<PAGE>
As filed with the Securities and Exchange Commission on May 1, 2000.
Securities Act File No. 333-32231
Investment Company Act File No. 811-08303
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / /
POST-EFFECTIVE AMENDMENT NO.5 /X/
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 7 /X/
--------------
MORGAN STANLEY DEAN WITTER 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 Dean Witter Investment Management Inc.
1221 Avenue of the Americas, New York, New York 10020
(Name and Address of Agent for Service)
--------------
COPIES TO:
Harold J. Schaaff, Jr., Esquire Richard W. Grant, Esquire
Morgan Stanley Dean Witter Morgan, Lewis & Bockius LLP
Investment Management Inc. 1701 Market Street
1221 Avenue of the America Philadelphia, PA 19103-2921
New York, NY 10020
--------------
- --------------------------------------------------------------------------------
It is proposed that this filing will become effective (check appropriate box)
___ immediately upon filing pursuant to paragraph (b) of Rule 485.
_X_ on May 1, 2000 pursuant to paragraph (b) of Rule 485.
___ 60 days after filing pursuant to paragraph (a)(1) of Rule 485.
___ 75 days after filing pursuant to paragraph (a)(2) of Rule 485.
___ on [date] pursuant to paragraph (a) of Rule 485.
- --------------------------------------------------------------------------------
<PAGE>
- -------------------------------------------------------------------------------
PROSPECTUS MAY 1, 2000
- -------------------------------------------------------------------------------
PORTFOLIOS OF [LOGO] MORGAN STANLEY DEAN WITTER
STRATEGIC ADVISER FUND, INC.
CONSERVATIVE PORTFOLIO
THE CONSERVATIVE PORTFOLIO SEEKS THE HIGHEST LEVEL OF LONG-TERM TOTAL RETURN
THAT IS CONSISTENT WITH A RELATIVELY CONSERVATIVE LEVEL OF RISK.
MODERATE PORTFOLIO
THE MODERATE PORTFOLIO SEEKS THE HIGHEST LEVEL OF LONG-TERM TOTAL RETURN THAT IS
CONSISTENT WITH A RELATIVELY MODERATE LEVEL OF RISK.
AGGRESSIVE PORTFOLIO
THE AGGRESSIVE PORTFOLIO SEEKS THE HIGHEST LEVEL OF LONG-TERM CAPITAL
APPRECIATION THAT IS CONSISTENT WITH A RELATIVELY HIGH LEVEL OF RISK.
INVESTMENT ADVISER
MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT INC.
DISTRIBUTOR
MORGAN STANLEY & CO. INCORPORATED
MORGAN STANLEY DEAN WITTER STRATEGIC ADVISER FUND, INC. (THE "FUND") IS A
NO-LOAD MUTUAL FUND THAT OFFERS INVESTORS A RANGE OF ASSET ALLOCATION STRATEGIES
DESIGNED TO ACCOMMODATE DIFFERENT INVESTMENT PHILOSOPHIES, GOALS AND RISK
TOLERANCES. THE FUND IMPLEMENTS THESE STRATEGIES BY INVESTING IN A COMBINATION
OF MUTUAL FUNDS ("UNDERLYING FUNDS") THAT ARE INVESTMENT PORTFOLIOS OF MORGAN
STANLEY DEAN WITTER INSTITUTIONAL FUND, INC. ("MSDWIF") AND MAS FUNDS. THE
UNDERLYING FUNDS ARE MANAGED BY EITHER MORGAN STANLEY DEAN WITTER INVESTMENT
MANAGEMENT INC. ("MSDW INVESTMENT MANAGEMENT") OR MILLER ANDERSON & SHERRERD,
LLP ("MAS"). THIS PROSPECTUS OFFERS CLASS A AND CLASS B SHARES OF THE PORTFOLIOS
LISTED ABOVE (EACH A "PORTFOLIO" AND, COLLECTIVELY, THE "PORTFOLIOS").
THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT SUMMARY
THE FUND 1
CONSERVATIVE PORTFOLIO 2
MODERATE PORTFOLIO 4
AGGRESSIVE PORTFOLIO 6
FEES AND EXPENSES OF THE PORTFOLIOS 8
ADDITIONAL RISK FACTORS AND INFORMATION 9
UNDERLYING FUNDS 10
INVESTMENT ADVISER 14
PORTFOLIO MANAGER 14
DISTRIBUTION OF PORTFOLIO SHARES 15
SHAREHOLDER INFORMATION 15
FINANCIAL HIGHLIGHTS 16
CONSERVATIVE PORTFOLIO 17
MODERATE PORTFOLIO 18
AGGRESSIVE PORTFOLIO 19
</TABLE>
<PAGE>
- ----------------------------
INVESTMENT SUMMARY
- -------------------------------------------------------------------------------
THE FUND
- -------------------------------------------------------------------------------
THIS SECTION DISCUSSES THE INVESTMENT APPROACH OF THE FUND AND, IN GENERAL, HOW
MSDW INVESTMENT MANAGEMENT MANAGES THE INVESTMENTS OF ALL OF THE PORTFOLIOS. IN
ADDITION, THE INVESTMENT SUMMARIES THAT FOLLOW DESCRIBE IN GREATER DETAIL THE
INDIVIDUAL INVESTMENT OBJECTIVES AND POLICIES OF EACH PORTFOLIO.
APPROACH
The Fund is a type of mutual fund often described as a "fund of funds." The
three Portfolios of the Fund have distinct investment objectives and are
designed to accommodate different investment philosophies, goals and risk
tolerances. Each Portfolio invests in different combinations of shares of
Underlying Funds, which are Class A shares of investment portfolios of MSDWIF or
Institutional Class shares of MAS Funds. These Underlying Funds, in turn, invest
directly in securities in accordance with their own varying investment
objectives and policies.
PROCESS
MSDW Investment Management allocates each Portfolio's investments within broad
ranges for Underlying Funds that invest primarily in fixed income securities
("Underlying Fixed Income Funds") and equity securities ("Underlying Equity
Funds"). The Portfolios' permissible ranges for Underlying Fixed Income Funds
and Underlying Equity Funds, as well as their current investments, are set forth
in the Investment Summaries that follow. The allocation process is strategic,
rather than tactical, and focuses on subtle adjustments in response to longer
term trends in market forces. Accordingly, MSDW Investment Management expects
each Portfolio's allocation among Underlying Funds to remain relatively static,
but it may rebalance the investment allocations to restore weightings to the
permitted ranges.
You can find additional information about the Underlying Funds, including a
discussion of their investment strategies, later in this Prospectus under
"Additional Risk Factors and Information." The Portfolios also may invest in
other Underlying Funds (i.e., other investment portfolios that MSDWIF and MAS
Funds currently offer or may offer in the future). The Portfolios intend to
invest entirely in combinations of Underlying Funds, however, they also may
invest directly in certain fixed income securities.
1
<PAGE>
- ----------------------------
INVESTMENT SUMMARY
- -------------------------------------------------------------------------------
CONSERVATIVE PORTFOLIO
- -------------------------------------------------------------------------------
THE CONSERVATIVE PORTFOLIO SEEKS THE HIGHEST LEVEL OF LONG-TERM TOTAL RETURN
THAT IS CONSISTENT WITH A RELATIVELY CONSERVATIVE LEVEL OF RISK.
APPROACH
MSDW Investment Management seeks to invest in Underlying Funds that, together,
have low to moderate potential risk and reward. The Conservative 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 -- for example, investors who are investing with a 3-5 year
time horizon.
PROCESS
The Conservative Portfolio invests in Underlying Fixed Income Funds and, to a
lesser extent, in Underlying Equity Funds, within the following permitted
ranges:
INVESTMENT PARAMETERS OF THE FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
FIXED INCOME 75% TO 85% EQUITY 15% TO 25%
- -------------------------------------------------------------------------------------------------
</TABLE>
MSDW Investment Management anticipates allocating the Portfolio's investments to
Underlying Funds that focus their investments on the U.S. and that invest in
short-duration fixed income securities. The Portfolio invests, to a lesser
extent, in Underlying Funds that invest in equity securities of larger issuers.
The following is an example of how MSDW Investment Management may allocate the
Portfolio's investments, based on the allocations on the date of this
Prospectus:
PORTFOLIO ALLOCATIONS AS OF MAY 1, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
MAS LIMITED DURATION PORTFOLIO 70% MAS HIGH YIELD PORTFOLIO 9%
- -------------------------------------------------------------------------------------------------
MSDWIF U.S. EQUITY PLUS PORTFOLIO 2% MSDWIF EQUITY GROWTH PORTFOLIO 6%
- -------------------------------------------------------------------------------------------------
MAS SMALL CAP GROWTH PORTFOLIO 1% MAS MID CAP VALUE PORTFOLIO 3%
- -------------------------------------------------------------------------------------------------
MAS MID CAP GROWTH PORTFOLIO 1% MSDWIF VALUE EQUITY PORTFOLIO 3%
- -------------------------------------------------------------------------------------------------
MSDWIF EMERGING MARKETS DEBT 2% MSDWIF EMERGING MARKETS 1%
PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------
MSDWIF ACTIVE INTERNATIONAL 1% MSDWIF ASIAN EQUITY 1%
ALLOCATION PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------------
</TABLE>
This example only illustrates the Portfolio's investments. MSDW Investment
Management may alter the Portfolio's investment allocation at any time,
consistent with the permitted ranges for Underlying Fixed Income and Underlying
Equity Funds.
RISK
The value of your investment in the Conservative Portfolio is based primarily on
the prices of the Underlying Funds that the Portfolio purchases. The price of
each Underlying Fund, in turn, is based on the value of the securities that it
purchases. These prices change daily due to economic and other events that
affect equity and fixed income markets generally, as well as those that affect
particular issuers, such as companies and governments. These price movements,
sometimes called volatility, may be greater or lesser depending on the types of
Underlying Funds and, indirectly, the types of securities the Portfolio owns and
the markets in which the securities trade. Over time, equity securities, and
therefore Underlying Equity Funds, have shown superior gains, although they have
tended to be more volatile in the short term. Fixed income securities, and
therefore Underlying Fixed Income Funds, also experience price volatility,
especially in response to interest rate changes. As a result of price
volatility, there is a risk that you may lose money by investing in the
Portfolio.
2
<PAGE>
- ----------------------------
INVESTMENT SUMMARY
- -------------------------------------------------------------------------------
CONSERVATIVE PORTFOLIO
- -------------------------------------------------------------------------------
The bar chart and table below show the performance of the Portfolio from year to
year and as an average over different periods of time. Together, the bar chart
and table demonstrate the variability of performance over time and provide an
indication of the risks of investing in the Portfolio. In addition, the table
compares the performance of the Portfolio to a Composite Index and the Lehman
1-3 Year Government Bond Index. An index is a hypothetical measure of
performance based on the ups and downs of securities that make up a particular
market. An index does not show actual investment returns or reflect payment of
management fees, which would lower the index's performance. How the Portfolio
has performed in the past does not necessarily indicate how the Portfolio will
perform in the future.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
PERFORMANCE
(CLASS A
SHARES)
COMMENCED
OPERATIONS
ON
DECEMBER
31, 1997
<S> <C>
1998 7.76%
1999 8.69%
HIGH
(QUARTER)
10/99-12/99
4.94%
LOW
(QUARTER)
7/98-9/98
- -2.09%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 1999
<TABLE>
CONSERVATIVE PORTFOLIO
CLASS A CLASS B
(COMMENCED (COMMENCED
OPERATIONS ON OPERATIONS ON COMPOSITE LEHMAN 1-3 YEAR
DECEMBER 31, 1997) DECEMBER 31, 1997) INDEX(1) GOV'T. BOND INDEX(2)
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
PAST ONE YEAR 8.69% 8.33% 6.38% 2.97%
- -----------------------------------------------------------------------------------------------------------
SINCE INCEPTION 8.23% 7.92% 8.70% 4.95%
</TABLE>
1. THE COMPOSITE INDEX FOR THE CONSERVATIVE PORTFOLIO IS COMPRISED OF 70% OF THE
LEHMAN 1-3 YEAR GOVERNMENT BOND INDEX, 20% OF THE S&P 500 INDEX AND 10% OF
THE SALOMON SMITH BARNEY HIGH YIELD MARKET INDEX. THE PORTFOLIO'S INVESTMENTS
VARY AND WILL NOT NECESSARILY MATCH THE COMPOSITE INDEX'S ALLOCATION AMONG
ASSET CLASSES.
2. THE LEHMAN 1-3 YEAR GOVERNMENT BOND INDEX IS COMPOSED OF GOVERNMENT AGENCY
AND TREASURY SECURITIES WITH MATURITIES OF 1-3 YEARS.
3
<PAGE>
- ----------------------------
INVESTMENT SUMMARY
- -------------------------------------------------------------------------------
MODERATE PORTFOLIO
- -------------------------------------------------------------------------------
THE MODERATE PORTFOLIO SEEKS THE HIGHEST LEVEL OF LONG-TERM TOTAL RETURN THAT IS
CONSISTENT WITH A RELATIVELY MODERATE LEVEL OF RISK.
APPROACH
MSDW Investment Management seeks to invest in Underlying Funds that, together,
have moderate potential risk and reward. The Moderate 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
in the hope of achieving capital appreciation -- for example, investors with a
5-20 year time horizon.
PROCESS
The Moderate Portfolio invests primarily in a mix of Underlying Equity Funds and
Underlying Fixed Income Funds, within the following permitted ranges:
INVESTMENT PARAMETERS OF THE FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
FIXED INCOME 45% TO 55% EQUITY 45% TO 55%
- --------------------------------------------------------------------------------------------
</TABLE>
MSDW Investment Management anticipates allocating the Portfolio's investments to
Underlying Funds that focus their investments on equity securities of mid- to
large-size U.S. and foreign issuers. The Portfolio also invests in Underlying
Funds that focus on short- to intermediate-duration fixed income securities,
including high yield securities and mortgage securities. The following is an
example of how MSDW Investment Management may allocate the Portfolio's
investments, based on the allocations on the date of this Prospectus:
PORTFOLIO ALLOCATIONS AS OF MAY 1, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
MAS INTERMEDIATE DURATION PORTFOLIO 39% MAS SMALL CAP GROWTH PORTFOLIO 3%
- ---------------------------------------------------------------------------------------------------------------
MSDWIF U.S. EQUITY PLUS PORTFOLIO 6% MAS MID CAP VALUE PORTFOLIO 3%
- ---------------------------------------------------------------------------------------------------------------
MAS HIGH YIELD PORTFOLIO 9% MSDWIF ACTIVE INTERNATIONAL 10%
ALLOCATION PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------
MSDWIF EQUITY GROWTH PORTFOLIO 14% MSDWIF VALUE EQUITY PORTFOLIO 8%
- ---------------------------------------------------------------------------------------------------------------
MSDWIF INTERNATIONAL MAGNUM 5% MSDWIF EMERGING MARKETS 1%
PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------
MSDWIF EMERGING MARKETS DEBT 1% MSDWIF ASIAN EQUITY 1%
PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
This example only illustrates the Portfolio's investments. MSDW Investment
Management may alter the Portfolio's investment allocation at any time,
consistent with the permitted ranges for Underlying Fixed Income and Underlying
Equity Funds.
RISK
The value of your investment in the Moderate Portfolio is based primarily on the
prices of the Underlying Funds that the Portfolio purchases. The price of each
Underlying Fund, in turn, is based on the value of the securities that it
purchases. These prices change daily due to economic and other events that
affect equity and fixed income markets generally, as well as those that affect
particular issuers, such as companies and governments. These price movements,
sometimes called volatility, may be greater or lesser depending on the types of
Underlying Funds and, indirectly, the types of securities the Portfolio owns and
the markets in which the securities trade. Over time, equity securities, and
therefore Underlying Equity Funds, have shown superior gains, although they have
tended to be more volatile in the short term. Fixed income securities, and
therefore Underlying Fixed Income Funds, also experience price volatility,
especially in response to interest rate changes. As a result of price
volatility, there is a risk that you may lose money by investing in the
Portfolio.
TO THE EXTENT THAT THE UNDERLYING FUNDS INVEST IN FOREIGN COUNTRIES,
PARTICULARLY EMERGING MARKETS, THERE IS THE RISK THAT NEWS AND EVENTS UNIQUE TO
A COUNTRY OR REGION WILL AFFECT THOSE MARKETS AND THEIR ISSUERS. THESE SAME
EVENTS WILL NOT NECESSARILY HAVE AN EFFECT ON THE U.S. ECONOMY OR SIMILAR
ISSUERS LOCATED IN THE UNITED STATES. IN ADDITION, THE UNDERLYING FUNDS'
INVESTMENTS IN FOREIGN COUNTRIES GENERALLY WILL BE DENOMINATED IN FOREIGN
CURRENCIES. AS A RESULT, CHANGES IN THE VALUE OF A COUNTRY'S CURRENCY COMPARED
TO THE U.S. DOLLAR MAY AFFECT THE VALUE OF THE PORTFOLIO'S INVESTMENTS. THESE
CHANGES MAY OCCUR SEPARATELY FROM AND IN RESPONSE TO EVENTS THAT DO NOT
OTHERWISE AFFECT THE VALUE OF THE SECURITY IN THE ISSUER'S HOME COUNTRY. MSDW
INVESTMENT MANAGEMENT AND MAS MAY INVEST IN CERTAIN INSTRUMENTS, SUCH AS
DERIVATIVES, AND MAY USE CERTAIN TECHNIQUES, SUCH AS HEDGING, TO MANAGE THESE
RISKS. HOWEVER, MSDW INVESTMENT MANAGEMENT AND MAS CANNOT GUARANTEE THAT IT WILL
BE PRACTICAL TO HEDGE THESE RISKS IN CERTAIN MARKETS OR UNDER PARTICULAR
CONDITIONS OR THAT THEY WILL SUCCEED IN DOING SO.
4
<PAGE>
- ----------------------------
INVESTMENT SUMMARY
- -------------------------------------------------------------------------------
MODERATE PORTFOLIO
- -------------------------------------------------------------------------------
The bar chart and table below show the performance of the Portfolio from year to
year and as an average over different periods of time. Together, the bar chart
and table demonstrate the variability of performance over time and provide an
indication of the risks of investing in the Portfolio. In addition, the table
compares the performance of the Portfolio to a Composite Index and the S&P 500
Index. An index is a hypothetical measure of performance based on the ups and
downs of securities that make up a particular market. An index does not show
actual investment returns or reflect payment of management fees, which would
lower the index's performance. How the Portfolio has performed in the past does
not necessarily indicate how the Portfolio will perform in the future.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
PERFORMANCE
(CLASS A
SHARES)
COMMENCED
OPERATIONS
ON
DECEMBER
31, 1997
<S> <C>
1998 9.93%
1999 15.79%
HIGH
(QUARTER)
10/99-12/99
9.92%
LOW
(QUARTER)
7/98-9/98
- -7.00%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 1999
<TABLE>
MODERATE PORTFOLIO
CLASS A CLASS B
(COMMENCED (COMMENCED
OPERATIONS ON OPERATIONS ON COMPOSITE S&P 500
DECEMBER 31, 1997) DECEMBER 31, 1997) INDEX(1) INDEX(2)
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------
PAST ONE YEAR 15.79% 15.54% 11.43% 21.04%
- -------------------------------------------------------------------------------------------
SINCE INCEPTION 12.82% 12.51% 14.21% 24.75%
</TABLE>
1. THE COMPOSITE INDEX FOR THE MODERATE PORTFOLIO IS COMPRISED OF 40% OF THE
LEHMAN INTERMEDIATE GOVERNMENT / CORPORATE BOND INDEX, 35% OF THE S&P 500
INDEX, 15% OF THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EUROPE,
AUSTRALASIA AND FAR EAST (EAFE) INDEX AND 10% OF THE SALOMON SMITH BARNEY
HIGH YIELD MARKET INDEX. THE PORTFOLIO'S INVESTMENTS VARY AND WILL NOT
NECESSARILY MATCH THE COMPOSITE INDEX'S ALLOCATION AMONG ASSET CLASSES.
2. THE S&P 500 INDEX IS A STOCK INDEX COMPRISED OF 500 LARGE-CAP U.S. COMPANIES
WITH MARKET CAPITALIZATION OF $1 BILLION OR MORE. THESE 500 COMPANIES ARE A
REPRESENTATIVE SAMPLE OF SOME 100 INDUSTRIES, CHOSEN MAINLY FOR MARKET SIZE,
LIQUIDITY AND INDUSTRY GROUP REPRESENTATION. THE S&P IS A MARKET-VALUE
WEIGHTED INDEX (STOCK PRICE TIMES NUMBER OF SHARES OUTSTANDING), WITH EACH
STOCK'S WEIGHT IN THE INDEX PROPORTIONATE TO ITS MARKET VALUE.
5
<PAGE>
- ----------------------------
INVESTMENT SUMMARY
- -------------------------------------------------------------------------------
AGGRESSIVE PORTFOLIO
- -------------------------------------------------------------------------------
THE AGGRESSIVE PORTFOLIO SEEKS THE HIGHEST LEVEL OF LONG-TERM CAPITAL
APPRECIATION THAT IS CONSISTENT WITH A RELATIVELY HIGH LEVEL OF RISK.
APPROACH
MSDW Investment Management seeks to invest in Underlying Funds that, together,
have moderate to high potential risk and reward. The Aggressive 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 in the hope
of achieving greater appreciation -- for example, investors with a 20 year or
longer time horizon.
PROCESS
The Aggressive Portfolio invests primarily in Underlying Equity Funds and, to a
lesser extent, in Underlying Fixed Income Funds within the following permitted
ranges:
INVESTMENT PARAMETERS OF THE FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
FIXED INCOME 10% TO 20% EQUITY 80% TO 90%
- -----------------------------------------------------------------------------------------------
</TABLE>
MSDW Investment Management anticipates allocating the Portfolio's investments to
Underlying Funds that focus their investments on equity securities of U.S. and
foreign issuers, including those in emerging markets. The Portfolio also
invests, to a lesser extent, in Underlying Funds that focus on intermediate- to
long-duration fixed income securities, including high yield securities and
mortgage securities. The following is an example of how MSDW Investment
Management may allocate the Portfolio's investments, based on the allocations on
the date of this Prospectus:
PORTFOLIO ALLOCATIONS AS OF MAY 1, 2000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
MSDWIF EQUITY GROWTH PORTFOLIO 18% MAS SMALL CAP GROWTH PORTFOLIO 5%
- ----------------------------------------------------------------------------------------------------
MAS MID CAP GROWTH PORTFOLIO 7% MAS FIXED INCOME PORTFOLIO 15%
- ----------------------------------------------------------------------------------------------------
MSDWIF EMERGING MARKETS PORTFOLIO 10% MAS MID CAP VALUE PORTFOLIO 2%
- ----------------------------------------------------------------------------------------------------
MSDWIF U.S. EQUITY PLUS PORTFOLIO 6% MSDWIF ACTIVE INTERNATIONAL 16%
ALLOCATION PORTFOLIO
- ----------------------------------------------------------------------------------------------------
MSDWIF VALUE EQUITY PORTFOLIO 11% MSDWIF INTERNATIONAL MAGNUM 8%
PORTFOLIO
- ----------------------------------------------------------------------------------------------------
MSDWIF EMERGING MARKETS DEBT 1% MSDWIF ASIAN EQUITY 1%
PORTFOLIO PORTFOLIO
- ----------------------------------------------------------------------------------------------------
</TABLE>
This example only illustrates the Portfolio's investments. MSDW Investment
Management may alter the Portfolio's investment allocation at any time,
consistent with the permitted ranges for Underlying Fixed Income and Underlying
Equity Funds.
RISK
The value of your investment in the Aggressive Portfolio is based primarily on
the prices of the Underlying Funds that the Portfolio purchases. The price of
each Underlying Fund, in turn, is based on the value of the securities that it
purchases. These prices change daily due to economic and other events that
affect equity and fixed income markets generally, as well as those that affect
particular issuers, such as companies and governments. These price movements,
sometimes called volatility, may be greater or lesser depending on the types of
Underlying Funds and, indirectly, the types of securities the Portfolio owns and
the markets in which the securities trade. Over time, equity securities, and
therefore Underlying Equity Funds, have shown superior gains, although they have
tended to be more volatile in the short term. Fixed income securities, and
therefore Underlying Fixed Income Funds, also experience price volatility,
especially in response to interest rate changes. As a result of price
volatility, there is a risk that you may lose money by investing in the
Portfolio.
TO THE EXTENT THAT THE UNDERLYING FUNDS INVEST IN FOREIGN COUNTRIES,
PARTICULARLY EMERGING MARKETS, THERE IS THE RISK THAT NEWS AND EVENTS UNIQUE TO
A COUNTRY OR REGION WILL AFFECT THOSE MARKETS AND THEIR ISSUERS. THESE SAME
EVENTS WILL NOT NECESSARILY HAVE AN EFFECT ON THE U.S. ECONOMY OR SIMILAR
ISSUERS LOCATED IN THE UNITED STATES. IN ADDITION, THE UNDERLYING FUNDS'
INVESTMENTS IN FOREIGN COUNTRIES GENERALLY WILL BE DENOMINATED IN FOREIGN
CURRENCIES. AS A RESULT, CHANGES IN THE VALUE OF A COUNTRY'S CURRENCY COMPARED
TO THE U.S. DOLLAR MAY AFFECT THE VALUE OF THE PORTFOLIO'S INVESTMENTS. THESE
CHANGES MAY OCCUR SEPARATELY FROM AND IN RESPONSE TO EVENTS THAT DO NOT
OTHERWISE AFFECT THE VALUE OF THE SECURITY IN THE ISSUER'S HOME COUNTRY. MSDW
INVESTMENT MANAGEMENT AND MAS MAY INVEST IN CERTAIN INSTRUMENTS, SUCH AS
DERIVATIVES, AND MAY USE CERTAIN TECHNIQUES, SUCH AS HEDGING, TO MANAGE THESE
RISKS. HOWEVER, MSDW INVESTMENT MANAGEMENT AND MAS CANNOT GUARANTEE THAT IT WILL
BE PRACTICAL TO HEDGE THESE RISKS IN CERTAIN MARKETS OR UNDER PARTICULAR
CONDITIONS OR THAT THEY WILL SUCCEED IN DOING SO.
6
<PAGE>
- ----------------------------
INVESTMENT SUMMARY
- -------------------------------------------------------------------------------
AGGRESSIVE PORTFOLIO
- -------------------------------------------------------------------------------
The bar chart and table below show the performance of the Portfolio from year to
year and as an average over different periods of time. Together, the bar chart
and table demonstrate the variability of performance over time and provide an
indication of the risks of investing in the Portfolio. In addition, the table
compares the performance of the Portfolio to a Composite Index and the MSCI
World Index. An index is a hypothetical measure of performance based on the ups
and downs of securities that make up a particular market. An index does not show
actual investment returns or reflect payment of management fees, which would
lower the index's performance. How the Portfolio has performed in the past does
not necessarily indicate how the Portfolio will perform in the future.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
PERFORMANCE
(CLASS A
SHARES)
COMMENCED
OPERATIONS
ON
DECEMBER
31, 1997
<S> <C>
1998 8.38%
1999 34.31%
HIGH
(QUARTER)
10/99-12/99
20.31%
LOW
(QUARTER)
7/98-9/98
- -14.71%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 1999
<TABLE>
AGGRESSIVE PORTFOLIO
CLASS A CLASS B
(COMMENCED (COMMENCED
OPERATIONS ON OPERATIONS ON COMPOSITE MSCI WORLD
DECEMBER 31, 1997) DECEMBER 31, 1997) INDEX(1) INDEX(2)
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
PAST ONE YEAR 34.31% 33.88% 23.11% 24.94%
- ---------------------------------------------------------------------------------------------
SINCE INCEPTION 20.65% 20.37% 19.58% 24.64%
</TABLE>
1. THE COMPOSITE INDEX FOR THE AGGRESSIVE PORTFOLIO IS COMPRISED OF 50% OF THE
RUSSELL 3000 INDEX, 25% OF THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI)
EUROPE, AUSTRALASIA AND FAR EAST (EAFE) INDEX, 15% OF THE LEHMAN AGGREGATE
BOND INDEX AND 10% OF THE IFC INVESTABLE EMERGING MARKETS INDEX. THE
PORTFOLIO'S INVESTMENTS VARY AND WILL NOT NECESSARILY MATCH THE COMPOSITE
INDEX'S ALLOCATION AMONG ASSET CLASSES.
