[Logo] undiscoveredmanagers (TM)
UNDISCOVERED MANAGERS FUNDS
Class C
P R O S P E C T U S
April 26, 1999
Class C shares of:
Undiscovered Managers Behavioral Growth Fund
Undiscovered Managers REIT Fund
Undiscovered Managers Small Cap Value Fund
Undiscovered Managers Core Equity Fund
Undiscovered Managers All Cap Value Fund
UM International Equity Fund
Undiscovered Managers Funds
Plaza of the Americas
700 North Pearl Street, Suite 1700
Dallas, Texas 75201
1-888-242-3514
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Class C Prospectus April 26, 1999
Undiscovered Managers Funds
Undiscovered Managers Funds (the "Trust") is a registered open-end management
investment company with eleven separately managed portfolios. Six of the Trust's
portfolios (each such portfolio a "Fund," and collectively, the "Funds") offer
Class C shares. Undiscovered Managers, LLC ("Undiscovered Managers") is the
investment adviser of the Funds. Each Fund's portfolio is managed by a
sub-adviser selected by Undiscovered Managers for its experience managing a
portfolio of this kind:
o Undiscovered Managers Behavioral Growth Fund (the "Behavioral Growth Fund") is
managed by Fuller & Thaler Asset Management, Inc.
o Undiscovered Managers REIT Fund (the "REIT Fund") is managed by Bay Isle
Financial Corporation.
o Undiscovered Managers Small Cap Value Fund (the "Small Cap Value Fund") is
managed by J.L. Kaplan Associates, LLC.
o Undiscovered Managers Core Equity Fund (the "Core Equity Fund") is managed
by Waite & Associates, L.L.C.
o Undiscovered Managers All Cap Value Fund (the "All Cap Value Fund")
is managed by E.R. Taylor Investments, Inc.
o UM International Equity Fund (the "International Equity Fund") is managed
by Unibank Securities, Inc.
Each Fund's investment objective is long-term growth of capital, except for the
Behavioral Growth Fund, which has the investment objective of growth of capital,
the REIT Fund, which has the investment objective of high total investment
return, and the International Equity Fund, which has the investment objective of
capital appreciation. In seeking to achieve its objective, each Fund invests
primarily in equity securities of U.S. companies, except for the International
Equity Fund, which invests primarily in equity securities of companies that are
principally traded on any of the stock markets of Europe, Asia, Australia or New
Zealand. There can be no assurance that the Funds will achieve their investment
objectives.
Each Fund currently offers three classes of shares -- Institutional Class
shares, Investor Class shares and Class C shares, except for the International
Equity Fund, which only offers two classes of shares -- Institutional Class
shares and Class C shares. This Prospectus concisely describes the information
that an investor should know before investing in Class C shares of each Fund.
Please read it carefully and keep it for future reference. Institutional Class
shares of the Funds and Investor Class shares of those Funds that offer such
shares are described in separate prospectuses. To obtain more information about
Institutional Class shares or Investor Class shares, please call toll free
1-888-242-3514.
A Statement of Additional Information (the "SAI") dated April 26, 1999, is
available upon request and free of charge. Write to Undiscovered Managers, LLC,
Plaza of the Americas, 700 North Pearl Street, Suite 1700, Dallas, Texas 75201,
or call toll free 1-888-242-3514. The SAI, which contains more detailed
information about the Funds and other series of the Trust, has been filed with
the Securities and Exchange Commission (the "SEC") and is incorporated by
reference into this Prospectus. The SEC maintains a Website (http://www.sec.gov)
that contains the SAI, material incorporated by reference into this Prospectus
and the SAI, and other information regarding registrants that file
electronically with the SEC.
For more information about establishing an account, or any other information
about the Funds and other series of the Trust, call toll free 1-888-242-3514.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
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Table of Contents
Page
Summary of Expenses 4
The Funds 6
Behavioral Growth Fund 6
REIT Fund 7
Small Cap Value Fund 8
Core Equity Fund 9
All Cap Value Fund 10
International Equity Fund 11
All Funds 12
More Information About the Funds'
Investments and Risk Considerations 13
Management of the Funds 16
Portfolio Transactions 18
How to Purchase Shares 19
General Shareholder Services 21
How to Redeem Shares 22
Calculation of Performance
Information 23
Dividends, Capital Gain Distributions and
Taxes 23
Organization and Capitalization
of the Trust 24
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Summary of Expenses
The following information is provided to assist an investor in understanding the
various expenses that an investor in Class C shares of a Fund will bear directly
or indirectly. The information about each Fund's Class C shares shown below is
based on annualized projected expenses of the Class C shares for the fiscal year
that ends on August 31, 1999. The information below should not be considered a
representation of past or future expenses, as actual expenses may be greater or
less than those shown. The examples show the cumulative expenses attributable to
a hypothetical $1,000 investment in the Class C shares of each Fund over
specified periods, assuming the 5% annual return required under federal
regulations.
Behavioral REIT Small Cap
Growth Fund Fund Value Fund
Class C Class C Class C
Shareholder Transaction Expenses:
Maximum Sales Load 2.00% 2.00% 2.00%
Maximum Sales Load Imposed on Purchases
(as a % of offering price) (1) 1.00% 1.00% 1.00%
Maximum Sales Load Imposed on Reinvested
Dividends (as % of offering price) none none none
Maximum Deferred Sales Load (as % of net
amount invested or redemption proceeds,
as applicable) (2) 1.00% 1.00% 1.00%
Redemption Fees (3) none none none
Exchange Fees none none none
Annual Operating Expenses
(as a percentage of average net assets):
Management Fees 0.95% 1.05% 1.05%
12b-1 Fees(4) 1.00% 1.00% 1.00%
Other Operating Expenses
(after expense reimbursements) 0.35% 0.35% 0.35%
Total Operating Expenses
(after expense reimbursements) 2.30% 2.40% 2.40%
Example (5):
An investor would pay the following expenses on a $1,000 investment assuming (i)
a 5% annual return and (ii) redemption at period end, or no such redemption:
Behavioral Growth Fund REIT Fund Small Cap Value Fund
Redemption No Redemption Redemption No Redemption Redemption No Redemption
One Year $43 $33 $44 $34 $44 $34
Three Years $81 $81 $84 $84 $84 $84
(1) The sales charge may be waived in certain instances. See "How to Purchase
Shares -- Sales Charge."
(2) A Contingent Deferred Sales Charge of 1.00% may apply to any Class C share
purchase if an investor sells the shares within 18 months. The charge is based
on the value of the shares sold or the net asset value at the time of purchase,
whichever is less. The Contingent Deferred Sales Charge does not apply to
reinvested distributions. See "How to Purchase Shares -- Contingent Deferred
Sales Charge."
(3) Redemptions by wire transfer are subject to a wire fee (currently $5) that
is deducted from the redemption proceeds.
(4) Because of the ongoing nature of the 12b-1 fees and the existence of certain
sales charges, long-term shareholders of Class C shares may pay more than the
economic equivalent of the maximum front-end sales charges permitted by rules of
the National Association of Securities Dealers, Inc.
(5) Under SEC rules, recently-organized funds, such as the Funds, are required
to show expenses in an example for one- and three-year periods only.
