of such person acting as aforesaid or that they
or any of them were disqualified, be as valid as if the Directors or such other
person, as the case may be, had been duly elected and were or was qualified to
be Directors or a Director of the Corporation.
Section 2. NUMBER AND TERM OF OFFICE. The number of Directors that shall
constitute the whole Board shall be determined from time to time by the Board of
Directors, but shall not be fewer than three, nor more than fifteen. Each
Director elected shall hold office until the earlier of the following: (i) his
or her successor is elected and qualified; (ii) his or her death; (iii) he or
she shall have resigned; or (iv) he or she shall have been removed as
hereinafter provided in these By-Laws or as otherwise provided by Statute or the
Articles of Incorporation. Directors need not be Stockholders.
Section 3. ELECTION. Initially the Directors shall be those persons named
as such in the Articles of Incorporation. The Directors shall be elected by the
vote of a majority of the shares present in person or by proxy at any Annual
Meeting of the Stockholders, except that any vacancy in the Board of Directors
may be filled by a majority vote of the Board of Directors, although not less
than a quorum, if immediately after filling any such
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vacancy at least two-thirds of the directors then holding office shall have
been elected to such office by the Stockholders. A newly created
directorship may be filled only by a vote of the entire Board of Directors.
However, if at any time less than a majority of the Directors then holding
office were elected by Stockholders, a Stockholders Meeting shall be called
as soon as practicable, and in any event within sixty days, for the purpose
of electing an entire Board of Directors.
Section 4. REMOVAL OF DIRECTORS. At any Stockholders Meeting, provided a
quorum is present, any Director may be removed (either with or without cause) by
the vote of the holders of a majority of the shares present or represented at
the meeting, and at the same meeting a duly qualified person may be elected in
his or her stead by a majority of the votes validly cast.
Section 5. PLACE OF MEETING. Meetings of the Board of Directors, regular
or special, may be held at any place in or out of the State of Maryland as the
Board may from time to time determine.
Section 6. QUORUM. At all meetings of the Board of Directors a majority
of the entire Board of Directors shall constitute a quorum for the transaction
of business and the action of a majority of the Directors present at any meeting
at which a quorum is present shall be the action of the Board of Directors
unless the concurrence of a greater proportion is required for such action by
the laws of Maryland, the 1940 Act, these By-Laws or the Articles of
Incorporation. If a quorum shall not be present at any meeting of Directors,
the Directors present may by a majority vote adjourn the meeting from time to
time without notice other than announcement at the meeting, until a quorum shall
be present.
Section 7. REGULAR MEETINGS. Regular meetings of the Board of Directors
may be held without notice at such time and place as shall from time to time be
determined by the Board of Directors, provided that notice of any change in the
time or place of such meetings shall be sent promptly to each Director not
present at the meeting at which such change was made in the manner provided for
notice of special meetings. Members of the Board of Directors or any committee
designated thereby may participate in a meeting of such Board or committee by
means of a conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other at the same
time, and participation by such means shall constitute presence in person at a
meeting.
Section 8. SPECIAL MEETINGS. Special Meetings of the Board of Directors
may be called by the Chairman of the Board or the President on one day's notice
to each Director; Special Meetings shall be called by the Chairman of the Board,
President or Secretary in like manner and on like notice on the written request
of two or more Directors.
Section 9. INFORMAL ACTIONS. Any action required or permitted to be taken
at any meeting of the Board of Directors or of any committee thereof may be
taken without a meeting, if a written consent to such action is signed in one or
more counterparts by all members of the Board or of such committee, as the case
may be, and such written consent is filed with the minutes of proceedings of the
Board or committee.
Section 10. COMMITTEES. The Board of Directors may by resolution passed
by a majority of the entire Board appoint from among its members an Executive
Committee and other committees composed of two or more Directors, and may
delegate to such committees, in the intervals between meetings of the Board of
Directors, any or all of the powers of the Board of Directors in the management
of the business and affairs of the Corporation, except the powers to declare
dividends or distributions on stock, to issue stock or to recommend to
Stockholders any action requiring Stockholder approval.
Section 11. ACTION OF COMMITTEES. In the absence of an appropriate
resolution of the Board of Directors each committee may adopt such rules and
regulations governing its proceedings, quorum and manner of acting as it
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shall deem proper and desirable, provided that the quorum shall not be less
than two Directors. The committees shall keep minutes of their proceedings
and shall report the same to the Board of Directors at the meeting next
succeeding, and any action by the committee shall be subject to revision and
alteration by the Board of Directors, provided that no rights of third
persons shall be affected by any such revision or alteration. In the absence
of any member of such committee the members thereof present at any meeting,
whether or not they constitute a quorum, may appoint a member of the Board of
Directors to act in the place of such absent member, amend the By-Law, or
approve any merger or share exchange which does not require Stockholder
approval.
Section 12. COMPENSATION. Any Director, whether or not he or she is a
salaried officer or employee of the Corporation, may be compensated for his or
her services as Director or as a member of a committee of Directors, or as
Chairman of the Board or chairman of a committee by fixed periodic payments or
by fees for attendance at meetings or by both, and in addition may be reimbursed
for transportation and other expenses, all in such manner and amounts as the
Board of Directors may from time to time determine.
ARTICLE IV
Notices
Section 1. FORM. Notices to Stockholders shall be in writing and
delivered personally or mailed to the Stockholders at their addresses appearing
on the books of the Corporation. Notices to Directors shall be oral or by
telephone or telegram or in writing delivered personally or mailed to the
Directors at their addresses appearing on the books of the Corporation. Notice
by mail shall be deemed to be given at the time when the same shall be mailed.
Notice to Directors need not state the purpose of a Regular or Special Meeting,
unless as otherwise required by the 1940 Act or other applicable laws or
regulations.
Section 2. WAIVER. Whenever any notice of the time, place or purpose of
any meeting of Stockholders, Directors or a committee is required to be given
under the provisions of Maryland law or under the provisions of the Articles of
Incorporation or these By-laws, a waiver thereof in writing, signed by the
person or persons entitled to such notice and filed with the records of the
meeting, whether before or after the holding thereof, or actual attendance at
the meeting of Stockholders in person or by proxy, or at the meeting of
Directors of committee in person, shall be deemed equivalent to the giving of
such notice to such persons.
ARTICLE V
Officers
Section 1. EXECUTIVE OFFICERS. The officers of the Corporation shall be
chosen by the Board of Directors and shall include a President, who shall be a
Director, a Secretary and a Treasurer. The Board of Directors may, from time to
time, elect or appoint a Controller, one or more Vice Presidents, Assistant
Secretaries and Assistant Treasurers. The Board of Directors, at its
discretion, may also appoint a Director as Chairman of the Board who shall
perform and execute such executive and administrative duties and powers as the
Board of Directors shall from time to time prescribe. The same person may hold
two or more offices, except that no person shall be both President and Secretary
and no officer shall execute, acknowledge or verify any instrument in more than
one capacity, if such instrument is required by law, the Articles of
Incorporation or these By-Laws to be executed, acknowledged or verified by two
or more officers.
Section 2. ELECTION. The Board of Directors shall choose a President, a
Secretary and a Treasurer at its first meeting and thereafter annually. If any
officer or officers are not elected at any such meeting, such officer or
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officers may be elected at any subsequent regular or special meeting of the
Board of Directors. Each officer elected by the Board of Directors shall hold
office until the next annual meeting of the Board of Directors and until his or
her successor shall have been chosen and qualified.
Section 3. OTHER OFFICERS. The Board of Directors from time to time may
appoint such other officers and agents as it shall deem advisable, who shall
hold their offices for such terms and shall exercise powers and perform such
duties as shall be determined from time to time by the Board. The Board of
Directors from time to time may delegate to one or more officers or agents the
power to appoint any such subordinate officers or agents and to prescribe their
respective rights, terms of office, authorities and duties.
Section 4. COMPENSATION. The salaries or other compensation of all
officers and agents of the Corporation shall be fixed by the Board of Directors,
except that the Board of Directors may delegate to any person or group of
persons the power to fix the salary or other compensation of any subordinate
officers or agents appointed pursuant to Section 3 of this Article V.
Section 5. TENURE. The officers of the Corporation shall serve for one
year and until their successors are chosen and qualify. Any officer or agent
may be removed by the affirmative vote of a majority of the Board of Directors
whenever, in its judgment, the best interests of the corporation will be served
thereby. In addition, any officer or agent appointed pursuant to Section 3 may
be removed, either with or without cause, by any officer upon whom such power of
removal shall have been conferred by the Board of Directors. Any vacancy
occurring in any office of the Corporation by death, resignation, removal or
otherwise shall be filled by the Board of Directors, unless pursuant to Section
3 the power of appointment has been conferred by the Board of Directors on any
other officer.
Section 6. PRESIDENT. The President, unless the Chairman has been so
designated, shall be the Chief Executive Officer of the Corporation; he or she
shall preside at all meetings of the Stockholders and Directors in the absence
of the Chairman, and shall see that all orders and resolutions of the Board are
carried into effect. The President, unless the Chairman has been so designated,
shall also be the chief administrative officer of the Corporation and shall
perform such other duties and have such other powers as the Board of Directors
may from time to time prescribe.
Section 7. CHAIRMAN OF THE BOARD. The Chairman of the Board, if one shall
be chosen, shall preside at all meetings of the Board of Directors and
Stockholders, and shall perform and execute such executive duties and
administrative powers as the Board of Directors shall from time to time
prescribe.
Section 8. VICE-PRESIDENT. The Vice-Presidents, in order of their
seniority, shall, in the absence or disability of the President, perform the
duties and exercise the powers of the President and shall perform such other
duties as the Board of Directors or the Chief Executive Officer may from time to
time prescribe.
Section 9. SECRETARY. The Secretary shall attend all meetings of the
Board of Directors and all meetings of the Stockholders and record all the
proceedings thereof and shall perform like duties for any Committee when
required. He or she shall give, or cause to be given, notice of meetings of the
Stockholders and of the Board of Directors, shall have charge of the records of
the Corporation, including the stock books, and shall perform such other duties
as may be prescribed by the Board of Directors or Chief Executive Officer, under
whose supervision he or she shall be. He or she shall keep in safe custody the
seal of the Corporation and, when authorized by the Board of Directors, shall
affix and attest the same to any instrument requiring it. The Board of
Directors may give general authority to any other officer to affix the seal of
the Corporation and to attest the affixing by his or her signature.
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Section 10. ASSISTANT SECRETARIES. The Assistant Secretaries in order of
their seniority, shall, in the absence or disability of the Secretary, perform
the duties and exercise the powers of the Secretary and shall perform such other
duties as the Board of Directors shall prescribe.