2. THE MSCI WORLD INDEX IS AN UNMANAGED INDEX OF COMMON STOCKS AND INCLUDES
SECURITIES REPRESENTATIVE OF THE MARKET STRUCTURE OF 22 DEVELOPED MARKET
COUNTRIES IN NORTH AMERICA, EUROPE, AND THE ASIA/PACIFIC REGION, INCLUDING
DIVIDENDS.
7
<PAGE>
- --------------------------------------------------------------------------------
FEES AND EXPENSES OF THE PORTFOLIOS
- -------------------------------------------------------------------------------
The Commission requires that the Fund disclose in the table below the fees and
expenses that you may pay if you buy and hold shares of the Portfolios. The
Portfolios do not charge any sales loads or similar fees when you purchase or
redeem shares. The Annual Fund Operating Expenses in the table below do not
reflect voluntary fee waivers and/or expense reimbursements from MSDW Investment
Management.
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)*
<TABLE>
CONSERVATIVE MODERATE AGGRESSIVE
PORTFOLIO PORTFOLIO PORTFOLIO
CLASS A
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------
MANAGEMENT FEES NONE NONE NONE
- -------------------------------------------------------------------------------------------
12B-1 FEE NONE NONE NONE
- -------------------------------------------------------------------------------------------
OTHER EXPENSES 2.74% 2.58% 2.66%
- -------------------------------------------------------------------------------------------
ADMINISTRATION FEE 0.15% 0.15% 0.15%
- -------------------------------------------------------------------------------------------
OTHER EXPENSES 2.59% 2.43% 2.51%
- -------------------------------------------------------------------------------------------
TOTAL ANNUAL FUND
OPERATING EXPENSES 2.74% 2.58% 2.66%
CLASS B
- -------------------------------------------------------------------------------------------
MANAGEMENT FEES NONE NONE NONE
- -------------------------------------------------------------------------------------------
12B-1 FEE 0.25% 0.25% 0.25%
- -------------------------------------------------------------------------------------------
OTHER EXPENSES 2.65% 2.56% 2.68%
- -------------------------------------------------------------------------------------------
ADMINISTRATION FEE 0.15% 0.15% 0.15%
- -------------------------------------------------------------------------------------------
OTHER EXPENSES 2.50% 2.41% 2.53%
- -------------------------------------------------------------------------------------------
TOTAL ANNUAL FUND
OPERATING EXPENSES 2.90% 2.81% 2.93%
</TABLE>
* THE FEES FOR THE PORTFOLIOS SHOWN IN THE TABLE ABOVE ARE THE HIGHEST THAT
COULD BE CHARGED. THIS TABLE DOES NOT SHOW THE EFFECTS OF MSDW INVESTMENT
MANAGEMENT'S VOLUNTARY FEE WAIVERS AND/OR EXPENSE REIMBURSEMENTS. MSDW
INVESTMENT MANAGEMENT HAS VOLUNTARILY AGREED TO REDUCE ITS ADMINISTRATION FEE
AND/OR REIMBURSE THE PORTFOLIOS SO THAT TOTAL ANNUAL EXPENSES, INCLUDING
EXPENSES ATTRIBUTABLE TO INVESTMENT IN UNDERLYING FUNDS, WILL NOT EXCEED 0.80%
FOR THE CLASS A SHARES AND 1.05% FOR THE CLASS B SHARES OF THE CONSERVATIVE
PORTFOLIO; 0.90% FOR THE CLASS A SHARES AND 1.15% FOR THE CLASS B SHARES OF
THE MODERATE PORTFOLIO; AND 1.10% FOR THE CLASS A SHARES AND 1.35% FOR THE
CLASS B SHARES OF THE AGGRESSIVE PORTFOLIO.
FOR THE YEAR ENDED DECEMBER 31, 1999, AFTER GIVING EFFECT TO MSDW INVESTMENT
MANAGEMENT'S VOLUNTARY MANAGEMENT FEE WAIVER AND/OR EXPENSE REIMBURSEMENT, THE
TOTAL OPERATING EXPENSES INCURRED BY INVESTORS WERE 0.31% FOR THE CLASS A
SHARES AND 0.56% FOR THE CLASS B SHARES FOR THE CONSERVATIVE PORTFOLIO; 0.23%
FOR THE CLASS A SHARES AND 0.48% FOR THE CLASS B SHARES OF THE MODERATE
PORTFOLIO; AND 0.28% FOR THE CLASS A SHARES AND 0.53% FOR THE CLASS B SHARES
OF THE AGGRESSIVE PORTFOLIO.
FEE WAIVERS AND/OR EXPENSE REIMBURSEMENTS ARE VOLUNTARY AND MSDW INVESTMENT
MANAGEMENT RESERVES THE RIGHT TO TERMINATE ANY WAIVER AND/OR REIMBURSEMENT AT
ANY TIME AND WITHOUT NOTICE.
8
<PAGE>
EXAMPLE
THIS EXAMPLE IS INTENDED TO HELP YOU COMPARE THE COST OF INVESTING IN EACH
PORTFOLIO WITH THE COST OF INVESTING IN OTHER MUTUAL FUNDS HAVING SIMILAR
INVESTMENT OBJECTIVES.
- --------------------------------------------------------------------------------
The example assumes that you invest $10,000 in each Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The example assumes that your investment has a 5% return each year and
that each Portfolio's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
CONSERVATIVE PORTFOLIO
- ------------------------------------------------------------------
CLASS A $277 $850 $1,450 $3,070
- ------------------------------------------------------------------
CLASS B $293 $898 $1,528 $3,223
MODERATE PORTFOLIO
- ------------------------------------------------------------------
CLASS A $261 $802 $1,370 $2,915
- ------------------------------------------------------------------
CLASS B $284 $871 $1,484 $3,138
AGGRESSIVE PORTFOLIO
- ------------------------------------------------------------------
CLASS A $269 $826 $1,410 $2,993
- ------------------------------------------------------------------
CLASS B $296 $907 $1,543 $3,252
</TABLE>
- --------------------------------------------------------------------------------
ADDITIONAL RISK FACTORS AND INFORMATION
- -------------------------------------------------------------------------------
THIS SECTION DISCUSSES ADDITIONAL RISK FACTORS AND INFORMATION RELATING TO THE
PORTFOLIOS AND THEIR INVESTMENTS IN THE UNDERLYING FUNDS. THE PORTFOLIOS'
INVESTMENT PRACTICES AND LIMITATIONS AND THE UNDERLYING FUNDS' INVESTMENTS ARE
DESCRIBED IN GREATER DETAIL IN THE STATEMENT OF ADDITIONAL INFORMATION ("SAI"),
WHICH IS LEGALLY PART OF THIS PROSPECTUS. FOR DETAILS ABOUT HOW TO OBTAIN A COPY
OF THE SAI AND OTHER REPORTS AND INFORMATION, SEE THE BACK COVER OF THIS
PROSPECTUS.
- --------------------------------------------------------------------------------
BANK INVESTORS
An investment in a Portfolio is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
TEMPORARY DEFENSIVE INVESTMENTS
When MSDW Investment Management believes that changes in economic, financial or
political conditions warrant, each Portfolio may invest without limit in certain
short- and medium-term fixed income securities for temporary purposes. If MSDW
Investment Management incorrectly predicts the effects of these changes, such
defensive investments may adversely affect the Portfolios' performance.
9
<PAGE>
- --------------------------------------------------------------------------------
UNDERLYING FUNDS
- -------------------------------------------------------------------------------
The Portfolios initially will consider the following Underlying Funds for
investment. However, MSDW Investment Management may, in accordance with the
Portfolios' investment objectives and policies, select additional Underlying
Funds for investment.
UNDERLYING EQUITY FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
U.S. EQUITY FUNDS INTERNATIONAL EQUITY FUNDS
MSDWIF Equity Growth Portfolio MSDWIF Active International Allocation
MSDWIF U.S. Equity Plus Portfolio Portfolio
MSDWIF U.S. Real Estate Portfolio MSDWIF Asian Equity Portfolio
MSDWIF Value Equity Portfolio MSDWIF Emerging Markets Portfolio
MAS Mid Cap Growth Portfolio MSDWIF European Equity Portfolio
MAS Mid Cap Value Portfolio MSDWIF International Equity Portfolio
MAS Small Cap Growth Portfolio MSDWIF International Magnum Portfolio
MAS Value Portfolio MSDWIF Japanese Equity Portfolio
MSDWIF Latin American Portfolio
</TABLE>
UNDERLYING FIXED INCOME FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
U.S. FIXED INCOME FUNDS INTERNATIONAL FIXED INCOME FUND
MSDWIF Fixed Income Portfolio MAS International Fixed Income Portfolio
MAS Fixed Income Portfolio
MAS High Yield Portfolio
MAS Intermediate Duration Portfolio
MAS Limited Duration Portfolio
</TABLE>
U.S. EQUITY FUNDS
MSDWIF EQUITY GROWTH PORTFOLIO
The MSDWIF Equity Growth Portfolio seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of large capitalization
companies.
MSDWIF U.S. EQUITY PLUS PORTFOLIO
The MSDWIF U.S. Equity Plus Portfolio seeks long-term capital appreciation by
investing primarily in equity securities of issuers included in the Standard &
Poor's ("S&P") 500 Index.
MSDWIF U.S. REAL ESTATE PORTFOLIO
The MSDWIF 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 ("REITs").
MSDWIF VALUE EQUITY PORTFOLIO
The MSDWIF Value Equity Portfolio seeks high total return by investing primarily
in equity securities that the investment adviser believes to be undervalued
relative to the stock market in general at the time of purchase.
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 MAS believes offer long-term growth potential. The
Underlying Fund invests in companies with equity capitalizations generally
matching the S&P MidCap 400 Index.
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
companies included in the S&P MidCap 400 Index.
MAS SMALL CAP GROWTH PORTFOLIO
The MAS Small Cap Growth Portfolio seeks long-term capital growth by investing
primarily in common stocks and other equity securities with equity
capitalizations in the range of companies included in the Russell 2000 Index.
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 common stocks and other equity
securities which are deemed by MAS to be relatively undervalued and other equity
securities with equity capitalizations greater than $1.5 billion.
10
<PAGE>
INTERNATIONAL EQUITY FUNDS
MSDWIF ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO
The MSDWIF Active International Allocation Portfolio seeks long-term capital
appreciation by investing primarily in accordance with country and sector
weightings determined by the investment adviser, in equity securities of
non-U.S. issuers which, in the aggregate, replicate broad market indices.
MSDWIF ASIAN EQUITY PORTFOLIO
The MSDWIF Asian Equity Portfolio seeks long-term capital appreciation by
investing primarily in equity securities of Asian issuers.
MSDWIF EMERGING MARKETS PORTFOLIO
The MSDWIF Emerging Markets Portfolio seeks long-term capital appreciation by
investing primarily in growth oriented equity securities of issuers in emerging
market countries.
MSDWIF EUROPEAN EQUITY PORTFOLIO
The MSDWIF European Equity Portfolio seeks long-term capital appreciation by
investing primarily in equity securities of European issuers.
MSDWIF INTERNATIONAL EQUITY PORTFOLIO
The MSDWIF International Equity Portfolio seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers.
MSDWIF INTERNATIONAL MAGNUM PORTFOLIO
The MSDWIF International Magnum Portfolio seeks long-term capital appreciation
by investing primarily in equity securities of non-U.S. issuers domiciled in
EAFE countries.
MSDWIF JAPANESE EQUITY PORTFOLIO
The MSDWIF Japanese Equity Portfolio seeks long-term capital appreciation by
investing primarily in equity securities of Japanese issuers.
MSDWIF LATIN AMERICAN PORTFOLIO
The MSDWIF Latin American Portfolio seeks long-term capital appreciation by
investing primarily in growth oriented equity securities of Latin American
issuers.
U.S. FIXED INCOME FUNDS
MSDWIF FIXED INCOME PORTFOLIO
The MSDWIF Fixed Income Portfolio seeks to produce a high total return
consistent with the preservation of capital by investing primarily in a
diversified portfolio of fixed income securities.
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 investment grade and, to
a lesser extent, high yield fixed income 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, corporate fixed income securities and other fixed
income securities (including bonds rated below investment grade) and
derivatives. The Underlying Fund's average weighted maturity will ordinarily
exceed five years.
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 of U.S. and foreign issuers. The Underlying
Fund will maintain a duration of between two and five years.
MAS LIMITED DURATION PORTFOLIO
The MAS Limited Duration Portfolio seeks above-average total return over a
market cycle of three to five years by investing in a diversified portfolio of
investment grade fixed income securities. The Underlying Fund will maintain a
duration of between one and three years.
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 those in emerging
markets. The Underlying Fund's average-weighted maturity will ordinarily be
greater than five years.
11
<PAGE>
- --------------------------------------------------------------------------------
UNDERLYING FUND INVESTMENT RISKS
- -------------------------------------------------------------------------------
THE FOLLOWING SECTIONS DESCRIBE SOME OF THE RISKS ASSOCIATED WITH THE UNDERLYING
FUNDS' INVESTMENT POLICIES AND STRATEGIES.
- ----------------------------------------------------------------------------
PRICE VOLATILITY
The value of a Portfolio's investment in an Underlying Fund is based on the
market prices of the securities the Underlying Fund holds. These prices change
daily due to economic and other events that affect markets generally, as well as
those that affect particular regions, countries, industries and companies. These
price movements, sometimes called volatility, may be greater or lesser depending
on the types of securities the Underlying Fund owns and the markets in which the
securities trade. Over time, equity securities have generally shown superior
gains, but they have tended to be more volatile than fixed income securities in
the short term. Fixed income securities, regardless of credit quality,
experience price volatility, especially in response to interest rate changes.
However, shorter duration fixed income securities tend to experience less price
volatility than longer term fixed income securities.
DERIVATIVES
An Underlying Fund may use various instruments that derive their values from
those of specified securities, indices, currencies or other points of reference
for both hedging and non-hedging purposes. Derivatives include futures, options,
forward contracts, swaps, and structured notes. These derivatives, including
those used to manage risk, are themselves subject to risks of the different
markets in which they trade and, therefore, may not serve their intended
purposes.
The primary risks of derivatives are: (i) changes in the market value of
securities held by the Underlying Fund, and of derivatives relating to those
securities, may not be proportionate, (ii) there may not be a liquid market for
an Underlying Fund to sell a derivative, which could result in difficulty
closing a position and (iii) certain derivatives can magnify the extent of
losses incurred due to changes in the market value of the securities to which
they relate. In addition, derivatives are subject to counterparty risk. To
minimize this risk, an Underlying Fund may enter into derivatives transactions
only with counterparties that meet certain requirements for credit quality and
collateral. Also, an Underlying Fund may invest in certain derivatives that
require it to segregate some or all of its cash or liquid securities to cover
its obligations under those instruments. At certain levels, this can cause an
Underlying Fund to lose flexibility in managing its investments properly,
responding to shareholder redemption requests, or meeting other obligations. If
an Underlying Fund is in that position, it could be forced to sell other
securities that it wanted to retain.
While the use of derivatives may be advantageous to an Underlying Fund, if MSDW
Investment Management or MAS is not successful in employing them, an Underlying
Fund's performance may be worse than if it did not make such investments. See
the SAI for more about the risks of different types of derivatives.
EQUITY SECURITIES
Equity securities generally represent an ownership interest in an issuer, or may
be convertible into or represent a right to acquire an ownership interest in an
issuer. While there are many types of equity securities, prices of all equity
securities will fluctuate. Economic, political and other events may affect the
prices of broad equity markets. For example, changes in inflation or consumer
demand may affect the prices of all equity securities in the United States.
Similar events also may affect the prices of particular equity securities. For
example, news about the success or failure of a new product may affect the price
of a particular issuer's equity securities.
FIXED INCOME SECURITIES
Fixed income securities generally are subject to risks related to changes in
interest rates and in the financial health or credit rating of the issuers. The
value of a fixed income security typically moves in the opposite direction of
prevailing interest rates: if rates rise, the value of a fixed income security
falls; if rates fall, the value increases. Certain types of fixed income
securities, such as inverse floaters, are designed to respond differently to
changes in interest rates. The maturity and duration of a fixed income
instrument also affects the extent to which the price of the security will
change in response to these and other factors. Longer term securities tend to
experience larger changes than shorter term securities because they are more
sensitive to
12
<PAGE>
changes in interest rates or in the credit ratings of the issuers. The average
duration of a fixed income portfolio measures its exposure to the risk of
changing interest rates. An Underlying Fund with a lower average duration
generally will experience less price volatility in response to changes in
interest rates as compared with a portfolio with a higher duration.
FOREIGN INVESTING
Investing in foreign countries, particularly emerging markets, entails the risk
that news and events unique to a country or region will affect those markets and
their issuers. These same events will not necessarily have an effect on the U.S.
economy or similar issuers located in the United States. In addition, an
Underlying Fund's investments in foreign countries generally will be denominated
in foreign currencies. As a result, changes in the value of a country's currency
compared to the U.S. dollar may affect the value of an Underlying Fund's
investments. These changes may occur separately from and in response to events
that do not otherwise affect the value of the security in the issuer's home
country. An Underlying Fund's adviser may invest in certain instruments, such as
derivatives and may use certain techniques such as hedging, to manage these
risks. However, the adviser cannot guarantee that it will be practical to hedge
these risks or that it will succeed in doing so. An Underlying Fund's adviser
may use derivatives for other purposes, such as gaining exposure to foreign
markets.
EMERGING MARKET RISKS
Emerging market countries are foreign countries that major international
financial institutions, such as the World Bank, generally consider to be less
economically mature than developed nations, such as the United States or most
nations in Western Europe. Emerging market countries can include every nation in
the world except the United States, Canada, Japan, Australia, New Zealand and
most countries located in Western Europe. Emerging market countries may be more
likely to experience political turmoil or rapid changes in economic conditions
than more developed countries, and the financial condition of issuers in
emerging market countries may be more precarious than in other countries. These
characteristics result in greater risk of price volatility in emerging market
countries, which may be heightened by currency fluctuations relative to the U.S.
dollar.
HIGH YIELD SECURITIES
Fixed income securities that are not investment grade are commonly referred to
as "junk bonds" or high yield, high risk securities. These securities offer a
higher yield than other, higher rated securities, but they carry a greater
degree of risk and are considered speculative by the major credit rating
agencies. High yield securities may be issued by companies that are
restructuring, are smaller and less credit worthy, or are more highly indebted
than other companies. This means that they may have more difficulty making
scheduled payments of principal and interest. Changes in the value of high yield
securities are influenced more by changes in the financial and business position
of the issuing company than by changes in interest rates when compared to
investment grade securities. An Underlying Fund's investments in high yield
securities expose it to a substantial degree of credit risk.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities are fixed income securities representing an interest
in a pool of underlying mortgage loans. They are sensitive to changes in
interest rates, but may respond to these changes differently from other fixed
income securities due to the possibility of prepayment of the underlying
mortgage loans. As a result, it may not be possible to determine in advance the
actual maturity date or average life of a mortgage-backed security. Rising
interest rates tend to discourage refinancings, with the result that the average
life and volatility of the security will increase and its market price will
decrease. When interest rates fall, however, mortgage-backed securities may not
gain as much in market value because additional mortgage prepayments must be
reinvested at lower interest rates. Prepayment risk may make it difficult to
calculate the average maturity of a portfolio of mortgage-backed securities and,
therefore, to assess the volatility risk of that portfolio.
Collateralized Mortgage Obligations ("CMOs") and Stripped Mortgage Backed
Securities ("SMBSs") are derivatives based on mortgage-backed securities. Both
CMOs and SMBSs are subject to the risks of price movements in response to
changing interest rates and the level of prepayments made by borrowers.
Depending on the class of CMOs or SMBSs that an Underlying Fund holds, these
price movements may be significantly greater than that experienced by
mortgage-backed securities generally.
13
<PAGE>
- -------------------------------------------------------------------------------
INVESTMENT ADVISER
- -------------------------------------------------------------------------------
Morgan Stanley Dean Witter Investment Management Inc. ("MSDW Investment
Management"), as investment adviser, allocates each Portfolio's investments in
the Underlying Funds. MSDW Investment Management also advises the Underlying
Funds that are portfolios of MSDWIF. Miller Anderson & Sherrerd, LLP ("MAS")
advises the Underlying Funds that are portfolios of MAS Funds.
MSDW Investment Management with principal offices at 1221 Avenue of the
Americas, New York, New York 10020, conducts a worldwide portfolio management
business and provides a broad range of portfolio management services to
customers in the United States and abroad. 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
mutual funds. Morgan Stanley Dean Witter & Co. ("MSDW") is the parent of MSDW
Investment Management, MAS and Morgan Stanley. MSDW is a preeminent global
financial services firm that maintains leading market positions in each of its
three primary businesses -- securities, asset management and credit services. At
December 31, 1999, MSDW Investment Management and MAS, together with their
affiliated institutional asset management companies, managed assets of
approximately $184.8 billion, including assets under fiduciary advice.
- -------------------------------------------------------------------------------
PORTFOLIO MANAGER
- -------------------------------------------------------------------------------
THE FOLLOWING INDIVIDUAL HAS PRIMARY DAY-TO-DAY PORTFOLIO MANAGEMENT
RESPONSIBILITY FOR EACH PORTFOLIO:
- ----------------------------------------------------------------------------
FRANCINE J. BOVICH
Francine J. Bovich is a Managing Director of MSDW Investment Management and
Morgan Stanley. Prior to joining MSDW Investment Management in 1993, she was a
Principal and Executive Vice President of Westwood Management Corp., a
registered investment adviser. She began her investment career at Bankers Trust
Company. She was also a Managing Director of Citicorp Investment Management,
Inc., where she had responsibility for the Institutional Investment Management
Group. Ms. Bovich serves as the U.S. Representative to the United Nations
Investments Committee. Additionally, she serves as an Emeritus Trustee and Chair
of the Investment Sub-Committee for Connecticut College. She is a former board
member of the YWCA Retirement Fund. She graduated from Connecticut College with
a B.A. in Economics and received her M.B.A. in Finance from New York University.
Ms. Bovich has had primary responsibility for managing the Portfolio's assets
since its inception.
14
<PAGE>
- --------------------------------------------------------------------------------
DISTRIBUTION OF PORTFOLIO SHARES
- -------------------------------------------------------------------------------
Morgan Stanley is the exclusive Distributor of Class A shares and Class B shares
of each Portfolio. Morgan Stanley receives no compensation for distributing
Class A shares of the Portfolios. The Fund has adopted a Plan of Distribution
with respect to the Class B shares of each Portfolio pursuant to Rule 12b-1
under the Investment Company Act of 1940, as amended, (the "Plan"). Under the
Plan, each Portfolio pays the Distributor a distribution fee of 0.25% of the
Class B shares' average daily net assets on an annualized basis. The
distribution fee compensates the Distributor for marketing and selling Class B
shares. The Distributor may pay others for providing distribution-related and
other services, including account maintenance services. Over time the
distribution fees will increase the cost of your investment and may cost you
more than paying other types of sales charges.
- -------------------------------------------------------------------------------
SHAREHOLDER INFORMATION
- -------------------------------------------------------------------------------
ABOUT NET ASSET VALUE
The net asset value ("NAV") per share of a class of shares of a Portfolio is
determined by dividing the total market value of the Portfolio's investments and
other assets attributable to the class, less any liabilities attributable to the
class, by the total number of outstanding shares of that class of the Portfolio.
In making this calculation, the Portfolio values Underlying Funds at their net
asset value and generally values other securities at market price. If market
prices are unavailable or may be unreliable because of events occurring after
the close of trading, fair value prices may be determined in good faith using
methods approved by the Board of Directors.
PRICING OF PORTFOLIO SHARES
The price to buy or sell (redeem) Class A and Class B shares of each Portfolio
is the NAV next determined for the class after receipt of your order. The Fund
determines the NAV of each Portfolio as of the close of the New York Stock
Exchange ("NYSE") (normally 4:00 p.m. Eastern Time) on each day that the NYSE is
open for business (the "Pricing Time").
HOW TO PURCHASE AND
REDEEM SHARES
Shares of the Portfolios are currently offered only to institutional investors
such as defined contribution plans, defined benefit plans and endowment funds.
Retirement 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 or administrators who have made arrangements with the Fund may
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 prior to the Pricing Time on that day
are aggregated, and the plan sponsor or plan administrator generally places a
net purchase and/or redemption order(s) 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 as of the Pricing Time the previous day.
Plan sponsors and plan administrators who choose not to enter into arrangements
of the type described above will need to transmit orders for receipt by the Fund
prior to the Pricing Time in order for those orders to be executed at the NAV
computed for that day.
The Fund will normally wire redemption proceeds 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 suspended or restricted or as permitted by the
Commission.
15
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
Each Portfolio's policy is to distribute to shareholders substantially all of
its taxable net investment income in the form of annual dividends and to
distribute net capital gains, if any, at least annually.
The Fund automatically reinvests all dividends and distributions in additional
shares. However, if eligible, you may elect to receive distributions in cash by
giving written notice to the Fund or your plan sponsor or plan administrator.
TAXES
The dividends and distributions you receive from a Portfolio may be subject to
Federal, state and local taxation, depending on your tax situation. The tax
treatment of dividends and distributions is the same whether or not you reinvest
them. Dividends are ordinary income and capital gains distributions are taxed
based on how long the Portfolio held the assets. The Fund will tell you annually
how to treat dividends and distributions.
If you redeem shares of a Portfolio, you will be subject to tax on any gains you
earn based on your holding period for the shares. An exchange of shares of a
Portfolio for shares of another portfolio is generally a sale of Portfolio
shares for tax purposes. Conversions of shares between classes will not
generally result in taxation.
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 retirement plans. There are various
restrictions on eligibility, contributions and withdrawals, depending on the
type of tax-deferred account or tax-qualified retirement plan. You should
consult with a tax professional on the specific rules governing your own plan.
The summary above is based on current tax laws, which may change. More
information about taxes is in the SAI.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
The following financial highlights tables are intended to help you understand
the financial performance of the Class A shares and Class B shares of each
Portfolio over the life of the Portfolio. Certain information reflects financial
results for a single Portfolio share. The total returns in the tables represent
the rate that an investor would have earned (or lost) on an investment in each
Portfolio (assuming reinvestment of all dividends and distributions). This
information has been audited by PricewaterhouseCoopers LLP, whose report, along
with the Fund's financial statements, are incorporated by reference into the
Fund's SAI and are included in the Fund's December 31, 1999 Annual Report to
Shareholders.