Other Operating Expenses are based on estimated amounts for the 1999 fiscal year
after giving effect to voluntary expense limitations. Undiscovered Managers, the
Funds' investment adviser, has voluntarily agreed, for an indefinite period, to
limit the Class C Total Operating Expenses of each of the Behavioral Growth,
REIT and Small Cap Value Funds to the percentages of net assets shown above,
subject to later reimbursement by such Funds in certain circumstances. Without
this agreement, estimated Other Operating Expenses and Total Operating Expenses
for Class C shares would be 2.76% and 4.71%, respectively, for the Behavioral
Growth Fund; 2.32% and 4.37%, respectively, for the REIT Fund; and 2.41% and
4.46%, respectively, for the Small Cap Value Fund. See "Management of the Funds
- -- Advisory and Sub-Advisory Fees." (continued)
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Core Equity All Cap Value International Equity
Fund Fund Fund
Class C Class C Class C
Shareholder Transaction Expenses:
Maximum Sales Load 2.00% 2.00% 2.00%
Maximum Sales Load Imposed on
Purchases (as a % of
offering price)(1) 1.00% 1.00% 1.00%
Maximum Sales Load Imposed
on Reinvested Dividends
(as % of offering price) none none none
Maximum Deferred Sales Load
(as % of net amount invested
or redemption proceeds,
as applicable) (2) 1.00% 1.00% 1.00%
Redemption Fees (as a %
of amount redeemed)(3) none none 1.00%(4)
Exchange Fees
(as a % of amount exchanged) none none 1.00%(4)
Annual Operating Expenses
(as a percentage of average net assets):
Management Fees 0.74% 0.74% 0.95%
12b-1 Fees(5) 1.00% 1.00% 1.00%
Other Operating Expenses
(after expense reimbursements) 0.25% 0.25% 0.50%
Total Operating Expenses
(after expense reimbursements) 1.99% 1.99% 2.45%
Example (6):
An investor would pay the following expenses on a $1,000 investment assuming (i)
a 5% annual return and (ii) redemption at period end, or no such redemption:
Core Equity Fund All Cap Value Fund International Equity Fund
Redemption No Redemption Redemption No Redemption Redemption No Redemption
One Year $40 $30 $40 $30 $55 $35
Three Year $72 $72 $72 $72 $86 $86
(1) The sales charge may be waived in certain instances. See "How to Purchase
Shares -- Sales Charge."
(2) A Contingent Deferred Sales Charge of 1.00% may apply to any Class C share
purchase if an investor sells the shares within 18 months. The charge is based
on the value of the shares sold or the net asset value at the time of purchase,
whichever is less. The Contingent Deferred Sales Charge does not apply to
reinvested distributions. See "How to Purchase Shares -- Contingent Deferred
Sales Charge."
(3) Redemptions by wire transfer are subject to a wire fee (currently $5) that
is deducted from the redemption proceeds.
(4) A contingent redemption fee in the amount of 1.00% is imposed on redemptions
and exchanges of Fund shares held for one year or less from the time of
purchase. The contingent redemption fee does not apply to reinvested dividends.
See "How to Redeem Shares -- Contingent Redemption Fee."
(5) Because of the ongoing nature of the 12b-1 fees and the existence of certain
sales charges, long-term shareholders of Class C shares may pay more than the
economic equivalent of the maximum front-end sales charges permitted by rules of
the National Association of Securities Dealers, Inc.
(6) Under SEC rules, recently-organized funds, such as the Funds, are required
to show expenses in an example for one- and three-year periods only.
Other Operating Expenses are based on estimated amounts for the 1999 fiscal year
after giving effect to voluntary expense limitations. Undiscovered Managers, the
Funds' investment adviser, has voluntarily agreed, for an indefinite period, to
limit the Class C Total Operating Expenses of each of the Core Equity, All Cap
Value and International Equity Funds to the percentages of net assets shown
above, subject to later reimbursement by such Funds in certain circumstances.
Without this agreement, estimated Other Operating Expenses and Total Operating
Expenses for Class C shares would be 8.87% and 10.61%, respectively, for the
Core Equity Fund; 31.28% and 33.02%, respectively, for the All Cap Value Fund
and 2.61% and 4.56%, respectively, for the International Equity Fund. See
"Management of the Funds -- Advisory and Sub-Advisory Fees."
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The Funds
The following sections present information about the investment objective,
policies and strategies, sub-adviser and portfolio manager(s) for each Fund.
Behavioral Growth Fund
The Behavioral Growth Fund's investment objective is growth of capital.
The Fund seeks to achieve its objective by investing primarily in common stocks
of U.S. companies that the Fund's sub-adviser believes have growth
characteristics. In selecting stocks for the Fund, the sub-adviser applies
principles based on behavioral studies. The sub-adviser believes that behavioral
biases on the part of investors may cause the market to under-react to new,
positive information concerning a company. The sub-adviser analyzes companies
that have recently announced higher than expected earnings, and seeks to
determine whether the market value of the company's stock fully reflects the
sub-adviser's expectations as to the company's future earnings and growth
prospects. The sub-adviser expects that the median market capitalization of
stocks held by the Fund will ordinarily be approximately $1 billion, and that
the average market capitalization will be between $1.5 and $2 billion, but the
median and average capitalizations could be significantly higher or lower. The
Fund will ordinarily remain substantially fully invested in common stocks.
Fuller & Thaler Asset Management, Inc. ("Fuller & Thaler"), formerly known as
RJF Asset Management, Inc., is the sub-adviser to the Fund. Fuller & Thaler, 411
Borel Avenue, Suite 402, San Mateo, California, was founded in 1993, and
currently serves as an investment adviser to pension and profit sharing plans,
academic institutions and other institutional investors.
Russell J. Fuller and Frederick W. Stanske have day-to-day responsibility for
the management of the Fund's portfolio. Mr. Fuller founded Fuller & Thaler and
has served as its President since 1993. He was a Vice President of Strategic
Development at Concord Capital Management from 1990 to 1993, and a Professor of
Finance and Chair of the Department of Finance at Washington State University
from 1984 to 1990. Mr. Stanske joined Fuller & Thaler in 1996 as Vice President
and Portfolio Manager and became Senior Vice President and Portfolio Manager in
1997. Prior to joining Fuller & Thaler, Mr. Stanske was employed as a Securities
Analyst at Farmers Insurance Group from 1987 to 1989 and as a Vice President and
Research Analyst at Fisher Investments from 1989 to 1996.
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REIT Fund
The REIT Fund's investment objective is high total investment return through a
combination of capital appreciation and current income.
The Fund seeks to achieve its objective by investing substantially all of its
assets, and in any event in normal market conditions at least 65% of its assets,
in equity securities of real estate investment trusts ("REITs"), including REITs
with relatively small market capitalization. In selecting investments for the
Fund, the Fund's sub-adviser seeks to identify REITs that have good management,
strong balance sheets, above average growth in funds from operations and that
trade at a discount to their underlying value.
Bay Isle Financial Corporation ("Bay Isle") is the Fund's sub-adviser. Bay Isle,
160 Sansome Street, San Francisco, California, was founded in 1986, and serves
as an investment adviser to pension and profit sharing plans, trusts, charitable
organizations, and other institutional and individual investors.
William F.K. Schaff has day-to-day responsibility for the management of the
Fund's portfolio. He receives significant analytical assistance from Bay Isle's
chief REIT analyst, Ralph L. Block. Mr. Schaff has served as a portfolio manager
and Chief Investment Officer of Bay Isle since 1989. Mr. Block has nearly 30
years' experience investing in REITs and is the author of a recent book on REIT
investing, The Essential REIT. Mr. Block has served as a REIT analyst for Bay
Isle since 1993. Mr. Block was also a Partner of the law firm of Graven Perry
Block Brody & Qualls from 1969 to 1995.
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Small Cap Value Fund
The Small Cap Value Fund's investment objective is long-term growth of capital.
The Fund seeks to achieve its objective by investing primarily in common stocks
of companies with a market float of $1.2 billion or less that the Fund's
sub-adviser considers to be undervalued at the time of purchase and to have the
potential for long-term capital appreciation. (Market float is the total value
of all the outstanding shares of a company that are registered for public
trading and does not include shares held by company founders or other insiders
that are not freely resalable.) In selecting stocks for the Fund, the Fund's
sub-adviser will consider, among other things, the issuer's earning power and
the relative value of the issuer's assets. Under normal market conditions, the
Fund will invest at least 65% of its total assets in common stocks of companies
with a market float of $1.2 billion or less.