Section 11. TREASURER. The Treasurer, unless another officer has been so
designated, shall be the Chief Financial Officer and the principal accounting
officer of the Corporation. He or she shall have general charge of the finances
and books of account of the Corporation. Except as otherwise provided by the
Board of Directors, he or she shall have general supervision of the funds and
property of the Corporation and of the performance by the custodian of its
duties with respect thereto. He or she shall render to the Board of Directors,
whenever directed by the Board, an account of the financial condition of the
Corporation and of all his or her transactions as Treasurer; and as soon as
possible after the close of each financial year he or she shall make and submit
to the Board of Directors a like report for such financial year. He or she
shall cause to be prepared annually a full and correct statement of the affairs
of the Corporation, including a balance sheet and a financial statement of
operations for the preceding fiscal year, which shall be submitted at the Annual
Meeting of Stockholders and filed within twenty days thereafter at the principal
office of the Corporation in the State of Maryland. He or she shall perform all
the acts incidental to the office of Treasurer, subject to the control of the
Board of Directors.
Section 12. CONTROLLER. The Controller shall be under the direct
supervision of the Chief Financial Officer of the Corporation. He or she shall
maintain adequate records of all assets, liabilities and transactions of the
Corporation, establish and maintain internal accounting control and, in
cooperation with the independent public accountants selected by the Board of
Directors, shall supervise internal auditing. He or she shall have such further
powers and duties as may be conferred upon him or her from time to time by the
President or the Board of Directors.
Section 13. ASSISTANT TREASURERS. The Assistant Treasurers, in the order
of their seniority, shall, in the absence or disability of the Treasurer,
perform the duties and exercise the powers of the Treasurer and shall perform
such other duties as the Board of Directors may from time to time prescribe.
Section 14. SURETY BONDS. The Board of Directors may require any officer
or agent of the Corporation to execute a bond (including, without limitation,
any bond required by the 1940 Act, and the rules and regulations of the
Securities and Exchange Commission) to the Corporation in such sum and with such
surety or sureties as the Board of Directors may determine, conditioned upon the
faithful performance of his or her duties of the Corporation, including
responsibility for negligence and for the accounting of any of the Corporation's
property, funds or securities that may come into his or her hands.
ARTICLE VI
Stock
Section 1. CERTIFICATES. No certificates certifying the ownership of
shares shall be issued except as the Directors may otherwise authorize. In the
event that the Directors authorize the issuance of share certificates, subject
to the provisions of Article VII, Section 3, each Stockholder shall be entitled
to a certificate stating the number of shares and the series or class owned by
him or her, in such form as shall be prescribed from time to time by the
Directors. Such certificates shall be signed by the President or any
Vice-President and by the Treasurer or any Assistant Treasurer. Such signatures
may be facsimiles if the certificate is signed by a transfer agent, or by a
registrar, other than a Director, officer or employee of the Corporation. In
case any officer who has signed or whose facsimile signature has been placed on
such certificate shall cease to be such officer before such certificate is
issued, it may be issued by the Corporation with the same effect as if he or she
were such officer at the time of its issue.
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In lieu of issuing certificates for shares, the Directors or the transfer
agent may either issue receipts therefor or may keep accounts upon the books of
the Corporation for the record holders of such shares, who shall in either case
be deemed, for all purposes hereunder, to be the holders of certificates for
such shares as if they had accepted such certificates and shall be held to have
expressly assented and agreed to the terms hereof.
Section 2. LOSS OF CERTIFICATES. In case of the alleged loss or
destruction or the mutilation of a share certificate, a duplicate certificate
may be issued in place thereof, upon such terms as the Directors may prescribe.
Section 3. ISSUANCE OF NEW CERTIFICATE TO PLEDGEE. A pledgee of shares
transferred as collateral security shall be entitled to a new certificate if the
instrument of transfer substantially describes the debt or duty that is intended
to be secured thereby. Such new certificate shall express on its face that it
is held as collateral security, and the name of the pledgor shall be stated
thereon, who alone shall be liable as a Stockholder, and entitled to vote
thereon.
Section 4. DISCONTINUANCE OF ISSUANCE OF CERTIFICATES. The Directors may
at any time discontinue the issuance of share certificates and may, by written
notice to each Stockholder, require the surrender of share certificates to the
Corporation for cancellation. Such surrender and cancellation shall not effect
the ownership of shares in the Corporation.
Section 5. TRANSFER OF CAPITAL STOCK. Transfers of shares of the stock of
the Corporation shall be made on the books of the Corporation by the holder of
record thereof (in person or by his or her attorney thereunto duly authorized by
a power of attorney duly executed in writing and filed with the Secretary of the
Corporation) (i) if a certificate or certificates have been issued, upon the
surrender of the certificate or certificates, properly endorsed or accompanied
by proper instruments of transfer, representing such shares, or (ii) as
otherwise prescribed by the Board of Directors. Every certificate exchanged,
surrendered for redemption or otherwise returned to the Corporation shall be
marked "Canceled" with the date of cancellation.
Section 6. REGISTERED STOCKHOLDERS. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such shares or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by the General Laws of the State of Maryland.
Section 7. TRANSFER AGENTS AND REGISTRARS. The Board of Directors may,
from time to time, appoint or remove transfer agents and/or registrars of
transfers of shares of stock of the Corporation, and it may appoint the same
person as both transfer agent and registrar. Upon any such appointment being
made all certificates representing shares of stock thereafter issued shall be
countersigned by one of such transfer agents or by one of such registrars of
transfers or by both and shall not be valid unless so countersigned. If the
same person shall be both transfer agent and registrar, only one
countersignature by such person shall be required.
Section 8. STOCK LEDGER. The Corporation shall maintain an original stock
ledger containing the names and addresses of all Stockholders and the number and
class of shares held by each Stockholder. Such stock ledger may be in written
form or any other form capable of being converted into written form within a
reasonable time for visual inspection.
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ARTICLE VII
General Provisions
Section 1. RIGHTS IN SECURITIES. The Board of Directors, on behalf of the
Corporation, shall have the authority to exercise all of the rights of the
Corporation as owner of any securities which might be exercised by any
individual owning such securities in his or her own right; including, but not
limited to, the rights to vote by proxy for any and all purposes, to consent to
the reorganization, merger or consolidation of any issuer or to consent to the
sale, lease or mortgage of all or substantially all of the property and assets
of any issuer; and to exchange any of the shares of stock of any issuer for the
shares of stock issued therefor upon any such reorganization, merger,
consolidation, sale lease or mortgage. The Board of Directors shall have the
right to authorize any officer of the investment adviser to execute proxies and
the right to delegate the authority granted by this Section 1 to any officer of
the Corporation.
Section 2. CUSTODIANSHIP.
(a) The Corporation shall place and at all times maintain in the custody of
a custodian or custodians (including any sub-custodian for the custodian) all
funds, securities and similar investments owned by the Corporation. Subject to
the approval of the Board of Directors the custodian may enter into arrangements
with securities depositories, as long as such arrangements comply with the
provisions of the 1940 Act and the rules and regulations promulgated thereunder.
Subject to the foregoing, the custodian (and any sub-custodian) shall be a bank
having no less aggregate capital, surplus and undivided profits as required by
the 1940 Act and the rules and regulations promulgated thereunder or such
greater amounts as determined by the Board of Directors from time to time, and
the custodian shall be appointed from time to time by the Board of Directors,
which shall fix its remuneration.
(b) Upon termination of a custodian agreement or inability of the custodian
to continue to serve, the Board of Directors shall promptly appoint a successor
custodian. But in the event that no successor custodian can be found who has
the required qualifications and is willing to serve, the Board of Directors
shall call as promptly as possible a Special Meeting of the Stockholders to
determine whether the Corporation shall function without a custodian or shall be
liquidated. If so directed by vote of the holders of a majority of the
outstanding shares of stock of the Corporation, the custodian shall deliver and
pay over all property of the Corporation held by it as specified in such vote.
(c) The following provisions shall apply to the employment of a custodian
and to any contract entered into with the custodian so employed:
The Board of Directors shall cause to be delivered to the custodian all
securities owned by the Corporation or to which it may become entitled, and
shall order the same to be delivered by the custodian only in completion of
a sale, exchange, transfer, pledge, or other disposition thereof, all as
the Board of Directors may generally or from time to time require or
approve or to a successor custodian; and the Board of Directors shall cause
all funds owned by the Corporation or to which it may become entitled to be
paid to the custodian, and shall order the same disbursed only for
investment against delivery of the securities acquired, or in payment of
expenses, including management compensation, and liabilities of the
Corporation, including distributions to Stockholders or proper payments to
borrowers of securities representing partial return of collateral, or to a
successor custodian.
Section 3. REPORTS. Not less often than semi-annually, the Corporation
shall transmit to the Stockholders a report of the operations of the
Corporation, based at least annually upon an audit by independent public
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accountants, which report shall clearly set forth, in addition to the
information customarily furnished in a balance sheet and profit and loss
statement, a statement of all amounts paid to security dealers, legal counsel,
transfer agent, disbursing agent, registrar or custodian or trustee, where such
payments are made to a firm, corporation, bank or trust company, having a
partner, officer or director who is also an officer or director of the
Corporation. A copy, or copies, of all reports submitted to the Stockholders of
the Corporation shall also be sent, as required, to the regulatory agencies of
the United States and of the states in which the securities of the Corporation
are registered and sold.
Section 4. SEAL. The corporate seal shall have inscribed thereon the name
of the Corporation, the year of its organization and the words "Corporate Seal,
Maryland". The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
Section 5. EXECUTION OF INSTRUMENTS. All deeds, documents, transfers,
contracts, agreements and other instruments requiring execution by the
Corporation shall be signed by the Chairman or the President or a Vice President
and by the Treasurer or Secretary or an Assistant Treasurer or an Assistant
Secretary, or as the Board of Directors may otherwise, from time to time,
authorize. Any such authorization may be general or confined to specific
instances. Except as otherwise authorized by the Board of Directors, all
requisitions or orders for the assignment of securities standing in the name of
the custodian or its nominee, or for the execution of powers to transfer the
same, shall be signed in the name of the Corporation by the Chairman or the
President or a Vice-President and by the Secretary, Treasurer or an Assistant
Treasurer.
ARTICLE VIII
Amendments
The By-Laws of the Corporation may be altered, amended or repealed either
by the affirmative vote of a majority of the stock issued and outstanding and
entitled to vote in respect thereof and represented in person or by proxy at any
annual or special meeting of the Stockholders, or by the Board of Directors at
any regular or special meeting of the Board of Directors.
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FORM OF MORGAN STANLEY ASSET MANAGEMENT INC.
INVESTMENT ADVISORY AGREEMENT
OF THE MORGAN STANLEY STRATEGIC ADVISER FUND, INC.
AGREEMENT made this by and between Morgan Stanley
Strategic Adviser Fund, Inc., a Maryland corporation (the "Fund") and Morgan
Stanley Asset Management Inc., a Delaware corporation (the "Adviser").