16
<PAGE>
- ----------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
CONSERVATIVE PORTFOLIO
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------
YEAR ENDED
DECEMBER 31,
---------------- ONE DAY ENDED
SELECTED PER SHARE DATA AND RATIOS 1999 1998 DECEMBER 31, 1997*
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.18 $10.00 $10.00
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME 0.56 0.35 --
NET REALIZED AND UNREALIZED GAIN 0.31 0.42 --
------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS 0.87 0.77 --
------ ------ ------
DISTRIBUTIONS
NET INVESTMENT INCOME (0.76) (0.46) --
NET REALIZED GAIN (0.13) (0.11) --
IN EXCESS OF NET REALIZED GAIN (0.07) (0.02) --
------ ------ ------
TOTAL DISTRIBUTIONS (0.96) (0.59) --
------ ------ ------
NET ASSET VALUE, END OF PERIOD $10.09 $10.18 $10.00
====== ====== ======
TOTAL RETURN 8.69% 7.76% 0.00%
====== ====== ======
RATIOS AND SUPPLEMENTAL DATA:
NET ASSETS, END OF PERIOD (THOUSANDS) $4,414 $3,141 $517
RATIO OF EXPENSES TO AVERAGE NET ASSETS (1) 0.31% 0.32% 0.00%**
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS (1) 5.02% 5.31% 0.00%**
PORTFOLIO TURNOVER 61% 129% 0%
- -------------------
(1) EFFECT OF VOLUNTARY EXPENSE LIMITATION DURING THE PERIOD:
PER SHARE BENEFIT TO NET INVESTMENT INCOME $0.27 $0.27 $0.00
RATIOS BEFORE EXPENSE LIMITATION:
EXPENSES TO AVERAGE NET ASSETS 2.74% 4.45% 0.00%**
NET INVESTMENT INCOME TO AVERAGE NET ASSETS 2.59% 1.21% 0.00%**
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
---------------------------------------
YEAR ENDED
DECEMBER 31,
---------------- ONE DAY ENDED
SELECTED PER SHARE DATA AND RATIOS 1999 1998 DECEMBER 31, 1997*
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.18 $10.00 $10.00
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME 0.50 0.52 --
NET REALIZED AND UNREALIZED GAIN 0.33 0.23 --
------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS 0.83 0.75 --
------ ------ ------
DISTRIBUTIONS
NET INVESTMENT INCOME (0.73) (0.44) --
NET REALIZED GAIN (0.13) (0.11) --
IN EXCESS OF NET REALIZED GAIN (0.07) (0.02) --
------ ------ ------
TOTAL DISTRIBUTIONS (0.93) (0.57) --
------ ------ ------
NET ASSET VALUE, END OF PERIOD $10.08 $10.18 $10.00
====== ====== ======
TOTAL RETURN 8.33% 7.52% 0.00%
====== ====== ======
RATIOS AND SUPPLEMENTAL DATA:
NET ASSETS, END OF PERIOD (THOUSANDS) $602 $555 $516
RATIO OF EXPENSES TO AVERAGE NET ASSETS (2) 0.56% 0.57% 0.00%**
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS (2) 4.73% 5.06% 0.00%**
PORTFOLIO TURNOVER 61% 129% 0%
- -------------------
(2) EFFECT OF VOLUNTARY EXPENSE LIMITATION DURING THE PERIOD:
PER SHARE BENEFIT TO NET INVESTMENT INCOME $0.25 $0.42 $0.00
RATIOS BEFORE EXPENSE LIMITATION:
EXPENSES TO AVERAGE NET ASSETS 2.90% 4.70% 0.00%**
NET INVESTMENT INCOME TO AVERAGE NET ASSETS 2.39% 0.96% 0.00%**
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
*COMMENCEMENT OF OPERATIONS
**ANNUALIZED
THE RATIOS OF EXPENSES TO AVERAGE NET ASSETS DO NOT REFLECT THE EXPENSES OF THE
UNDERLYING FUNDS ATTRIBUTABLE TO THE PORTFOLIO.
17
<PAGE>
- ----------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
MODERATE PORTFOLIO
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------
YEAR ENDED
DECEMBER 31,
---------------- ONE DAY ENDED
SELECTED PER SHARE DATA AND RATIOS 1999 1998 DECEMBER 31, 1997*
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.49 $10.00 $10.00
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME 0.39 0.28 --
NET REALIZED AND UNREALIZED GAIN 1.23 0.71 --
------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS 1.62 0.99 --
------ ------ ------
DISTRIBUTIONS
NET INVESTMENT INCOME (0.89) (0.43) --
NET REALIZED GAIN (0.47) (0.03) --
IN EXCESS OF NET REALIZED GAIN (0.06) (0.04) --
------ ------ ------
TOTAL DISTRIBUTIONS (1.42) (0.50) --
------ ------ ------
NET ASSET VALUE, END OF PERIOD $10.69 $10.49 $10.00
====== ====== ======
TOTAL RETURN 15.79% 9.93% 0.00%
====== ====== ======
RATIOS AND SUPPLEMENTAL DATA:
NET ASSETS, END OF PERIOD (THOUSANDS) $5,720 $4,580 $517
RATIO OF EXPENSES TO AVERAGE NET ASSETS (1) 0.23% 0.25% 0.00%**
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS (1) 3.59% 4.26% 0.00%**
PORTFOLIO TURNOVER 87% 139% 0%
- -------------------
(1) EFFECT OF VOLUNTARY EXPENSE LIMITATION DURING THE PERIOD:
PER SHARE BENEFIT TO NET INVESTMENT INCOME $0.26 $0.22 $0.00
RATIOS BEFORE EXPENSE LIMITATION:
EXPENSES TO AVERAGE NET ASSETS 2.58% 3.63% 0.00%**
NET INVESTMENT INCOME TO AVERAGE NET ASSETS 1.23% 0.88% 0.00%**
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
---------------------------------------
YEAR ENDED
DECEMBER 31,
---------------- ONE DAY ENDED
SELECTED PER SHARE DATA AND RATIOS 1999 1998 DECEMBER 31, 1997*
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.48 $10.00 $10.00
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME 0.37 0.42 --
NET REALIZED AND UNREALIZED GAIN 1.23 0.53 --
------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS 1.60 0.95 --
------ ------ ------
DISTRIBUTIONS
NET INVESTMENT INCOME (0.87) (0.40) --
NET REALIZED GAIN (0.47) (0.03) --
IN EXCESS OF NET REALIZED GAIN (0.06) (0.04) --
------ ------ ------
TOTAL DISTRIBUTIONS (1.40) (0.47) --
------ ------ ------
NET ASSET VALUE, END OF PERIOD $10.68 $10.48 $10.00
====== ====== ======
TOTAL RETURN 15.54% 9.57% 0.00%
====== ====== ======
RATIOS AND SUPPLEMENTAL DATA:
NET ASSETS, END OF PERIOD (THOUSANDS) $654 $566 $516
RATIO OF EXPENSES TO AVERAGE NET ASSETS (2) 0.48% 0.50% 0.00%**
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS (2) 3.35% 4.01% 0.00%**
PORTFOLIO TURNOVER 87% 139% 0%
- -------------------
(2) EFFECT OF VOLUNTARY EXPENSE LIMITATION DURING THE PERIOD:
PER SHARE BENEFIT TO NET INVESTMENT INCOME $0.26 $0.35 $0.00
RATIOS BEFORE EXPENSE LIMITATION:
EXPENSES TO AVERAGE NET ASSETS 2.81% 3.88% 0.00%**
NET INVESTMENT INCOME TO AVERAGE NET ASSETS 1.02% 0.63% 0.00%**
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
*COMMENCEMENT OF OPERATIONS
**ANNUALIZED
THE RATIOS OF EXPENSES TO AVERAGE NET ASSETS DO NOT REFLECT THE EXPENSES OF THE
UNDERLYING FUNDS ATTRIBUTABLE TO THE PORTFOLIO.
18
<PAGE>
- ----------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
AGGRESSIVE PORTFOLIO
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------
YEAR ENDED
DECEMBER 31,
---------------- ONE DAY ENDED
SELECTED PER SHARE DATA AND RATIOS 1999 1998 DECEMBER 31, 1997*
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.49 $10.00 $10.00
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME 0.24 0.13 --
NET REALIZED AND UNREALIZED GAIN 3.29 0.70 --
------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS 3.53 0.83 --
------ ------ ------
DISTRIBUTIONS
NET INVESTMENT INCOME (0.86) (0.24) --
NET REALIZED GAIN (0.86) (0.01) --
IN EXCESS OF NET REALIZED GAIN -- (0.09) --
------ ------ ------
TOTAL DISTRIBUTIONS (1.72) (0.34) --
------ ------ ------
NET ASSET VALUE, END OF PERIOD $12.30 $10.49 $10.00
====== ====== ======
TOTAL RETURN 34.31% 8.38% 0.00%
====== ====== ======
RATIOS AND SUPPLEMENTAL DATA:
NET ASSETS, END OF PERIOD (THOUSANDS) $6,200 $4,194 $517
RATIO OF EXPENSES TO AVERAGE NET ASSETS (1) 0.28% 0.31% 0.00%**
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS (1) 1.36% 2.18% 0.00%**
PORTFOLIO TURNOVER 106% 188% 0%
- -------------------
(1) EFFECT OF VOLUNTARY EXPENSE LIMITATION DURING THE PERIOD:
PER SHARE BENEFIT TO NET INVESTMENT INCOME $0.42 $0.23 $0.00
RATIOS BEFORE EXPENSE LIMITATION:
EXPENSES TO AVERAGE NET ASSETS 2.66% 4.19% 0.00%**
NET INVESTMENT INCOME (LOSS) TO AVERAGE NET ASSETS (1.03)% (1.69)% 0.00%**
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
---------------------------------------
YEAR ENDED
DECEMBER 31,
---------------- ONE DAY ENDED
SELECTED PER SHARE DATA AND RATIOS 1999 1998 DECEMBER 31, 1997*
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.50 $10.00 $10.00
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
NET INVESTMENT INCOME 0.19 0.20 --
NET REALIZED AND UNREALIZED GAIN 3.30 0.62 --
------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS 3.49 0.82 --
------ ------ ------
DISTRIBUTIONS
NET INVESTMENT INCOME (0.83) (0.22) --
NET REALIZED GAIN (0.86) (0.01) --
IN EXCESS OF NET REALIZED GAIN -- (0.09) --
------ ------ ------
TOTAL DISTRIBUTIONS (1.69) (0.32) --
------ ------ ------
NET ASSET VALUE, END OF PERIOD $12.30 $10.50 $10.00
====== ====== ======
TOTAL RETURN 33.88% 8.23% 0.00%
====== ====== ======
RATIOS AND SUPPLEMENTAL DATA:
NET ASSETS, END OF PERIOD (THOUSANDS) $ 748 $ 559 $ 516
RATIO OF EXPENSES TO AVERAGE NET ASSETS (2) 0.53% 0.56% 0.00%**
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS (2) 1.00% 1.93% 0.00%**
PORTFOLIO TURNOVER 106% 188% 0%
- -------------------
(2) EFFECT OF VOLUNTARY EXPENSE LIMITATION DURING THE PERIOD:
PER SHARE BENEFIT TO NET INVESTMENT INCOME $ 0.46 $ 0.41 $ 0.00
RATIOS BEFORE EXPENSE LIMITATION:
EXPENSES TO AVERAGE NET ASSETS 2.93% 4.44% 0.00%**
NET INVESTMENT INCOME (LOSS) TO AVERAGE NET ASSETS (1.39)% (1.94)% 0.00%**
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
*COMMENCEMENT OF OPERATIONS
**ANNUALIZED
THE RATIOS OF EXPENSES TO AVERAGE NET ASSETS DO NOT REFLECT THE EXPENSES OF THE
UNDERLYING FUNDS ATTRIBUTABLE TO THE PORTFOLIO.
19
<PAGE>
- -------------------------------------------------------------------------------
WHERE TO FIND ADDITIONAL INFORMATION
- -------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
In addition to this Prospectus, the Fund has an SAI, dated May 1, 2000, which
contains additional, more detailed information about the Fund and the
Portfolios. The SAI is incorporated by reference into this Prospectus and,
therefore, legally forms a part of this Prospectus.
SHAREHOLDER REPORTS
The Fund publishes annual and semi-annual reports containing financial
statements. These reports contain additional information about each Portfolio's
investments. In the Fund's shareholder reports, you will find a discussion of
the market conditions and the investment strategies that significantly affected
each Portfolio's performance during that period.
For additional Fund information, including information regarding investments
comprising the Fund's Portfolios, please call 1-800-354-8185.
You may obtain the SAI and shareholder reports without charge by contacting the
Fund at the toll-free number above. If you purchased shares through a retirement
plan, you may also obtain these documents, without charge, by contacting your
plan sponsor or plan administrator.
Information about the Fund, including the SAI, and the annual and semi-annual
reports, may be obtained from the Commission in any of the following ways:
(1) In person: you may review and copy documents in the Commission's Public
Reference Room in Washington D.C. (for information on the operation of the
Public Reference Room, call 1-202-942-8090); (2) On-line: you may retrieve
information from the EDGAR Database on the Commission's web site at "http://
www.sec.gov"; or (3) By mail: you may request documents, upon payment of a
duplicating fee, by writing to Securities and Exchange Commission, Public
Reference Section, Washington, D.C. 20549-0102. You may also obtain this
information upon payment of a duplicating fee, by e-mailing the Commission at
the following address: [email protected]. To aid you in obtaining this
information, the Fund's Investment Company Act registration number is 811-08303.
[LOGO]
MORGAN STANLEY DEAN WITTER STRATEGIC ADVISER FUND, INC.
P.O. Box 2798
Boston, Massachusetts 02208-2798
FOR INFORMATION CALL 1-800-354-8185
<PAGE>
MORGAN STANLEY DEAN WITTER STRATEGIC ADVISER FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
Morgan Stanley Dean Witter Strategic Adviser Fund, Inc. (the "Fund") is a
no-load, open-end management investment company with three series ("Portfolios")
each of which has Class A and Class B shares. Each Portfolio offers investors a
distinct risk/return profile by investing in various investment portfolios of
Morgan Stanley Dean Witter Institutional Funds, Inc. and 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
Dean Witter Investment Management Inc. ("MSDW Investment Management" or the
"Adviser"). Morgan Stanley & Co. Incorporated ("Morgan Stanley") is the
distributor of the Fund's shares. The Underlying Funds are managed by either
MSDW Investment Management or Miller Anderson & Sherrerd, LLP ("MAS"), an
affiliate of MSDW Investment Management.
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 Morgan
Stanley Dean Witter Strategic Adviser Fund, Inc. Services Group at
1-800-354-8185.
STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 2000 RELATING TO PROSPECTUS
DATED MAY 1, 2000.
--------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
--------
SECURITIES AND INVESTMENT TECHNIQUES........................ 2
INVESTMENT LIMITATIONS...................................... 18
PURCHASE OF SHARES.......................................... 19
REDEMPTION OF SHARES........................................ 19
MANAGEMENT OF THE FUND...................................... 20
COMPENSATION TABLE.......................................... 22
INVESTMENT ADVISORY AND OTHER SERVICES...................... 23
DISTRIBUTION OF SHARES...................................... 24
PORTFOLIO TRANSACTIONS...................................... 24
GENERAL INFORMATION......................................... 25
FEDERAL INCOME TAX TREATMENT................................ 25
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES......... 28
PERFORMANCE INFORMATION..................................... 29
DESCRIPTION OF RATINGS...................................... 31
FINANCIAL STATEMENTS........................................ 32
APPENDIX A.................................................. 33
</TABLE>
The Fund's audited financial statements for the fiscal year ended December 31,
1999, including notes thereto and the report of PricewaterhouseCoopers LLP are
incorporated by reference herein from the Fund's Annual Report. A copy of the
Fund's Annual Report to Shareholders must accompany the delivery of this
Statement of Additional Information. You may obtain the Fund's most recent
Annual Report by calling the Morgan Stanley Dean Witter Strategic Adviser
Fund, Inc. Services Group at 1-800-354-8185.
1
<PAGE>
SECURITIES AND INVESTMENT TECHNIQUES
The following pages contain more detailed information about types of instruments
in which the Underlying Funds may invest, and strategies MSDW Investment
Management or MAS may employ, in pursuit of an Underlying Fund's investment
objective.
EQUITY SECURITIES
Equity Securities generally represent an ownership interest in an issuer, or may
be convertible into or represent a right to acquire an ownership interest in an
issuer. While there are many types of Equity Securities, prices of all equity
securities will fluctuate. Economic, political and other events may affect the
prices of broad equity markets. For example, changes in inflation or consumer
demand may affect the prices of all Equity Securities in the United States.
Similar events also may affect the prices of particular equity securities. For
example, news about the success or failure of a new product may affect the price
of a particular issuer's Equity Securities.
COMMON STOCKS. Common Stocks represent an ownership interest in a corporation,
entitling the stockholder to voting rights and receipt of dividends paid based
on proportionate ownership.
DEPOSITARY RECEIPTS. Depositary Receipts represent an ownership interest in
securities of foreign companies (an "underlying issuer") that are deposited with
a depositary. Depositary Receipts are not necessarily denominated in the same
currency as the underlying securities. Depositary Receipts include American
Depositary Receipts ("ADRs"), Global Depositary Receipts ("GDRs") and other
types of Depositary Receipts (which, together with ADRs and GDRs, are
hereinafter collectively referred to as "Depositary Receipts"). ADRs are
dollar-denominated Depositary Receipts typically issued by a U.S. financial
institution which evidence an ownership interest in a security or pool of
securities issued by a foreign issuer. ADRs are listed and traded in the United
States. GDRs 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.
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 unsponsored
Depositary Receipts generally bear all the costs associated with establishing
unsponsored Depositary Receipts. In addition, the issuers of the securities
underlying unsponsored Depository 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. For
purposes of a Portfolio's investment policies, the Portfolio's investments in
Depositary Receipts will be deemed to be an investment in the underlying
securities, except that ADRs may be deemed to be issued by a U.S. issuer.
PREFERRED STOCKS. Preferred Stocks are securities that evidence ownership in a
corporation and pay a fixed or variable stream of dividends. Preferred Stocks
have a preference over Common Stocks in the event of the liquidation of an
issuer and usually do not carry voting rights. Because Preferred Stocks pay a
fixed or variable stream of dividends they have many of the characteristics of a
Fixed Income Security and are, therefore, included in both the definition of
Equity Security and Fixed Income Security.
RIGHTS. Rights represent the right, but not the obligation, for a fixed period
of time to purchase additional shares of an issuer's Common Stock at the time of
a new issuance, usually at a price below the initial offering price of the
Common Stock and before the Common Stock is offered to the general public.
Rights are usually freely transferrable. The risk of investing in a Right is
that the Right may expire prior to the market value of the Common Stock
exceeding the price fixed by the Right.
WARRANTS. Warrants give holders the right, but not the obligation, to buy
Common Stock of an issuer at a given price, usually higher than the market price
at the time of issuance, during a specified period. Warrants are usually freely
transferrable. The risk of investing in a Warrant is that the Warrant may expire
prior to the market value of the Common Stock exceeding the price fixed by the
Warrant.
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. Convertible Securities generally represent a
feature of some other type of security, such as a Fixed Income Security or
Preferred Stock, so that, for example, a Convertible Fixed Income Security would
be a Fixed Income Security that is convertible into Common Stock. Convertible
Securities may be viewed as an investment in the current security or the
security into which the Convertible Securities may be exchanged and, therefore,
are included in both the definition of Equity Security and Fixed Income
Security.
LIMITED PARTNERSHIPS. A limited partnership interest entitles an Underlying
Fund to participate in the investment return of the partnership's assets as
defined by the agreement among the partners. As a limited partner, an Underlying
Fund generally is not permitted to participate in the management of the
partnership. However, unlike a general partner whose liability is not limited, a
limited partner's liability generally is limited to the amount of its commitment
to the partnership.
2
<PAGE>
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 Portfolio's total assets
in any one investment company and no more than 10% in any combination of
investment companies. A Portfolio may invest in Investment Company Securities of
investment companies managed by MSDW Investment Management or its affiliates to
the extent permitted under the 1940 Act or as otherwise authorized by the
Securities and Exchange Commission ("SEC"). To the extent an Underlying Fund
invests a portion of its assets in Investment Company Securities, those assets
will be subject to the risks of the purchased investment company's portfolio
securities. The Underlying Fund also will bear its proportionate share of the
expenses of the purchased investment company in addition to its own expenses.
REAL ESTATE INVESTING. Investments in securities of issuers engaged in the real
estate industry entail special risks and considerations. In particular,
securities of such issuers may be subject to risks associated with the direct
ownership of real estate. These risks include: the cyclical nature of real
estate values, risks related to general and local economic conditions,
overbuilding and increased competition, increases in property taxes and
operating expenses, demographic trends and variations in rental income, changes
in zoning laws, casualty or condemnation losses, environmental risks, regulatory
limitations on rents, changes in neighborhood values, changes in the appeal of
properties to tenants, increases in interest rates and other real estate capital
market influences. Generally, increases in interest rates will increase the
costs of obtaining financing, which could directly and indirectly decrease the
value of the Portfolios' investments.
REITS. Real Estate Investment Trusts ("REITs") pool investors' funds for
investment primarily in income producing real estate or real estate related
loans or interests. A REIT is not taxed on income distributed to its
shareholders or unitholders if it complies with regulatory requirements relating
to its organization, ownership, assets and income, and with a regulatory
requirement that it distribute to its shareholders or unitholders at least 95%
of its taxable income for each taxable year. Generally, REITs can be classified
as Equity REITs, Mortgage REITs or Hybrid REITs. Equity REITs invest the
majority of their assets directly in real property and derive their income
primarily from rents and capital gains from appreciation realized through
property sales. Equity REITs are further categorized according to the types of
real estate securities they own, e.g., apartment properties, retail shopping
centers, office and industrial properties, hotels, health-care facilities,
manufactured housing and mixed-property types. Mortgage REITs invest the
majority of their assets in real estate mortgages and derive their income
primarily from interest payments. Hybrid REITs combine the characteristics of
both Equity and Mortgage REITs.
A shareholder in any of the Portfolios, by investing in REITs indirectly through
the Portfolio, will bear not only his proportionate share of the expenses of the
Portfolio, but also, indirectly, the management expenses of underlying REITs.
REITs may be affected by changes in the value of their underlying properties and
by defaults by borrowers or tenants. Mortgage REITs may be affected by the
quality of the credit extended. Furthermore, REITs are dependent on specialized
management skills. Some REITs may have limited diversification and may be
subject to risks inherent in investments in a limited number of properties, in a
narrow geographic area, or in a single property type. REITs depend generally on
their ability to generate cash flow to make distributions to shareholders or
unitholders, and may be subject to defaults by borrowers and to
self-liquidations. In addition, the performance of a REIT may be affected by its
failure to qualify for tax-free pass-through of income, or its failure to
maintain exemption from registration under the 1940 Act.
SPECIALIZED OWNERSHIP VEHICLES. Specialized ownership vehicles pool investors'
funds for investment primarily in income-producing real estate or real estate
related loans or interests. Such specialized ownership vehicles in which the
Portfolios may invest include property unit trusts, REITs and other similar
specialized investment vehicles. Investments in such specialized ownership
vehicles may have favorable or unfavorable legal, regulatory or tax implications
for a Portfolio and, to the extent such vehicles are structured similarly to
investment funds, may cause the Underlying Funds' shareholders to indirectly
bear certain additional operating expenses.
FIXED INCOME SECURITIES
Fixed Income Securities generally represent an issuer's obligation to repay
money that it has borrowed together with interest on the amount borrowed. Fixed
Income Securities come in many varieties and may differ in the way that interest
is calculated, the amount and frequency of payments, the type of collateral, if
any, and some Fixed Income Securities may have other novel features such as
conversion rights. Prices of Fixed Income Securities fluctuate and, in
particular, are subject to credit risk and market risk. Credit risk is the
possibility that an issuer may be unable to meet scheduled interest and
principal payments. Market risk is the possibility that a change in interest
rates or the market's perception of the issuer's prospects may adversely affect
the value of a Fixed Income Security. Economic, political and other events also
may affect the prices of broad fixed income markets. Generally, the values of
Fixed Income Securities vary inversely with changes in interest rates. During
periods of falling interest rates the values of outstanding Fixed Income
Securities generally rise and during periods of rising interest rates, the
values of such securities generally decline. Prepayments also will affect the
maturity and value of Fixed Income Securities. Prepayments generally rise in
response to a decline in interest rates as debtors take advantage of the
opportunity to refinance their obligations. When this happens, an Underlying
Fund may be forced to reinvest in lower yielding Fixed Income Securities.
The length of time to the final payment, or maturity, of a Fixed Income Security
also affects its price volatility. While securities with longer maturities tend
to produce higher yields, the prices of longer maturity securities are subject
to greater market
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fluctuation, especially as a result of changes in interest rates. Traditionally,
term to maturity has been used as a barometer of a Fixed Income Security's
sensitivity to interest rate changes. However, this measure considers only the
time until final payment and takes no account of the pattern of payments prior
to maturity. Duration is a more precise measure of the expected life of a Fixed
Income Security that combines consideration of yield, coupon, interest payments,
final maturity and call features and measures the expected life of a Fixed
Income Security on a present value basis. The duration of a Fixed Income
Security ordinarily is shorter than its maturity.
INVESTMENT GRADE SECURITIES. Investment Grade Securities are Fixed Income
Securities 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
Standard & Poor's Ratings Group ("S&P") or Fitch Investors Service, Inc.
("Fitch"), or Aaa, Aa, A or Baa by Moody's Investors Service, Inc. ("Moody's"))
or determined to be of equivalent quality by MSDW Investment Management.
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.
Ratings assigned to Fixed Income Securities represent only the opinion of the
rating agency assigning the rating and are not dispositive of the credit risk
associated with the purchase of a particular Fixed Income Security. Moreover,
market risk also will affect the prices of even the highest rated Fixed Income
Securities so that their prices may rise or fall even if the issuer's capacity
to repay its obligations remains unchanged.
HIGH YIELD SECURITIES. High Yield Securities are generally considered to
include Fixed Income Securities rated below the four highest rating categories
at the time of purchase (e.g., Ba through C by Moody's or BB through D by S&P)
and unrated securities considered by MSDW Investment Management or MAS to be of
equivalent quality. High Yield Securities are not considered investment grade
and are commonly referred to as junk bonds or high yield, high risk securities.
While High Yield Securities offer higher yields, they carry a high degree of
credit risk and are considered speculative by the major credit rating agencies.
High Yield Securities are often issued by smaller, less credit worthy issuers,
or by highly leveraged (indebted) issuers that are generally less able than more
established or less leveraged issuers to make scheduled payments of interest and
principal. In comparison to Investment Grade Securities, the price movement of
these securities is influenced less by changes in interest rates and more by the
financial and business position of the issuer. The values of High Yield
Securities are more volatile and may react with greater sensitivity to market
changes.
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.
AGENCIES. Agencies are Fixed Income 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, or any of several other
agencies.
CORPORATES. Corporates are Fixed Income Securities issued by private
businesses. Holders, as creditors, have a prior legal claim over holders of
Equity Securities of the issuer as to both income and assets for the principal
and interest due the holder.
MONEY MARKET INSTRUMENTS. Money Market Instruments are high quality short-term
Fixed Income Securities. Money Market Instruments may include obligations of
governments, government agencies, banks, corporations and special purpose
entities and Repurchase Agreements relating to these obligations. Certain Money
Market Instruments may be denominated in a foreign currency.
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.