J.L. Kaplan Associates, LLC ("Kaplan Associates") is the sub-adviser to the
Fund. Kaplan Associates, 222 Berkeley Street, Suite 2010, Boston, Massachusetts,
is the successor firm to J.L. Kaplan Associates, an investment advisory firm
founded in 1976. Kaplan Associates serves as an investment adviser to pension
and profit sharing plans, trusts, charitable organizations and other
institutional and private investors.
James L. Kaplan and Paul Weisman have day-to-day responsibility for managing the
Fund's portfolio. Mr. Kaplan has been the principal of Kaplan Associates and its
predecessor since founding the firm in 1976. From 1972 to 1984, he was Associate
Professor of Mathematics at Boston University. Mr. Weisman has been a portfolio
manager at the firm since 1986. From 1984 to 1986, Mr. Weisman was an investment
analyst at Delphi Management, Inc.
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Core Equity Fund
The Core Equity Fund's investment objective is long-term growth of capital.
The Fund seeks to achieve its objective by investing substantially all of its
assets in common stocks of well-established, high-quality U.S. companies.
Although the common stocks in which the Fund invests will typically have larger
market capitalizations, the Fund may invest in stocks with capitalizations as
low as $1 billion. In selecting investments for the Fund, the Fund's sub-adviser
will consider, among other things, its expectations as to the relative
performance of various sectors of the economy and the relative growth prospects
of different companies within such sectors. Under normal market conditions, the
Fund will ordinarily be substantially fully invested in common stocks of U.S.
companies.
Waite & Associates, L.L.C. is the Fund's sub-adviser. Waite & Associates,
L.L.C., 601 South Figueroa Street, Los Angeles, California, is the successor
firm to Waite & Associates, the successor firm to Waite & Correnti, an
investment advisory firm founded in 1978. Leslie A. Waite and Diana L. Calhoun
have day-to-day responsibility for the management of the Fund's portfolio. Mr.
Waite founded Waite & Correnti in 1978 and has served since then as President
and Chief Investment Officer of the firm. Ms. Calhoun joined the firm in 1981
and holds the positions of Managing Director and Senior Portfolio Manager. Ms.
Calhoun held the position of Senior Vice President of Trading from 1981 until
becoming a Managing Director in 1997, and has been a Senior Portfolio Manager
since 1992.
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All Cap Value Fund
The All Cap Value Fund's investment objective is long-term growth of capital.
The Fund seeks to achieve its objective by investing in common stocks of
companies of any market capitalization (small-, mid- or large-cap) that its
sub-adviser believes are undervalued and therefore offer above-average potential
for capital growth. In selecting these stocks, the sub-adviser will consider,
among other things, the issuer's cash flow, price-to-book ratio, return on
capital, balance sheets, and management. The Fund will ordinarily remain
substantially fully invested in common stocks.
E.R. Taylor Investments, Inc. ("E.R. Taylor") is the sub-adviser to the Fund.
E.R. Taylor, 46 South Main Street, Suite 4, Concord, New Hampshire, was founded
in 1983, and serves as an investment adviser to endowment funds, charitable
organizations and other institutional and individual investors. E.R. Taylor's
philosophy is to invest in undervalued, quality companies where management uses
cash flow to build shareholder value.
Investment decisions for the Fund are made by E.R. Taylor's Investment
Committee, which consists of six investment professionals. Sherwood T. Small,
President of E.R. Taylor, is the Chairman of the Investment Committee. Mr. Small
has served as President of E.R. Taylor since 1992.
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International Equity Fund
The International Equity Fund's investment objective is capital appreciation.
The Fund seeks to achieve its objective by investing in common stocks or other
equity securities of issuers of any market capitalization (small-, mid- or
large-cap) that are principally traded on any of the stock markets of Europe,
Asia, Australia or New Zealand. Although permitted to invest in equity
securities that are principally traded on any of the foregoing stock markets,
the Fund will not, under normal market conditions, invest more than 15% of its
total assets in issuers whose equity securities are not principally traded in
countries included in the Morgan Stanley Capital International Europe,
Australasia, Far East ("MSCI EAFE") Index. In selecting investment securities
for the Fund, the sub-adviser focuses on economies, industries or companies that
are undergoing significant structural or other changes. Under normal market
conditions, the Fund will ordinarily be substantially fully invested in equity
securities, and its portfolio will contain equity securities of issuers from at
least three countries outside the United States. In addition, under normal
market conditions, the Fund will invest at least 65% of its total assets in
equity securities of issuers headquartered outside of the United States or that
derive a substantial part of their revenues or profits from countries outside
the United States.
Unibank Securities, Inc. ("Unibank"), 13-15 West 54th Street, New York, New
York, was founded in 1994, and is the sub-adviser to the Fund. Unibank or its
affiliate, Unibank A/S, currently serves as an investment adviser to pension and
profit sharing plans, trusts and other institutional and private investors.
Investment decisions for the Fund are made by an investment team.
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All Funds
THE FUNDS' INVESTMENTS
In addition to the investments described above, each Fund may lend its portfolio
securities and enter into repurchase agreements. See "More Information About the
Funds' Investments and Risk Considerations" below.
INVESTMENT OBJECTIVES AND POLICIES
Except as explicitly described otherwise, the investment objective and policies
of each of the Funds are not "fundamental" and may be changed without
shareholder approval.
DIVERSIFICATION
Each Fund is a "diversified" fund, as defined in the Investment Company Act of
1940 (the "1940 Act"), except for the REIT Fund, which is "non-diversified."
With respect to 75% of its assets, a diversified fund may not invest more than
5% of its total assets in the securities of any one issuer (except U.S.
government securities) while the remaining 25% of its total assets is not
subject to such restriction. A non-diversified fund is restricted with respect
to 50% of its total assets from investing more than 5% of its total assets in
the securities of any one issuer (except U.S. government securities), and with
respect to the remaining 50% of its total assets from investing more than 25% of
its total assets in the securities of any one issuer. A non-diversified fund may
invest a greater percentage of its total assets in securities of individual
issuers, or may invest in a smaller number of different issuers, than a
diversified fund. Accordingly, a non-diversified fund is more susceptible to
risks associated with particular issuers than a diversified fund.
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More Information About the Funds' Investments and Risk Considerations
It is important to understand the following risks inherent in a Fund before you
invest.
COMMON STOCKS AND OTHER EQUITY SECURITIES
Common stocks and similar equity securities are securities that represent an
ownership interest (or the right to acquire such an interest) in a company and
include securities exercisable for or convertible into common stocks (e.g.,
warrants). While offering greater potential for long-term growth, common stocks
and similar equity securities are more volatile and more risky than some other
forms of investment. Therefore, the value of your investment in a Fund may
sometimes decrease instead of increase. Each Fund may invest in equity
securities of companies with relatively small market capitalization. Securities
of such companies may be more volatile than the securities of larger, more
established companies and the broad equity market indices. See "Small Companies"
below. Each Fund's investments may include securities traded "over-the-counter"
as well as those traded on a securities exchange. Some over-the-counter
securities may be more difficult to sell under some market conditions.
Convertible securities include other securities, such as warrants, that provide
an opportunity for equity participation. Because convertible securities can be
converted into equity securities, their values will normally increase or
decrease as the values of the underlying equity securities increase or decrease.
The movements in the prices of convertible securities, however, may be smaller
than the movements in the value of the underlying equity securities.