1. DUTIES OF ADVISER. The Fund hereby appoints the Adviser to act as
investment adviser to each of the Fund's Portfolios identified at Schedule A,
and any additional portfolios as may be added to Schedule A by mutual agreement
of the Fund and the Adviser, for the period and on such terms set forth in this
Agreement. The Fund employs the Adviser to manage the investment and
reinvestment of the assets of the Fund's Portfolios, to continuously review,
supervise and administer the investment program of each of the Portfolios, to
determine in its discretion the securities to be purchased or sold and the
portion of each such Portfolio's assets to be held uninvested, to provide the
Fund with records concerning the Adviser's activities which the Fund is required
to maintain, and to render regular reports to the Fund's officer and Board of
Directors concerning the Adviser's discharge of the foregoing responsibilities.
The Adviser shall discharge the foregoing responsibilities subject to the
control of the officers and the Board of Directors of the Fund, and in
compliance with the objectives, policies and limitations set forth in the Fund's
prospectus and applicable laws and regulations. The Adviser accepts such
employment and agrees to render the services and to provide, at its own expense,
the office space, furnishing and equipment and the personnel required by it to
perform the services on the terms and for the compensation provided herein.
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2. PORTFOLIO TRANSACTIONS. The Adviser is authorized to select the
brokers or dealers that will execute the purchases and sales of securities for
each of the Fund's Portfolios and is directed to use its best efforts to obtain
the best available price and most favorable execution, except as prescribed
herein. Unless and until otherwise directed by the Board of Directors of the
Fund, the Adviser may also be authorized to effect individual securities
transactions at commission rates in excess of the minimum commission rates
available, if the Adviser determines in good faith that such amount of
commission is reasonable in relation to the value of the brokerage or research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or the Adviser's overall responsibilities with respect to
the Fund. The execution of such transactions shall not be deemed to represent
an unlawful act or breach of any duty created by this Agreement or otherwise.
The Adviser will promptly communicate to the officers and Directors of the Fund
such information relating to portfolio transactions as they may reasonably
request.
3. COMPENSATION OF THE ADVISER. In recognition of the fact that the
Fund's investment in shares of other registered investment companies advised by
the Adviser or its affiliates will result in increased compensation to the
Adviser or its affiliates under their investment advisory contracts with those
investment companies, the receipt of such compensation is deemed to be
sufficient consideration for the services to be rendered by the Adviser as
provided in Section 1 of this Agreement.
4. OTHER SERVICES. At the request of the Fund, the Adviser in its
discretion may make available to the Fund office facilities, equipment,
personnel and other services. Such office
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facilities, equipment, personnel and services shall be provided for or
rendered by the Adviser and billed to the Fund at the Adviser's cost.
5. REPORTS. The Fund and the Adviser agree to furnish to each other
current prospectuses, proxy statements, reports to shareholders, certified
copies of their financial statements, and such other information with regard to
their affairs as each may reasonably request.
6. STATUS OF ADVISER. The services of the Adviser to the Fund are not to
be deemed exclusive, and the Adviser shall be free to render similar services to
others.
7. LIABILITY OF ADVISER. In the absence of (i) willful misfeasance, bad
faith or gross negligence on the part of the Adviser in performance of its
obligations and duties hereunder, (ii) reckless disregard by the Adviser of its
obligations and duties hereunder, or (iii) a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services (in
which case any award of damages shall be limited to the period and the amount
set forth in Section 36(b)(3) of the Investment Company Act of 1940 ("1940
Act"), the Adviser shall not be subject to any liability whatsoever to the Fund,
or to any shareholder of the Fund, for any error or judgment, mistake of law or
any other act or omission in the course of, or connected with, rendering
services hereunder including, without limitation, for any losses that may be
sustained in connection with the purchase, holding, redemption or sale of any
security on behalf of any Portfolio of the Fund.
8. PERMISSIBLE INTERESTS. Subject to and in accordance with the Articles
of Incorporation of the Fund and the Articles of Incorporation of the Adviser,
Directors, officers, agents and shareholders of the Fund are or may be
interested in the Adviser (or any successor thereof) as Directors, officers,
agents, shareholders or otherwise; Directors, officers, agents and shareholders
of the Adviser are or may be interested in the Fund as Directors, officers,
shareholders or otherwise; and the Adviser (or any successor) is or may be
interested in the Fund as a shareholder or otherwise;
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and that the effect of any such interrelationships shall be governed by said
Articles of Incorporation and the provisions of the 1940 Act.
9. DURATION AND TERMINATION. This Agreement, unless sooner terminated
as provided herein, shall continue until ______________, 199__ and thereafter
for additional periods of one year from the anniversary thereof, but only so
long as such continuance is specifically approved at least annually (a) by
the vote of a majority of those members of the Board of Directors of the Fund
who are not parties to this Agreement or interested persons of any such
party, cast in person at a meeting called for the purpose of voting on such
approval, and (b) by the Board of Directors of the Fund or by vote of a
majority of the outstanding voting securities of each Portfolio of the Fund;
PROVIDED HOWEVER, that if the holders of any Portfolio fail to approve the
Agreement as provided herein, the Adviser may continue to serve in such
capacity in the manner and to the extent permitted by the 1940 Act and Rules
thereunder. This Agreement may be terminated by any Portfolio of the Fund at
any time, without the payment of any penalty, by vote of a majority of the
entire Board of Directors of the Fund or by vote of a majority of the
outstanding voting securities of the Portfolio on 60 days' written notice to
the Adviser. This Agreement may be terminated by the Adviser at any time,
without the payment of any penalty, upon 90 days' written notice to the Fund.
This agreement will automatically and immediately terminate in the event of
its assignment, PROVIDED that an assignment to a corporate successor to all
of substantially all of the Adviser's business or to a wholly-owned
subsidiary of such corporate successor which does not result in a change of
actual control of the Adviser's business shall not be deemed to be an
assignment for the purposes of this
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Agreement. Any notice under this Agreement shall be given in writing,
addressed and delivered or mailed postpaid, to the other party at any office
of such party and shall be deemed given when received by the addressee.
As used in this Section 9, the terms "assignment", "interested persons",
and "a vote of a majority of the outstanding voting securities" shall have the
respective meanings set forth in Section 2(a)(4), Section 2(a)(19) and Section
2(a)(42) of the 1940 Act.
10. AMENDMENT OF AGREEMENT. This Agreement may be amended by mutual
consent, but the consent of the Fund must be approved (a) by vote of a majority
of those members of the Board of Directors of the Fund who are not parties to
this Agreement or interested persons of any such party, cast in person at a
meeting called for the purpose of voting on such amendment, and (b) by vote of a
majority of the outstanding voting securities of each Portfolio of the Fund.
11. USE OF NAME. The Fund agrees that if this Agreement is terminated and
the Adviser shall no longer be the adviser to the Fund, the Fund will, within a
reasonable period of time, change its name to delete reference to "Morgan
Stanley".
12. SEVERABILITY. If any provisions of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
13. APPLICABLE LAW. This Agreement shall be construed in accordance with
the laws of the State of New York, PROVIDED, HOWEVER, that nothing herein shall
be construed as being inconsistent with the 1940 Act.
14. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized as of the day and year
first written above.
MORGAN STANLEY ASSET MORGAN STANLEY STRATEGIC
MANAGEMENT INC. ADVISER FUND, INC.
By: By:
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SCHEDULE A
Strategic Adviser Aggressive Portfolio
Strategic Adviser Conservative Portfolio
Strategic Adviser Moderate Portfolio
7
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FORM OF
DISTRIBUTION AGREEMENT
AGREEMENT made this __ day of May, 1997, between MORGAN STANLEY
STRATEGIC ADVISER FUND, INC., a Maryland Corporation (the "Fund"), and MORGAN
STANLEY & CO. INCORPORATED, a Delaware corporation (the "Distributor").
W I T N E S S E T H :
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as a diversified open-end management
investment company and it is in the interest of the Fund to offer its shares for
sale continuously and to appoint a principal underwriter for the purpose of
facilitating such offers and sales;
WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other with respect to the continuous offering of the Fund's shares of
beneficial interest ("Shares"), to commence after the effectiveness of its
initial registration statement filed pursuant to the Securities Act of 1933, as
amended (the "1933 Act"), and the 1940 Act.
NOW, THEREFORE, the parties agree as follows:
Section 1. APPOINTMENT OF THE DISTRIBUTOR.
The Fund hereby appoints the Distributor its exclusive underwriter in connection
with the offering and sale of the Shares on the terms set forth in this
Agreement and the Distributor hereby accepts such appointment and agrees to act
hereunder.
Section 2. SERVICES AND DUTIES OF THE DISTRIBUTOR.
(a) The Distributor agrees to sell, as agent for the Fund, from time
to time during the term of this Agreement, Shares upon the terms described in
the Prospectus. As used in this Agreement, the term "Prospectus" shall mean the
prospectus included as part of the Fund's Registration Statement, as such
prospectus may be amended or supplemented from time to time, and the term
"Registration Statement" shall mean the Registration Statement most recently
filed from time to time by the Fund with the Securities and Exchange Commission
and effective under the 1933 Act and the 1940 Act, as such Registration
Statement is amended by any amendments thereto at the time in effect.
(b) Upon commencement of the Fund's operations, the Distributor will
hold itself available to receive orders, satisfactory to the Distributor, for
the purchase of Shares and will accept such orders on behalf of the Fund and
will transmit such orders as are so accepted to
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the Fund's transfer and shareholder servicing agent as promptly as
practicable. The Distributor shall promptly forward to the Fund's Custodian
funds received in respect of purchases of shares in accordance with the
instructions of the Fund's Administrator. Purchase orders shall be deemed
effective at the time and in the manner set forth in the Prospectus.
(c) The offering price of the Shares shall be the net asset value
(determined as set forth in the Prospectus) per Share next determined following
receipt of an order. The Fund shall furnish the Distributor, with all possible
promptness, an advice of each computation of net asset value.
(d) The Distributor shall not be obligated to sell any certain number
of Shares and nothing herein contained shall prevent the Distributor from
entering into like distribution arrangements with other investment companies.
Section 3. DUTIES OF THE FUND.
(a) The Fund agrees to sell its Shares so long as it has Shares
available for sale and to cause the Fund's transfer and shareholder servicing
agent to record on its books the ownership of (or deliver certificates, if any,
for) such Shares registered in such names and amounts as the Distributor has
requested in writing or other means of data transmission, as promptly as
practicable after receipt by the Fund of the net asset value thereof and written
request of the Distributor therefor.
(b) The Fund shall keep the Distributor fully informed with regard to
its affairs and shall furnish to the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Shares of the Fund, and
this shall include one certified copy, upon request by the Distributor, of all
financial statements prepared for the Fund by independent accountants and such
reasonable number of copies of its most current Prospectus and annual and
interim reports as the Distributor may request and shall cooperate fully in the
efforts of the Distributor to sell and arrange for the sale of the Shares and in
the performance of the Distributor under this Agreement.