MORTGAGE-BACKED SECURITIES. With mortgage-backed securities ("MBSs"), many
mortgagees' obligations to make monthly payments to their lending institution
are pooled together and passed through to investors. 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"), Fannie Mae, private issuers and
other government agencies. MBSs issued by non-agency issuers, whether or not
such securities are subject to guarantees, may entail greater risk, since
private issuers may not be able to meet their obligations under the policies. If
there is no guarantee provided by the issuer, a Portfolio will purchase only
MBSs which at the time of purchase are rated investment grade by one or more
NRSROs or, if unrated, are deemed by MSDW Investment Management or MAS to be of
comparable quality.
MBSs are issued or guaranteed by private sector originators of or investors in
mortgage loans and 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, however, they are
generally structured with one or more of the types of credit enhancement
described below. Fannie Mae and FHLMC obligations are not backed by the full
faith and credit of the U.S.
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Government as GNMA certificates are. FHLMC securities are supported by its right
to borrow from the U.S. Treasury. Each of GNMA, Fannie Mae and FHLMC guarantees
timely distributions of interest to certificate holders. Each of GNMA and Fannie
Mae also guarantees timely distributions of scheduled principal. Although FHLMC
has in the past guaranteed only the ultimate collection of principal of the
underlying mortgage loan, FHLMC now issues 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.
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 are
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. 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. As average life extends, price
volatility generally increases. This extension of average life causes the market
price of the MBSs to decrease further when interest rates rise 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 the average life
movement could be and to calculate the effect that it will have on the price of
the MBS. In selecting MBSs, MSDW Investment Management or MAS looks 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, a Portfolio 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 MSDW Investment Management or MAS deems that the quality
of the investment, the quality of the issuer, and market conditions warrant such
investments. The Underlying Funds will purchase securities issued by private
issuers which are rated investment grade at the time of purchase by Moody's or
S&P or be deemed by MSDW Investment Management or MAS to be of comparable
investment quality.
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 Veteran 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 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
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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 periodic
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.
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.
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 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 do
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 on
that tranche at the time of issue will be 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 and yields of these tranches are more
volatile. In addition, some inverse floating rate 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, provided
that, among other things, the actual prepayment experience on the underlying
Mortgage Assets falls within a predefined range. If the actual prepayment
experience on the underlying Mortgage Assets is faster or slower than the
predefined range or if deviations from other assumptions occur, payments on the
PAC Bond may be earlier or later than predicted and the yield may rise or fall.
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 risk of prepayment than are other types of
mortgage related securities.
STRIPPED MORTGAGE-BACKED SECURITIES. Stripped Mortgage-Backed Securities
("SMBSs") are multi-class mortgage securities 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
significant changes in the rate of principal repayments will have a
corresponding effect on the SMBSs' yield to maturity.
CREDIT ENHANCEMENT. Mortgage related securities are often backed by a pool
of assets representing the obligations of a number of parties. To lessen the
effect of failure by obligors on underlying assets to make payments, these
securities may have various types of credit support. Credit support falls into
two primary 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.
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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 decline
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 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. Repurchase Agreements are transactions in which a
Portfolio purchases a security or basket of securities and simultaneously
commits to resell that security or basket to the seller (a bank, broker or
dealer) at a mutually agreed upon date and price. 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. Repurchase
Agreements may be viewed as a fully collateralized loan of money by the
Portfolio to the seller at a mutually agreed upon rate and price. The term of
these agreements is usually from overnight to one week, and never exceeds one
year. Repurchase Agreements with a term of over seven days are considered
illiquid.
In these transactions, the Portfolio receives as collateral securities that have
a market value at least equal to the purchase price (including accrued interest)
of the Repurchase Agreement, and this value is maintained during the term of the
agreement. These securities are held by the Portfolio's Custodian or an approved
third party for the benefit of the Portfolio until repurchased. Repurchase
Agreements permit a Portfolio to remain fully invested while retaining overnight
flexibility to pursue investments of a longer-term nature. If the seller
defaults and the collateral value declines, the Portfolio might incur a loss. If
bankruptcy proceedings are commenced with respect to the seller, the Portfolio's
realization upon the collateral may be delayed or limited.
Pursuant to an order issued by the SEC, the Underlying Funds may pool their
daily uninvested cash balances in order to invest in Repurchase Agreements on a
joint basis with other investment companies advised by MSDW Investment
Management or MAS. By entering into Repurchase Agreements on a joint basis, the
Underlying Funds expect to incur lower transaction costs and potentially obtain
higher rates of interest on such Repurchase Agreements. Each Underlying Fund's
participation in the income from jointly purchased Repurchase Agreements will be
based on that Underlying Fund's percentage share in the total Repurchase
Agreement.
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 and in certain instances, from state and local
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). Municipal bonds are issued for a wide variety of reasons:
to construct public facilities, such as airports, highways, bridges, schools,
hospitals, mass transportation, streets, water and sewer works; to obtain funds
for operating expenses; to refund outstanding municipal obligations; and to loan
funds to various public institutions and facilities. Certain industrial
development bonds are also considered municipal bonds if their interest is
exempt from federal income taxes. Industrial development bonds are issued by or
on behalf of public authorities to obtain funds for various privately-operated
manufacturing facilities, housing, sports arenas, convention centers, airports,
mass transportation systems and water, gas or sewer works. Industrial
development bonds are ordinarily dependent on the credit quality of a private
user, not the public issuer.
ASSET-BACKED SECURITIES. Asset-Backed Securities ("Asset-Backeds") are
securities collateralized by shorter-term loans such as automobile loans, home
equity loans, equipment or computer leases or credit card receivables. The
payments from the collateral are passed through to the security holder. The
collateral underlying 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. However, it is possible
that prepayments (on automobile loans and other collateral) will alter the cash
flow on Asset-Backeds and 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. The maturity of Asset-Backeds
will be based on the expected average life of the instrument. In selecting these
securities, MSDW Investment Management or MAS will look for those securities
that offer a higher yield to compensate for any variation in average maturity.
PREFERRED STOCKS. Preferred Stocks are securities that evidence ownership in a
corporation and pay a fixed or variable stream of dividends. Preferred Stocks
have a preference over Common Stocks in the event of the liquidation of an
issuer and usually do not carry voting rights. Because Preferred Stocks
represent an ownership interest in the issuer they have many of the
characteristics of an Equity Security and are, therefore, included in both the
definition of Fixed Income Security and Equity Security.
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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. Convertible Securities generally represent a
feature of some other type of security, such as a Fixed Income Security or
Preferred Stock, so that, for example, a Convertible Fixed Income Security would
be a Fixed Income Security that is convertible into Common Stock. Prices of
Convertible Fixed Income Securities frequently are more volatile than
non-Convertible Fixed Income Securities. Convertible Securities may be viewed as
an investment in the current security or the security into which the Convertible
Security may be exchanged and, therefore, are included in both the definition of
Fixed Income Security or Equity Security.
LOAN PARTICIPATIONS AND ASSIGNMENTS. Loan Participations are interests in loans
or other direct debt instruments ("Loans") relating to amounts owed by a
corporate, governmental or other borrower to another party. Loans may represent
amounts owed to lenders or lending syndicates, to suppliers of goods or services
(trade claims or other receivables), or to other parties ("Lenders") and may be
fixed rate or floating rate. Loans also may be arranged through private
negotiations between an issuer of sovereign debt obligations and Lenders.
A Portfolio's investments in Loans are expected in most instances to be in the
form of a participation in Loans ("Participations") and assignments of all or a
portion of Loans ("Assignments") from third parties. In the case of a
Participation, a Portfolio 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 the event of an insolvency of the Lender selling a Participation, a
Portfolio 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. Even
under such a structure, in the event of a Lender's insolvency, the Lender's
servicing of the Participation may be delayed and the assignability of the
Participation may be impaired. A Portfolio will acquire Participations only if
the Lender interpositioned between an Underlying Fund and the borrower is
determined by MSDW Investment Management or MAS to be creditworthy.
When a Portfolio 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 an Underlying Fund as the
purchaser of an Assignment may differ from, and be more limited than, those held
by the assigning Lender. Because there is no liquid market for such securities,
it is likely 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 an Underlying Fund's ability
to dispose of particular Assignments or Participations when necessary to meet an
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 an Underlying Fund to assign a value to these securities for
purposes of valuing an Underlying Fund's securities and calculating its net
asset value.
Loan Participations and Assignments involve a risk of loss in case of default or
insolvency of the borrower. In addition, they may offer less legal protection to
a Underlying Fund in the event of fraud or misrepresentation and may involve a
risk of insolvency of the Lender. Certain Loan Participations and Assignments
may also include standby financing commitments that obligate the investing
Underlying Fund to supply additional cash to the borrower on demand.
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 Lenders that are
themselves subject to political and economic risks, including the risk of
currency devaluation, expropriation, or failure. Such Loan Participations and
Assignments present additional risk of default or loss.
TEMPORARY INVESTMENTS. When MSDW Investment Management or MAS believes that
changes in economic, financial or political conditions make it advisable, each
Underlying Fund may invest up to 100% of its assets in cash and certain short-
and medium-term Fixed Income Securities for temporary defensive purposes. These
Temporary Investments may consist of obligations of the U.S. or foreign
governments, their agencies or instrumentalities; Money Market Instruments; and
instruments issued by international development agencies.
ZERO COUPONS, PAY-IN-KIND SECURITIES OR DEFERRED PAYMENT SECURITIES. Zero
Coupon, Pay-In-Kind and Deferred Payment Securities are all types of Fixed
Income Securities on which the holder does not receive periodic cash payments of
interest or principal. Generally, these securities are subject to greater price
volatility and lesser liquidity in the event of adverse market conditions than
comparably rated securities paying cash interest at regular intervals. Although
an Underlying Fund will not receive cash periodic coupon payments on these
securities, the Underlying Fund may be deemed to have received interest income,
or "phantom income" during the life of the obligation. The Underlying Funds may
have to pay taxes on this phantom income, although it has not received any cash
payment.
ZERO COUPONS. Zero Coupons are fixed income securities that do not make
regular interest payments. Instead, Zero Coupons are sold at a discount 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. Zero Coupons may offer investors the
opportunity to earn a higher yield than that available on ordinary
interest-paying obligations of similar credit quality and maturity.
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PAY-IN-KIND SECURITIES. 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. 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.
FLOATERS. Floaters are Fixed Income Securities with a rate of interest that
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."
INVERSE FLOATERS. Inverse floating rate obligations ("Inverse Floaters") are
Fixed Income Securities that 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 other mortgage-related securities.
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. The Underlying Funds may consider Yankee
dollar obligations to be domestic securities for purposes of their investment
policies.
Eurodollar and Yankee dollar obligations are subject to the same risks as
domestic issues but Eurodollar (and to a limited extent, Yankee dollar)
obligations are also 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 its borders. Other risks include adverse political
and economic developments; the extent and quality of government regulations of
financial markets and institutions; the imposition of foreign withholding taxes;
and the expropriation or nationalization of foreign issuers.
FOREIGN INVESTMENT
Investing in foreign securities involves certain special considerations which
are not typically associated with investing in the Equity Securities or Fixed
Income Securities of U.S. issuers. 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. As a result,
there may be less information available about foreign issuers 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 United States. In addition, with respect to
certain foreign countries, there is a possibility of expropriation or
confiscatory taxation, political and social instability, or diplomatic
developments which could affect U.S. investments in those countries. The costs
of investing in foreign countries frequently is higher than the costs of
investing in the United States. Although MSDW Investment Management and MAS
endeavor to achieve the most favorable execution costs in portfolio
transactions, fixed commissions on many foreign stock exchanges are generally
higher than negotiated commissions on U.S. exchanges.
Investments in securities of foreign issuers generally are denominated in
foreign currencies. Accordingly, the value of an 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. An Underlying Fund
may incur costs in connection with conversions between various currencies.
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. The Underlying Funds may
be able to claim a credit for U.S. tax purposes with respect to any such foreign
taxes.
FOREIGN EQUITY SECURITIES. Foreign Equity Securities are Equity Securities of
an issuer in a foreign country.
FOREIGN GOVERNMENT FIXED INCOME SECURITIES. Foreign Government Fixed Income
Securities are Fixed Income Securities issued by a foreign government or
government-related issuer in a foreign country.
FOREIGN CORPORATE FIXED INCOME SECURITIES. Foreign Corporate Fixed Income
Securities are Fixed Income Securities issued by a private issuer in a foreign
country.
EMERGING MARKET COUNTRY SECURITIES. An emerging market country security is one
issued by a foreign government or private issuer that has one or more of the
following characteristics: (i) its principal securities trading market is in an
emerging market
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country, (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, or 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 major organizations in 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. 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.
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. These economies also
have been, and may continue to be, adversely affected by economic conditions in
the countries with which they trade.
Prior governmental approval for foreign investments may be required under
certain circumstances in some emerging market countries, and the extent of
foreign investment in certain fixed income securities and domestic companies may
be subject to limitation in other emerging market countries. Foreign ownership
limitations also may be imposed by the charters of individual companies in
emerging market 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 of approval for such repatriation. Any investment
subject to subject to such repatriation controls will be considered illiquid if
it appears reasonably likely that this process will take more than seven days.
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.
In any such case, the issuer's poor or deteriorating financial condition may
increase the likelihood that the investing Underlying Fund will experience
losses or diminution in available grains due to bankruptcy, insolvency or fraud.
Emerging market countries also pose the risk 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 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).
RUSSIAN EQUITY SECURITIES. The registration, clearing and settlement of
securities transactions involving Russian issuers are subject to significant
risks not normally associated with securities transactions in the United States
and other more developed markets. Ownership of Equity Securities in Russian
companies is evidenced by entries in a company's share register (except where
shares are held through depositories that meet the requirements of the 1940 Act)
and the issuance of extracts from the register or, in certain limited cases, by
formal share certificates. However, Russian share registers are frequently
unreliable and an Underlying Fund could possibly lose its registration through
oversight, negligence or fraud. Moreover, Russia lacks a centralized registry to
record securities transactions and registrars located throughout Russia or the
companies themselves maintain share registers. Registrars are under no
obligation to provide extracts to potential purchasers in a timely manner or at
all and are not necessarily subject to effective state supervision. In addition,
while registrars are liable under law for losses resulting from their errors, it
may be difficult for an Underlying Fund to enforce any rights it may have
against the registrar or issuer of the securities in the event of loss of share
registration. Although Russian companies with more than 1,000 shareholders are
required by Russian law to employ an independent registrar, in practice, such
companies have not always followed this law. Because of this lack of
independence of registrars, management of a Russian company may be able to exert
considerable influence over who can purchase and sell the company's shares by
illegally instructing the registrar to refuse to record transactions on the
share register. Furthermore, these practices may prevent an Underlying Fund from
investing in the securities of certain Russian companies deemed suitable by the
Adviser and could cause a delay in the sale of Russian Securities by an
Underlying Fund if the company deems a purchaser unsuitable, which may expose
the Underlying Fund to potential loss on its investment.
In light of the risks described above, the Board Directors of the Fund has
approved certain procedures concerning the Fund's investments in Russian
Securities. Among these procedures is a requirement that an Underlying Fund will
not invest in the Equity Securities of a Russian company unless that issuer's
registrar has entered into a contract with the Fund's sub-custodian containing
certain protective conditions, including, among other things, the
sub-custodian's right to conduct regular share confirmations on behalf of the
Underlying Fund. This requirement will likely have the effect of precluding
investments in certain Russian companies that an Underlying Fund would otherwise
make.
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FOREIGN CURRENCY TRANSACTIONS. The U.S. dollar value of the assets of the
Underlying Funds, to the extent they invest in securities denominated in foreign
currencies, may be affected favorably or unfavorably by changes in foreign
currency exchange rates and exchange control regulations, and the Underlying
Funds may incur costs in connection with conversions between various currencies.
The Underlying Funds may conduct their foreign currency exchange transactions on
a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market. The Underlying Funds also may manage their foreign currency
transactions by entering into foreign currency forward contracts to purchase or
sell foreign currencies or by using other instruments and techniques described
under "Derivatives" below.
Under normal circumstances, consideration of the prospect for changes in the
values of currency will be incorporated into the long-term investment decisions
made with regard to overall diversification strategies. However, MSDW Investment
Management and MAS believe that it is important to have the flexibility to use
such derivative products when it determines that it is in the best interests of
an Underlying Fund. It may not be practicable to hedge foreign currency risk in
all markets, particularly emerging markets.
FOREIGN CURRENCY WARRANTS. Underlying Funds may invest in foreign currency
warrants, which entitle the holder to receive from the issuer an amount of cash
(generally, for warrants issued in the U.S., in U.S. dollars) which is
calculated pursuant to a predetermined formula and based on the exchange rate
between a specified foreign currency and the U.S. dollar as of the exercise date
of the warrant. Foreign currency warrants generally are exercisable upon their
issuance and expire as of a specified date and time.
Foreign currency warrants have been issued in connection with U.S.
dollar-denominated debt offerings by major corporate issuers in an attempt to
reduce the foreign currency exchange risk which, from the point of view of
prospective purchasers of the securities, is inherent in the international
fixed-income marketplace. Foreign currency warrants may attempt to reduce the
foreign exchange risk assumed by purchasers of a security by, for example,
providing for a supplemental payment in the event that the U.S. dollar
depreciates against the value of a major foreign currency such as the Japanese
Yen or German Deutschmark. The formula used to determine the amount payable upon
exercise of a foreign currency warrant may make the warrant worthless unless the
applicable foreign currency exchange rate moves in a particular direction (E.G.,
unless the U.S. dollar appreciates or depreciates against the particular foreign
currency to which the warrant is linked or indexed). Foreign currency warrants
are severable from the debt obligations with which they may be offered, and may
be listed on exchanges.
Foreign currency warrants may be exercisable only in certain minimum amounts,
and an investor wishing to exercise warrants who possesses less than the minimum
number required for exercise may be required either to sell the warrants or to
purchase additional warrants, thereby incurring additional transaction costs. In
the case of any exercise of warrants, there may be a delay between the time a
holder of warrants gives instructions to exercise and the time the exchange rate
relating to exercise is determined, during which time the exchange rate could
change significantly, thereby affecting both the market and cash settlement
values of the warrants being exercised. The expiration date of the warrants may
be accelerated if the warrants should be delisted from an exchange or if their
trading should be suspended permanently, which would result in the loss of any
remaining "time value" of the warrants (I.E., the difference between the current
market value and the exercise value of the warrants), and, in the case where the
warrants were "out-of-the-money," in a total loss of the purchase price of the
warrants.
Foreign currency warrants are generally unsecured obligations of their issuers
and are not standardized foreign currency options issued by the Options Clearing
Corporation ("OCC"). Unlike foreign currency options issued by the OCC, the
terms of foreign exchange warrants generally will not be amended in the event of
governmental or regulatory actions affecting exchange rates or in the event of
the imposition of other regulatory controls affecting the international currency
markets. The initial public offering price of foreign currency warrants is
generally considerably in excess of the price that a commercial user of foreign
currencies might pay in the interbank market for a comparable option involving
significantly larger amounts of foreign currencies. Foreign currency warrants
are subject to complex political or economic factors.
PRINCIPAL EXCHANGE RATE LINKED SECURITIES. Principal exchange rate linked
securities are debt obligations the principal on which is payable at maturity in
an amount that may vary based on the exchange rate between the U.S. dollar and a
particular foreign currency at or about that time. The return on "standard"
principal exchange rate linked securities is enhanced if the foreign currency to
which the security is linked appreciates against the U.S. dollar, and is
adversely affected by increases in the foreign exchange value of the
U.S. dollar; "reverse" principal exchange rate linked securities are like the
"standard" securities, except that their return is enhanced by increases in the
value of the U.S. dollar and adversely impacted by increases in the value of
foreign currency. Interest payments on the securities are generally made in
U.S. dollars at rates that reflect the degree of foreign currency risk assumed
or given up by the purchaser of the notes (I.E., at relatively higher interest
rates if the purchaser has assumed some foreign currency risk).
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 under a plan introduced by
Nicholas F. Brady when he was the U.S. Secretary of the Treasury. Brady Bonds
have only been issued 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. The Underlying Funds
will invest in
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Brady Bonds only if they are consistent with the Underlying Fund's quality
specifications. However, Brady Bonds should be viewed as speculative in light of
the history of defaults with respect to commercial bank loans by public and
private entities of countries issuing Brady Bonds.
INVESTMENT FUNDS. Some emerging market countries have laws and regulations that
currently preclude direct investment or make it undesirable to invest directly
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.
EUROPEAN CURRENCY TRANSITION. On January 1, 1999, the European Monetary Union
(EMU) implemented a new currency unit, the Euro, which is expected to reshape
financial markets, banking systems and monetary policies in Europe and other
parts of the world. Implementation of this plan will mean that financial
transactions and market information, including share quotations and company
accounts, in participating countries will be denominated in Euros. Monetary
policy for participating countries will be uniformly managed by a new central
bank, the European Central Bank (ECB).
The transition to the Euro may change the economic environment and behavior of
investors, particularly in European markets. For example, the process of
implementing the Euro may adversely affect financial markets world-wide and may
result in changes in the relative strength and value of the U.S. dollar or other
major currencies, as well as possible adverse tax consequences. The transition
to the Euro is likely to have a significant impact on fiscal and monetary policy
in the participating countries and may produce unpredictable effects on trade
and commerce generally. These resulting uncertainties could create increased
volatility in financial markets world-wide.
OTHER SECURITIES
LOANS OF PORTFOLIO SECURITIES. Each Underlying Fund may lend its investment
securities to qualified institutional investors that 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 (i) 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; (ii) the borrower add to such collateral whenever the price of the
securities loaned rises (i.e., the borrower "marks to market" on a daily basis);
(iii) the loan be made subject to termination by the Underlying Fund at any
time; and (iv) the Underlying Fund receive reasonable interest on the loan
(which may include the Underlying Fund investing any 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 be made only to borrowers
deemed by MSDW Investment Management or MAS to be of good standing and when, in
the judgment of MSDW Investment Management 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.
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.
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 and restricted securities. Such unlisted securities may involve a higher
degree of business and financial risk that can result in substantial losses. 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 that 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
sold, the Underlying Fund may be required to bear the expenses of registration.
As a general matter, an Underlying Fund may not invest more than 15% of its net
assets in illiquid securities, such as securities for which there is not readily
available secondary market or securities that are restricted from sale to the
public without registration. However, certain Restricted Securities can be
offered and sold to qualified institutional buyers under Rule 144A
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under the Securities Act of 1933 (the "1933 Act") ("Rule 144A Securities") and
may be deemed to be liquid under guidelines adopted by the Fund's Board of
Directors. The Underlying Funds may invest without limit in liquid Rule 144A
Securities. Rule 144A Securities may become illiquid if qualified institutional
buyers are not interested in acquiring the securities.
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. When an
Underlying Fund agrees to purchase When-Issued or Delayed Delivery Securities,
it will earmark or segregate cash or liquid securities in an amount equal to the
Underlying Fund's commitment to purchase these securities.
BORROWING FOR INVESTMENT PURPOSES. Borrowing for investment purposes creates
leverage which is a speculative characteristic. Underlying Funds authorized to
borrow may do so when MSDW Investment Management 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 funds. Borrowing by an Underlying Fund 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 an Underlying Fund's net asset value per share and net
yield. Each Underlying Fund that engages in borrowing expects that all of its
borrowing will be made on a secured basis. The Underlying Fund will either
segregate the assets securing the borrowing for the benefit of the lenders or
arrangements will be made with a suitable sub-custodian. If assets used to
secure the borrowing decrease in value, an Underlying Fund may be required to
pledge additional collateral to the lender in the form of cash or securities to
avoid liquidation of those assets.
REVERSE REPURCHASE AGREEMENTS. Under a Reverse Repurchase Agreement, an
Underlying Fund sells a security and promises to repurchase that security at an
agreed upon future date and price. The price paid to repurchase the security
reflects interest accrued during the term of the agreement. The Underlying Fund
will earmark cash or liquid assets or establish a segregated account holding
cash and other liquid assets in an amount not less than the purchase obligations
of the agreement. Reverse Repurchase Agreements may be viewed as a speculative
form of borrowing called leveraging. An Underlying Fund may invest in reverse
repurchase agreements if (i) interest earned from leveraging exceeds the
interest expense of the original reverse repurchase transaction and
(ii) proceeds from the transaction are not invested for longer than the term of
the Reverse Repurchase Agreement.
SHORT SALES. 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. To deliver the securities to the buyer, the
Underlying Fund arranges through a broker to borrow the securities and, in so
doing, the Underlying Fund becomes obligated to replace the securities borrowed
at their market price at the time of replacement. When selling short, the
Underlying Fund intends to replace the securities at a lower price and
therefore, profit from the difference between the cost to replace the securities
and the proceeds received from the sale 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.
The Underlying Fund's obligation to replace the securities borrowed in
connection with a short sales will be secured by collateral deposited with the
broker that consists of cash or other liquid securities. In addition, the
Underlying Fund will earmark cash or liquid assets or place in a segregated
account an amount of cash or other liquid assets equal to the difference, if
any, between (i) the market value of the securities sold at the time they were
sold short, and (ii) any cash or other liquid securities deposited as collateral
with the broker in connection with the short sale. Short sales by the Underlying
Fund involve certain risk and special considerations. If MSDW Investment
Management or MAS incorrectly predicts that the price of the borrowed security
will decline, the Underlying Fund will have to replace the securities with
securities with a greater value than the amount received from the sale. As a
result, 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.
STRUCTURED INVESTMENTS. Structured Investments are securities that are
convertible into, or the value of which is based upon the value of, other fixed
income or equity securities or indices upon certain terms and conditions. The
amount an Underlying Fund receives when it sells a Structured Investment or at
maturity of a Structured Investment is not fixed, but is based on the price of
the underlying security or index. Particular Structured Investments may be
designed so that they move in conjunction with or differently from their
underlying security or index in terms of price and volatility. It is impossible
to predict whether the underlying index or price of the underlying security will
rise or fall, but prices of the underlying indices and securities (and,
therefore, the prices of Structured Investments) will be influenced by the same
types of political and economic events that affect particular issuers of fixed
income and equity securities and capital markets generally. Structured
Investments also may trade differently from their underlying securities.
Structured Investments generally trade on the secondary market, which is fairly
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developed and liquid. However, the market for such securities may be shallow
compared to the market for the underlying securities or the underlying index.
Accordingly, periods of high market volatility may affect the liquidity of
Structured Investments, making high volume trades possible only with
discounting.
Structured Investments are a relatively new innovation and may be designed to
have various combinations of equity and fixed income characteristics. The
following sections describe four of the more common types of Structured
Investments. The Underlying Funds may invest in other Structured Investments,
including those that may be developed in the future, to the extent that the
Structured Investments are otherwise consistent with an Underlying Fund's
investment objective and policies.
PERCS. Preferred Equity Redemption Cumulative Stock ("PERCS") technically
is preferred stock with some characteristics of common stock. PERCS are
mandatorily convertible into common stock after a period of time, usually three
years, during which the investors' capital gains are capped, usually at 30%.
Commonly, PERCS may be redeemed by the issuer at any time or if the issuer's
common stock is trading at a specified price level or better. The redemption
price starts at the beginning of the PERCS duration period at a price that is
above the cap by the amount of the extra dividends the PERCS holder is entitled
to receive relative to the common stock over the duration of the PERCS and
declines to the cap price shortly before maturity of the PERCS. In exchange for
having the cap on capital gains and giving the issuer the option to redeem the
PERCS at any time or at the specified common stock price level, an Underlying
Fund may be compensated with a substantially higher dividend yield than that on
the underlying common stock. Investors that seek current income find PERCS
attractive because PERCS provide a high dividend income than that paid with
respect to a company's common stock.