SMALL COMPANIES
All of the Funds may invest in companies with relatively small market
capitalization, and the Small Cap Value Fund will invest primarily in such
companies. See "The Funds -- Small Cap Value Fund" above.
Investments in companies with relatively small capitalizations may involve
greater risk than is usually associated with stocks of larger companies. These
companies often have sales and earnings growth rates which exceed those of
companies with larger capitalizations. Such growth rates may in turn be
reflected in more rapid share price appreciation. However, companies with
smaller capitalizations often have limited product lines, markets or financial
resources and may be dependent upon a relatively small management group. The
securities may have limited marketability and may be subject to more abrupt or
erratic movements in price than securities of companies with larger
capitalizations or market averages in general. The net asset value per share of
Funds that invest in companies with smaller capitalizations therefore may
fluctuate more widely than market averages.
REPURCHASE AGREEMENTS
All of the Funds will normally invest at least 65% of their total assets in
common stocks or other equity securities. Any assets not invested in common
stocks or other equity securities will generally be held in the form of cash or
in repurchase agreements.
Under a repurchase agreement, a Fund buys securities from a seller, usually a
bank or brokerage firm, with the understanding that the seller will repurchase
the securities at a higher price at a later date. If the seller fails to
repurchase the securities, the Fund has rights to sell the securities to third
parties. Repurchase agreements can be regarded as loans by the Fund to the
seller, collateralized by the securities that are the subject of the agreement.
Repurchase agreements afford an opportunity for the Fund to earn a return on
available cash at relatively low credit risk, although the Fund may be subject
to various delays and risks of loss if the seller fails to meet its obligation
to repurchase.
The staff of the SEC is currently of the view that repurchase agreements
maturing in more than seven days are illiquid securities.
LOANS OF SECURITIES
The Funds may lend their portfolio securities, provided that cash or equivalent
collateral equal to at least 100% of the market value of the securities loaned
is continuously maintained by the borrower with the Funds. During the time
securities are on loan, the borrower will pay the Fund an amount equivalent to
any dividends or interest paid on such securities, and the Fund may invest the
cash collateral and earn additional income, or it may receive an agreed upon
amount of interest income from the borrower who has delivered equivalent
collateral. These loans are subject to termination at the option of the Fund or
the borrower. A Fund may pay reasonable administrative and custodial fees in
connection with a loan and may pay a negotiated portion of the interest earned
on the cash or
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equivalent collateral to the borrower or placing broker. It is not currently
anticipated that any Fund will have on loan at any given time securities
totaling more than one-third of its net assets. A Fund runs the risk that the
counterparty to a loan transaction will default on its obligation and that the
value of the collateral received may be insufficient to cover the securities
loaned as a result of an increase in the value of the securities or decline in
the value of the collateral.
REAL ESTATE INVESTMENT TRUSTS
The REIT Fund will invest primarily in shares of REITs. REITs pool investors'
funds for investment primarily in income producing real estate or real estate
related loans or interests. Under the Internal Revenue Code of 1986, as amended
(the "Code"), a REIT is not taxed on income it distributes to its shareholders
if it complies with several requirements relating to its organization,
ownership, assets, and income and a requirement that it generally distribute to
its shareholders at least 95% of its taxable income (other than net capital
gains) for each taxable year. REITs can generally be classified as Equity REITs,
Mortgage REITs and Hybrid REITs. Equity REITs, which invest the majority of
their assets directly in real property, derive their income primarily from
rents. Equity REITs can also realize capital gains by selling properties that
have appreciated in value. Mortgage REITs, which invest the majority of their
assets in real estate mortgages, derive their income primarily from interest
payments. Hybrid REITs combine the characteristics of both Equity REITs and
Mortgage REITs.
While the Fund will not invest in real estate directly, the Fund may be subject
to risks similar to those associated with the direct ownership of real estate
(in addition to securities markets' risks) because of its policy of
concentration in the securities of companies in the real estate industry. These
risks include declines in the value of real estate, risks related to general and
local economic conditions, dependency on management skill, heavy cash flow
dependency, possible lack of availability of mortgage funds, overbuilding,
extended vacancies of properties, increased competition, increases in property
taxes and operating expenses, changes in zoning laws, losses due to costs
resulting from the clean-up of environmental problems, liability to third
parties for damages resulting from environmental problems, casualty or
condemnation losses, limitations on rents, changes in neighborhood values and in
the appeal of properties to tenants and changes in interest rates.
In addition to these risks, Equity REITs may be affected by changes in the value
of the underlying property owned by the trusts, while Mortgage REITs may be
affected by the quality of any credit they extend. Further, Equity REITs and
Mortgage REITs are dependent upon management skills and generally may not be
diversified. Equity REITs and Mortgage REITs are also subject to heavy cash flow
dependency, defaults by borrowers and self-liquidation. In addition, Equity
REITs and Mortgage REITs could possibly fail to qualify for tax-free
pass-through of income under the Code or to maintain their exemptions from
registration under the 1940 Act. There is also the risk that borrowers under
mortgages held by a REIT or lessees of property that a REIT owns may be unable
to meet their obligations to the REIT. In the event of a default by a borrower
or lessee, the REIT may experience delays in enforcing its rights as a mortgagee
or lessor and may incur substantial costs associated with protecting its
investments. In addition to the foregoing risks, certain "special purpose" REITs
in which the Fund may invest may have their assets in specific real estate
sectors, such as hotel REITs, nursing home REITs or warehouse REITs, and are
therefore subject to the risks associated with adverse developments in any such
sectors.
FOREIGN SECURITIES
The International Equity Fund will invest primarily in foreign securities.
Investments in foreign securities present risks not typically associated with
investments in comparable securities of U.S. issuers.
Since most foreign securities are denominated in foreign currencies or traded
primarily in securities markets in which settlements are made in foreign
currencies, the value of these investments and the net investment income
available for distribution to shareholders of the International Equity Fund may
be affected favorably or unfavorably by changes in currency exchange rates or
exchange control regulations. Because the International Equity Fund may purchase
securities denominated in foreign currencies, a change in the value of any such
currency against the U.S. dollar will result in a change in the U.S. dollar
value of the Fund's assets and the Fund's income available for distribution.
In addition, although the International Equity Fund's income may be received or
realized in foreign currencies, the Fund will be required to compute and
distribute its income in U.S. dollars. Therefore, if the value of a currency
relative to the U.S. dollar declines after the Fund's income has been earned in
that currency, translated into U.S. dollars and declared as a dividend, but
before payment of such dividend, the Fund could be required to liquidate
portfolio securities to pay such dividend. Similarly, if the value of a currency
relative to the U.S. dollar declines between
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the time the Fund incurs expenses in U.S. dollars and the time such expenses are
paid, the amount of such currency required to be converted into U.S. dollars in
order to pay such expenses in U.S. dollars will be greater than the equivalent
amount in such currency of such expenses at the time they were incurred.
There may be less information publicly available about a foreign corporate or
government issuer than about a U.S. issuer, and foreign corporate issuers are
not generally subject to accounting, auditing and financial reporting standards
and practices comparable to those in the United States. The securities of some
foreign issuers are less liquid and at times more volatile than securities of
comparable U.S. issuers. Foreign brokerage commissions and securities custody
costs are often higher than those in the United States, and judgments against
foreign entities may be more difficult to obtain and enforce. With respect to
certain foreign countries, there is a possibility of governmental expropriation
of assets, confiscatory taxation, political or financial instability and
diplomatic developments that could affect the value of investments in those
countries. The receipt of interest on foreign government securities may depend
on the availability of tax or other revenues to satisfy the issuer's
obligations.