(c) The Fund shall take, from time to time, such steps, including
payment of the related filing fee, as may be necessary to register its Shares
under the 1933 Act to the end that there will be available for sale such number
of Shares as the Distributor may be expected to sell. The Fund agrees to file
from time to time such amendments, reports and other documents as may be
necessary in order that there may be no untrue statement of a material fact in a
Registration Statement or Prospectus, or necessary in order that there may be no
omission to state a material fact in the Registration Statement or Prospectus
which omission would make the statements therein misleading.
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<PAGE>
(d) The Fund shall use its best efforts to qualify and maintain the
qualification of an appropriate number of its Shares for sale under the
securities laws of such states as the Distributor and the Fund may approve, and,
if necessary or appropriate in connection therewith, to qualify and maintain the
qualification of the Fund as a broker or dealer in such states; provided that
the Fund shall not be required to amend its Articles of Incorporation or By-Laws
to comply with the laws of any state, to maintain an office in any state, to
change the terms of the offering of the Shares in any state from the terms set
forth in its Registration Statement and Prospectus, to qualify as a foreign
corporation in any state or to consent to service of process in any state other
than with respect to claims arising out of the offering of the Shares. The
Distributor shall furnish such information and other material relating to its
affairs and activities as may be required by the Fund in connection with such
qualifications.
Section 4. EXPENSES.
(a) The Fund shall bear all costs and expenses of the continuous
offering of the Shares in connection with (i) fees and disbursements of its
counsel and independent accountants, (ii) the preparation, filing and printing
of any registration statements and/or prospectuses required to be filed by and
under the federal and state securities laws, (iii) the preparation and mailing
of annual and interim reports, prospectuses and proxy materials to shareholders
and (iv) the qualifications of Shares for sale and of the Fund as a broker or
dealer under the securities laws of such states or other jurisdictions as shall
be selected by the Fund and the Distributor pursuant to Section 3(d) hereof and
the cost and expenses payable to each such state for continuing qualification
therein.
(b) The Distributor shall bear (i) the costs and expenses of
preparing, printing and distributing any materials not prepared by the Fund and
other materials used by the Distributor in connection with its offering of the
Shares for sale to the public, including the additional cost of printing copies,
at printer's over-run cost, of the Prospectus and of annual and interim reports
to shareholders other than copies thereof required for distribution to
shareholders or for filing with any federal and state securities authorities,
(ii) any expenses of advertising incurred by the Distributor in connection with
such offering and (iii) the expenses of registration or qualification of the
Distributor as a dealer or broker under federal or state laws and the expenses
of continuing such registration or qualification.
Section 5. COMPENSATION. For the services to be rendered and the
expenses assumed by the Distributor with respect to the Class B Shares, the Fund
shall pay to the Distributor, compensation at the annual rate of .25% of the
average daily net assets of the Class B Shares. Except as hereinafter set
forth, continuing compensation under this Agreement shall be calculated and
accrued daily and the amounts of the daily accruals shall be paid monthly in
arrears within ten days after the end of the month. If this Agreement becomes
effective subsequent to the first day of a month or shall terminate before the
last day of a month, compensation for that part of the month this Agreement is
in effect shall be prorated in a manner consistent with the calculations of the
fees as set forth above. Payment of the Distributor's
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<PAGE>
compensation for the preceding month shall be made as promptly as possible,
but in no event later than ten days after the end of the month.
Section 6. INDEMNIFICATION. The Fund agrees to indemnify, defend and
hold the Distributor, its officers and directors and any person who controls the
Distributor within the meaning of Section 15 of the 1933 Act, free and harmless
from and against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending such claims, demands or
liabilities and any counsel fees incurred in connection therewith) which the
Distributor, its officers, directors or any such controlling person may incur
under the 1933 Act, or under common law or otherwise, arising out of or based
upon any untrue statement of a material fact contained in the Registration
Statement or Prospectus or arising out of or based upon any alleged omission to
state a material fact required to be stated in either thereof or necessary to
make the statements in either thereof not misleading, except insofar as such
claims, demands, liabilities or expenses arise out of or are based upon any such
untrue statement or omission or alleged untrue statement or omission made in
reliance upon and in conformity with information furnished in writing by the
Distributor to the Fund for use in the Registration Statement or Prospectus;
provided, however, that this indemnity agreement, to the extent that it might
require indemnity of any person who is also an officer or Director of the fund
or who controls the Fund within the meaning of Section 15 of the 1933 Act, shall
not inure to the benefit of such officer, Director or controlling person unless
a court of competent jurisdiction shall determine, or it shall have been
determined by controlling precedent, that such result would not be against
public policy as expressed in the 1933 Act; and further provided, that in no
event shall anything contained herein be so construed as to protect the
Distributor against any liability to the Fund or to its security holders to
which the Distributor would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence in the performance of its duties, or
by reason of its reckless disregard of its obligations under this Agreement.
The Fund's agreement to indemnify the Distributor, its officers and directors
and any such controlling person as aforesaid is expressly conditioned upon the
Fund's being promptly notified of any action brought against the Distributor,
its officers or directors, or any such controlling person, such notification to
be given to the Fund at its principal business office. The Fund agrees promptly
to notify the Distributor of the commencement of any litigation or proceedings
against it or any of its officers or Directors in connection with the issue and
sale of any Shares.
The Distributor agrees to indemnify, defend and hold the Fund, its
Directors and officers and any person who controls the Fund, if any, within the
meaning of Section 15 of the 1933 Act, free and harmless from and against any
and all claims, demands, liabilities and expenses (including the cost of
investigating or defending against such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Fund, its Directors or
officers or any such controlling person may incur under the 1933 Act or under
common law or otherwise, but only to the extent that such liability or expense
incurred by the Fund, its Directors or officers or such controlling person
resulting from such claims or demands shall arise out of or be based upon any
alleged untrue statement of a material fact contained in information furnished
in writing by the Distributor to the Fund for use in the preparation of the
Registration Statement
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or Prospectus or shall arise out of or be based upon any alleged omission to
state a material fact in such information or a fact necessary to make such
information not misleading, it being understood that the Fund will rely upon
the information provided by the Distributor for use in the preparation of the
Registration Statement and Prospectus. The Distributor's agreement to
indemnify the Fund, its Directors and officers, and any such controlling
person as aforesaid is expressly conditioned upon the Distributor's being
promptly notified of any action brought against the Fund, its Directors or
officers or any such controlling person, such notification to be given to the
Distributor at its principal business office.
Section 7. COMPLIANCE WITH SECURITIES LAWS. The Fund represents that
it is registered as a diversified open-end management investment company under
the 1940 Act, and agrees that it will comply with the provisions of the 1940 Act
and of the rules and regulations thereunder. The Fund and the Distributor each
agree to comply with the applicable terms and provisions of the 1940 Act, the
1933 Act and, subject to the provisions of Section 3(d), applicable state "Blue
Sky" laws. The Distributor agrees to comply with the applicable terms and
provisions of the Securities Exchange Act of 1934.
Section 8. TERM OF AGREEMENT; TERMINATION. This Agreement shall
commence on the date first set forth above. This Agreement shall continue in
effect for a period more than two years from the date hereof only so long as
such continuance is specifically approved at least annually in conformity with
the requirements of the 1940 Act.
This Agreement shall terminate automatically in the event of its
assignment (as defined by the 1940 Act). In addition, this Agreement may be
terminated by either party at any time, without penalty, on not more than sixty
days' nor less than thirty days' written notice to the other party.
Section 9. NOTICES. Any notice required to be given pursuant to this
Agreement shall be deemed duly given if delivered or mailed by registered mail,
postage prepaid, (1) to the Distributor at Morgan Stanley & Co. Incorporated,
1221 Avenue of the Americas, 21st Floor, New York, N.Y. 10020, Attention:
Michael F. Klein, or (2) to the Fund at Morgan Stanley Strategic Adviser Fund,
Inc., ________________. Attention: Secretary.
Section 10. The Directors have authorized the execution of this
Agreement in their capacity as Directors and not individually and the
Distributor agrees that neither the shareholders nor the Directors nor any
officer, employee, representative or agent of the Fund shall be personally
liable upon, nor shall resort be had to their private property for the
satisfaction of, obligations given, executed or delivered on behalf of or by the
Fund, that the shareholders, Directors, officers, employees, representatives and
agents of the Fund shall not be personally liable hereunder, and that it shall
look solely to the property of the Fund for the satisfaction of any claim
hereunder.
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Section 11. GOVERNING LAW. This Agreement shall be governed and
construed in accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year first above written.
MORGAN STANLEY & CO. INCORPORATED
By
-----------------------
MORGAN STANLEY
STRATEGIC ADVISER FUND, INC.
By
-----------------------
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FORM OF
ADMINISTRATION AGREEMENT
Agreement dated as of ___________, 1997 between MORGAN STANLEY
STRATEGIC ADVISER FUND, INC., a Maryland corporation (the "Fund") and MORGAN
STANLEY ASSET MANAGEMENT INC., a Delaware corporation ("MSAM").
WHEREAS, the Fund has filed a Registration Statement on Form N-1A to
register as an investment company under the Investment Company Act of 1940 (the
"1940 Act") and to offer shares of three portfolios (the Aggressive Portfolio,
the Conservative Portfolio, and the Moderate Portfolio) under the Securities Act
of 1933, and such additional portfolios as may be mutually agreed by the Fund
and MSAM; and
WHEREAS, the Fund desires to retain MSAM to render certain management,
administrative, transfer agency, dividend disbursing and other services to the
Fund, and MSAM is willing to render such services;
NOW, THEREFORE, the parties hereto, intending to be legally bound
hereby, agree as follows:
1. APPOINTMENT OF ADMINISTRATOR
The Fund hereby appoints MSAM to act as administrator to the Fund for
the period and on the terms set forth in this Agreement. In connection
therewith, MSAM accepts such appointment and agrees to render the services and
provide, at its own expense, the office space, furnishings and equipment and the
personnel required by it to perform the services on the terms and for the
compensation herein provided. The parties hereto agree that MSAM may render and
provide the services described herein directly or through the services of third
parties. In connection with such appointment, the Fund will deliver to MSAM
copies of each of the following documents and will deliver to it all future
amendments and supplements, if any:
A. Certified copies of the Articles of Incorporation of the Fund as
presently in effect and as amended from time to time;
B. A certified copy of the Fund's By-Laws as presently in effect as
amended from time to time;
C. A copy of the resolution of the Fund's Board of Directors
authorizing this Agreement;
D. Specimens of all forms of outstanding and new stock certificates
in the forms approved from time to time by the Board of Directors of the Fund
with a certificate of the Secretary of the Fund as to such approval;
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E. The Fund's registration statement on Form N-1A as filed with, and
declared effective by, the U.S. Securities and Exchange Commission, and all
amendments thereto;
F. Each resolution of the Board of Directors of the Fund authorizing
the original issue of its shares.