ELKS. Equity-Linked Securities ("ELKS") differ from ordinary debt
securities, in that the principal amount received at maturity is not fixed but
is based on the price of the issuer's common stock. ELKS are debt securities
commonly issued in fully registered form for a term of three years under an
indenture trust. At maturity, the holder of ELKS will be entitled to receive a
principal amount equal to the lesser of a cap amount, commonly in the range of
30% to 55% greater than the current price of the issuer's common stock, or the
average closing price per share of the issuer's common stock , subject to
adjustment as a result of certain dilution events, for the 10 trading days
immediately prior to maturity. Unlike PERCS, ELKS are commonly not subject to
redemption prior to maturity. ELKS usually bear interest during the three-year
term at a substantially higher rate than the dividend yield on the underlying
common stock. In exchange for having the cap on the return that might have been
received as capital gains on the underlying common stock, an Underlying Fund may
be compensated with the higher yield, contingent on how well the underlying
common stock does. Investors that seek current income, find ELKS attractive
because ELKS provide a higher dividend income than that paid with respect to a
company's common stock. The return on ELKS depends on the creditworthiness of
the issuer of the securities, which may be the issuer of the underlying
securities or a third party investment banker or other lender. The
creditworthiness of such third party issuer of ELKS may, and often does, exceed
the creditworthiness of the issuer of the underlying securities. The advantage
of using ELKS over traditional equity and debt securities is that the former are
income producing vehicles that may provide a higher income than the dividend
income on the underlying equity securities while allowing some participation in
the capital appreciation of the underlying equity securities. Another advantage
of using ELKS is that they may be used for hedging to reduce the risk of
investing in the generally more volatile underlying equity securities.
LYONS. Liquid Yield Option Notes ("LYONs") differ from ordinary debt
securities, in that the amount received prior to maturity is not fixed but is
based on the price of the issuer's common stock. LYONs are zero-coupon notes
that sell at a large discount from face value. For an investment in LYONs, the
Underlying Fund will not receive any interest payments until the notes mature,
typically in 15 to 20 years, when the notes are redeemed at face, or par, value.
The yield on LYONs, typically, is lower-than-market rate for debt securities of
the same maturity, due in part to the fact that the LYONs are convertible into
common stock of the issuer at any time at the option of the holder of the LYONs.
Commonly, the LYONs are redeemable by the issuer at any time after an initial
period or if the issuer's common stock is trading at a specified price level or
better or, at the option of the holder, upon certain fixed dates. The redemption
price typically is the purchase price of the LYONs plus accrued original issue
discount to the date of redemption, which amounts to the lower-than-market
yield. An Underlying Fund will receive only the lower-than-market yield unless
the underlying common stock increases in value at a substantial rate. LYONs are
attractive to investors when it appears that they will increase in value due to
the rise in value of the underlying common stock.
STRUCTURED NOTES. Structured Notes are derivative securities for 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. In some cases, the impact of the
movements of these factors may increase or decrease through the use of
multipliers or deflators. Structured Notes may be designed to have particular
quality and maturity characteristics and may vary from money market quality to
below investment grade. Depending on the factor used and the use of multipliers
or deflators, however, changes in interest rates and movement of the factor may
cause significant price fluctuations or may cause particular Structured Notes to
become illiquid. The Underlying Funds will use Structured Notes to tailor their
investments to the specific risks and returns MSDW Investment Management or MAS
wish to accept while avoiding or reducing certain other risks.
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DERIVATIVES
The Underlying Funds are permitted to utilize various exchange-traded and
over-the-counter derivative instruments and derivative securities, both for
hedging and non-hedging purposes. Permitted derivative products include, but are
not limited to futures contracts ("futures"); forward contracts ("forwards");
options; swaps, caps, collars and floors; structured notes; and other derivative
products yet to be developed, so long as these new products are used in a manner
consistent with the objectives of the Underlying Funds. These derivative
products may be based on a wide variety of underlying rates, indices,
instruments, securities and other products, such as interest rates, foreign
currencies, foreign and domestic fixed income and equity securities, groups or
"baskets" of securities and securities indices (for each derivative product, the
"underlying"). Each Underlying Fund of the Morgan Stanley Dean Witter
Institutional Fund will limit its use of derivative products to 33 1/3% of their
total assets, measured by the aggregate notional amount of outstanding
derivative products. The Underlying Fixed Income Funds of MAS Funds, exclusive
of derivatives used for hedging purposes, will limit their use of derivatives so
that no more than 5% of the Underlying Fund's total assets at the time of the
transaction are required as margin and option premiums to secure the Underlying
Fund's obligations under such derivatives. The Underlying Equity Funds of
MAS Funds, exclusive of derivatives used for hedging purposes, are subject to
the same 5% limit, but also will not incur obligations to purchase securities
under futures and options contracts in excess of 50% of their total. There is no
limit on the use of forward foreign currency contracts or other derivative
products for hedging purposes.
The term hedging, generally, means that an Underlying Fund is using a derivative
product as a way to reduce or limit risk. For example, an Underlying Fund may
hedge in order to limit the effects of a change in the value of a particular
foreign currency versus the U.S. dollar or could use a portion of its cash to
buy securities futures in order to hedge the risk of not being fully invested.
The Underlying Funds also may use certain complex hedging techniques. For
example, an Underlying Fund may use a type of hedge known as a cross hedge or a
proxy hedge, where the Underlying Fund hedges the risk associated with one
underlying by purchasing or selling a derivative product with an underlying that
is different. There is no limit on the use of foreign currency forward contracts
or other derivative products for hedging purposes.
The Underlying Funds may use derivative products under a number of different
circumstances to further their investment objectives. For example, an Underlying
Fund may purchase derivatives to gain exposure to a market quickly in response
to changes in the Underlying Fund's investment strategy, upon the inflow of
investable cash or when the derivative provides greater liquidity than the
underlying market. An Underlying Fund may also use derivatives when it is
restricted from directly owning the "underlying" or when derivatives provide a
pricing advantage or lower transaction costs. The Underlying Funds also may
purchase combinations of derivatives in order to gain exposure to an investment
in lieu of actually purchasing such investment. Derivatives may also be used by
an Underlying Fund for hedging or risk management purposes and in other
circumstances when MSDW Investment Management believes it advantageous to do so
consistent with the Underlying Fund's investment objectives and policies. Except
under circumstances where a segregated account is not required under the 1940
Act or the rules adopted thereunder, the Underlying Fund will earmark cash or
liquid assets or place them in a segregated account in an amount necessary to
cover the Underlying Fund's obligations under such derivative transactions.
The use of derivative products is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If MSDW Investment Management or MAS is
incorrect in forecasts of market values, interest rates, and currency exchange
rates, the investment performance of the Underlying Funds will be less favorable
than it would have been if these investment techniques had not been used.
Some of the derivative products in which the Underlying Funds may invest and
some of the risks related thereto are described in further detail below.
FOREIGN CURRENCY FORWARD CONTRACTS. A foreign currency 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. 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 foreign currency
forward contracts in many circumstances. For example, 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, the 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. However, it may not be practicable to hedge currency in
all markets, particularly emerging markets.
15
<PAGE>
The term hedging, generally, means that an Underlying Fund is using a derivative
product as a way to reduce or limit risk. For example, an Underlying Fund may
hedge in order to limit the effects of a change in the value of a particular
foreign currency versus the U.S. dollar. The Underlying Funds also may use
certain complex hedging techniques. For example, an Underlying Fund may use a
type of hedge known as a cross hedge or a proxy hedge, where the Underlying Fund
hedges the risk associated with one underlying by purchasing or selling a
derivative product with an underlying that is different. There is no limit on
the use of forward foreign currency contracts or other derivative products for
hedging purposes.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
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 extremely difficult, and the successful execution of
a short-term hedging strategy is highly uncertain.
Under normal circumstances, consideration of the prospect for changes in values
of currency will be incorporated into the long-term investment decisions made
with regard to overall diversification strategies. However, the management of
the Underlying Fund believes that it is important to have the flexibility to
enter into such forward contracts when it determines that it is in the best
interests of the Underlying Fund. Except under circumstances where a segregated
account is not required under the 1940 Act or the rules adopted thereunder, the
Fund's Custodian will earmark cash or liquid assets or place them 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 currency
exchange 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 contracts.
The Underlying Funds generally will not enter into a forward contract with a
term of greater than one year. At the maturity of a forward contract, a
Underlying Fund may either sell the portfolio security and make delivery of the
foreign currency, or it may retain the security and terminate its contractual
obligation to deliver the foreign currency by purchasing an "offsetting"
contract with the same currency trader obligating it to purchase, on the same
maturity date, the same amount of the foreign currency.
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 such 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.
FUTURES CONTRACTS (FUTURES) AND FORWARD CONTRACTS (FORWARDS). The Underlying
Funds may purchase and sell futures contracts, including futures on securities
indices, baskets of securities, foreign currencies and interest rates of the
type generally known as financial futures. These are standardized contracts that
are bought and sold on organized exchanges. A futures contract obligates a party
to buy or sell a specific amount of the "underlying," such as a particular
foreign currency, on a specified future date at a specified price or to settle
the value in cash.
The Underlying Funds may also purchase and sell forward contracts, such as
forward rate agreements and other financial forward contracts. The Underlying
Funds may also use foreign currency forward contracts which are separately
discussed under "Foreign Currency Forward Contracts." These forward contracts
are privately negotiated and are bought and sold in the over-the-counter market.
Like a future, a forward contract obligates a party to buy or sell a specific
amount of the underlying on a specified future date at a specified price. The
terms of the forward contract are customized. Forward contracts, like other
over-the-counter contracts that are negotiated directly with an individual
counterparty, subject the Underlying Fund to the risk of counterparty default.
In some cases, the Underlying Funds may be able to use either futures contracts,
forward contracts or exchange-traded or over-the-counter options to accomplish
similar purposes. In all cases, the Underlying Funds will uses these products
only as permitted by applicable laws and regulations. Some of the ways in which
the Underlying Funds may use futures contracts, forward contracts and related
options are as follows:
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<PAGE>
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 may purchase
securities index futures or options in order to gain market exposure. There
currently are limited securities index futures and options on such futures in
many countries, particularly emerging markets. The nature of the strategies
adopted by MSDW Investment Management or MAS, and the extent to which those
strategies are used, may depend on the development of such markets. The
Underlying Funds may also purchase and sell foreign currency futures to lock in
rates or to adjust their exposure to a particular currency.
The Underlying Fund may engage in transactions in interest rate futures and
related products. The value of these contracts rises and falls inversely with
change in interest rates. The Underlying Funds may engage in such transactions
to hedge their holdings of debt instruments against future changes in interest
rates or for other purposes.
Gains and losses on futures contracts, forward contracts and related options
depend on MSDW Investment Management's or MAS' ability to predict correctly the
direction of movement of securities prices, interest rates and other economic
factors. Other risks associated with the use of these instruments include
(i) imperfect correlation between the changes in market value of investments
held by an Underlying Fund and the prices of derivative products relating to
investments purchased or sold by the Underlying Fund, and (ii) possible lack of
a liquid secondary market for a derivative product and the resulting inability
to close out a position. An Underlying Fund will seek to minimize the risk by
only entering into transactions for which there appears to be a liquid exchange
or secondary market. In some strategies, the risk of loss in trading on futures
and related transactions can be substantial, due both to the low margin deposits
required and the extremely high degree of leverage involved in pricing.
Under rules adopted by the Commodity Futures Trading Commission (the "CFTC"),
each Underlying Fund may, without registering with the CFTC as a Commodity Pool
Operator, 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 relating to non-bona
fide hedging activities.
OPTIONS. The Underlying Funds may seek to increase their returns or may hedge
their portfolio investments through options transactions with respect to
individual securities, indices or baskets in which such Underlying Funds may
invest; other financial instruments; and foreign currency. Various options may
be purchased and sold on exchanges or over-the-counter markets.
Each Underlying Fund may purchase put and call options. Purchasing a put option
gives an Underlying Fund the right, but not the obligation, to sell the
underlying (such as a securities index or a particular foreign currency) at the
exercise price either on a specific date or during a specified exercise period.
The purchaser pays a premium to the seller (also known as the writer) of the
option.
Each Underlying Fund also may write put and call options on investments held in
its portfolio, as well as foreign currency options. An Underlying Fund that has
written an option receives a premium that increases the Underlying Fund's return
on the underlying in the event the option expires unexercised or is closed out
at a profit. However, by writing a call option, an Underlying Fund will limit
its opportunity to profit from an increase in the market value of the underlying
above the exercise price of the option. By writing a put option, an Underlying
Fund will be exposed to the amount by which the price of the underlying is less
than the strike price.
By writing an option, an Underlying Fund incurs an obligation either to buy (in
the case of a put option) or sell (in the case of a call option) the underlying
from the purchaser of the option at the option's exercise price, upon exercise
by the purchaser. Pursuant to guidelines established by the Board of Directors,
the Underlying Funds may only write options that are "covered." A covered call
option means that until the expiration of the option, the Underlying Fund will
either earmark or segregate sufficient liquid assets to cover its obligations
under the option or will continue to own (i) the underlying; (ii) securities or
instruments convertible or exchangeable without the payment of any consideration
into the underlying; or (iii) a call option on the same underlying with a strike
price no higher than the price at which the underlying was sold pursuant to a
short option position. In the case of a put option, the Underlying Fund will
either earmark or segregate sufficient liquid assets to cover its obligations
under the option or will own another put option on the same underlying with an
equal or higher strike price.
There currently are limited options markets in many countries, particularly
emerging market countries, and the nature of the strategies adopted by MSDW
Investment Management or MAS and the extent to which those strategies are used
will depend on the development of these options markets. The primary risks
associated with the Underlying Funds' use of options as described include
(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, and (ii) possible lack of a liquid secondary market for an
option.
SWAPS, CAPS, COLLARS AND FLOORS. Swaps are privately negotiated
over-the-counter derivative products in which two parties agree to exchange
payment streams calculated in relation to a rate, index, instrument or certain
securities and a particular "notional amount." As with many of the other
derivative products available to the Underlying Funds, the underlying may
include an interest rate (fixed or floating), a currency exchange rate, a
commodity price index, and a security, securities index or a combination
thereof. A great deal of flexibility is possible in the way the products may be
structured, with the effect being that the parties may have exchanged amounts
equal to the return on one rate, index or group of securities for another. For
example, in a simple fixed-to-floating interest rate swap, one party makes
payments equivalent to a fixed interest rate, and the other make
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<PAGE>
payments equivalent to a specified interest rate index. An Underlying Fund may
engage in simple or more complex swap transactions involving a wide variety of
underlyings. The currency swaps that 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.
Caps, collars and floors are privately-negotiated option-based derivative
products. An Underlying Fund may use one or more of these products in addition
to or in lieu of a swap involving a similar rate or index. As in the case of a
put or call option, the buyer of a cap or floor pays a premium to the writer. In
exchange for that premium, the buyer receives the right to a payment equal to
the differential if the specified index or rate rises above (in the case of a
cap) or falls below (in the case of a floor) a pre-determined strike level. As
in the case of swaps, obligations under caps and floors are calculated based
upon an agreed notional amount, and like most swaps (other than foreign currency
swaps), the entire notional amount is not exchanged and thus is not at risk. A
collar is a combination product in which the same party, such as the Underlying
Fund, buys a cap from and sells a floor to the other party. As with put and call
options, the amount at risk is limited for the buyer, but, if the cap or floor
in not hedged or covered, may be unlimited for the seller. Under current market
practice, caps, collars and floors between the same two parties are generally
documented under the same "master agreement." In some cases, options and forward
agreements may also be governed by the same master agreement. In the event of a
default, amounts owed under all transactions entered into under, or covered by,
the same master agreement would be netted and only a single payment would be
made.
Swaps, caps, collars and floors are credit-intensive products. An Underlying
Fund that enters into a swap transaction bears the risk of default, i.e.
nonpayment, by the other party. The guidelines under which each Underlying Fund
enters derivative transactions, along with some features of the transactions
themselves, are intended to reduce these risks to the extent reasonably
practicable, although they cannot eliminate the risks entirely. Under guidelines
established by the Board of Directors, an Underlying Fund may enter into swaps
only with parties that meet certain credit rating guidelines. Consistent with
current market practices, an Underlying Fund will generally enter into swap
transactions on a net basis, and all swap transactions with the same party will
be documented under a single master agreement to provide for net payment upon
default. In addition, an Underlying Fund's obligations under an agreement will
be accrued daily (offset against any amounts owing to the Underlying Fund) and
any accrued, but unpaid, net amounts owed to the other party to a master
agreement will be covered by the maintenance of a segregated account consisting
of cash or liquid securities.
Interest rate and total rate of return (fixed income or equity) swaps generally
do not involve the delivery of securities, other underlying assets, or
principal. In such case, if the other party to an interest rate or total rate of
return swap defaults, an Underlying Fund's risk of loss will consist of the
payments that an Underlying Fund is contractually entitled to receive from the
other party. This may not be true for currency swaps that require the delivery
of the entire notional amount of one designated currency in exchange for the
other. If there is a default by the other party, an Underlying Fund may have
contractual remedies under the agreements related to the transaction.
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.
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: (i) 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 (ii) 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 33
1/3% of its total assets would be lent to other parties, but this limitation
does not apply to purchases of debt securities or repurchase agreements;
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<PAGE>
(4) except with respect to the shares of Underlying Funds, with respect to
75% of the Portfolio's assets (i) purchase more than 10% 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 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 33 1/3% of its total assets (including the amount borrowed)
less liabilities;
(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; or
(7) acquire any securities of companies within one industry if, as a result
of such acquisition, 25% or more of the value of the Portfolio's total assets
would be invested in securities of companies within such industry; provided,
that (i) each Portfolio will invest at least 25% 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
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;
(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; or
(7) purchase additional securities while borrowings exceed 5% of total
assets.
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 described in the Statement of Additional Information for such
Underlying Fund.
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, an order received
prior to the close of the New York Stock Exchange (the "NYSE") (normally 4:00
p.m. Eastern Time) will be executed at the price computed on the date of
receipt; and an order received after the close of the NYSE will be executed at
the price computed on the next day the NYSE is open. 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 or suspended 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 SEC may permit.
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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.
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 funds in the Fund Complex (defined below) or
other investment companies managed, administered, advised or distributed by MSDW
Investment Management, MAS or their affiliates. Two Directors and all of the
officers of the Fund are directors, officers or employees of the Fund's adviser,
distributor or sub-administrator. The other Directors have no affiliation with
the Fund's adviser, distributor or sub-administrator. 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 AGE 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
Morgan Stanley Dean Witter Stanley Dean Witter Investment Management Inc. and
Investment Management Morgan Stanley Dean Witter Investment Management
1221 Avenue of the Americas Limited; Managing Director of Morgan Stanley & Co.
New York, NY 10020 Incorporated; Director of Rand McNally Company;
11/26/32 Member of the Yale Development Board; and Chairman
and Director of various funds in the Fund
Complex.**
John D. Barrett, II Director Chairman and Director of Barrett Associates, Inc.
Barrett Associates Inc. (investment counseling); Director of the Ashforth
521 Fifth Avenue Company (real estate); and Director of various
New York, NY 10135 funds in the Fund Complex.
8/21/35
Gerard E. Jones Director Partner in Richards & O'Neil LLP (law firm); and
Richards & O'Neil LLP Director of various funds in the Fund Complex.
43 Arch Street
Greenwich, CT 06830
1/23/37
Graham E. Jones Director Senior Vice President of BGK Properties; Trustee of
330 Garfield Street various investment companies managed by Weiss,
Suite 200 Peck & Greer; Trustee of various investment
Santa Fe, New Mexico 87501 companies managed by Morgan Grenfell Capital
1/31/33 Management Incorporated; Trustee of various
investment companies managed by Sun Capital
Advisors, Inc.; and Director of various funds in
the Fund Complex. Formerly, Chief Financial
Officer of Practice Management Systems, Inc.
John A. Levin Director Chairman and Chief Executive Officer of John A.
One Rockefeller Plaza Levin & Co., Inc.; Director, President and Chief
New York, NY 10020 Executive Officer of Baker Fentress & Company; and
8/20/38 Director of various funds in the Fund Complex.
Andrew McNally IV Director Director of Mercury Finance (consumer finance);
333 North Michigan Avenue Zenith Electronics, Hubbell, Inc. (industrial
Suite 501 electronics); and Director of various funds in the
Chicago, IL 60601 Fund Complex. Formerly, Chairman and Chief
11/11/39 Executive Officer of Rand McNally & Company
(publishing).
William G. Morton, Jr. Director Chairman and Chief Executive Officer of Boston Stock
100 Franklin Street Exchange; Director of Tandy Corporation; and
Boston, Massachusetts 02110 Director of various funds in the Fund Complex.
3/31/37
</TABLE>
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<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
- --------------------------------------- --------------------- -------------------------------------------
<S> <C> <C>
Samuel T. Reeves Director President of Pinnacle L.L.C. (investments); and
8211 North Fresno Street Director of various funds in the Fund Complex.
Fresno, CA 93720
7/28/34
Fergus Reid Director Chairman and Chief Executive Officer of LumeLite
85 Charles Colman Blvd Plastics Corporation (injection molding); Trustee
Pawling, NY 12564 and Director of Vista Mutual Fund Group; and
8/12/32 Director of various funds in the Fund Complex.
Frederick O. Robertshaw Director Of Counsel, Copple, Chamberlin and Boehm, P.C. (law
2025 North Third Street firm) and Director of various funds in the Fund
Suite 300 Complex. Formerly of Counsel, Bryan, Cave LLP (law
Phoenix, AZ 85004 firm).
1/24/34
Harold J. Schaaff, Jr. President Managing Director of Morgan Stanley & Co.
Morgan Stanley Dean Witter Incorporated and Morgan Stanley Dean Witter
Investment Management Investment Management Inc.; and Director and Vice
1221 Avenue of the Americas President of various funds in the Fund Complex.
New York, NY 10020 Previously General Counsel and Secretary of MSDW
6/10/60 Investment Management.
Joseph P. Stadler Vice President Principal of Morgan Stanley & Co. Incorporated and
Morgan Stanley Dean Witter Morgan Stanley Dean Witter Investment Management
Investment Management Inc.; and Vice President of various funds in the
1221 Avenue of the Americas Fund Complex. Previously with Price Waterhouse LLP
New York, NY 10020 (now PricewaterhouseCoopers LLP).
6/7/54
Stefanie V. Chang Vice President Vice President of Morgan Stanley & Co. Incorporated
Morgan Stanley Dean Witter and Morgan Stanley Dean Witter Investment
Investment Management Management Inc.; and Vice President of various
1221 Avenue of the Americas funds in the Fund Complex. Previously practiced
New York, NY 10020 law with the New York law firm of Rogers & Wells.
11/30/66
Mary E. Mullin Secretary Vice President of Morgan Stanley & Co. Incorporated
Morgan Stanley Dean Witter and Morgan Stanley Dean Witter Investment
Investment Management Inc. Management Inc.; and Secretary of various funds in
1221 Avenue of the Americas the Fund Complex. Previously practiced law with
New York, NY 10020 the New York law firms of McDermott, Will & Emery
3/22/67 and Skadden, Arps, Slate, Meagher & Flom LLP.
Belinda A. Brady Treasurer Fund Administration Senior Manager, Chase Global
Chase Global Funds Services Company and Treasurer of various
Funds Services Company funds in the Fund Complex. Previously was senior
73 Tremont Street auditor at Price Waterhouse LLP (now
Boston, MA 02108-3913 PricewaterhouseCoopers LLP).
1/23/68
Robin L. Conkey Assistant Treasurer Fund Administration Manager, Chase Global Funds
Chase Global Services Company and Assistant Treasurer of
Funds Services Company various funds in the Fund Complex. Previously was
73 Tremont Street senior auditor at Price Waterhouse LLP (now
Boston, MA 02108-3913 PricewaterhouseCoopers LLP).
5/11/70
</TABLE>
- --------------
* "Interested Person" within the meaning of the 1940 Act.
** The Fund Complex currently includes Morgan Stanley Dean Witter Institutional
Fund, Inc.; Morgan Stanley Dean Witter Universal Funds, Inc.; Morgan Stanley
Dean Witter Strategic Adviser Fund, Inc.; Morgan Stanley Dean Witter Africa
Investment Fund, Inc.; Morgan Stanley Dean Witter Asia-Pacific Fund, Inc.;
Morgan Stanley Dean Witter Eastern Europe Fund, Inc.; Morgan Stanley Dean
Witter Emerging Markets Fund, Inc.; Morgan Stanley Dean Witter Emerging
Markets Debt Fund, Inc.; Morgan Stanley Dean Witter Global Opportunity Bond
Fund, Inc.; Morgan Stanley Dean Witter High Yield Fund, Inc.; Morgan Stanley
Dean Witter India Investment Fund, Inc.; The Latin American Discovery Fund,
Inc.; The Malaysia Fund, Inc.; The Pakistan Investment Fund, Inc.; The Thai
Fund, Inc.; and The Turkish Investment Fund, Inc.
21
<PAGE>
COMPENSATION 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 ("Disinterested
Directors") are also members of the boards of directors of other funds in the
Fund Complex, including certain Underlying Funds, 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
Fund Complex pays each of the Disinterested Directors an annual aggregate
compensation of $75,000, plus reasonable out-of-pocket expenses. The aggregate
of such compensation for each Disinterested Director is allocated among the
funds in the Fund Complex for which such Director serves as a director in
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 (3) in the table sets
forth aggregate compensation paid by the Fund Complex to each Director during
the fiscal year ended December 31, 1999. Compensation amounts do not include
reimbursements of out-of-pocket expenses. Prior to April 1, 2000 each
Independent Director received annual compensation of $65,000, plus reasonable
out-of-pocket expenses from the Fund Complex. Members of the Board's Audit
Committee received an additional $10,000 per year from the Fund Complex.
COMPENSATION TABLE
<TABLE>
<CAPTION>
(2) (3)
AGGREGATE TOTAL COMPENSATION FROM
(1) COMPENSATION FUND COMPLEX PAID TO
NAME OF DIRECTOR FROM FUND DIRECTORS(3)
---------------- ------------ -----------------------
<S> <C> <C>
Barton M. Biggs............................................. None None
Michael F. Klein(1)......................................... None None
John D. Barrett, II(4)...................................... None $65,000
Gerard E. Jones(5).......................................... None $72,100
Graham E. Jones(2)(5)....................................... N/A $75,750
John A. Levin(2)(4)......................................... N/A $72,100
Andrew McNally, IV(5)....................................... None $75,000
William G. Morton, Jr.(2)(5)................................ N/A $65,000
Samuel T. Reeves(4)......................................... None $82,100
Fergus Reid(4).............................................. None $72,100
Frederick O. Robertshaw(5).................................. None $75,000
</TABLE>
- ------------------
(1) Mr. Klein resigned from the Board effective March 2, 2000.
(2) Messrs. Jones, Levin and Morton were appointed to the Board on February 17,
2000 and therefore, did not receive compensation from the Fund for the
fiscal year ended December 31, 1999.
(3) Number of other investment companies in Fund Complex from whom Director(s)
received compensation: Mr. Barrett--2; Mr. Gerard E. Jones--3; Mr.Graham E.
Jones--12; Mr. Levin--12; Mr. McNally--2; Mr. Morton--12; Mr. Reeves--3; Mr.
Reid--3; Mr. Robertshaw--2.
(4) Member of Nominating/Compensation Committee of the Board of Directors of the
Fund.