The International Equity Fund's investments in foreign securities may include
investments in emerging or developing countries, whose economies or securities
markets are not yet highly developed. Special risks associated with these
investments (in addition to the risks associated with foreign investments
generally) may include, among others, greater political uncertainties, an
economy's dependence on revenues from particular commodities or on international
aid or development assistance, currency transfer restrictions, highly limited
numbers of potential buyers for such securities and delays and disruptions in
securities settlement procedures.
The International Equity Fund may invest in foreign equity securities either by
purchasing such securities directly or by purchasing "depository receipts."
Depository receipts are instruments issued by a bank that represent an interest
in equity securities held by arrangement with the bank. Depository receipts can
be either "sponsored" or "unsponsored." Sponsored depository receipts are issued
by banks in cooperation with the issuer of the underlying equity securities.
Unsponsored depository receipts are arranged without involvement by the issuer
of the underlying equity securities. Less information about the issuer of the
underlying equity securities may be available in the case of unsponsored
depository receipts.
In determining whether to invest in securities of foreign issuers, the
sub-adviser of the International Equity Fund will consider the likely effects of
foreign taxes on the net yield available to the Fund and to its shareholders.
Compliance with foreign tax law may reduce the Fund's net income available for
distribution to its shareholders.
FOREIGN CURRENCY
Most foreign securities in the International Equity Fund's portfolio will be
denominated in foreign currencies or traded in securities markets in which
settlements are made in foreign currencies. Similarly, any income on such
securities is generally paid to the Fund in foreign currencies. The value of
these foreign currencies relative to the U.S. dollar varies continually, causing
changes in the dollar value of the Fund's portfolio investments (even if the
local market price of the investments is unchanged) and changes in the dollar
value of the Fund's income available for distribution to its shareholders. The
effect of changes in the dollar value of a foreign currency on the dollar value
of the Fund's assets and on the net investment income available for distribution
may be favorable or unfavorable.
The International Equity Fund may incur costs in connection with conversions
between various currencies. In addition, the International Equity Fund may be
required to liquidate portfolio assets, or may incur increased currency
conversion costs, to compensate for a decline in the dollar value of a foreign
currency occurring between the time when the Fund declares and pays a dividend,
or between the time when the Fund accrues and pays an operating expense in U.S.
dollars.
CURRENCY HEDGING TRANSACTIONS
The International Equity Fund may, at the discretion of its sub-adviser, engage
in foreign currency exchange transactions, in connection with the purchase and
sale of portfolio securities, to protect the value of specific portfolio
positions or in anticipation of changes in relative values of currencies in
which current or future Fund portfolio holdings are denominated or quoted.
Currency hedging transactions may include forward contracts (contracts with
another party to buy or sell a currency at a specified price on a specified
date), futures contracts (which are similar to forward contracts but are traded
on an exchange) and options to buy or sell currencies and currency futures
contracts. For more information on foreign currency hedging transactions, see
the SAI. The International Equity Fund's sub-adviser expects to engage in
currency hedging transactions only under unusual circumstances. Therefore,
investors in the International Equity Fund will ordinarily be exposed to the
risks associated with fluctuations in the value of the U.S. dollar relative to
the currencies in which the Fund's portfolio securities trade.
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"YEAR 2000" MATTERS
Many of the services provided to the Funds depend on the smooth functioning of
computer systems. Many systems in use today cannot distinguish between the year
1900 and the year 2000. Should any of the service systems of a Fund fail to
process information properly, such failure could have an adverse impact on the
Fund's operations and services provided to shareholders. Undiscovered Managers,
the sub-advisers and the distributor, administrator, sub-administrator, transfer
agent, custodians and certain other service providers to each of the Funds have
reported that each expects to modify its systems, as necessary, prior to January
1, 2000 to address this so-called "Year 2000 problem." However, there can be no
assurance that the problem will be corrected in all respects and that the Funds'
operations and services provided to shareholders will not be adversely affected.
The Funds may also be adversely affected if the issuers in which they invest
(both foreign and domestic, as applicable), the markets in which such issuers'
securities are traded, or the governments of the countries where the issuers are
headquartered, where the issuers derive a substantial part of their revenue or
where the issuers' securities are traded, are unable to modify their systems, as
necessary, prior to January 1, 2000 to address this so-called "Year 2000
problem." If any such modification is necessary but not made, it is likely that
the securities of the issuers affected will decrease in value, which will have a
similar impact on the value of the Fund(s) invested in such securities.
Management of the Funds
Undiscovered Managers is the investment adviser of each Fund and has
responsibility for the management of the Funds' affairs, under the supervision
of the Trust's Board of Trustees. Each Fund's investment portfolio is managed on
a day-to-day basis by that Fund's sub-adviser, under the general oversight of
Undiscovered Managers and the Board of Trustees. Undiscovered Managers monitors
and evaluates each sub-adviser to assure that the sub-adviser is managing its
Fund consistently with the Fund's investment objective and restrictions and
applicable laws and guidelines. Undiscovered Managers does not, however,
determine what investments will be purchased or sold for a Fund.
Undiscovered Managers was organized in 1997 as a Delaware limited liability
company. The address of Undiscovered Managers is Plaza of the Americas, 700
North Pearl Street, Dallas, Texas 75201. Mark P. Hurley, the President of
Undiscovered Managers, and AMRESCO, Inc., a publicly traded corporation engaged
in residential mortgage banking, commercial mortgage banking, asset management
and commercial finance, each own more than 25% of the voting securities of
Undiscovered Managers and therefore are regarded to control Undiscovered
Managers for purposes of the 1940 Act. Each of the sub-advisers, except Unibank,
is regarded for purposes of the 1940 Act as being controlled by the following
persons, each of whom is a principal of the firm and owns more than 25% of the
voting securities of the firm: Russell J. Fuller (Fuller & Thaler); Gary G.
Pollock and William F.K. Schaff (Bay Isle); James L. Kaplan (Kaplan Associates);
Leslie A. Waite (Waite & Associates, L.L.C.); and Sherwood T. Small (E.R.
Taylor). Unibank is regarded for purposes of the 1940 Act as being controlled by
Unidanmark A/S, a publicly traded financial services holding company in Denmark.
Unibank began managing mutual funds in 1999.
The Bank of New York is the custodian for all of the Funds. First Data
Distributors, Inc. (the "Distributor") is the distributor for all the Funds.
ADVISORY AND SUB-ADVISORY FEES AND OTHER EXPENSES
Each Fund pays Undiscovered Managers a management fee at the following annual
percentage rates of the Fund's daily net assets, subject to the fee deferral
arrangements described below:
Fund Fee Rate
Behavioral Growth Fund 0.95%
REIT Fund 1.05%
Small Cap Value Fund 1.05%
Core Equity Fund 0.74%
All Cap Value Fund 0.74%
International Equity Fund 0.95%
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Undiscovered Managers pays each Fund's sub-adviser a sub-advisory fee at the
following annual percentage rates of the specified levels of the Fund's average
daily net assets:
Fund Sub-adviser Fee Rate as % of Fund's Net Assets
Behavioral Growth Fuller & Thaler 0.60% of the first $200 million
Fund 0.55% of the next $100 million
0.50% of assets in excess of
$300 million
REIT Fund Bay Isle 0.70% of the first $200 million
0.65% of the next $100 million
0.60% of assets in excess of
$300 million
Small Cap Kaplan Associates 0.70% of the first $200 million
Value Fund 0.65% of the next $100 million
0.60% of assets in excess of
$300 million
Core Equity Fund Waite & Associates, L.L.C.