G. Certified copies of the resolutions of the Fund's Board of
Directors authorizing: (1) certain persons to give instructions to the Fund's
Custodian pursuant to the Corporate Custody Agreement and (2) certain persons to
sign checks and pay expenses on behalf of the Fund.
H. A copy of the Investment Advisory Agreement dated October 1, 1988
between the Fund and Morgan Stanley Asset Management, Inc.
I. A copy of the Corporate Custody Agreement dated October 1, 1988
between the Fund and The Morgan Guaranty Trust Company of New York.
J. Such other certificates, documents or opinions which MSAM may, in
its reasonable discretion, deem necessary or appropriate in the proper
performance of its duties.
2. REPRESENTATION AND WARRANTIES OF MSAM
MSAM represents and warrants to the Fund that:
A. It is a corporation, duly organized and existing in good standing
under the laws of Delaware.
B. It is duly qualified to carry on its business in the State of
New York.
C. It is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into and perform the services contemplated in
this Agreement.
D. All requisite corporate proceedings have been taken to authorize
it to enter into and perform this Agreement.
E. It has and will continue to have and maintain, directly or
through third parties, the necessary facilities, equipment and personnel to
perform its duties and obligations under this Agreement.
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3. AUTHORIZED SHARES
The Fund certifies to MSAM that as of the close of business on the
date of this Agreement, the Fund is authorized to issue ____________ shares of
common stock ("shares"), $.001 par value, and that the Board of Directors has
the power to classify or reclassify unissued shares of stock, from time to time,
into one or more classes ("Portfolios") of shares, and that it would initially
offer shares of three Portfolios (the Aggressive Portfolio, the Conservative
Portfolio and the Moderate Portfolio).
4. SERVICES PROVIDED BY MSAM
MSAM shall discharge, directly or through third parties, the following
responsibilities subject to the control of the Fund's Board of Directors, and in
compliance with the objectives, policies and limitations set forth in the
Fund's registration statement, By-Laws and applicable laws and regulations.
A. GENERAL ADMINISTRATION. Under the direction of the Fund's Board
of Directors, MSAM shall manage, administer, and conduct all of the general
business activities of the Fund other than those which have been contracted to
third parties by the Fund. MSAM shall, directly or through third parties,
provide the personnel and facilities necessary to perform such general business
activities under the supervision of the Fund's Board of Directors and Executive
Officers.
B. ACCOUNTING. MSAM shall, directly or through third parties,
provide the following accounting services to the Fund:
1) Maintenance of the books and records and accounting controls for
the Fund's assets, including records of all securities transactions;
2) Daily calculation of the net asset value for each of the Fund's
Portfolios;
3) Accounting for dividends and interest received and distributions
made by each of the Fund's Portfolios;
4) Preparation and filing of the Fund's U.S. tax returns and annual
and semi-annual reports on Form N-SAR:
5) The production of transaction data, financial reports and such
other periodic and special reports as the Board of Directors of the
Fund may reasonably request;
6) The preparation of financial statements for the annual and
semi-annual reports and other shareholder communications;
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7) Liaison with the Fund's independent auditors;
8) Monitoring and administration of arrangements with the Fund's
custodian and depository banks; and
9) Maintenance of (but not the payment for) the Fidelity Bond
required to be maintained under the 1940 Act and preparation of the
filings required in connection therewith.
C. TRANSFER AGENT. The Fund hereby directs MSAM to be responsible
for the appointment of Transfer Agent for the Fund and MSAM agrees to act in
such capacity. In connection with such appointment, the transfer agent shall:
1) Maintain records showing for each Fund shareholder the following:
a) Name, address and tax identifying number (if applicable);
b) Number of shares of the Portfolio of the Fund held;
c) Historical information including dividends paid and date and
price of all transactions including individual purchases and
redemptions; and
d) Any dividend reinvestment order, application, dividend
address and correspondence relating to the current maintenance of
the account;
2) Record the issuance of shares of common stock of each Portfolio
of the Fund and shall notify the Fund in case any proposed issue of
shares by the fund shall result in an over-issue as identified by
Section 8-104(2) of the Uniform Commercial Code and in case any issue
would result in such an over-issue, shall refuse to countersign and
issue, and/or credit, said shares. Except as specifically agreed in
writing, MSAM and any transfer agent appointed by MSAM shall have no
obligation when countersigning and issuing and/or crediting shares, to
take cognizance of any other laws relating to the issue and sale of
such shares except insofar as policies and procedures of the Stock
Transfer Association recognize such laws.
3) Process all orders for the purchase of each Portfolio of the Fund
in accordance with the Fund's current registration statement. Upon
receipt of any check or other payment for purchase of shares of the
Fund from an investor, the transfer agent will (i) stamp the order
with the date of receipt, (ii) determine the amounts thereof due the
Fund, and notify the Fund of such determination and deposit, such
notification to be given on a daily basis of the total amounts
determined and deposited to said account during such day. The
transfer agent shall then credit the
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share account of the investor with the number of shares to be
purchased according to the price of the Portfolio's shares in
effect for purchases made on the date such payment is received as
set forth in the Fund's current prospectus and shall promptly mail
a confirmation of said purchase to the investor, all subject to any
instructions which the fund may give to MSAM or the transfer agent
with respect to the timing or manner of acceptance of orders for
shares relating to payments so received by it.
4) Receive and stamp with the date of receipt all requests for
redemptions of shares, and shall process said redemptions requests as
follows:
a) If such redemption request complies with the applicable
standards approved by the Fund, MSAM or the transfer agent shall
on each business day notify the Fund of the total number of
shares presented and covered by such requests received by MSAM or
the transfer agent on such day;
b) On or prior to the seventh calendar day succeeding any such
request for redemption, MSAM or the transfer agent shall notify
the Custodian, subject to instructions from the Fund, to transfer
monies to such account as designated by MSAM or the transfer
agent for such payment to the redeeming shareholder of the
applicable redemption or repurchase price.
c) If any such request for redemption does not comply with
applicable standards, MSAM or the transfer agent shall promptly
notify the investor of such fact, together with the reason
therefore, and shall effect such redemption at the Portfolio's
price next determined after receipt of documents complying with
said standards or, at such other time as the Fund shall so
direct;
5) Acknowledge all correspondence from shareholders relating to
their share accounts and undertake such other shareholder
correspondence as may from time to time be mutually agreed upon;
6) Process redemptions, exchanges and transfers of Fund shares upon
telephone instructions from qualified shareholders in accordance with
the procedures set forth in the Fund's current prospectus. MSAM and
any transfer agent appointed by MSAM shall be permitted to act upon
the instruction of any person by telephone to redeem, exchange and/or
transfer Fund shares from any account for which such services have
been authorized. In accordance with Section 7 herein, the Fund hereby
agrees to indemnify and hold MSAM and any transfer agent appointed by
MSAM harmless against all losses, costs or expenses, including
attorney fees, suffered or incurred by MSAM and any transfer agent
appointed by MSAM directly or indirectly as a result of (i) taping the
telephone conversation of
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any shareholder, or (ii) relying on the telephone instructions of
any person acting on behalf of a shareholder account for which
telephone services have been authorized.
D. RECORDING OF TRANSFER. A transfer agent duly appointed by
MSAM is authorized to transfer on the records of the Fund maintained by it
issued shares held in non-certificate form, upon the surrender to it of
documents evidencing ownership in proper form for transfer, and upon
cancellation thereof to countersign and issue new documents of ownership for
a like amount of stock and to deliver the same pursuant to the transfer
instructions.
E. RETURNED CHECKS. In the event that any check or other order
for the payment of money is returned unpaid for any reason, MSAM or a third
party appointed by MSAM will take such steps, including redepositing said
check for collection or returning said check to the investor, as MSAM or a
third party appointed by MSAM may, at its discretion, deem appropriate, or as
the Fund may instruct.
F. DIVIDEND TAX REPORTING AND WITHHOLDING. MSAM or a third party
appointed by MSAM will prepare, file with the Internal Revenue Service and
mail to shareholders such returns for reporting payment of dividends and
distributions as are required by applicable laws to be so filed and/or mailed
and MSAM or a third party appointed by MSAM shall withhold such sums as are
required to be withheld under applicable Federal income tax laws, rules and
regulations.
G. PROXIES. MSAM or a third party appointed by MSAM shall mail
proxy statements, proxy cards and other materials supplied to it by the Fund
and shall receive, examine and tabulate returned proxies. MSAM or a third
party appointed by MSAM shall make interim reports of the status of such
tabulation to the Fund upon request, and shall certify the final results of
the tabulation.
H. DIVIDENDS DISBURSING. MSAM or a third party appointed by MSAM
shall act as Dividend Disbursing Agent for the Fund and each of its
Portfolios, and, as such shall prepare and mail checks or credit income and
capital gain payments to shareholders. The Fund shall advise MSAM or a third
party appointed by MSAM of the declaration of any dividend or distribution
and the record and payable date thereof at least five (5) days prior to the
record date. MSAM or a third party appointed by MSAM shall, on or before the
payment date of any such dividend or distribution, notify the Fund's
Custodian of the estimated amount required to pay any portion of said
dividend or distribution which is payable in cash, and on or before the
payment date of such distribution, the Fund shall instruct its Custodian to
make available to MSAM or a third party appointed by MSAM sufficient funds
for the cash amount to be paid out. If a shareholder is entitled to receive
additional shares by virtue of any such distribution or dividend, appropriate
credits will be made to this account. A shareholder will receive a
confirmation from MSAM or a third party appointed by MSAM indicating the
number of shares credited to his account as a result of the reinvested
dividend or distribution.
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I. OTHER INFORMATION. MSAM shall, directly or through third
parties, furnish for the Fund such other information as is required by law,
including but not limited to shareholder lists, and such statistical
information as may be reasonably requested by the Fund.
5. SERVICES TO BE OBTAINED INDEPENDENTLY BY THE FUND
The following shall be provided at no expense to MSAM hereunder:
A. Organizational expenses;
B. Services of an independent accountant;
C. Services of outside legal counsel (including such counsel's
review of the Fund's registration statement, proxy materials and other reports
and materials prepared by MSAM, directly or through third parties under this
Agreement);
D. Any services contracted for by the Fund directly from parties
other than MSAM;
E. Trading operations and brokerage fees, commissions and transfer
taxes in connection with the purchase and sale of securities for its investment
portfolio;
F. Taxes, insurance premiums and other fees and expenses applicable
to its operation;
G. Investment advisory services;
H. Costs incidental to any meetings of shareholders including, but
not limited to, legal and accounting fees, proxy filing fees and the
preparation, printing and mailing of any proxy materials;
I. Costs incidental to Directors' meetings, including fees and
expenses of Directors;
J. The salary and expenses of any officer or employee of the Fund;
K. Custodian and depository banks, and all services related thereto;
L. Costs incidental to the preparation, printing and distribution of
its registration statement and any amendments thereto, and shareholder reports;
M. All registration fees and filing fees required under the
securities laws of the United States and state regulatory authorities;
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N. Fidelity bond and Director's and Officers' liability insurance.