(5) Member of the Audit Committee of the Board of Directors of the Fund.
22
<PAGE>
The Fund maintains an unfunded Deferred Compensation Plan which allows each
independent Director to defer payment of all, or a portion, of the fees he or
she receives for attending meetings of the Board of Directors throughout the
year. Each eligible Director generally may elect to have the deferred amounts
credited with a return equal to either of the following: (i) a rate equal to the
prevailing rate for 90-day U.S. Treasury Bills, or (ii) a rate equal to the
total return on one or more portfolios of the Fund or other funds in the Fund
Complex selected by the Director. Distributions generally are in the form of
equal annual installments over a period of five years beginning on the first day
of the year following the year in which the Director's service terminates,
except that the Board of Directors, in its sole discretion, may accelerate or
extend such distribution schedule. The Fund intends that the Deferred
Compensation Plan shall be maintained at all times on an unfunded basis for
federal income tax purposes under the Internal Revenue Code of 1986, as amended
(the "Code"). The rights of an eligible Director and the beneficiaries to the
amounts held under the Deferred Compensation Plan are unsecured and such amounts
are subject to the claims of the creditors of the Fund.
CODE OF ETHICS
Pursuant to Rule 17j-l under the 1940 Act, the Board of Directors has adopted a
Code of Ethics for the Fund and approved Codes of Ethics adopted by MSDW
Investment Management and Morgan Stanley (collectively the "Codes"). The Codes
are intended to ensure that the interests of shareholders and other clients are
placed ahead of any personal interest, that no undue personal benefit is
obtained from the person's employment activities and that actual and potential
conflicts of interest are avoided.
The Codes apply to the personal investing activities of Directors and officers
of the Fund, MSDW Investment Management and Morgan Stanley ("Access Persons").
Rule 17j-l and the Codes are designed to prevent unlawful practices in
connection with the purchase or sale of securities by Access Persons. Under the
Codes, Access Persons are permitted to engage in personal securities
transactions, but are required to report their personal securities transactions
for monitoring purposes. In addition, certain Access Persons are required to
obtain approval before investing in initial public offerings or private
placements. The Codes are on file with the SEC, and are available to the Public.
INVESTMENT ADVISORY AND OTHER SERVICES
MSDW Investment Management is a wholly owned subsidiary of Morgan Stanley Dean
Witter & Co. ("MSDW"). The principal offices of MSDW Investment Management are
at 1221 Avenue of the Americas, New York, New York 10020. MSDW Investment
Management receives no compensation for advisory services to the Portfolios.
Pursuant to a separate Administration Agreement with the Fund, MSDW Investment
Management provides administrative services, including accounting, transfer
agency, dividend disbursement, and other services, directly or through third
parties to the Portfolios. For its services under the Administration Agreement,
the Fund pays MSDW Investment Management a monthly fee which on an annual basis
equals 0.15% of the average daily net assets of each Portfolio.
Under a Sub-Administration Agreement between MSDW Investment Management and The
Chase Manhattan Bank ("Chase"), Chase Global Funds Services Company ("Chase
Global," a corporate affiliate of Chase) provides dividend disbursing, transfer
agent and other fund accounting services to the Fund. Chase Global's business
address is 73 Tremont Street, Boston, Massachusetts 02108-3913.
PRINCIPAL UNDERWRITER
Morgan Stanley serves as principal underwriter to the Fund. For information
relating to the services provided by Morgan Stanley see "Distribution of
Shares."
FUND ADMINISTRATION
MSDW Investment Management also provides administrative services to the Fund
pursuant to an Administration Agreement. The services provided under the
Administration Agreement are subject to the supervision of the officers and the
Board of Directors of the Fund and include day-to-day administration of matters
related to the corporate existence of the Fund, maintenance of records,
preparation of reports, supervision of the Fund's arrangements with its
custodian, and assistance in the preparation of the Fund's registration
statement under federal laws. The Administration Agreement also provides that
MSDW Investment Management, through its agents, will provide dividend disbursing
and transfer agent services to the Fund. For its services under the
Administration Agreement, the Fund pays MSDW Investment Management a monthly fee
which on an annual basis equals 0.15% of the average daily net assets of each
Portfolio.
SUB-ADMINISTRATOR. Under an agreement between MSDW Investment Management and
Chase Bank, Chase Global, a corporate affiliate of Chase Bank, provides certain
administrative services to the Fund. MSDW Investment Management supervises and
monitors the administrative services provided by Chase Global. Their services
are also subject to the supervision of the officers and Board of Directors of
the Fund. Chase Global provides operational and administrative services to
investment companies with approximately $164 billion in assets and having
approximately 391,442 shareholder accounts as of December 31, 1999. Chase
Global's business address is 73 Tremont Street, Boston, Massachusetts
02108-3913.
23
<PAGE>
CUSTODIAN
Chase, located at 3 Chase MetroTech Center, Brooklyn, NY 11245, acts as the
Fund's custodian.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global, located at 73 Tremont Street, Boston, MA, 02108-3913, provides
dividend disbursing and transfer agency for the Fund pursuant to the
Sub-Administration Agreement.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, located at 1177 Avenue of the Americas, New York, NY
10036, serves as independent accountants for the Fund and audits the annual
financial statements of each Portfolio.
FUND COUNSEL
Morgan, Lewis & Bockius LLP, located at 1701 Market Street, Philadelphia, PA
19103, acts as the Fund's legal counsel.
YEAR 2000
The Fund and its service providers do not appear to have been adversely affected
by computer problems related to the transition to the year 2000. However, there
remains a risk that such problems could arise or be discovered in the future.
Year 2000 related problems also may adversely affect issuers whose securities
the Fund purchases, which could have an impact on the value of your investment.
DISTRIBUTION OF SHARES
Morgan Stanley, a wholly-owned subsidiary of MSDW, serves as the Fund's
exclusive distributor of Portfolio shares pursuant to a Distribution Agreement.
In addition, to promote the sale of Fund shares, the Fund has adopted a Plan of
Distribution with respect to the Class B shares of each Portfolio under Rule
12b-1 of the 1940 Act (each, a "Plan"). Under each Plan, Morgan Stanley is
entitled to receive as compensation from each Portfolio a fee, which is accrued
daily and paid quarterly, at an annual rate of 0.25% of the average daily net
assets of the Class B shares. Each Plan is designed to compensate Morgan Stanley
for its services in connection with distributing shares of all Portfolios.
Morgan Stanley may retain any portion of the fees it does not expend in meeting
its obligations to the Fund. Morgan Stanley may compensate financial
intermediaries, plan fiduciaries and administrators for providing
distribution-related services, including account maintenance services, to
shareholders (including, where applicable, underlying beneficial owners) of
Class B shares.
The Plans for the Class B shares were most recently approved by the Fund's Board
of Directors, including those directors who are not "interested persons" of the
Fund and who have no direct or indirect financial interest in the operation of a
Plan or in any agreements related thereto, on June 22, 1999.
For the fiscal year ended December 31, 1999 Morgan Stanley spent 12b-1 fees
received from the Portfolios pursuant to the Plan in the following ways:
<TABLE>
<CAPTION>
TOTAL DOLLAR AMOUNT OF 12B-1 FEES SPENT DURING
FISCAL YEAR ENDED DECEMBER 31, 1999
----------------------------------------------
<S> <C>
Advertising, printing and mailing of prospectuses to other
than current shareholders.................................. $3,323
Compensation to underwriters................................ $ 0
Compensation to broker-dealers.............................. $ 0
Compensation to sales personnel............................. $ 0
Interest, carrying, or other financing charges.............. $ 0
Shareholder servicing....................................... $ 0
</TABLE>
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 MSDWIF 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.
24
<PAGE>
GENERAL INFORMATION
FUND HISTORY
The Fund was incorporated pursuant to the laws of the State of Maryland on
May 20, 1997 under the name Morgan Stanley Strategic Adviser Fund, Inc. The Fund
filed a registration statement with the SEC registering itself as an open-end
management investment company offering diversified and non-diversified series
under the 1940 Act and its shares under the 1933 Act and commenced operations on
December 31, 1997. Effective December 1, 1998, the Fund changed its name to
Morgan Stanley Dean Witter Strategic Adviser Fund, Inc.
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 (both income dividends and capital gains distributions in cash)
has been elected.
FEDERAL INCOME TAX TREATMENT
The following is a summary of certain federal income tax considerations
generally affecting the Fund, Portfolios and their shareholders that are not
described in the Prospectuses. No attempt is made to present a detailed
explanation of the federal, state or local tax treatment of the Fund, Portfolios
or shareholders, and the discussion here and in the Prospectuses is not intended
to be a substitute for careful tax planning.
The following general discussion of 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. Thus, the provisions of the Code generally will
be applied to each Portfolio separately, rather than to the Fund as a whole.
REGULATED INVESTMENT COMPANY QUALIFICATION
Each Portfolio intends to qualify and elect to be treated for each taxable year
as a regulated investment company ("RIC") under Subchapter M of the Code. In
order to so qualify, each Portfolio must, among other things, (i) 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 other income derived
with respect to its business of investing in such stock, securities or
currencies, including, generally, certain gains from options, futures and
forward contracts; and (ii) diversify its holdings so that, at the end of each
fiscal quarter of the Portfolio's taxable year, (a) at least 50% of the market
value of the Portfolio's total assets is represented by cash and cash items,
U.S. 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 (b) not more than 25% of the
value of its total assets are invested in the securities (other than U.S.
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
25
<PAGE>
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, a
Portfolio must distribute at least 90% of its 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, for each tax year, if any, to
its 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 net income
will be subject to tax at corporate rates whether or not distributed to
shareholders, and its distributions (including capital gains distributions) will
be taxable as ordinary income dividends to its shareholders to the extent of the
Portfolio's current and accumulated earnings and profits, and will be eligible
for the corporate dividends received deduction for corporate shareholders.
GENERAL TAX TREATMENT OF QUALIFYING RICS AND SHAREHOLDERS
Each Portfolio intends to distribute substantially all of its net investment
income (including, for this purpose, net short-term capital gain) to
shareholders. Dividends from a Portfolio's net investment income are taxable to
shareholders as ordinary income, whether received in cash or in additional
shares. Such dividends paid by a Portfolio generally will only qualify for the
dividends-received deduction for corporate shareholders to the extent of the
Portfolio's qualifying dividend income and to the extent designated by the
Portfolio. Each Portfolio will report annually to its shareholders the amount of
dividend income qualifying for such treatment.
Each Portfolio will decide whether to distribute or to retain all or part of any
net capital gains (the excess of net long-term capital gains over net short-term
capital losses) in any year for reinvestment. Distributions of net capital gain
are taxable to shareholders as a long-term capital gain regardless of how long
shareholders have held their shares. Each Portfolio will send reports annually
to shareholders regarding the federal income tax status of all distributions
made during the preceding year. If any such gains are retained, the Portfolio
will pay federal income tax thereon, and, if the Portfolio makes an election,
the shareholders will include such undistributed gains in their income, will
increase their tax basis in Portfolio shares by the difference between the
amount included in their income and the tax deemed paid by the shareholder.
Dividends and other distributions 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
shareholders on December 31 of that year if the distributions are paid by the
Portfolio at any time during the following January.
A gain or loss realized by a shareholder on the sale, exchange or redemption of
shares of a Portfolio held as a capital asset will be capital gain or loss, and
such gain or loss will be long-term if the holding period for the shares exceeds
12 months and otherwise will be short-term. Any loss realized on a sale,
exchange or redemption of shares of a Portfolio will be disallowed to the extent
the shares disposed of are replaced within the 61-day period beginning 30 days
before and ending 30 days after the shares are disposed of. Any loss realized by
a shareholder on the disposition of shares held 6 months or less is treated as a
long-term capital loss to the extent of any distributions of net long-term
capital gains received by the shareholder with respect to such shares or any
inclusion of undistributed capital gain with respect to such shares.
Each Portfolio will generally be subject to a nondeductible 4% federal excise
tax to the extent it fails to distribute by the end of any calendar year at
least 98% of its ordinary income for that year and 98% of its capital gain net
income (the excess of short- and long-term capital gains over short- and
long-term capital losses) for the one-year period ending on October 31 of that
year, plus certain other amounts. 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 losses, including any available capital loss
carryforwards), prior to the end of each calendar year to avoid liability for
federal excise tax.
The Fund 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 (i) 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 Account Registration Form; (ii) who is subject to backup withholding by the
Internal Revenue Service; or (iii) 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.
A Section 1256 position held by a Portfolio will generally be marked-to-market
(i.e. treated as if it were sold for fair market value) on the last business day
of the Fund's fiscal year, and all gain or loss associated with fiscal year
transactions and mark-to-market positions at fiscal year end (except certain
currency gain or loss covered by Section 988 of the Code) will generally be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. The effect of Section 1256 mark-to-market rules may be to accelerate
income or to convert what otherwise would have been long-term capital gains into
short-term capital gains or short-term capital losses into long-term capital
losses within a Portfolio. The acceleration of income on Section 1256 positions
may require a Portfolio to accrue taxable income without the corresponding
receipt of cash. In order to generate cash
26
<PAGE>
to satisfy the distribution requirements of the Code, a Portfolio may be
required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources. Any or all of these
rules may, therefore, affect the amount, character and timing of income earned
and, in turn, distributed to shareholders by a Portfolio.
As discussed above, in order for each Portfolio to continue to qualify for
federal income tax treatment as a RIC, at least 90% of its gross income for a
taxable year must be derived from certain qualifying income, including
dividends, interest, income derived from loans of securities, and gains from the
sale or other disposition of stock, securities or foreign currencies, or other
related income, including gains from options, futures and forward contracts,
derived with respect to its business of investing in stock, securities or
currencies. Any net gain realized from the closing out of futures contracts will
therefore generally be qualifying income for purposes of the 90% requirement.
TAXES AND FOREIGN SHAREHOLDERS
Taxation of a shareholder who, as to the United States, is a nonresident alien
individual, a foreign trust or estate, a foreign corporation, or a foreign
partnership ("Foreign Shareholder") depends on whether the income from the
Portfolio is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from a Portfolio is not effectively connected with a U.S. trade or
business carried on by a Foreign Shareholder, distributions of net investment
income plus the excess of net short-term capital gains over net long-term
capital losses will be subject to U.S. withholding tax at the rate of 30% (or
such lower treaty rate as may be applicable) upon the gross amount of the
dividend. Furthermore, Foreign Shareholders will generally be exempt from U.S.
federal income tax on gains realized on the sale of shares of a Portfolio,
distributions of net long-term capital gains, and amounts retained by the Fund
which are designated as undistributed capital gains.
If the income from a Portfolio is effectively connected with a U.S. trade or
business carried on by a Foreign Shareholder, then distributions from the
Portfolio and any gains realized upon the sale of shares of the Portfolio, will
be subject to U.S. federal income tax at the rates applicable to U.S. citizens
and residents or domestic corporations.
A Portfolio may be required to withhold U.S. federal income tax on distributions
that are otherwise exempt from withholding tax (or taxable at a reduced treaty
rate) unless the Foreign Shareholder complies with Internal Revenue Service
certification requirements.
The tax consequences to a Foreign Shareholder entitled to claim the benefits of
an applicable tax treaty may differ from those described here. Furthermore,
Foreign Shareholders are strongly urged to consult their own tax advisors with
respect to the particular tax consequences to them of an investment in a
Portfolio.
STATE AND LOCAL TAXES
Depending upon state and local tax law, distributions by the Portfolios to
Shareholders and the ownership of shares may be subject to state and local tax
laws. Shareholders are urged to consult their tax advisors as to the
consequences of these and other state and local tax rules affecting an
investment in the Portfolio.
27
<PAGE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
CONTROL PERSONS
As of April 3, 2000, 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>
Conservative Portfolio (Class A)............................ Morgan Stanley Dean Witter 57.8%
Institutional Management Inc.
("MSDWIM")
1221 Avenue of the Americas
New York, NY 10020
The Northern Trust Company 26.6%
P.O. Box 92956
Chicago, IL 60675
Fidelity Investments 15.6%
100 Magellan Way KW1C
Covington, KY 41015
Conservative Portfolio (Class B)............................ MSDWIM 100%
1221 Avenue of the Americas
New York, NY 10020
Moderate Portfolio (Class A)................................ The Northern Trust Company 93.5%
P.O. Box 92956
Chicago, IL 60675
Fidelity Investments 6.5%
100 Magellan Way KWIC
Covington, KY 41015
Moderate Portfolio (Class B)................................ Morgan Stanley Dean Witter & Co. 100%
1585 Broadway
New York, NY 10020
Aggressive Portfolio (Class A).............................. The Northern Trust Company 57.7%
P.O. Box 92956
Chicago, IL 60675
MSDWIM 28.6%
1221 Avenue of the Americas
New York, NY 10020
Fidelity Investments 13.7%
100 Magellan Way KWIC
Covington, KY 41015
Aggressive Portfolio (Class B).............................. MSDWIM 100%
1221 Avenue of the Americas
New York, NY 10020
</TABLE>
MSDW has voting power with respect to the voting securities in its ownership.
Consequently, under the 1940 Act, MSDW may be deemed to be a controlling person
of the Portfolio.
As of April 3, 2000, to Fund management's knowledge, the Directors and officers
of the Fund, as a group, owned less than 1% of the outstanding common stock of
each Portfolio of the Fund.
To the best knowledge of the Fund, MSDW'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.
28
<PAGE>
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 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.
The average annual compounded rates of return (unless otherwise noted) for the
Fund's Portfolios for the one year and five year periods ended December 31, 1999
and for the period from inception through December 31, 1999 are as follows:
<TABLE>
<CAPTION>
AVERAGE
INCEPTION ONE AVERAGE ANNUAL ANNUAL
NAME OF PORTFOLIO DATE YEAR FIVE YEARS SINCE INCEPTION
- ------------------------------------------------------------ --------- -------- -------------- ---------------
<S> <C> <C> <C> <C>
Conservative Portfolio
Class A................................................... 12/31/97 8.69% N/A 8.23%
Class B................................................... 12/31/97 8.33% N/A 7.92%
Moderate Portfolio
Class A................................................... 12/31/97 15.79% N/A 12.82%
Class B................................................... 12/31/97 15.54% N/A 12.51%
Aggressive Portfolio
Class A................................................... 12/31/97 34.31% N/A 20.65%
Class B................................................... 12/31/97 33.88% N/A 20.37%
</TABLE>
These figures were calculated according to the following formula:
<TABLE>
<C> <C> <S>
P(1+T)TO THE POWER OF n = ERV
</TABLE>
where:
<TABLE>
<C> <C> <S>
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).
</TABLE>
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:
Yield = 2 [( (a-b) + 1) TO THE POWER OF (6) - 1 ]
____
cd
where:
<TABLE>
<C> <C> <S>
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
</TABLE>
29
<PAGE>
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 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
manager's 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 be 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.
30
<PAGE>
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.
DESCRIPTION OF RATINGS
DESCRIPTION OF COMMERCIAL PAPER AND BOND RATINGS
EXCERPTS FROM MOODY'S DESCRIPTION OF BOND RATINGS: Aaa -- Bonds which are rated
Aaa are judged to be of the best quality. They carry the smallest degree of
investment risk and are generally referred to as "gilt-edged." Interest payments
are protected by a large or by an exceptionally stable margin and principal is
secure. While the various protective elements are likely to change, such changes
as can be visualized are most unlikely to impair the fundamentally strong
position of such issues. Aa -- Bonds which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group they comprise what are
generally known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risks appear somewhat larger
than Aaa securities. A -- Bonds which are rated A possess many favorable
investment attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to
impairment some time in the future. Baa -- Bonds which are rated Baa are
considered as medium-grade obligations, i.e., they are neither highly protected
nor poorly secured. Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well. Ba -- Bonds which are rated Ba are judged to have
speculative elements; their future cannot be considered as well assured. Often
the protection of interest and principal payments may be very moderate, and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class. B -- Bonds which are
rated B generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small. Moody's applies numerical modifiers
1, 2 and 3 in each generic voting classification from Aa through B. The modifier
1 indicates that the security ranks at a higher end of the rating category;
modifier 2 indicates a mid-range rating; and the modifier 3 indicates that the
issue ranks at the lower end of the rating category. Caa -- Bonds which are
rated Caa are of poor standing. Such issues may be in default or there may be
present elements of danger with respect to principal or interest. Ca -- Bonds
which are rated Ca represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings. C -- Bonds
which are rated C are the lowest rated class of bonds, and issues so rated can
be regarded as having extremely poor prospects of ever attaining any real
investment standing.
EXCERPTS FROM S&P'S DESCRIPTION OF BOND RATINGS: AAA -- Bonds rated AAA have
the highest rating assigned by Standard & Poor's to a debt obligation and
indicate an extremely strong capacity to pay principal and interest. AA -- Bonds
rated AA have a very strong capacity to pay interest and repay principal and
differ from the highest rated issues only to a small degree. A -- Bonds rated A
have a strong capacity to pay interest and repay principal although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than bonds in higher rated categories. BBB -- Bonds rated
BBB are regarded as having an adequate capacity to pay interest and repay
principal. Whereas they normally exhibit adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than for debt in higher rated categories. BB, B, CCC, CC -- Debt rated BB, B,
CCC, CC and C is regarded, on balance, as predominantly speculative with respect
to capacity to pay interest and repay principal in accordance with the terms of
the obligation. BB indicates the lowest degree of speculation and C the highest
degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions. C -- The rating C may be used to cover a
situation where a bankruptcy petition has been filed or similar action has been
taken, but payments on this obligation are being continued. D -- Debt rated D is
in default, and payment of interest and/or repayment of principal is in arrears.
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 ("Pl") --
Judged to be of the best quality. Their short-term debt obligations carry the
smallest degree of investment risk.
31
<PAGE>
EXCERPT FROM S&P'S RATING OF MUNICIPAL NOTE ISSUES: SP-l+ -- 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-l+ -- this designation
indicates the degree of safety regarding timely payment is extremely strong. A-1
- -- this designation indicates the degree of safety regarding timely payment is
strong.
FINANCIAL STATEMENTS
The Fund's audited financial statements for the fiscal year ended December 31,
1999, including notes thereto and the report of PricewaterhouseCoopers LLP are
herein incorporated by reference from the Fund's Annual Report. A copy of the
Fund's Annual Report to Shareholders must accompany the delivery of this
Statement of Additional Information.
32
<PAGE>
APPENDIX A
The following is a list of the Underlying Funds which are investment portfolios
of MORGAN STANLEY DEAN WITTER INSTITUTIONAL FUND, INC., with their respective
investment objectives and a brief statement of their investment policies.
GLOBAL AND INTERNATIONAL EQUITY PORTFOLIOS:
The ACTIVE INTERNATIONAL ALLOCATION PORTFOLIO seeks long-term capital
appreciation by investing primarily, in accordance with country and sector
weightings determined by the investment adviser, in equity securities of
non-U.S. issuers which, in the aggregate, replicate broad market indices.
The ASIAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of Asian issuers.
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 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 growth oriented equity securities of issuers in emerging market
countries.
The EUROPEAN EQUITY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of European issuers.
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 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 the 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 small non-U.S. companies.
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 growth oriented equity securities of Latin American issuers.
U.S. EQUITY PORTFOLIOS:
The EQUITY GROWTH PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth-oriented equity securities of large capitalization
companies.
The FOCUS EQUITY PORTFOLIO seeks capital appreciation by investing primarily in
equity securities that exhibit strong or accelerated earnings growth.
The MICROCAP PORTFOLIO seeks long-term capital appreciation by investing
primarily in growth oriented equity securities of small corporations.
The SMALL COMPANY GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in growth-oriented equity securities of small companies.
The TECHNOLOGY PORTFOLIO seeks long-term capital appreciation by investing
primarily in equity securities of companies that the investment adviser expects
will 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 Standard & Poor's 500
Index.
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 ("REITs").
33
<PAGE>
The VALUE EQUITY PORTFOLIO seeks high total return by investing primarily in
equity securities that the investment adviser believes to be undervalued
relative to the stock market in general at the time of purchase.
EQUITY AND FIXED INCOME PORTFOLIOS:
FIXED INCOME PORTFOLIOS:
The EMERGING MARKETS DEBT PORTFOLIO seeks high total return by investing
primarily in fixed income securities of government and government-related
issuers and, to a lesser extent, of corporate issuers in emerging market
countries.
The FIXED INCOME PORTFOLIO seeks to produce a high total return consistent with
the preservation of capital by investing primarily 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 primarily in high quality fixed
income securities of issuers throughout the world, including U.S. issuers.
The HIGH YIELD PORTFOLIO seeks to maximize total return by investing primarily
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 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 primarily in municipal
obligations, the interest on which is exempt from federal income tax.
MONEY MARKET PORTFOLIOS:
The MONEY MARKET PORTFOLIO seeks to maximize current income and preserve capital
while maintaining high levels of liquidity.
The MUNICIPAL MONEY MARKET PORTFOLIO seeks to maximize current tax-exempt income
and preserve capital.
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 above-average total return over a market cycle of
three to five years by investing primarily in common stocks and other equity
securities of large companies.
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 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 MAS believes offer long-term growth potential. The
Underlying Fund invests in companies with equity capitalizations generally
matching the S&P MidCap 400 Index.
The 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 companies
included in the S&P MidCap 400 Index.
The SMALL CAP GROWTH PORTFOLIO seeks long-term capital growth by investing
primarily in common stocks and other equity securities with equity
capitalizations in the range of companies included in the Russell 2000 Index.
The SMALL CAP VALUE PORTFOLIO (not currently offered to new investors) seeks
above-average total return over a market cycle of three to five years by
investing primarily in common stocks with equity capitalizations in the range of
companies included in the Russell 2000 Index which are deemed by MAS to be
relatively undervalued based on certain proprietary measures of value.
The VALUE PORTFOLIO seeks above-average total return over a market cycle of
three to five years by investing primarily in common stocks and other equity
securities which are deemed by MAS to be relatively undervalued and other equity
securities with equity capitalizations greater than $1.5 billion.
The VALUE II PORTFOLIO seeks above-average total return over a market cycle of
three to five years, consistent with reasonable risk, by investing in common
stocks which are deemed by the Adviser to be relatively undervalued.
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.
34
<PAGE>
The DOMESTIC FIXED INCOME PORTFOLIO seeks above-average total return over a
market cycle of three to five years 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 above-average total return over a market cycle
of three to five years by investing primarily in investment grade and, to a
lesser extent, high yield fixed income securities.
The FIXED INCOME II PORTFOLIO seeks above-average total return over a market
cycle of three to five years by investing primarily in U.S. Governments and
other investment grade fixed income securities.
The GLOBAL FIXED INCOME PORTFOLIO seeks above-average total return over a market
cycle of three to five years by investing primarily in high-grade fixed income
securities, foreign bonds and derivatives representing securities of United
States and foreign issuers. The Underlying Fund's average weighted maturity will
ordinarily exceed five years.
The 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, corporate fixed income securities and other fixed income
securities (including bonds rated below investment grade) and derivatives. The
Underlying Fund's average weighted maturity will ordinarily exceed five years.
The 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 of U.S. and foreign issuers. The Underlying
Fund will maintain a duration of between two and five years.
The 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 those in emerging markets.
The Underlying Fund's average-weighted maturity will ordinarily be greater than
five years.
The LIMITED DURATION PORTFOLIO seeks above-average total return over a market
cycle of three to five years by investing in a diversified portfolio of
investment grade fixed income securities. The Underlying Fund will maintain a
duration of between one and three years.
The MORTGAGE-BACKED SECURITIES PORTFOLIO seeks above average total return over a
market cycle of three to five years by investing primarily in mortgage
securities in U.S. Government and private issuers, and in mortgage derivatives.