0.40% of the first $200 million
0.35% of the next $100 million
0.30% of assets in excess
of $300 million
All Cap E.R. Taylor 0.40% of the first $200 million
Value Fund 0.35% of the next $100 million
0.30% of assets in excess of
$300 million
International Unibank 0.60% of the first $200 million
Equity Fund 0.55% of the next $100 million
0.50% of assets in excess of
$300 million
The Trust intends to apply for an exemptive order from the SEC to permit
Undiscovered Managers, subject to the approval of the Trust's Board of Trustees
and certain other conditions, to enter into sub-advisory agreements with
sub-advisers other than the current sub-adviser of any Fund or any other series
of the Trust without obtaining shareholder approval. The exemptive request will
also seek to permit, without obtaining shareholder approval, the terms of an
existing sub-advisory agreement to be changed or the employment of an existing
sub-adviser to be continued after events that would otherwise cause an automatic
termination of a sub-advisory agreement when such changes or continuation are
approved by the Trust's Board of Trustees. There is no assurance that the SEC
will issue the exemptive order. This Prospectus would be revised and
shareholders notified if the sub-adviser of any Fund is changed.
Pursuant to an Administrative Services Agreement, Undiscovered Managers has
agreed to provide each Fund all administrative services, including but not
limited to corporate secretarial, treasury, blue sky and fund accounting
services. For these services, each Fund pays Undiscovered Managers a monthly fee
at the annual rate of 0.25% of the Fund's average net asset value. Undiscovered
Managers has entered into an agreement with First Data Investor Services Group,
Inc. ("First Data") to provide certain of the foregoing administrative services,
at the expense of Undiscovered Managers. First Data has no responsibility with
respect to the oversight of any Fund's investment advisory services.
Under a Service and Distribution Plan adopted by the Trust pursuant to Rule
12b-1 under the 1940 Act (the "Class C Service and Distribution Plan"), the
Trust may pay to the Distributor or any successor principal underwriter of the
Trust or to one or more other persons or entities (which may but need not be
affiliated with the Trust or any of its investment advisers or other service
providers), pursuant to agreements executed on behalf of the Trust by one or
more officers of the Trust or by the Distributor or any successor principal
underwriter of the Trust, fees as compensation for any or all of the following:
(i) engaging in activities or bearing expenses primarily intended to result in
the sale of Class C shares of the Trust and (ii) providing additional personal
services to the Trust's Class C shareholders and/or for the maintenance of Class
C shareholder accounts. On an annual basis, the aggregate amount of fees under
the Class C Service and Distribution Plan with respect to each Fund will not
exceed 1.00% of the Fund's average daily net assets attributable to its Class C
shares.
OTHER FUND EXPENSES
In addition to the investment advisory fee, each Fund pays all expenses not
expressly assumed by Undiscovered Managers, including taxes, brokerage
commissions, fees under any 12b-1 plans with respect to the Fund, fees and
expenses of registering and qualifying the Fund's shares under federal and state
securities laws, fees of the Fund's custodian, transfer agent, independent
accountants and legal counsel, expenses of shareholders' and Trustees' meetings,
expenses of preparing, printing and mailing prospectuses to existing
shareholders and fees of Trustees
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who are not directors, officers or employees of Undiscovered Managers. In
general, fees and expenses of a Fund are allocated pro rata among such Fund's
shares, regardless of class. Fees under a 12b-1 plan with respect to a Fund, if
any, however, are allocated only to the class of shares of that Fund to which
the plan relates. Certain other expenses relating to a particular class (such as
class-specific shareholder services fees) may also be allocated solely to that
class.
Undiscovered Managers has voluntarily agreed, for an indefinite period, to
reduce its fees and pay the expenses of each Fund's Class C shares in excess of
the following annual percentage rates of the average daily net assets of each
Fund's Class C shares, subject to the obligation of the Fund to repay
Undiscovered Managers such expenses in future years, if any, when the expenses
of the Fund's Class C shares fall below the stated percentage rate, but only to
the extent that such repayment would not cause the expenses of the Fund's Class
C shares in any such future year to exceed the stated percentage rate, and
provided that the Funds are not obligated to repay any such expenses more than
two years after the end of the fiscal year in which they were incurred: 1.99%
for the All Cap Value Fund and the Core Equity Fund; 2.30% for the Behavioral
Growth Fund; 2.40% for the REIT Fund and the Small Cap Value Fund; and 2.45% for
the International Equity Fund. Undiscovered Managers may change or terminate
these voluntary arrangements at any time, but this Prospectus would be
supplemented to describe the change.
Portfolio Transactions
In addition to selecting portfolio investments for the Fund(s) it manages, each
sub-adviser selects brokers or dealers to execute securities purchases and sales
for the Fund's account. Each sub-adviser selects only brokers or dealers which
it believes are financially responsible, will provide efficient and effective
services in executing, clearing and settling an order and will charge commission
rates which, when combined with the quality of the foregoing services, will
produce best price and execution for the transaction. This does not necessarily
mean that the lowest available brokerage commission will be paid. However, the
commissions are believed to be competitive with generally prevailing rates. Each
sub-adviser uses its best efforts to obtain information as to the general level
of commission rates being charged by the brokerage community from time to time
and evaluates the overall reasonableness of brokerage commissions paid on
transactions by reference to such data. In making such evaluation, all factors
affecting liquidity and execution of the order, as well as the amount of the
capital commitment by the broker in connection with the order, are taken into
account.
A sub-adviser's receipt of research services from brokers may sometimes be a
factor in its selection of a broker that it believes will provide best price and
execution for a transaction. These research services include not only a wide
variety of reports on such matters as economic and political developments,
industries, companies, securities, portfolio strategy, account performance,
daily prices of securities, stock and bond market conditions and projections,
asset allocation and portfolio structure, but also meetings with management
representatives of issuers and with other analysts and specialists. Although it
is in many cases not possible to assign an exact dollar value to these services,
they may, to the extent used, tend to reduce the sub-adviser's expenses. Such
services may be used by a sub-adviser in managing other client accounts and in
some cases may not be used with respect to the Funds. Receipt of services or
products other than research from brokers is not a factor in the selection of
brokers. Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc., and subject to seeking best price and execution,
purchases of shares of a Fund by customers of broker-dealers may be considered
as a factor in the selection of broker-dealers to execute the Fund's securities
transactions.
A sub-adviser may cause a Fund to pay a broker-dealer that provides brokerage
and research services to the sub-adviser an amount of commission for effecting a
securities transaction for that Fund in excess of the amount another
broker-dealer would have charged for effecting that transaction. The sub-adviser
must determine in good faith that such greater commission is reasonable in
relation to the value of the brokerage and research services provided by the
executing broker-dealer viewed in terms of that particular transaction or the
sub-adviser's overall responsibilities to the Fund and its other clients. The
sub-adviser's authority to cause a Fund to pay greater commissions is also
subject to such policies as the Trustees of the Trust may adopt from time to
time.
Portfolio transactions for the International Equity Fund may be effected by Aros
Securities Inc., which is an affiliate of Unibank, the sub-adviser to that Fund.
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It is not possible to predict the Funds' portfolio turnover rates with
certainty. Each Fund's sub-adviser has indicated, however, that it does not
expect that the annual portfolio turnover rate of the Fund(s) it manages would
normally exceed the following rates: 50% for the All Cap Value, Core Equity,
REIT and International Equity Funds; 75% for the Small Cap Value Fund; and 200%
for the Behavioral Growth Fund. Any Fund's portfolio turnover rate in any year
could be significantly higher or lower than these estimates. Higher levels of
portfolio turnover may result in higher transactions costs and higher levels of
taxable realized capital gains (including short-term capital gains generally
taxed to individual shareholders at ordinary income tax rates). See "Dividends,
Capital Gain Distributions and Taxes" below.