6. PRICES, CHARGES AND INSTRUCTIONS
A. The Fund will pay to MSAM, as compensation for the services
provided and the expenses assumed pursuant to this Agreement, as agreed to in a
written fee schedule approved by the parties hereto (see Schedule A). In
addition, MSAM, or third parties providing such services for the benefit of the
Fund through arrangements with MSAM, shall be reimbursed for the cost of any and
all forms, including blank checks and proxies, used by it in communicating with
shareholders of the Fund, or especially prepared for use in connection with its
obligations hereunder, as well as the cost of postage, telephone, telex and
telecopy used in communicating with shareholders of the Fund and microfilm used
each year to record the previous year's transactions in shareholder accounts and
computer tapes used for permanent storage of records, permanent storage costs
for hard copy Fund records and cost of insertion of materials in mailing
envelopes by outside firms. Prior to ordering any forms in such supply as it
estimates will be adequate for more than two years' use, MSAM or any third party
appointed by MSAM shall obtain the written consent of the Fund. All forms for
which MSAM or any third party appointed by MSAM has received reimbursement from
the Fund shall be and remain the property of the Fund until used.
B. At any time MSAM, and third parties providing such services for
the benefit of the Fund through arrangements with MSAM may apply to any officer
of the fund or officer of the Fund's investment adviser for instructions, and
may consult with legal counsel for the Fund, or its own outside legal counsel,
at the expense of the Fund, with respect to any matter arising in connection
with the services to be performed by MSAM or any third party appointed by MSAM
under this Agreement and MSAM and such third parties shall not be liable and
shall be indemnified by the Fund for any action taken or omitted by it in good
faith in reliance upon such instructions. In carrying out its duties hereunder,
MSAM and such third parties shall be protected and indemnified in acting upon
any paper or document believed by it to be genuine and to have been signed by
the proper person or persons and shall not be held to have notice of any change
or authority of any person, until receipt of written notice thereof from the
Fund.
7. LIMITATION OF LIABILITY AND INDEMNIFICATION.
A. MSAM shall be responsible hereunder for the performance of only
such duties as are set forth or contemplated herein or contained in instructions
given to it which are not contrary to this Agreement. MSAM shall have no
liability for any loss or damage resulting from the performance or
non-performance of its duties hereunder unless solely caused by or resulting
from the gross negligence or willful misconduct of MSAM, its officers and
employees.
B. The fund shall indemnify and hold MSAM, and third parties
providing services for the benefit of the Fund through arrangements with MSAM,
harmless from all loss, cost, damage and expense, including reasonable expenses
for counsel, incurred by any such
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person resulting from any claim, demand, action or omission by it in the
performance of its duties hereunder or under such arrangements with MSAM, or
as a result of acting upon any instructions reasonably believed by any such
person to have been executed by a duly authorized officer of the fund or of
the Fund's investment advisers, provided that this indemnification shall not
apply to actions or omission of MSAM, its officers, employees or agents in
cases of its or their own gross negligence or willful misconduct.
C. The Fund will be entitled to participate at its own expense in
the defense, or, if it so elects, to assume the defense of any suit brought to
enforce any liability subject to the indemnification provided above, but, if the
Fund elects to assume the defense, such defense shall be conducted by counsel
chosen by the Fund. In the event the Fund elects to assume the defense of any
such suit and retain such counsel, MSAM or any of its affiliated persons or any
third parties providing services for the benefit of the Fund through
arrangements with MSAM, named as defendant or defendants in the suit, may retain
additional counsel but shall bear the fees and expenses of such counsel unless
at such time the Fund specifically authorizes in writing the retaining of such
counsel at the Fund's expense.
D. No provisions of this Agreement shall be deemed to protect MSAM
or any of its directors, officers and/or employees, against liability to the
Fund or its shareholders to which it might otherwise be subject by reason of any
fraud, willful misfeasance or gross negligence in the performance of its duties
or the reckless disregard of its obligations under this Agreement.
8. CONFIDENTIALITY
MSAM agrees that, except as otherwise required by law or as necessary
in accordance with this Agreement, MSAM will keep confidential all records and
information in its possession relating to the Fund or its shareholders or
shareholder accounts and will not disclose the same to any person except at the
request or with the written consent of the Fund.
9. COMPLIANCE WITH GOVERNMENTAL RULES AND REGULATIONS
The Fund assumes full responsibility hereunder for complying with all
applicable requirements of the Securities Act of 1933, the Investment Company
Act of 1940 and the Securities Exchange Act of 1934, all as amended, and any
laws, rules and regulations of governmental authorities having jurisdiction,
except to the extent that MSAM specifically assumes any such obligations under
the terms of this Agreement.
MSAM shall, directly or through third parties, maintain and preserve
for the periods prescribed, such records relating to the services to be
performed by MSAM under this Agreement as are required pursuant to the
Investment Company Act of 1940 and the Securities Exchange Act of 1934. All
such records shall at all times remain the respective properties of the Fund,
shall be readily accessible during normal business hours to each, and shall be
promptly
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surrendered upon the termination of this Agreement or otherwise on
written request. Records shall be surrendered in usable machine readable form.
10. STATUS OF MSAM
The services of MSAM to the Fund are not to be deemed exclusive, and
MSAM shall be free to render similar services to others. MSAM shall be deemed
to be an independent contractor hereunder and shall, unless otherwise expressly
provided herein or authorized by the Fund from time to time, have no authority
to act or represent the Fund in any way or otherwise be deemed an agent of the
Fund with respect to this Agreement.
11. PRINTED MATTER CONCERNING THE FUND OR MSAM
Neither the fund nor MSAM shall, with respect to this Agreement,
publish and circulate any printed matter which contains any reference to the
other party without its prior written approval, excepting such printed matter as
refers in accurate terms to MSAM's appointment under this Agreement and except
as required by applicable laws.
12. TERM, AMENDMENT AND TERMINATION
This Agreement may be modified or amended from time to time by mutual
agreement between the parties hereto. The Agreement shall remain in effect for
a period of one year from the date the Fund's registration statement on file
with the U.S. Securities and Exchange Commission becomes effective and shall
automatically continue in effect thereafter unless terminated by either party at
the end of such period or thereafter on one 60 days' prior written notice. Upon
termination of the Agreement, the fund shall pay to MSAM such compensation as
may be due under the terms hereof as the of the date of such termination. If,
during the initial one year period, either of the parties hereto shall be in
default in the performance of any its duties and obligations hereunder (the
defaulting party), the other party hereto may give written notice to the
defaulting party and if such default shall not have been remedied within 30 days
after such written notice is given, then the party giving such notice may
terminate this Agreement by 90 days' written notice of such termination to the
defaulting party, but such termination shall not affect any rights or
obligations of either party arising from or relating to such default under the
terms hereof.
13. NOTICES
Any notice or other communication authorized or required by this
Agreement to be given to any party mentioned herein shall be sufficiently given
if addressed to such party and mailed postage prepaid or delivered to its
principal office.
14. NON-ASSIGNABILITY
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This Agreement shall not be assigned by any of the parties hereto
without the prior consent in writing of the other party.
15. SUCCESSORS
This Agreement shall be binding on and shall inure to the benefit of
the Fund and MSAM, and their respective successors.
16. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
17. COUNTERPARTS
This Agreement may be executed in one or more counterparts, each of
which shall be deemed to be an original.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be duly executed as of the day and year first above written.
ATTEST: MORGAN STANLEY STRATEGIC
ADVISER FUND, INC.
By:
- ------------------ ---------------------
ATTEST: MORGAN STANLEY ASSET
MANAGEMENT INC.
By:
- ------------------ ---------------------
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SCHEDULE A
TO
ADMINISTRATION AGREEMENT DATED AS OF ___________, 1997
MORGAN STANLEY STRATEGIC ADVISER FUND, INC.
and
MORGAN STANLEY ASSET MANAGEMENT INC.
PORTFOLIOS
1. Strategic Adviser Aggressive Portfolio
2. Strategic Adviser Conservative Portfolio
3. Strategic Adviser Moderate Portfolio
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SCHEDULE B
TO
ADMINISTRATION AGREEMENT DATED AS OF ___________, 1997
MORGAN STANLEY STRATEGIC ADVISER FUND, INC.
and
MORGAN STANLEY ASSET MANAGEMENT INC.
FEE SCHEDULE
For the services provided and the expenses assumed pursuant to the attached
Administration Agreement, the Morgan Stanley Strategic Adviser Fund, Inc. shall
pay to Morgan Stanley Asset Management Inc. an annual fee, in monthly
installments, of .25% of the average daily net assets of each Portfolio of the
Fund listed on Schedule A.
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the reference to us under the heading "Other Services --
Independent Accountants" in the Prospectus constituting part of this
Pre-Effective Amendment No. 1 to the registration statement on Form N-1A of
the Morgan Stanley Strategic Adviser Fund, Inc.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
July 24, 1997
<PAGE>
FORM OF
PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1
OF
MORGAN STANLEY STRATEGIC ADVISER FUND, INC.
CLASS B SHARES
WHEREAS, Morgan Stanley Strategic Adviser Fund, Inc. (the "Fund") intends
to engage in business as an open-end management investment company and is
registered as such under the Investment Company Act of 1940, as amended (the
"Act"); and
WHEREAS, the Fund desires to adopt a Plan of Distribution pursuant to Rule
12b-1 under the Act with respect to the Class B shares of its common stock, par
value $.001 per share, that are classified and allocated to each portfolio of
the Fund listed at Schedule A (the "Shares") and the Board of Directors has
determined that there is a reasonable likelihood that adoption of this Plan of
Distribution will benefit the Fund and its stockholders; and
WHEREAS, the Fund intends to employ Morgan Stanley & Co. Incorporated (the
"Distributor") as distributor of the Shares; and
WHEREAS, the Fund and the Distributor have entered into a Distribution
Agreement with the Fund for Shares, pursuant to which the Fund will employ the
Distributor as distributor for the continuous offering of Shares;
NOW, THEREFORE, the Fund hereby adopts, and the Distributor hereby agrees
to the terms of, this Plan of Distribution (the "Plan") in accordance with Rule
12b-1 under the Act on the following terms and conditions:
1. The Fund shall pay to the Distributor, as the distributor of the
Shares, compensation for distribution of the
<PAGE>
Shares at the annual rate not to exceed 0.25% of the average daily net assets
of the Portfolio attributable to its Class B Shares. The amount of such
compensation shall be agreed upon by the Board of Directors of the Fund and
by the Distributor and shall be calculated and accrued daily and paid monthly
or at such other intervals as the Board of Directors and the Distributor
shall mutually agree.