The MULTI-MARKET 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 fixed income securities of U.S. and foreign issuers. The Underlying
Fund's average weighted maturity will ordinarily exceed five 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 municipal and other fixed income securities and
derivatives, including a limited percentage of bonds rated below investment
grade. The Underlying Fund's average weighted maturity will ordinarily be
between five and ten years.
The NY MUNICIPAL PORTFOLIO seeks to realize above-average total return over a
market cycle of three to five years by investing primarily in fixed income
securities issued by local, state and regional governments that provide income
that is exempt from regular federal income taxes (commonly called municipal
securities) and income that may be exempt from New York State and City taxes.
The SPECIAL PURPOSE 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. Governments, corporate fixed income securities, mortgage
securities, foreign bonds and other fixed income securities and derivatives. The
Underlying Fund's average weighted maturity will ordinarily exceed five years.
The TARGETED DURATION PORTFOLIO seeks above average total return consistent with
reasonable risk by investing in fixed income securities and maintaining an
average weighted duration of the Merrill Lynch 1-3 Year Government Bond Index.
BALANCED PORTFOLIOS:
The BALANCED PORTFOLIO seeks above-average total return over a market cycle of
three to five years, consistent with reasonable risk, by investing in equity
securities, fixed income securities and derivatives. 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 BALANCED PLUS PORTFOLIO seeks to achieve above-average total return over a
market cycle of three to five years by investing in common stocks of domestic
and foreign issuers and fixed income securities.
The MULTI-ASSET-CLASS PORTFOLIO seeks above-average total return over a market
cycle of three to five years by investing primarily in 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.
35
<PAGE>
ADVISORY PORTFOLIOS:
The ADVISORY FOREIGN FIXED INCOME PORTFOLIO seeks 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 returns consistent with returns generated
by the market for mortgage securities by investing primarily in mortgage
securities. The Underlying Fund's average weighted maturity will ordinarily be
greater than seven years.
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<PAGE>
PART C
Morgan Stanley Dean Witter Strategic Adviser Fund, Inc.
Other Information
Item 23. EXHIBITS
(a) (1) Articles of Incorporation are incorporated by reference to
Exhibit No. 1 to Pre-Effective Amendment No.1 to Registrant's
Registration Statement on Form N-1A( File Nos. 333-32231 and
811-08303), as filed with the Securities and Exchange Commission
via EDGAR(Accession #0000912057-97-025172) on July 28, 1997.
(2) Articles of Amendment to Articles of Incorporation (regarding name
change) are incorporated by reference to Exhibit (a)(2) to
Post-Effective Amendment No.2 to Registrant's Registration
Statement on Form N-1A (File Nos. 333-32231 and 811-08303), as
filed with the Securities and Exchange Commission via EDGAR
(Accession #0001047469-99-007658) on February 26, 1999.
(b) By-laws are incorporated by reference to Exhibit No. 2 to Pre-Effective
Amendment No 1. to Registrant's Registration Statement on Form N-1A( File
Nos. 333-32231 and 811-08303), as filed with the Securities and Exchange
Commission via EDGAR (Accession #0000912057-97-025172) on July 28, 1997.
(c) Instruments Defining Rights of Security Holders, incorporated by
reference to Exhibit 1(Articles of Incorporation) as amended to date,
filed as part of Pre-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A (Registration No. 333-32231) filed
with the Securities and Exchange Commission via EDGAR (Accession No.
0000912057-97-025172) on July 28, 1997, and Exhibit 2 (By-Laws) as
amended to date, filed as part of Pre-Effective Amendment No. 1 to such
Registration Statement filed with the Securities and Exchange Commission
via EDGAR on July 28, 1997.
(d) Investment Advisory Agreement between Registrant and Morgan Stanley Asset
Management Inc. (now known as Morgan Stanley Dean Witter Investment
Management Inc.) with respect to the Strategic Adviser Conservative,
Strategic Adviser Moderate and Strategic Adviser Aggressive Portfolios is
incorporated by reference to Exhibit (d) to the Post-Effective Amendment
No.2 to Registrant's Registration Statement on Form N-1A (File Nos.
333-32231 and 811-08303), as filed with the Securities and Exchange
Commission via EDGAR (Accession #0001047469-99-007658) on February 26,
1999.
(e) Distribution Agreement between Registrant and Morgan Stanley & Co.
Incorporated is incorporated by reference to Exhibit (e) to
Post-Effective Amendment No.2 to Registrant's Registration Statement on
Form N-1A (File Nos. 333-32231 and 811-08303, as filed with the
Securities and Exchange Commission via EDGAR (Accession
#0001047469-99-007658) on February 26, 1999.
(f) Not applicable.
(g) Not applicable.
(h) (1) Administration Agreement between Registrant and Morgan Stanley
Asset Management Inc. (now known as Morgan Stanley Dean Witter
Investment Management Inc.) is incorporated by reference to
Exhibit (h) (1) to the Post-Effective Amendment No.2 to the
Registrant's Registration Statement on Form N-1A (File Nos.
333-32231 and 811-08303), as filed with the Securities and
Exchange Commission via EDGAR (Accession #0001047469-99-007658) on
February 26, 1999.
(2) Form of Sub-Administration Agreement between Registrant and The
Chase Manhattan Bank to be filed by amendment.
(i) Opinion of Counsel is filed herewith.
C-1
<PAGE>
(j) Consent of PricewaterhouseCoopers LLP (formerly, Price Waterhouse, LLP),
Independent Accountants is filed herewith.
(k) None.
(l) Not applicable.
(m) 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 incorporated by reference to
Exhibit No. 15 to Pre-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A( File Nos. 333-32231 and 811-08303),
as filed with the Securities and Exchange Commission via EDGAR(Accession
#0000912057-97-025172) on July 28, 1997.
(n) Not applicable.
(o) Registrant's Rule 18f-3 Multiple Class Plan is incorporated by reference
to Exhibit No.18 to the Pre-Effective Amendment No.1 to the Registrant's
Registration Statement on Form N-1A( File Nos. 333-32231 and 811-08303),
as filed with the Securities and Exchange Commission via EDGAR (Accession
#0000912057-97-025172) on July 28, 1997.
(p) Codes of Ethics are filed herewith.
(q) Powers of Attorney are filed herewith.
C-2
<PAGE>
Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
PROVIDE A LIST OR DIAGRAM OF ALL PERSONS DIRECTLY OR INDIRECTLY
CONTROLLED BY OR UNDER COMMON CONTROL WITH THE REGISTRANT. FOR ANY PERSON
CONTROLLED BY ANOTHER PERSON, DISCLOSE THE PERCENTAGE OF VOTING SECURITIES OWNED
BY THE IMMEDIATELY CONTROLLING PERSON OR OTHER BASIS OF THAT PERSON'S CONTROL.
FOR EACH COMPANY, ALSO PROVIDE THE STATE OR OTHER SOVEREIGN POWER UNDER THE LAWS
OF WHICH THE COMPANY IS ORGANIZED.
No person is controlled by or under common control with the
Registrant.
Item 25. INDEMNIFICATION
STATE THE GENERAL EFFECT OF ANY CONTRACT, ARRANGEMENTS OR STATUTE
UNDER WHICH ANY DIRECTOR, OFFICER, UNDERWRITER OR AFFILIATED PERSON OF THE
REGISTRANT IS INSURED OR INDEMNIFIED AGAINST ANY LIABILITY INCURRED IN THEIR
OFFICIAL CAPACITY, OTHER THAN INSURANCE PROVIDED BY ANY DIRECTOR, OFFICER,
AFFILIATED PERSON, OR UNDERWRITER FOR THEIR OWN PROTECTION.
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 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
DESCRIBE ANY OTHER BUSINESS, PROFESSION, VOCATION OR EMPLOYMENT OF A
SUBSTANTIAL NATURE IN WHICH THE INVESTMENT ADVISER AND EACH DIRECTOR, OFFICER OR
PARTNER OF THE INVESTMENT ADVISER, IS OR HAS BEEN, ENGAGED WITHIN THE LAST TWO
FISCAL YEARS FOR HIS OR HER OWN ACCOUNT OR IN THE CAPACITY OF DIRECTOR, OFFICER,
EMPLOYEE, PARTNER OR TRUSTEE. (DISCLOSE THE NAME AND PRINCIPAL BUSINESS ADDRESS
OF ANY COMPANY FOR WHICH A PERSON LISTED ABOVE SERVES IN THE CAPACITY OF
DIRECTOR, OFFICER, EMPLOYEE, PARTNER OR TRUSTEE, AND THE NATURE OF THE
RELATIONSHIP.)
Reference is made to the caption "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 Dean
Witter Investment Management Inc.:
C-3
<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION WITH MSDW
INVESTMENT MANAGEMENT INC. NAME OF OTHER COMPANY POSITION WITH OTHER COMPANY
<S> <C> <C>
Barton M. Biggs Morgan Stanley & Co. Incorporated Managing Director
Chairman, Director and Managing
Director
Richard B. Worley Miller Anderson & Sherrerd, LLP Portfolio Manager and Executive
President, Director, Managing Director Committee Member
and Member of Executive
Committee MAS Fund Distribution, Inc. Registered Representative
Morgan Stanley & Co. Incorporated Managing Director
Harold J. Schaaff, Jr. Morgan Stanley & Co. Incorporated Managing Director
General Counsel, Secretary and
Managing Director
Donald P. Ryan Morgan Stanley & Co. Incorporated Principal
Compliance Officer and Principal
Alexander C. Frank Morgan Stanley & Co. Managing Director
Treasurer Incorporated
Marna C. Whittington Miller Anderson & Sherrerd, LLP Executive Committee Member
Chief Operating Officer, Managing
Director and Member of Executive
Committee
Peter D. Caldecott Morgan Stanley Dean Witter Managing Director
Managing Director and Member of Investment Management Limited
Executive Committee
Thomas L. Bennett Morgan Stanley & Co. Incorporated Managing Director
Member of Executive Committee and
Portfolio
Manager
MAS Fund Distribution, Inc. Director
Miller Anderson & Sherrerd, LLP Portfolio Manager
Alan E. Goldberg Morgan Stanley & Co. Incorporated Managing Director
Member of Executive Committee
</TABLE>
In addition, MSDW Investment Management acts as investment adviser or
sub-adviser to the following registered investment companies: CIGNA Charter
Funds-Large Company Stock Growth Fund; Fifth Third Funds- International Equity
Fund; The Latin American Discovery Fund, Inc.; The Malaysia Fund, Inc.; Morgan
Stanley Dean Witter Africa Investment Fund, Inc.; Morgan Stanley Dean Witter
Asia-Pacific Fund, Inc.; Morgan Stanley Dean Witter Emerging Markets Debt Fund,
Inc.; Morgan Stanley Dean Witter Emerging Markets Fund, Inc.; Morgan Stanley
Dean Witter Global Opportunity Bond Fund, Inc.; Morgan Stanley Dean Witter High
Yield Fund, Inc.; Morgan Stanley Dean Witter Eastern Europe, Inc.; Morgan
Stanley Dean Witter India Investment Fund, Inc.; certain portfolios of Morgan
Stanley Dean Witter Universal Funds, Inc.; Morgan Stanley Dean Witter Strategic
Adviser Fund, Inc.; The Pakistan Investment Fund, Inc.; The Thai Fund, Inc.; The
Turkish Investment Fund, Inc.; Aggressive Growth and Asset Allocation Accounts
of Principal Variable Contracts Fund, Inc.; Principal Partners Aggressive Growth
Fund, Inc; SunAmerica Series Trust-International Diversified Equities Portfolio;
SunAmerica Series Trust-Worldwide High Income Portfolio; Fortis Series Fund,
Inc. - Global Asset Allocation Series; Morgan Stanley Dean Witter International
Fund; Morgan Stanley Dean Witter International SmallCap Fund; Morgan Stanley
Dean Witter Pacific Growth Fund, Inc.; Morgan Stanley Dean Witter Real Estate
Fund; Morgan Stanley Dean Witter Variable Investment Series - Pacific Growth
Portfolio; Morgan Stanley Dean Witter Japan Fund, Inc.; Morgan Stanley Dean
C-4
<PAGE>
Witter European Growth Fund Inc.; Morgan Stanley Dean Witter Variable Investment
Series - European Growth Portfolio; Morgan Stanley Dean Witter Growth Fund;
Morgan Stanley Dean Witter Select Dimensions Investment Series -- The Growth
Portfolio; Endeavor Money Market Portfolio; Endeavor Series Trust - Endeavor
Asset Allocation Portfolio; EQ Advisors Trust - Morgan Stanley Dean Witter
Emerging Markets Equity Portfolio; John Hancock Variable Series Trust I-Emerging
Markets Equity Portfolio; LSA Variable Series Trust-MSAM Focued Equity Fund;
Manufacturers Investment Trust - Global Equity Trust; New England Zenith Fund -
Morgan Stanley Dean Witter International Magnum Equity Series; North American
Funds - Global Equity Fund; North American Funds-International Equity Fund;
Pacific Select Fund - The International Portfolio; Pacific Select Fund - Real
Estate Investment Trust ("REIT") Portfolio; Phoenix Edge Series Fund-Morgan
Stanley Focus Equity Series; SEI Institutional International Trust - Emerging
Markets Equity Portfolio; Van Kampen World Portfolio Series Trust - Global
Government Securities Fund; Van Kampen Life Investment Trust - Global Equity
Portfolio; Van Kampen Life Investment Trust - Morgan Stanley Real Estate
Securities Portfolio; Van Kampen Global Managed Assets Fund; Van Kampen Real
Estate Securities Fund; certain portfolios of the Van Kampen Series Fund, Inc.
Item 27. PRINCIPAL UNDERWRITERS
(a) STATE THE NAME OF EACH INVESTMENT COMPANY (OTHER THAN THE
REGISTRANT) FOR WHICH EACH PRINCIPAL UNDERWRITER CURRENTLY DISTRIBUTING
SECURITIES OF THE REGISTRANT ALSO ACTS AS A PRINCIPAL UNDERWRITER, DEPOSITOR OR
INVESTMENT ADVISER.
Morgan Stanley & Co. Incorporated ("MS&Co.") is distributor for Morgan
Stanley Dean Witter Strategic Adviser Fund, Inc., Morgan Stanley Dean Witter
Institutional Fund, Inc. and Morgan Stanley Dean Witter Universal Funds, Inc.
(b) PROVIDE THE INFORMATION WITH RESPECT TO EACH DIRECTOR, OFFICER OR
PARTNER OF EACH PRINCIPAL UNDERWRITER NAMED IN ANSWER TO ITEM 20.
<TABLE>
<CAPTION>
Name and Principal Business Address* Position and Offices with Morgan Position and Offices with Registrant
Stanley & Co. Incorporated
<S> <C> <C>
Barton M. Biggs Director Chairman and Director
Bruce D. Fiedorek Director and Vice Chairman
Mario Francescatti Director
Peter F. Karches Director, President and Chief
Operating Officer
John J. Mack Director
Robert A. Metzler Director
Stephan F. Newhouse Director and Vice Chairman
Ralph L. Pellechio General Counsel and Secretary
Joseph R. Perella Director
Philip J. Purcell Director
John H. Schaefer Director
Robert G. Scott Director and Chief Financial Officer
John S. Wadsworth, Jr. Director
Sir David Alan Walker Director
Alexander C. Frank Treasurer
</TABLE>
*Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
C-5
<PAGE>
Item 28. LOCATION OF ACCOUNTS AND RECORDS
STATE THE NAME AND ADDRESS OF EACH PERSON MAINTAINING PRINCIPAL
POSSESSION OF EACH ACCOUNT, BOOK OR OTHER DOCUMENT REQUIRED TO BE MAINTAINED BY
SECTION 31(A) OF THE 1940 ACT [15 U.S.C. 80A-30(A)] AND THE RULES UNDER THAT
SECTION.
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.
In addition, Morgan Stanley Dean Witter Investment Management Inc. and
Miller Anderson & Sherrerd, LLP, Registrant's investment advisers and
administrators, maintain possession of the Fund's corporate organizational
records, in addition to certain other records required by Rule 31a-1(b).
Item 29. MANAGEMENT SERVICES
PROVIDE A SUMMARY OF THE SUBSTANTIVE PROVISIONS OF ANY
MANAGEMENT-RELATED SERVICE CONTRACT NOT DISCUSSED IN PART A OR PART B,
DISCLOSING THE PARTIES TO THE CONTRACT AND THE TOTAL AMOUNT PAID AND BY WHOM,
FOR THE FUND's LAST THREE FISCAL YEARS.
Morgan Stanley Dean Witter Investment Management 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 30. UNDERTAKINGS
IN INITIAL REGISTRATION STATEMENTS FILED UNDER THE SECURITIES ACT,
PROVIDE AN UNDERTAKING TO FILE AN AMENDMENT TO THE REGISTRATION STATEMENT WITH
CERTIFIED FINANCIAL STATEMENTS SHOWING THE INITIAL CAPITAL RECEIVED BEFORE
ACCEPTING SUBSCRIPTIONS FROM MORE THAN 25 PERSONS IF THE FUND INTENDS TO RAISE
ITS INITIAL CAPITAL UNDER SECTION 14(A)(3)[15U.S.C. 80A-14(A)(3)].
(a) Not applicable.
(b) 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.
(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.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended
(the "1933 Act"), and the Investment Company Act of 1940, as amended, the
Registrant certifies that it meets all of the requirements for effectiveness of
this Amendment to its Registration Statement pursuant to Rule 485(b) under the
1933 Act and has duly caused this Amendment to its Registration Statement to be
signed on its behalf by the undersigned, duly authorized, in the City of New
York and State of New York on April 28, 2000.
MORGAN STANLEY DEAN WITTER STRATEGIC ADVISER FUND, INC.
By: /s/ Harold J. Schaaff, Jr.
-----------------------------
Harold J. Schaaff, Jr.
President
Pursuant to the requirements of the 1933 Act, this Amendment to the
Registration Statement has been signed below by the following persons in the
capacities and on the date(s) indicated.
SIGNATURE TITLE(S) DATE
/s/ Harold J. Schaaff, Jr President April 28, 2000
Harold J. Schaaff, Jr
*/s/ Barton M. Biggs Director (Chairman) April 28, 2000
Barton M. Biggs
*/s/ John D. Barrett, II Director April 28, 2000
John D. Barrett, II
*/s/ Gerard E. Jones Director April 28, 2000
Gerard E. Jones
*/s/ Graham Jones Director April 28, 2000
Graham Jones
*/s/ John Levin Director April 28, 2000
John Levin
*/s/ Andrew McNally, IV Director April 28, 2000
Andrew McNally, IV
*/s/ William Morton Director April 28, 2000
William Morton
*/s/ Samuel T. Reeves Director April 28, 2000
Samuel T. Reeves
*/s/ Fergus Reid Director April 28, 2000
Fergus Reid
*/s/ Frederick O. Robertshaw Director April 28, 2000
Frederick O. Robertshaw
/s/Belinda Brady Treasurer April 28, 2000
Belinda A. Brady
*By: /s/ Harold J. Schaaff, Jr.
Harold J. Schaaff, Jr.
Attorney-In-Fact
C-7
<PAGE>
EXHIBIT INDEX
EDGAR
EXHIBIT
NUMBER DOCUMENT
- -------- ----------------------------------------------------------------
(a) (1) Articles of Incorporation are incorporated by
reference to Exhibit No. 1 to Pre-Effective
Amendment No.1 to Registrant's Registration
Statement on Form N-1A( File Nos. 333-32231 and
811-08303), as filed with the Securities and
Exchange Commission via EDGAR(Accession
#0000912057-97-025172) on July 28, 1997.
(2) Articles of Amendment to Articles of
Incorporation (regarding name change) are
incorporated by reference to Exhibit (a)(2) to
Post-Effective Amendment No.2 to Registrant's
Registration Statement on Form N-1A (File Nos.
333-32231 and 811-08303), as filed with the
Securities and Exchange Commission via EDGAR
(Accession #0001047469-99-007658) on February 26,
1999.
(b) By-laws are incorporated by reference to Exhibit No. 2
to Pre-Effective Amendment No 1. to Registrant's
Registration Statement on Form N-1A( File Nos. 333-32231
and 811-08303), as filed with the Securities and
Exchange Commission via EDGAR (Accession
#0000912057-97-025172) on July 28, 1997.
(c) Instruments Defining Rights of Security Holders,
incorporated by reference to Exhibit 1(Articles of
Incorporation) as amended to date, filed as part of
Pre-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A (Registration No.
333-32231) filed with the Securities and Exchange
Commission via EDGAR (Accession No.
0000912057-97-025172) on July 28, 1997, and Exhibit 2
(By-Laws) as amended to date, filed as part of
Pre-Effective Amendment No. 1 to such Registration
Statement filed with the Securities and Exchange
Commission via EDGAR on July 28, 1997.
(d) Investment Advisory Agreement between Registrant and
Morgan Stanley Asset Management Inc. (now known as
Morgan Stanley Dean Witter Investment Management Inc.)
with respect to the Strategic Adviser Conservative,
Strategic Adviser Moderate and Strategic Adviser
Aggressive Portfolios is incorporated by reference to
Exhibit (d) to the Post-Effective Amendment No.2 to
Registrant's Registration Statement on Form N-1A (File
Nos. 333-32231 and 811-08303), as filed with the
Securities and Exchange Commission via EDGAR (Accession
#0001047469-99-007658) on February 26, 1999.
(e) Distribution Agreement between Registrant and Morgan
Stanley & Co. Incorporated is incorporated by reference
to Exhibit (e) to Post-Effective Amendment No.2 to
Registrant's Registration Statement on Form N-1A (File
Nos. 333-32231 and 811-08303), as filed with the
Securities and Exchange Commission via EDGAR (Accession
#0001047469-99-007658) on February 26, 1999.
(f) Not applicable.
(g) Not applicable.
(h) (1) Administration Agreement between Registrant
and Morgan Stanley Asset Management Inc. (now
known as Morgan Stanley Dean Witter Investment
Management Inc.) is incorporated by reference to
Exhibit (h) (1) to the Post-Effective Amendment
No.2 to the Registrant's Registration Statement
on Form N-1A (File Nos. 333-32231 and 811-08303,
as filed with the Securities and Exchange
Commission via EDGAR (Accession
#0001047469-99-007658) on February 26, 1999.
(2) Form of Sub-Administration Agreement between
Registrant and The Chase Manhattan Bank to be
filed by amendment.
EX-99. (i) Opinion of Counsel is filed herewith
C-8
<PAGE>
EXHIBIT INDEX
EDGAR
EXHIBIT
NUMBER DOCUMENT
- -------- ----------------------------------------------------------------
EX-99. (j) Consent of PricewaterhouseCoopers LLP (formerly,
Price Waterhouse, LLP), Independent Accountants is
filed herewith.
(k) None.
(l) Not applicable.
(m) 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 incorporated by reference to Exhibit No.
15 to the Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form N-1A( File
Nos. 333-32231 and 811-08303), as filed with the
Securities and Exchange Commission via EDGAR(Accession
#0000912057-97-025172) on July 28, 1997.
(n) Not applicable.
(o) Registrant's Rule 18f-3 Multiple Class Plan is
incorporated by reference to Exhibit No.18 to the
Pre-Effective Amendment No.1 to the Registrant's
Registration Statement on Form N-1A( File Nos. 333-32231
and 811-08303), as filed with the Securities and
Exchange Commission via EDGAR (Accession
#0000912057-97-025172) on July 28, 1997.
EX-99. (p) Codes of Ethics are filed herewith.
EX-99. (q) Powers of Attorney are filed herewith.
C-9
<PAGE>
April 26, 2000
Morgan Stanley Dean Witter Strategic Adviser Fund, Inc.
1221 Avenue of the Americas
New York, NY 10020
Re: Opinion of Counsel regarding Post-Effective Amendment No. 5 to the
Registration Statement filed on Form N-1A under the Securities Act of
1933 (File No. 333-32231).
---------------------------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Morgan Stanley Dean Witter Strategic Adviser Fund,
Inc., a Maryland corporation (the "Fund"), in connection with the
above-referenced Registration Statement which relates to the Fund's shares of
common stock, par value $.001 per share (collectively, the "Shares"). This
opinion is being delivered to you in connection with the Fund's filing of
Post-Effective Amendment No. 5 to the Registration Statement (the "Amendment")
to be filed with the Securities and Exchange Commission pursuant to Rule 485(b)
under the Securities Act of 1933 (the "1933 Act"). With your permission, all
assumptions and statements of reliance herein have been made without any
independent investigation or verification on our part, except to the extent
otherwise expressly stated, and we express no opinion with respect to the
subject matter or accuracy of such assumptions or items relied upon.
In connection with this opinion, we have reviewed, among other things, executed
copies of the following documents:
(a) a certificate of the State of Maryland to the existence and
good standing of the Fund dated April 11, 2000;
(b) the Articles of Incorporation of the Fund and all amendments
and supplements thereto (the "Articles of Incorporation");
(c) a certificate executed by Mary E. Mullin, the Secretary of the
Fund, certifying as to the Fund's Articles of Incorporation
and Amended and Restated By-Laws (the "By-Laws"), and certain
resolutions adopted by the Board of Directors of the Fund
authorizing the issuance of the Shares; and
<PAGE>
Morgan Stanley Dean Witter Strategic Adviser Fund, Inc.
April 26, 2000
Page 2
(d) a printer's proof of the Amendment.
In our capacity as counsel to the Fund, we have examined the originals, or
certified, conformed or reproduced copies, of all records, agreements,
instruments and documents as we have deemed relevant or necessary as the basis
for the opinion hereinafter expressed. In all such examinations, we have assumed
the legal capacity of all natural persons executing documents, the genuineness
of all signatures, the authenticity of all original or certified copies, and the
conformity to original or certified copies of all copies submitted to us as
conformed or reproduced copies. As to various questions of fact relevant to such
opinion, we have relied upon, and assume the accuracy of, certificates and oral
or written statements of public officials and officers or representatives of the
Fund. We have assumed that the Amendment, as filed with the Securities and
Exchange Commission, will be in substantially the form of the printer's proof
referred to in paragraph (d) above.
Based upon, and subject to, the limitations set forth herein, we are of the
opinion that the Shares, when issued and sold in accordance with the Articles of
Incorporation and By-Laws, and for the consideration described in the
Registration Statement, will be legally issued, fully paid and nonassessable
under the laws of the State of Maryland.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving this consent, we do not concede that we are in
the category of persons whose consent is required under Section 7 of the 1933
Act.
Very truly yours,
/s/ Morgan, Lewis and Bockius LLP
-----------------------------
Morgan, Lewis and Bockius LLP
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form N-1A of our report dated February 8, 2000, relating to the
financial statements and financial highlights which appears in the
December 31, 1999 Annual Report to Shareholders of Morgan Stanley Dean Witter
Strategic Adviser Fund, Inc., which are also incorporated by reference into the
Registration Statement. We also consent to the references to us under the
headings "Table of Contents", "Financial Highlights", "Independent
Accountants" and "Financial Statements" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
April 28, 2000
<PAGE>
MORGAN STANLEY DEAN WITTER AFRICA INVESTMENT FUND, INC.
MORGAN STANLEY DEAN WITTER ASIA-PACIFIC FUND, INC.
MORGAN STANLEY DEAN WITTER EASTERN EUROPE FUND, INC.
MORGAN STANLEY DEAN WITTER EMERGING MARKETS FUND, INC.
MORGAN STANLEY DEAN WITTER EMERGING MARKETS DEBT FUND, INC.