How to Purchase Shares
An investor may make an initial purchase of Class C shares of any Fund by
submitting a completed application form and payment to:
Undiscovered Managers Funds
4400 Computer Drive
P.O. Box 5181
Westborough, MA 01581-5181
The minimum initial investment in any Fund is $250,000 in that Fund. A minimum
investment of $10,000 applies to the Trustees of the Trust, investment advisory
clients of the sub-advisers (and their directors, officers and employees), and
employees of Undiscovered Managers and the parents, spouses and children of the
foregoing. The minimum investment may be waived by Undiscovered Managers in its
sole discretion and will be waived for any new shareholder in Undiscovered
Managers Funds who initially invests less than $250,000 but signs a letter of
intent stating the shareholder's intention to bring his or her balance to
$250,000 within six months after the initial purchase. For investors who
purchase through a financial intermediary and hold their shares through an
omnibus account with that financial intermediary, the minimum initial investment
applies to the omnibus account and not to the investors individually.
Undiscovered Managers reserves the right to redeem the accounts at net asset
value of shareholders that have signed a letter of intent but fail to meet the
minimum investment within the specified time or to waive any minimum investment
in its sole discretion. Subsequent investments must be at least $50,000.
If the balance in a shareholder's account with a Fund is less than a minimum
amount set by the Trustees of the Trust from time to time (currently $250,000
for all accounts), that Fund may close the account and send the proceeds to the
shareholder. Shareholders who are affected by this policy will be notified of
the Fund's intention to close the account and will have 60 days immediately
following the notice to bring the account up to the minimum. The minimum does
not apply to automatic investment plans or accounts that have fallen below the
minimum solely because of fluctuations in a Fund's net asset value per share.
Shares of any Fund may be purchased by (i) cash, (ii) exchanging securities on
deposit with a custodian acceptable to Undiscovered Managers or (iii) any
combination of such securities and cash. Purchase of shares of the Fund in
exchange for securities is subject in each case to the determination by
Undiscovered Managers and the Fund's sub-adviser that the securities to be
exchanged are acceptable for purchase by the Fund. In all cases, Undiscovered
Managers reserves the right to reject any securities that are proposed for
exchange. Securities accepted by Undiscovered Managers in exchange for Fund
shares will be valued in the same manner as the Fund's assets as described below
as of the time of the Fund's next determination of net asset value after such
acceptance. All dividends and subscription or other rights which are reflected
in the market price of accepted securities at the time of valuation become the
property of the Fund and must be delivered to the Fund upon receipt by the
investor from the issuer. Generally, a gain or loss for federal income tax
purposes would be realized upon the exchange of securities by an investor that
is subject to federal income taxation, depending upon the investor's basis in
the securities tendered. An investor who wishes to purchase shares by exchanging
securities should obtain instructions by calling 1-800-667-1224.
Undiscovered Managers will not approve the acceptance of securities in exchange
for shares of any Fund unless (1) Undiscovered Managers and the applicable
sub-adviser in their discretion believe the securities are appropriate
investments for the Fund; (2) the investor represents and agrees that all
securities offered to the Fund can be resold by the Fund without restriction
under the Securities Act of 1933, as amended, or otherwise; and (3) the secu-
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urities are eligible to be acquired under the Fund's investment policies and
restrictions. No investor owning 5% or more of a Fund's shares may purchase
additional shares of that Fund by an exchange of securities.
All purchases made by check should be in U.S. dollars and made payable to
Undiscovered Managers Funds. Third party checks will not be accepted. When
purchases are made by check, redemption proceeds will not be sent until the
check paying for the investment has cleared, which may take up to 15 calendar
days.
Upon acceptance of an investor's order, First Data opens an account, applies the
payment, less any sales charge, to the purchase of full and fractional Fund
shares and mails a statement of the account confirming the transaction. See
"Sales Charge" below.
After an account has been established, an investor may send subsequent
investments at any time directly to First Data at the above address. The
remittance must be accompanied by either the account identification slip
detached from a statement of account or a note containing sufficient information
to identify the account, i.e., the Fund name and the investor's account number
or name and social security number.
Initial and subsequent investments can also be made by federal funds wire.
Investors should instruct their banks to wire federal funds to Boston Safe
Deposit & Trust Company, ABA #011001234. The text of the wire should read as
follows:
Boston Safe Deposit & Trust Company
ABA #011001234
Account #145483
FBO: Shareholder Name and Account Number
FOR: Undiscovered Managers Funds
A bank may charge a fee for transmitting funds by wire.
Each Fund and the Distributor reserve the right to reject any purchase order,
including orders in connection with exchanges, for any reason which the Fund or
the Distributor in its sole discretion deems appropriate. Although the Funds do
not presently anticipate that they will do so, each Fund reserves the right to
suspend or change the terms of the offering of its shares.
Except for the broker-dealer transaction-based or other fees described in the
next paragraph, the price an investor pays for Class C shares will be the per
share net asset value next calculated after a proper investment order is
received by the Trust's transfer or other agent or sub-agent, plus any
applicable sales charge. The net asset value of each Fund's shares is calculated
once daily as of the close of regular trading on the New York Stock Exchange on
each day the Exchange is open for trading, by dividing the Fund's net assets by
the number of shares outstanding. Portfolio securities are valued at their
market value as more fully described in the SAI.
The Distributor may accept telephone orders from broker-dealers, and other
intermediaries designated by such broker-dealers, who have been previously
approved by the Distributor. A Fund will be deemed to have received a purchase
order when an approved broker-dealer or its authorized designee accepts such
order. It is the responsibility of such broker-dealers to promptly forward
purchase or redemption orders to the Distributor. In addition to the front-end
and contingent deferred sales charges imposed by the Distributor, broker-dealers
may charge the investor a transaction-based fee or other fee for their services
at either the time of purchase or the time of redemption. Such charges may vary
among broker-dealers but in all cases will be retained by the broker-dealers and
not remitted to the Funds.
SALES CHARGE
Class C shares of the Funds are offered at net asset value plus a 1.00% sales
charge. On each purchase, the net asset value is invested in the applicable
Fund, and the sales charge is paid to the Distributor. The Distributor reallows
the whole sales charge to the investment dealer who initiates and is responsible
for the share purchase. In addition, at the time of sale, the Distributor
advances to the investment dealer the first year's fee pursuant to the Class C
Service and Distribution Plan on purchases of Class C shares.
Investment dealers who receive the sales charge described above will be eligible
to receive the fee under the Class C Service and Distribution Plan associated
with the purchase starting in the thirteenth calendar month after
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such purchase. No sales charge will be assessed on reinvested distributions into
Class C shares or on exchanges from one Fund to another Fund.
Total Sales Charge
as a % of
Offering Net Amount Amount Paid to Dealer as a
Amount of Purchase Price Invested % of Public Offering Price
All Amounts*. 1.00% 1.01% 1.00%
* A Contingent Deferred Sales Charge of 1.00% may apply to any Class C share
purchase. See "Contingent Deferred Sales Charge" below.
CONTINGENT DEFERRED SALES CHARGE
For any Class C purchase, a Contingent Deferred Sales Charge ("CDSC") may apply
if an investor sells the shares within eighteen months after purchase. The CDSC
is 1.00% of the value of the shares sold or the net asset value at the time of
purchase, whichever is less. The CDSC is paid to the Distributor. If an investor
redeems any Class C shares in a Fund, the Fund will first redeem any shares in
the investor's account that are not subject to the CDSC. If there are not enough
of these shares to meet the investor's request, the Fund will redeem shares
subject to the charge in the order they were purchased. Unless otherwise
specified, when an investor requests to sell a stated dollar amount in a Fund,
the Fund will redeem additional shares to cover any CDSC. For requests to sell a
stated number of shares in a Fund, the Fund will deduct the amount of the CDSC,
if any, from the sale proceeds.