2. The amount set forth in Paragraph 1 of this Plan shall be paid for the
Distributor's services as distributor of the Shares. Such amount may be spent
by the Distributor on any activities or expenses primarily intended to result in
the sale of Shares, including, but not limited to: compensation to and
expenses, including overhead and telephone expenses, of employees of the
Distributor who engage in or support distribution of the Shares; printing of
prospectuses and reports for other than existing stockholders; preparation,
printing and distribution of sales literature and advertising materials; and
compensation to broker/dealers who sell Shares. The Distributor may negotiate
with any such broker/dealer the services to be provided by the broker/dealer to
stockholders in connection with the sale of Shares, and all or any portion of
the compensation paid to the Distributor under Paragraph 1 of this Plan may be
reallocated by the Distributor to broker/dealers who sell Shares.
3. This Plan shall not take effect until it has been approved, together
with any related agreements, by votes of a majority of both (a) the Board of
Directors of the Fund and (b) those Directors of the Fund who are not
"interested persons" of the Fund (as defined in the Act) and have no direct or
indirect financial interest in the operation of this Plan or any agreements
related to it (the "Rule 12b-1 Directors"), cast in person at a meeting (or
meetings) called for the purpose of voting on this Plan and such related
agreements.
4. This Plan shall continue in effect for a term of one year.
Thereafter, this Plan shall continue in effect for so long as such continuance
is specifically approved at least annually in the manner provided for approval
of this Plan in Paragraph 3.
<PAGE>
5. The Distributor shall provide to the Board of Directors of the Fund
and the Board of Directors shall review, at least quarterly, a written report of
the amounts expended pursuant to this Plan and the purposes for which such
expenditures were made, including commissions, advertising, printing, interest,
carrying charges and allocated overhead expenses.
7. This Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Directors, or by a vote of a majority of the outstanding Shares.
8. This Plan may not be amended to increase materially the amount of
compensation provided for in Paragraph 1 hereof unless such amendment is
approved by a majority of the outstanding shares, as defined in the 1940 Act, of
Class B, and no material amendment to the Plan of any kind, including an
amendment which would increase materially the amount of such compensation, shall
be made unless approved in the manner provided for approval and annual renewal
in Paragraph 4 hereof.
9. While this Plan is in effect, the selection and nomination of
Directors who are not interested persons (as defined in the Act) of the Fund
shall be committed to the discretion of the then current Directors who are not
interested persons (as defined in the Act) of the Fund.
10. The Fund shall preserve copies of this Plan and any related agreements
and all reports made pursuant to Paragraph 6 hereof for a period of not less
than six years from the date of this Plan, such agreements or such reports, as
the case may be, the first two years in an easily accessible place.
<PAGE>
SCHEDULE A
MORGAN STANLEY STRATEGIC ADVISER FUND, INC.
Portfolio Distribution Fee
- --------- ----------------
Strategic Aggressive Portfolio . . . . . . . . . . . . . . .25%
Strategic Conservative Portfolio . . . . . . . . . . . . . .25%
Strategic Moderate Portfolio . . . . . . . . . . . . . . . .25%
<PAGE>
MORGAN STANLEY STRATEGIC ADVISER FUND, INC.
RULE 18f-3
MULTIPLE CLASS PLAN
MAY , 1997
Morgan Stanley Strategic Adviser Fund, Inc. (the "Fund"), a registered
investment company that currently consists of a number of separately managed
portfolios, has elected to rely on Rule 18f-3 under the Investment Company Act
of 1940, as amended (the "1940 Act"), in offering multiple classes of shares in
each portfolio listed on Schedule A hereto (each a "Portfolio").
I. ADOPTION OF PLAN; AMENDMENT OF PLAN; AND PERIODIC REVIEW. Pursuant to
Rule 18f-3, the Fund is required to create a written plan specifying all of the
differences among the Fund's classes, including shareholder services,
distribution arrangements, expense allocations, and any related conversion
features or exchange options. The Board has created the Plan to meet this
requirement. The Board, including a majority of the Independent Directors, must
periodically review the Plan for its continued appropriateness, and must approve
any material amendment of the Plan as it relates to any class of any Series
covered by the Plan. This Plan must be amended to properly describe (through
additional exhibits hereto or otherwise) each additional class of shares
approved by the Fund's Board of Directors after the date hereof. Before any
material amendment of the Plan, the Fund is required to obtain a finding by a
majority of the Board, and a majority of the Independent Directors, that the
Plan as proposed to be amended, including the expense allocations, is in the
best interests of each class individually and the Fund as a whole.
II. ATTRIBUTES OF SHARE CLASSES
A. The rights, obligations and features of each of the classes of the
Fund shall be as set forth in the Fund's Articles of Incorporation and Bylaws,
as each such document is amended or restated, the resolutions that are adopted
by the Board of Directors with respect to the classes of the Fund and that are
adopted pursuant to the Plan, and related materials of the Board, as set forth
in Exhibit A hereto.
B. With respect to any class of shares of a Series, the following
requirements shall apply. Each share of a particular Series shall represent an
equal PRO RATA interest in the Series and shall have identical voting, dividend,
liquidation and other rights, preferences, powers, restrictions, limitations,
qualifications, designations and terms and conditions, except that (i) each
class shall have a different class designation (e.g., Class A, Class B, Class C,
etc.); (ii) each class of shares shall separately bear any distribution expenses
in connection with the plan adopted pursuant to Rule 12b-1 under the 1940 Act (a
"Rule 12b-1 Plan"), if any, for such class
<PAGE>
(and any other costs relating to obtaining shareholder approval of the Rule
12b-1 Plan for such class, or an amendment of such plan) and shall separately
bear any expenses associated with any non-Rule 12b-1 Plan service payments
("service fees") that are made under any servicing agreement, if any, entered
into with respect to that class; (iii) holders of the shares of the class
shall have exclusive voting rights regarding the Rule 12b-1 Plan relating to
such class (e.g., the adoption, amendment or termination of a Rule 12b-1
Plan), regarding the servicing agreements relating to such class and
regarding any matter submitted to shareholders in which the interests of that
class differ from the interests of any other class; (iv) each new class of
shares may bear, consistent with rulings and other published statements of
position by the Internal Revenue Service, the expenses of the Fund's
operation that are directly attributable to such class ("Class Expenses")(1);
and (v) each class may have conversion features unique to such class,
permitting conversion of shares of such class to shares of another class,
subject to the requirements set forth in Rule 18f-3.
III. EXPENSE ALLOCATIONS
Expenses of each class created after the date hereof must be allocated
as follows: (i) distribution and shareholder servicing payments associated with
any Rule 12b-1 Plan or servicing agreement, if any, relating to each respective
class of shares (including any costs relating to implementing such plans or any
amendment thereto) will be borne exclusively by that class; (ii) any incremental
transfer agency fees relating to a particular class will be borne exclusively by
that class; and (iii) Class Expenses relating to a particular class will be
borne exclusively by that class.
The methodology and procedures for calculating the net asset value and
dividends and distributions of the various classes of shares of the Fund and the
proper allocation of income and expenses among the various classes of shares of
the Fund are required to comply with the Fund's internal control structure
pursuant to applicable auditing standards, including Statement on Auditing
Standards No. 55, and to be reviewed as part of the independent accountants'
review of such internal control structure. The independent accountants' report
on the Fund's system of
- ------------------------------
(1) Class Expenses are limited to any or all of the following: (i) transfer
agent fees identified as being attributable to a specific class of shares, (ii)
stationery, printing, postage, and delivery expenses related to preparing and
distributing materials such as shareholder reports, prospectuses, and proxy
statements to current shareholders of a specific class, (iii) Blue Sky
registration fees incurred by a class of shares, (iv) SEC registration fees
incurred by a class of shares, (v) expenses of administrative personnel and
services as required to support the shareholders of a specific class, (vi)
directors' fees or expenses incurred as a result of issues relating solely to a
class of shares, (vii) account expenses relating solely to a class of shares,
(viii) auditors' fees, litigation expenses, and legal fees and expenses relating
solely to a class of shares, and (ix) expenses incurred in connection with
shareholder meetings as a result of issues relating solely to a class of shares.
<PAGE>
internal controls required by Form N-SAR, Item 77B, is not required to refer
expressly to the procedures for calculating the classes' net asset values.
<PAGE>
EXHIBIT A
MORGAN STANLEY INSTITUTIONAL FUND, INC.
18f-3 Plan Exhibit Index
Item No.
--------
1 Resolutions.
2 Registrant's Articles of Incorporation filed as an Exhibit to
____________ to Registrant's Registration Statement on Form N-1A
(File Nos. 33-_______ and 811-_______), via EDGAR on
_____________ are incorporated herein by reference.
3 Registrant's By-Laws filed as an Exhibit to ____________ to
Registrant's Registration Statement on Form N-1A (File Nos.
33-_____ and 811-____), via EDGAR on _______________ are
incorporated herein by reference.
4 Registrant's Distribution Agreement between Registrant and Morgan
Stanley & Co. Incorporated filed as an Exhibit to ___________ to
Registrant's Registration Statement on Form N-1A (File Nos.
33-_______ and 811-____), via EDGAR on ___________ is
incorporated herein by reference.
5 Registrant's Form of Plan of Distribution Pursuant to Rule 12b-1
for Class B Shares filed as an Exhibit to ________________ to the
Registrant's Registration Statement on Form N-1A (File Nos.
33-_____ and 811-____), via EDGAR on ____________ is incorporated
herein by reference.
The Prospectus dated ________________ relating to the Aggressive, Conservative,
and Moderate Portfolios filed as a part of ________________________to
Registrant's Registration
<PAGE>
Statement on Form N-1A (File Nos. 33-_____ and 811-____) on _______, as
supplemented and amended from time to time, is incorporated by reference.
<PAGE>
MORGAN STANLEY STRATEGIC ADVISER FUND, INC.
POWER OF ATTORNEY
Barton M. Biggs, whose signature appears below, does hereby constitute and
appoint Michael F. Klein, Harold J. Schaaff, Jr. and Valerie Y. Lewis his true
and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents may deem necessary or advisable or
which may be required to enable Morgan Stanley Strategic Adviser Fund, Inc. (the
"Fund") to comply with the Securities Act of 1933, as amended (the "1933 Act")
and the Investment Company Act of 1940, as amended (the "1940 Act"), and any
rules, regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the Fund's Registration Statement on Form
N-1A pursuant to the 1933 Act and the 1940 Act, together with any and all
amendments thereto, including within the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as a director of the Fund such
Registration Statement and any and all such amendments filed with the Securities
and Exchanges Commission under the 1933 Act and the 1940 Act, and any other
instruments or documents related thereto, and the undersigned does hereby ratify
and confirm all that said attorney and agents shall do or cause to be done by
virtue hereof.