MORGAN STANLEY DEAN WITTER GLOBAL OPPORTUNITY BOND FUND, INC.
MORGAN STANLEY DEAN WITTER HIGH YIELD FUND, INC.
MORGAN STANLEY DEAN WITTER INDIA INVESTMENT FUND, INC.
THE LATIN AMERICAN DISCOVERY FUND, INC.
THE MALAYSIA FUND, INC.
THE PAKISTAN INVESTMENT FUND, INC.
THE THAI FUND, INC.
THE TURKISH INVESTMENT FUND, INC.
(THE "CLOSED-END FUNDS")
AND
MORGAN STANLEY DEAN WITTER INSTITUTIONAL FUND, INC.
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
MORGAN STANLEY DEAN WITTER STRATEGIC ADVISER FUND, INC.
(THE "OPEN-END FUNDS", AND TOGETHER WITH THE CLOSED-END FUNDS, THE "FUNDS")
AND
MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT INC.
("MSDW INVESTMENT MANAGEMENT")
AND
MILLER ANDERSON & SHERRERD, LLP
("MAS", AND TOGETHER WITH MSDW INVESTMENT MANAGEMENT, THE "INVESTMENT MANAGERS")
AND
MORGAN STANLEY & CO. INCORPORATED
("MS&CO.")
CODE OF ETHICS
1. PURPOSES
This Code of Ethics has been adopted by the Funds, the Investment
Managers and MS&Co., the principal underwriter of the Open-End Funds, in
accordance with Rule 17j-1 under the Investment Company Act of 1940, as amended
(the "Act"). Rule 17j-1 under the Act generally proscribes fraudulent or
manipulative practices with respect to purchases or sales of securities held or
to be acquired by investment companies, if effected by affiliated persons (as
defined under the Act) of such companies. Specifically, Rule 17j-1 provides that
it is unlawful for any affiliated person of or principal underwriter for a
registered investment company, or any affiliated person of an investment adviser
of or principal underwriter for a registered investment company, in connection
with the purchase or sale, directly or indirectly, by such person of a security
held or to be acquired by such registered investment
1
<PAGE>
company:
(a) To employ any device, scheme or artifice to defraud such
registered investment company;
(b) To make to such registered investment company any untrue
statement of a material fact or omit to state to such
registered investment company a material fact necessary in
order to make the statements made, in light of the
circumstances under which they are made, not misleading;
(c) To engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any such
registered investment company; or
(d) To engage in any manipulative practice with respect to such
registered investment company.
While Rule 17j-1 is designed to protect only the interests of the Funds
and their stockholders, the Investment Managers apply the policies and
procedures described in this Code of Ethics to all employees of the Investment
Managers to protect the interests of their non-Fund clients as well
(hereinafter, where appropriate, non-Fund clients of the Investment Managers are
referred to as "Advisory Clients" and any reference to an Advisory Client(s)
relates only to the activities of employees of the Investment Managers).
The purpose of this Code of Ethics is to (i) ensure that Access Persons
conduct their personal securities transactions in a manner which does not (a)
create an actual or potential conflict of interest with the Funds' or an
Advisory Client's portfolio transactions, (b) place their personal interests
before the interest of the Funds and their stockholders or an Advisory Client or
(c) take unfair advantage of their relationship to the Funds or an Advisory
Client and (ii) provide policies and procedures consistent with the Act and Rule
17j-1 designed to give effect to the general prohibitions set forth in Rule
17j-l.
Among other things, the procedures set forth in this Code of Ethics
require that all (i) Access Persons review this Code of Ethics at least
annually, (ii) Access Persons, unless excepted by Sections 8. (d) or (e) of this
Code of Ethics, report transactions in Covered Securities, (iii) Access Persons
refrain from engaging in certain transactions, and (iv) employees of the
Investment Managers pre-clear with the Compliance Department or the trading desk
at MAS any transactions in Covered Securities.
2. DEFINITIONS
(a) "Access Person" means (i) any director, officer or Advisory
Person of the Funds or of the Investment Managers, and (ii)
any director or officer of MS&Co., who, in the ordinary course
of business, makes, participates in or obtains information
regarding the purchase or sale of Covered
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Securities by the Funds.
(b) "Advisory Person" means any employee of the Funds, or of the
Investment Managers (or of any company in a control
relationship to the Funds or the Investment Managers), who, in
connection with his or her regular functions or duties, makes,
participates in, or obtains information regarding the purchase
or sale of Covered Securities by the Funds or an Advisory
Client, or whose functions relate to the making of any
recommendations with respect to such purchases or sales.
(c) "Beneficial ownership" shall be interpreted in the same manner
as it would be in determining whether a person is subject to
the provisions of Section 16 of the Securities Exchange Act of
1934, as amended, and the rules and regulations thereunder,
except that the determination of direct or indirect beneficial
ownership shall apply to all securities which an Access Person
has or acquires.
(d) "Control" shall have the same meaning as that set forth in
Section 2(a)(9) of the Act.
(e) "Compliance Department" means the MSDW Investment Management
or MAS Compliance Department.
(f) "Covered Security" means a security as defined in Section
2(a)(36) of the Act, except that it does not include: (i)
shares of registered open-end investment companies, (ii)
direct obligations of the Government of the United States, and
(iii) bankers' acceptances, bank certificates of deposit,
commercial paper, and high quality short-term debt
instruments, including repurchase agreements.
(g) "Disinterested Director" means a director of a Fund who is not
an "interested person" of such Fund within the meaning of
Section 2(a)(19) of the Act.
(h) "Purchase or sale (or sell)" with respect to a Covered
Security means any acquisition or disposition of a direct or
indirect beneficial interest in a Covered Security, including,
INTER ALIA, the writing or buying of an option to purchase or
sell a Covered Security.
(i) "Security held or to be acquired" means (i) any Covered
Security which, within the most recent 15 days, is or has been
held by a Fund or an Advisory Client, or is being or has been
considered by a Fund or an Advisory Client or the Investment
Managers for purchase by a Fund or an Advisory Client and (ii)
any option to purchase or sell, and any security convertible
into or exchangeable for, a Covered Security described in this
paragraph.
3. PROHIBITED TRANSACTIONS
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(a) No Access Person or employee of the Investment Managers shall
purchase or sell any Covered Security which to his or her
actual knowledge at the time of such purchase or sale:
(i) is being considered for purchase or sale by a Fund or an
Advisory Client; or
(ii) is being purchased or sold by a Fund or an Advisory Client.
(b) No employee of the Investment Managers shall purchase or sell
a Covered Security while there is a pending "buy" or "sell"
order in the same or a related security for a Fund or an
Advisory Client until that order is executed or withdrawn.
(c) No Advisory Person shall purchase or sell a Covered Security
within seven calendar days before or after any portfolio(s) of
the Funds over which such Advisory Person exercises investment
discretion or an Advisory Client over which the Advisory
Person exercises investment discretion purchases or sells the
same or a related Covered Security. Any profits realized or
unrealized by the Advisory Person on a prohibited purchase or
sale within the proscribed period shall be disgorged to a
charity.
(d) No employee of the Investment Managers shall profit from the
purchase and sale or sale and purchase of the same (or
equivalent) Covered Security within 60 calendar days, except
that he or she may sell a Covered Security for a loss after 30
calendar days. Any profits realized within 60 calendar days on
such purchase or sale shall be disgorged to a charity.
(e) No employee of the Investment Managers shall purchase any
securities in an initial public offering.
(f) No employee of the Investment Managers shall purchase
privately-placed securities unless such purchase is
pre-approved by the Compliance Department. Any such person who
has previously purchased privately-placed securities must
disclose such purchases to the Compliance Department before
such person participates in a Fund's or an Advisory Client's
subsequent consideration of an investment in the securities of
the same or a related issuer. Upon such disclosure, the
Compliance Department shall appoint another person with no
personal interest in the issuer, to conduct an independent
review of such Fund's or such Advisory Client's decision to
purchase securities of the same or a related issuer.
(g) No Access Person or employee of the Investment Managers shall
recommend the purchase
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or sale of any Covered Securities to a Fund or to an Advisory
Client without having disclosed to the Compliance Department
his or her interest, if any, in such Covered Securities or the
issuer thereof, including without limitation (i) his or her
direct or indirect beneficial ownership of any securities of
such issuer, (ii) any contemplated purchase or sale by such
person of such securities, (iii) any position with such issuer
or its affiliates, and (iv) any present or proposed business
relationship between such issuer or its affiliates, on the one
hand, and such person or any party in which such person has a
significant interest, on the other; provided, however, that in
the event the interest of such person in such securities or
the issuer thereof is not material to his or her personal net
worth and any contemplated purchase or sale by such person in
such securities cannot reasonably be expected to have a
material adverse effect on any such purchase or sale by a Fund
or an Advisory Client or on the market for the securities
generally, such person shall not be required to disclose his
or her interest in the securities or the issuer thereof in
connection with any such recommendation.
(h) No Access Person or employee of the Investment Managers shall
reveal to any other person (except in the normal course of his
or her duties on behalf of a Fund or an Advisory Client) any
information regarding the purchase or sale of any Covered
Security by a Fund or an Advisory Client or consideration of
the purchase or sale by a Fund or an Advisory Client of any
such Covered Security.
4. PRE-CLEARANCE OF COVERED SECURITIES TRANSACTIONS AND PERMITTED
BROKERAGE ACCOUNTS
No employee of MSDW Investment Management shall purchase or sell
Covered Securities without prior written authorization from its Compliance
Department. No employee of MAS shall purchase or sell Covered Securities without
prior written authorization from the appropriate trading desk. Unless otherwise
indicated by the Compliance Department, pre-clearance of a purchase or sale
shall be valid and in effect only for the business day in which such
pre-clearance is given; provided, however, that the approval of an unexecuted
purchase or sale is deemed to be revoked when the employee becomes aware of
facts or circumstances that would have resulted in the denial of approval of the
approved purchase or sale were such facts or circumstances made known to the
Compliance Department or MAS trading desk, as appropriate, at the time the
proposed purchase or sale was originally presented for approval. The Investment
Managers require all of their employees to maintain their personal brokerage
accounts at MS&Co. or a broker/dealer affiliated with MS&Co. (hereinafter, a
"Morgan Stanley Account"). Outside personal brokerage accounts are permitted
only under very limited circumstances and only with express written approval by
the Compliance Department. The Compliance Department has implemented procedures
reasonably designed to monitor purchases and sales effected pursuant to the
aforementioned pre-clearance procedures.
5. EXEMPTED TRANSACTIONS
5
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(a) The prohibitions of Section 3 and Section 4 of this Code of
Ethics shall not apply to:
(i) Purchases or sales effected in any account over which
an Access Person or an employee of the Investment
Managers has no direct or indirect influence or
control;
(ii) Purchases or sales which are non-volitional;
(iii) Purchases which are part of an automatic purchase
plan directly with the issuer or its agent or which
are part of an automatic dividend reinvestment plan;
or
(iv) Purchases effected upon the exercise of rights issued
by an issuer PRO RATA to all holders of a class of
its securities and sales of such rights so acquired,
but only to the extent such rights were acquired from
such issuer.
(b) Notwithstanding the prohibitions of Sections 3. (a), (b) and
(c) of this Code of Ethics, the Compliance Department or MAS
trading desk, as appropriate, may approve a purchase or sale
of a Covered Security by employees of the Investment Managers
which would appear to be in contravention of the prohibitions
in Sections 3. (a), (b) and (c) if it is determined that (i)
the facts and circumstances applicable at the time of such
purchase or sale do not conflict with the interests of a Fund
or an Advisory Client, or (ii) such purchase or sale is only
remotely potentially harmful to a Fund or an Advisory Client
because it would be very unlikely to affect a highly
institutional market, or because it is clearly not related
economically to the securities to be purchased, sold or held
by such Fund or Advisory Client, and (iii) the spirit and
intent of this Code of Ethics is met.
6. RESTRICTIONS ON RECEIVING GIFTS
No employee of the Investment Managers shall receive any gift or other
consideration in merchandise, service or otherwise of more than DE MINIMIS value
from any person, firm, corporation, association or other entity that does
business with or on behalf of the Funds or an Advisory Client.
7. SERVICE AS A DIRECTOR
No employee of the Investment Managers shall serve on the board of
directors of a publicly-traded company without prior written authorization from
the Compliance Department. Approval will be based upon a determination
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that the board service would not conflict with the interests of the Funds and
their stockholders or an Advisory Client.
8. REPORTING
(a) Unless excepted by Section 8. (d) or (e) of this Code of
Ethics, each Access Person must disclose all personal holdings
in Covered Securities to the Compliance Department for its
review no later than 10 days after becoming an Access Person
and annually thereafter. The initial and annual holdings
reports must contain the following information:
(i) The title, number of shares and principal amount of
each Covered Security in which the Access Person has
any direct or indirect beneficial ownership;
(ii) The name of any broker, dealer or bank with or
through whom the Access Person maintained an account
in which any securities were held for the direct or
indirect benefit of the Access Person; and
(iii) The date the report was submitted to the Compliance
Department by the Access Person.
(b) Unless excepted by Section 8. (d) or (e) of this Code of
Ethics, each Access Person and each employee of the Investment
Managers must report to the Compliance Department for its
review within 10 days of the end of a calendar quarter the
information described below with respect to transactions in
Covered Securities in which such person has, or by reason of
such transactions acquires any direct or indirect beneficial
interest:
(i) The date of the transaction, the title, the interest
rate and maturity date (if applicable), the number of
shares and the principal amount of each Covered
Security involved;
(ii) The nature of the transaction (i.e., purchase, sale
or any other type of acquisition or disposition);
(iii) The price of the Covered Security at which the
purchase or sale was effected;
(iv) The name of the broker, dealer or bank with or
through which the purchase or sale was effected; and
(v) The date the report was submitted to the Compliance
Department by such person.
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(c) Unless excepted by Section 8. (d) or (e) of this Code of
Ethics, each Access Person and each employee of the Investment
Managers must report to the Compliance Department for its
review within 10 days of the end of a calendar quarter the
information described below with respect to any account
established by such person in which any securities were held
during the quarter for the direct or indirect benefit of such
person:
(i) The name of the broker, dealer or bank with whom the
account was established;
(ii) The date the account was established; and
(iii) The date the report was submitted to the Compliance
Department by such person.
(d) An Access Person will not be required to make any reports
described in Sections 8. (a), (b) and (c) above for any
account over which the Access Person has no direct or indirect
influence or control. An Access Person or an employee of the
Investment Managers will not be required to make the annual
holdings report under Section 8. (a) and the quarterly
transactions report under Section 8. (b) with respect to
purchases or sales effected for, and Covered Securities held
in: (i) a Morgan Stanley Account, (ii) an account in which the
Covered Securities were purchased pursuant to an automatic
purchase plan set up directly with the issuer or its agent or
pursuant to a dividend reinvestment plan, or (iii) an account
for which the Compliance Department receives duplicate trade
confirmations and quarterly statements. An Access Person or an
employee of MSDW Investment Management will not be required to
make a report under Section 8. (c) for any account in which
only shares of open-end registered investment companies can be
purchased or sold. Lastly, an employee of MSDW Investment
Management will no be required to make a report under Section
8. (c) for any account established with MS&Co. or a
broker/dealer affiliated with MS&Co., or for any account which
was pre-approved by the Compliance Department.
(e) A Disinterested Director of a Fund, who would be required to
make a report solely by reason of being a Fund director, is
not required to make initial and annual holdings reports.
Additionally, such Disinterested Director need only make a
quarterly transactions report for a purchase or sale of
Covered Securities if he or she, at the time of that
transaction, knew or, in the ordinary course of fulfilling his
or her official duties as a Disinterested Director of a Fund,
should have known that, during the 15-day period immediately
preceding or following the date of the Covered Securities
transaction by him or her, such Covered Security is or was
purchased or sold by a Fund or was being considered for
purchase or sale by a Fund.
(f) The reports described in Sections 8. (a), (b) and (c) above
may contain a statement that the
8
<PAGE>
reports shall not be construed as an admission by the person
making such reports that he or she has any direct or indirect
beneficial ownership in the Covered Securities to which the
reports relate.
9. ANNUAL CERTIFICATIONS
All Access Persons and employees of the Investment Managers must
certify annually that they have read, understood and complied with the
requirements of this Code of Ethics and recognize that they are subject to this
Code of Ethics by signing the certification attached hereto as Exhibit A.
10. BOARD REVIEW
The management of the Funds and representatives or officers of the
Investment Managers and, with respect to the Open-End Funds, MS&Co., shall each
provide each Fund's Board of Directors, at least annually, with the following:
(a) a summary of existing procedures concerning personal investing
and any changes in the procedures made during the past year;
(b) a description of any issues arising under this Code of Ethics
or procedures since the last such report, including, but not
limited to, information about material violations of this Code
of Ethics or procedures and sanctions imposed in response to
material violations;
(c) any recommended changes in the existing restrictions or
procedures based upon a Fund's or the Investment Managers'
experience under this Code of Ethics, evolving industry
practices or developments in applicable laws and regulations;
and
(d) a certification (attached hereto as Exhibits B, C, D, and E,
as appropriate) that each has adopted procedures reasonably
necessary to prevent its Access Persons from violating this
Code of Ethics.
11. SANCTIONS
Upon discovering a violation of this Code of Ethics, the Board of
Directors of such Fund or of the Investment Managers, as the case may be, may
impose such sanctions as it deems appropriate.
12. RECORDKEEPING REQUIREMENTS
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The management of the Funds and representatives or officers of the
Investment Managers and, with respect to the Open-End Funds, MS&Co., each shall
maintain, as appropriate, the following records for a period of five years, the
first two years in an easily accessible place, and shall make these records
available to the Securities and Exchange Commission or any representative of
such during an examination of the Funds or of the Investment Managers:
(a) a copy of this Code of Ethics or any other Code of Ethics
which was in effect at any time within the previous five
years;
(b) a record of any violation of this Code of Ethics during the
previous five years, and of any action taken as a result of
the violation;
(c) a copy of each report required by Section 8. of this Code of
Ethics, including any information provided in lieu of each
such report;
(d) a record of all persons, currently or within the past five
years, who are or were subject to this Code of Ethics and who
are or were required to make reports under Section 8. of this
Code of Ethics;
(e) a record of all persons, currently or within the past five
years, who are or were responsible for reviewing the reports
required under Section 8. of this Code of Ethics; and
(f) a record of any decision, and the reasons supporting the
decision, to approve the acquisition of securities described
in Sections 3. (e) and (f) of this Code of Ethics.
10
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EXHIBIT A
MORGAN STANLEY DEAN WITTER AFRICA INVESTMENT FUND, INC.
MORGAN STANLEY DEAN WITTER ASIA-PACIFIC FUND, INC.
MORGAN STANLEY DEAN WITTER EASTERN EUROPE FUND, INC.
MORGAN STANLEY DEAN WITTER EMERGING MARKETS FUND, INC.
MORGAN STANLEY DEAN WITTER EMERGING MARKETS DEBT FUND, INC.
MORGAN STANLEY DEAN WITTER GLOBAL OPPORTUNITY BOND FUND, INC.
MORGAN STANLEY DEAN WITTER HIGH YIELD FUND, INC.
MORGAN STANLEY DEAN WITTER INDIA INVESTMENT FUND, INC.
THE LATIN AMERICAN DISCOVERY FUND, INC.
THE MALAYSIA FUND, INC.
THE PAKISTAN INVESTMENT FUND, INC.
THE THAI FUND, INC.
THE TURKISH INVESTMENT FUND, INC.
(THE "CLOSED-END FUNDS")
AND
MORGAN STANLEY DEAN WITTER INSTITUTIONAL FUND, INC.
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
MORGAN STANLEY DEAN WITTER STRATEGIC ADVISER FUND, INC.
(THE "OPEN-END FUNDS", AND TOGETHER WITH THE CLOSED-END FUNDS, THE "FUNDS")
AND
MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT INC.
("MSDW INVESTMENT MANAGEMENT")
AND
MILLER ANDERSON & SHERRERD, LLP
("MAS", AND TOGETHER WITH MSDW INVESTMENT MANAGEMENT, THE "INVESTMENT MANAGERS")
AND
MORGAN STANLEY & CO., INCORPORATED
("MS&CO.")
CODE OF ETHICS
ANNUAL CERTIFICATION
I hereby certify that I have read and understand the Code of Ethics
(the "Code") which has been adopted by the Funds, the Investment Managers and
MS&Co. and recognize that it applies to me and agree to comply in all respects
with the policies and procedures described therein. Furthermore, I hereby
certify that I have complied with the requirements of the Code in effect, as
amended, for the year ended December 31, ____, and that all of my reportable
transactions in Covered Securities were executed and reflected accurately in a
Morgan Stanley Account (as defined in the Code) or that I have attached a report
that satisfies the annual holdings disclosure requirement as described in
Section 8. (a) of the Code.
Date:_________________________, _____ Name:______________________________
11
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Signature:___________________________
12
<PAGE>
EXHIBIT B
MORGAN STANLEY DEAN WITTER AFRICA INVESTMENT FUND, INC.
MORGAN STANLEY DEAN WITTER ASIA-PACIFIC FUND, INC.
MORGAN STANLEY DEAN WITTER EASTERN EUROPE FUND, INC.
MORGAN STANLEY DEAN WITTER EMERGING MARKETS FUND, INC.
MORGAN STANLEY DEAN WITTER EMERGING MARKETS DEBT FUND, INC.
MORGAN STANLEY DEAN WITTER GLOBAL OPPORTUNITY BOND FUND, INC.
MORGAN STANLEY DEAN WITTER HIGH YIELD FUND, INC.
MORGAN STANLEY DEAN WITTER INDIA INVESTMENT FUND, INC.
MORGAN STANLEY DEAN WITTER INSTITUTIONAL FUND, INC.
MORGAN STANLEY DEAN WITTER STRATEGIC ADVISER FUND, INC.
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC.
THE LATIN AMERICAN DISCOVERY FUND, INC.
THE MALAYSIA FUND, INC.
THE PAKISTAN INVESTMENT FUND, INC.
THE THAI FUND, INC.
THE TURKISH INVESTMENT FUND, INC.
(THE "FUNDS")
ANNUAL CERTIFICATION UNDER RULE 17j-1
OF THE INVESTMENT COMPANY ACT OF 1940
Pursuant to Rule 17j-1 under the Investment Company Act of 1940, as
amended (the "1940 Act") and pursuant to the Code of Ethics for the Funds,
Morgan Stanley Dean Witter Investment Management, Inc., Miller, Anderson
& Sherrerd, LLP and Morgan Stanley & Co., Incorporated (the "Code of Ethics"),
each of the Funds hereby certifies to such Fund's Board of Directors that such
Fund has adopted procedures reasonably necessary to prevent Access Persons (as
defined in the Code of Ethics) from violating the Code of Ethics.
Date:_________________ By:__________________________________
Name: Mary E. Mullin
Title: Secretary
<PAGE>
EXHIBIT C
MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT, INC.
("MSDW INVESTMENT MANAGEMENT")
ANNUAL CERTIFICATION UNDER RULE 17j-1
OF THE INVESTMENT COMPANY ACT OF 1940
Pursuant to Rule 17j-1 under the Investment Company Act of 1940, as
amended (the "1940 Act") and pursuant to the Code of Ethics for MSDW Investment
Management, the Funds (as defined in the Code of Ethics) and Morgan Stanley &
Co., Incorporated (the "Code of Ethics"), MSDW Investment Management hereby
certifies to the Board of Directors of the Funds that MSDW Investment Management
has adopted procedures reasonably necessary to prevent Access Persons (as
defined in the Code of Ethics) from violating the Code of Ethics.
Date:_________________ By:__________________________________
Name: Harold J. Schaaff, Jr.
Title: General Counsel
<PAGE>
EXHIBIT D
MILLER, ANDERSON & SHERRERD, LLP ("MAS")
ANNUAL CERTIFICATION UNDER RULE 17j-1
OF THE INVESTMENT COMPANY ACT OF 1940
Pursuant to Rule 17j-1 under the Investment Company Act of 1940, as
amended (the "1940 Act") and pursuant to the Code of Ethics for MAS, the Funds
(as defined in the Code of Ethics) and Morgan Stanley & Co., Incorporated (the
"Code of Ethics"), MAS hereby certifies to the Board of Directors of the Funds
that MAS has adopted procedures reasonably necessary to prevent Access Persons
(as defined in the Code of Ethics) from violating the Code of Ethics.
Date:_________________ By:__________________________________
Name: Paul A. Frick
Title: Compliance Officer
<PAGE>
EXHIBIT E
MORGAN STANLEY & CO. INCORPORATED
("MS&CO.")
ANNUAL CERTIFICATION UNDER RULE 17j-1
OF THE INVESTMENT COMPANY ACT OF 1940
Pursuant to Rule 17j-1 under the Investment Company Act of 1940, as
amended (the "1940 Act") and pursuant to the Code of Ethics for MS&Co., the
Open-End Funds (as defined in the Code of Ethics), Morgan Stanley Dean Witter
Investment Management Inc., and Miller, Anderson & Sherrerd, LLP (the "Code of
Ethics"), MS&Co. hereby certifies to the Board of Directors of the Open-End
Funds that MS&Co. has adopted procedures reasonably necessary to prevent Access
Persons (as defined in the Code of Ethics) from violating the Code of Ethics.
Date:_________________ By:__________________________________
Name: Harold J. Schaaff, Jr.
Title: Managing Director
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended
(the "1933 Act"), and the Investment Company Act of 1940, as amended, the
Registrant certifies that it meets all of the requirements for effectiveness of
this Amendment to its Registration Statement pursuant to Rule 485(b) under the
1933 Act and has duly caused this Amendment to its Registration Statement to be
signed on its behalf by the undersigned, duly authorized, in the City of New
York and State of New York on April 28, 2000.
MORGAN STANLEY DEAN WITTER STRATEGIC ADVISER FUND, INC.
By: /s/ Harold J. Schaaff, Jr.
----------------------------
Harold J. Schaaff, Jr.
President
Pursuant to the requirements of the 1933 Act, this Amendment to the
Registration Statement has been signed below by the following persons in the
capacities and on the date(s) indicated.
SIGNATURE TITLE(S) DATE
/s/ Harold J. Schaaff, Jr President April 28, 2000
- ---------------------------------
Harold J. Schaaff, Jr
*/s/ Barton M. Biggs Director (Chairman) April 28, 2000
- ---------------------------------
Barton M. Biggs
*/s/ John D. Barrett, II Director April 28, 2000
- ---------------------------------
John D. Barrett, II
*/s/ Gerard E. Jones Director April 28, 2000
- ---------------------------------
Gerard E. Jones
*/s/ Graham Jones Director April 28, 2000
- ---------------------------------
Graham Jones
*/s/ John Levin Director April 28, 2000
- ---------------------------------
John Levin
*/s/ Andrew McNally, IV Director April 28, 2000
- ---------------------------------
Andrew McNally, IV
*/s/ William Morton Director April 28, 2000
- ---------------------------------
William Morton
*/s/ Samuel T. Reeves Director April 28, 2000
- ---------------------------------
Samuel T. Reeves
*/s/ Fergus Reid Director April 28, 2000
- ---------------------------------
Fergus Reid
*/s/ Frederick O. Robertshaw Director April 28, 2000
- ---------------------------------
Frederick O. Robertshaw
/s/ Belinda A. Brady Treasurer April 28, 2000
- ---------------------------------
Belinda A. Brady
*By: /s/ Harold J. Schaaff, Jr.
- ---------------------------------
Harold J. Schaaff, Jr.
Attorney-In-Fact