/s/ Barton M. Biggs
-----------------------------
Barton M. Biggs
Date: July 1, 1997
---
<PAGE>
MORGAN STANLEY STRATEGIC ADVISER FUND, INC.
POWER OF ATTORNEY
Frederick O. Robertshaw, whose signature appears below, does hereby
constitute and appoint Michael F. Klein, Harold J. Schaaff, Jr. and Valerie
Y. Lewis, his true and lawful attorneys and agents, with power of
substitution or resubstitution, to do any and all acts and things and to
execute any and all instruments which said attorneys and agents may deem
necessary or advisable or which may be required to enable Morgan Stanley
Strategic Adviser Fund, Inc. (the "Fund") to comply with the Securities Act
of 1933, as amended (the "1933 Act") and the Investment Company Act of 1940,
as amended (the "1940 Act"), and any rules, regulations or requirements of
the Securities and Exchange Commission in respect thereof, in connection with
the Fund's Registration Statement on Form N-1A pursuant to the 1933 Act and
the 1940 Act, together with any and all amendments thereto, including
foregoing, the power and authority to sign in the name and on behalf of the
undersigned as a President and a director of the Fund such Registration
Statement and any and all such amendments filed with the Securities and
Exchanges Commission under the 1933 Act and the 1940 Act, and any other
instruments or documents related thereto, and the undersigned does hereby
ratify and confirm all that said attorney and agents shall do or cause to be
done by virtue hereof.
/s/ Joanna M. Haigney
-----------------------------
Joanna M. Haigney
Date: July 2, 1997
---
<PAGE>
MORGAN STANLEY STRATEGIC ADVISER FUND, INC.
POWER OF ATTORNEY
Michael F. Klein, whose signature appears below, does hereby constitute and
appoint Harold J. Schaaff, Jr. and Valerie Y. Lewis, his true and lawful
attorneys and agents, with power of substitution or resubstitution, to do
any and all acts and things and to execute any and all instruments which said
attorneys and agents may deem necessary or advisable or which may be required to
enable Morgan Stanley Strategic Adviser Fund, Inc. (the "Fund") to comply with
the Securities Act of 1933, as amended (the "1933 Act") and the Investment
Company Act of 1940, as amended (the "1940 Act"), and any rules, regulations or
requirements of the Securities and Exchange Commission in respect thereof, in
connection with the Fund's Registration Statement on Form N-1A pursuant to the
1933 Act and the 1940 Act, together with any and all amendments thereto,
including foregoing, the power and authority to sign in the name and
on behalf of the undersigned as a President and a director of the Fund such
Registration Statement and any and all such amendments filed with the Securities
and Exchanges Commission under the 1933 Act and the 1940 Act, and any other
instruments or documents related thereto, and the undersigned does hereby ratify
and confirm all that said attorney and agents shall do or cause to be done by
virtue hereof.
/s/ Michael F. Klein
-----------------------------
Michael F. Klein
Date: July 1, 1997
---
<PAGE>
MORGAN STANLEY STRATEGIC ADVISER FUND, INC.
POWER OF ATTORNEY
John D. Barrett, II, whose signature appears below, does hereby
constitute and appoint Michael F. Klein, Harold J. Schaaff, Jr. and Valerie
Y. Lewis, his true and lawful attorneys and agents, with power of
substitution or resubstitution, to do any and all acts and things and to
execute any and all instruments which said attorneys and agents may deem
necessary or advisable or which may be required to enable Morgan Stanley
Strategic Adviser Fund, Inc. (the "Fund") to comply with the Securities Act
of 1933, as amended (the "1933 Act") and the Investment Company Act of 1940,
as amended (the "1940 Act"), and any rules, regulations or requirements of
the Securities and Exchange Commission in respect thereof, in connection with
the Fund's Registration Statement on Form N-1A pursuant to the 1933 Act and
the 1940 Act, together with any and all amendments thereto, including
foregoing, the power and authority to sign in the name and on behalf of the
undersigned as a President and a director of the Fund such Registration
Statement and any and all such amendments filed with the Securities and
Exchanges Commission under the 1933 Act and the 1940 Act, and any other
instruments or documents related thereto, and the undersigned does hereby
ratify and confirm all that said attorney and agents shall do or cause to be
done by virtue hereof.
/s/ John D. Barrett, II
-----------------------------
John D. Barrett, II
Date: July 1, 1997
---
<PAGE>
MORGAN STANLEY STRATEGIC ADVISER FUND, INC.
POWER OF ATTORNEY
Gerard E. Jones, whose signature appears below, does hereby constitute
and appoint Michael F. Klein, Harold J. Schaaff, Jr. and Valerie Y. Lewis,
his true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents may deem necessary or advisable
or which may be required to enable Morgan Stanley Strategic Adviser Fund,
Inc. (the "Fund") to comply with the Securities Act of 1933, as amended (the
"1933 Act") and the Investment Company Act of 1940, as amended (the "1940
Act"), and any rules, regulations or requirements of the Securities and
Exchange Commission in respect thereof, in connection with the Fund's
Registration Statement on Form N-1A pursuant to the 1933 Act and the 1940
Act, together with any and all amendments thereto, including foregoing, the
power and authority to sign in the name and on behalf of the undersigned as a
President and a director of the Fund such Registration Statement and any and
all such amendments filed with the Securities and Exchanges Commission under
the 1933 Act and the 1940 Act, and any other instruments or documents related
thereto, and the undersigned does hereby ratify and confirm all that said
attorney and agents shall do or cause to be done by virtue hereof.
/s/ Gerard E. Jones
-----------------------------
Gerard E. Jones
Date: July 1, 1997
---
<PAGE>
MORGAN STANLEY STRATEGIC ADVISER FUND, INC.
POWER OF ATTORNEY
Andrew McNally, IV, whose signature appears below, does hereby constitute
and appoint Michael F. Klein, Harold J. Schaaff, Jr. and Valerie Y. Lewis,
his true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents may deem necessary or advisable
or which may be required to enable Morgan Stanley Strategic Adviser Fund,
Inc. (the "Fund") to comply with the Securities Act of 1933, as amended (the
"1933 Act") and the Investment Company Act of 1940, as amended (the "1940
Act"), and any rules, regulations or requirements of the Securities and
Exchange Commission in respect thereof, in connection with the Fund's
Registration Statement on Form N-1A pursuant to the 1933 Act and the 1940
Act, together with any and all amendments thereto, including foregoing, the
power and authority to sign in the name and on behalf of the undersigned as a
President and a director of the Fund such Registration Statement and any and
all such amendments filed with the Securities and Exchanges Commission under
the 1933 Act and the 1940 Act, and any other instruments or documents related
thereto, and the undersigned does hereby ratify and confirm all that said
attorney and agents shall do or cause to be done by virtue hereof.
/s/ Andrew McNally, IV
-----------------------------
Andrew McNally, IV
Date: July 1, 1997
---
<PAGE>
MORGAN STANLEY STRATEGIC ADVISER FUND, INC.
POWER OF ATTORNEY
Samuel T. Reeves, whose signature appears below, does hereby constitute
and appoint Michael F. Klein, Harold J. Schaaff, Jr. and Valerie Y. Lewis,
his true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents may deem necessary or advisable
or which may be required to enable Morgan Stanley Strategic Adviser Fund,
Inc. (the "Fund") to comply with the Securities Act of 1933, as amended (the
"1933 Act") and the Investment Company Act of 1940, as amended (the "1940
Act"), and any rules, regulations or requirements of the Securities and
Exchange Commission in respect thereof, in connection with the Fund's
Registration Statement on Form N-1A pursuant to the 1933 Act and the 1940
Act, together with any and all amendments thereto, including foregoing, the
power and authority to sign in the name and on behalf of the undersigned as a
President and a director of the Fund such Registration Statement and any and
all such amendments filed with the Securities and Exchanges Commission under
the 1933 Act and the 1940 Act, and any other instruments or documents related
thereto, and the undersigned does hereby ratify and confirm all that said
attorney and agents shall do or cause to be done by virtue hereof.
/s/ Samuel T. Reeves
-----------------------------
Samuel T. Reeves
Date: July 2, 1997
---
<PAGE>
MORGAN STANLEY STRATEGIC ADVISER FUND, INC.
POWER OF ATTORNEY
Fergus Reid, whose signature appears below, does hereby constitute and
appoint Michael F. Klein, Harold J. Schaaff, Jr. and Valerie Y. Lewis, his
true and lawful attorneys and agents, with power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments which said attorneys and agents may deem necessary or advisable
or which may be required to enable Morgan Stanley Strategic Adviser Fund,
Inc. (the "Fund") to comply with the Securities Act of 1933, as amended (the
"1933 Act") and the Investment Company Act of 1940, as amended (the "1940
Act"), and any rules, regulations or requirements of the Securities and
Exchange Commission in respect thereof, in connection with the Fund's
Registration Statement on Form N-1A pursuant to the 1933 Act and the 1940
Act, together with any and all amendments thereto, including foregoing, the
power and authority to sign in the name and on behalf of the undersigned as a
President and a director of the Fund such Registration Statement and any and
all such amendments filed with the Securities and Exchanges Commission under
the 1933 Act and the 1940 Act, and any other instruments or documents related
thereto, and the undersigned does hereby ratify and confirm all that said
attorney and agents shall do or cause to be done by virtue hereof.
/s/ Fergus Reid
-----------------------------
Fergus Reid
Date: July 1, 1997
---
<PAGE>
MORGAN STANLEY STRATEGIC ADVISER FUND, INC.
POWER OF ATTORNEY
Frederick O. Robertshaw, whose signature appears below, does hereby
constitute and appoint Michael F. Klein, Harold J. Schaaff, Jr. and Valerie
Y. Lewis, his true and lawful attorneys and agents, with power of
substitution or resubstitution, to do any and all acts and things and to
execute any and all instruments which said attorneys and agents may deem
necessary or advisable or which may be required to enable Morgan Stanley
Strategic Adviser Fund, Inc. (the "Fund") to comply with the Securities Act
of 1933, as amended (the "1933 Act") and the Investment Company Act of 1940,
as amended (the "1940 Act"), and any rules, regulations or requirements of
the Securities and Exchange Commission in respect thereof, in connection with
the Fund's Registration Statement on Form N-1A pursuant to the 1933 Act and
the 1940 Act, together with any and all amendments thereto, including
foregoing, the power and authority to sign in the name and on behalf of the
undersigned as a President and a director of the Fund such Registration
Statement and any and all such amendments filed with the Securities and
Exchanges Commission under the 1933 Act and the 1940 Act, and any other
instruments or documents related thereto, and the undersigned does hereby
ratify and confirm all that said attorney and agents shall do or cause to be
done by virtue hereof.
/s/ Frederick O. Robertshaw
-----------------------------
Frederick O. Robertshaw
Date: July 3 , 1997
---