No CDSC will be assessed on reinvested distributions, redemptions by a Fund when
an account falls below the minimum required account size, redemptions following
the death of the shareholder or beneficial owner, distributions from IRAs due to
death or disability or returns of excess contributions (and earnings, if
applicable) from retirement plan accounts. An exchange of Class C shares from
one Fund to another Fund is not considered a redemption or a purchase for
purposes of the CDSC. If a shareholder exchanges Class C shares of a Fund for
Class C shares of another Fund, the eighteen-month holding period for purposes
of the CDSC will continue to run after the exchange. In addition to the CDSC, a
redemption fee applies to certain redemptions of shares of the International
Equity Fund. See "How to Redeem Shares -- Contingent Redemption Fee" below.
General Shareholder Services
The Funds offer the following shareholder services, which are more fully
described in the SAI. Explanations and forms are available from First Data.
Telephone redemption and exchange privileges will be established automatically
when an investor opens an account unless an investor elects on the application
to decline the privileges. Other privileges must be specifically elected. A
signature guarantee will be required to establish a privilege after an account
is opened.
Free Exchange Privilege. Class C shares of any Fund may be exchanged, subject to
any applicable redemption fee in the case of the International Equity Fund, for
Class C shares of any other Fund. No front-end or contingent deferred sales
charges will be imposed on any such exchange. Class C shares may not be
exchanged for Institutional Class or Investor Class shares. Exchanges may be
made by written instructions or by telephone, unless an investor elected on the
application to decline telephone exchange privileges. The exchange privilege
should not be viewed as a means for taking advantage of short-term swings in the
market, and the Funds reserve the right to terminate or limit the privilege of
any shareholder who makes more than four exchanges in any calendar year. An
exchange of shares of one Fund for shares of another Fund will generally be
treated as a sale of the exchanged shares for federal income tax purposes. The
Funds may terminate or change the terms of the exchange privilege at any time,
upon 60 days' notice to shareholders.
Retirement Plans. The Funds' Class C shares may be purchased by all types of
tax-deferred retirement plans. The Distributor makes available retirement plan
forms for IRAs.
Systematic Withdrawal Plan. If the value of an account is at least $25,000, an
investor may have periodic cash withdrawals automatically paid to the investor
or any person designated by the investor.
Automatic Investment Plan. Voluntary monthly investments of at least $1,000 may
be made automatically by pre-authorized withdrawals from an investor's checking
account.
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How to Redeem Shares
An investor can redeem shares of any Fund by sending a written request to First
Data Investor Services Group at 4400 Computer Drive, P.O. Box 5181, Westborough,
MA 01581-5181, Attn: Undiscovered Managers Funds. As described below, an
investor may also redeem shares of any Fund by calling Undiscovered Managers at
1-800-667-1224. Proceeds resulting from a written or telephonic redemption
request can be wired to an investor's bank account or sent by check in the name
of the registered owners to their record address.
The written request must include the name of the Fund, the class of shares, the
account number, the exact name(s) in which the shares are registered, and the
number of shares or the dollar amount to be redeemed. All owners of the shares
must sign the request in the exact names in which the shares are registered
(this appears on an investor's confirmation statement) and should indicate any
special capacity in which they are signing (such as trustee or custodian or on
behalf of a partnership, corporation or other entity). Investors requesting that
redemption proceeds be wired to their bank accounts must provide specific wire
instructions.
If (1) an investor is redeeming shares worth more than $50,000, (2) an investor
is requesting that the proceeds check be made out to someone other than the
registered owners or be sent to an address other than the record address, (3)
the account registration has changed within the last 30 days or (4) an investor
is providing instructions to wire the proceeds to a bank account not designated
on the application, the investor must have his or her signature guaranteed by an
eligible guarantor. Eligible guarantors include commercial banks, trust
companies, savings associations, credit unions and brokerage firms that are
members of domestic securities exchanges. Before submitting the redemption
request, an investor should verify with the guarantor institution that it is an
eligible guarantor. Signature guarantees by notaries public are not acceptable.
When an investor telephones a redemption request, the proceeds are wired to the
bank account previously chosen by the investor. A wire fee (currently $5) will
be deducted from the proceeds. A telephonic redemption request must be received
by Undiscovered Managers prior to the close of regular trading on the New York
Stock Exchange. If an investor telephones a request to Undiscovered Managers
after the Exchange closes or on a day when the Exchange is not open for
business, Undiscovered Managers cannot accept the request and a new request will
be necessary.
If an investor decides to change the bank account to which proceeds are to be
wired, an investor must send in this change on the Service Options Form with a
signature guarantee. Telephonic redemptions may only be made if an investor's
bank is a member of the Federal Reserve System or has a correspondent bank that
is a member of the System. Unless an investor indicates otherwise on the account
application, Undiscovered Managers will be authorized to act upon redemption and
exchange instructions received by telephone from the investor or any person
claiming to act as the investor's representative who can provide Undiscovered
Managers with the investor's account registration and address as it appears on
the records of the Trust. Undiscovered Managers will employ these or other
reasonable procedures to confirm that instructions communicated by telephone are
genuine. The Trust, First Data, the Distributor, Undiscovered Managers and the
sub-advisers will not be liable for any losses due to unauthorized or fraudulent
instructions if these or other reasonable procedures are followed, but may be
liable for any losses due to unauthorized or fraudulent instructions in the
event reasonable procedures are not followed. For further information, consult
Undiscovered Managers. In times of heavy market activity, an investor who
encounters difficulty in placing a redemption or exchange order by telephone may
wish to place the order by mail as described above.
The redemption price for shares of any Fund will be the net asset value per
share next determined after the redemption request and any necessary special
documentation are received by First Data or an approved broker-dealer or its
authorized designee in proper form, less any applicable CDSC and/or redemption
fee. See "Contingent Redemption Fee" below.
Proceeds resulting from a written redemption request will normally be mailed to
an investor within seven days after receipt of the investor's request, if the
request is in good order. Telephonic redemption proceeds will normally be wired
to an investor's bank on the first business day following receipt of a proper
redemption request. If an investor purchased shares by check and the check was
deposited less than fifteen days prior to the redemption request, the Fund may
withhold redemption proceeds until the check has cleared.
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The Trust may suspend the right of redemption and may postpone payment for more
than seven days when the New York Stock Exchange is closed for other than
weekends or holidays, or if permitted by the rules of the SEC when trading on
the Exchange is restricted or during an emergency which makes it impracticable
for the Funds to dispose of their securities or to determine fairly the value of
its net assets, or during any other period permitted by the SEC for the
protection of investors.
CONTINGENT REDEMPTION FEE
The International Equity Fund is intended for long-term investors. Short-term
"market timers" who engage in frequent purchases and redemptions can disrupt the
Fund's investment program and create additional transaction costs that are borne
by all shareholders. For these reasons, the International Equity Fund assesses a
redemption fee in the amount of 1.00% on redemptions and exchanges of Fund
shares held for one year or less from the time of purchase.
The contingent redemption fee will be paid to the International Equity Fund to
help offset brokerage and other Fund costs associated with redemptions. The Fund
will use the "First-in, First-out" (FIFO) method to determine the holding period
of an investor's shares. Under this method, the date of the redemption or
exchange will be compared with the earliest purchase date of Fund shares held in
the account. If this holding period is one year or less, the contingent
redemption fee will be assessed. Redemption fees are not sales loads or
contingent deferred sales loads.
The contingent redemption fee does not apply to any shares purchased through the
reinvestment of dividends.
Calculation of Performance Information
The Funds may include in advertising their "total return" for the one-, five-
and ten-year periods (or for the life of a Fund, if shorter) through the most
recent calendar quarter. These total returns for Class C shares represent the
average annual compounded rate of return on a hypothetical investment of $1,000
in a Fund (assuming deduction of the 1.00% sales charge, automatic reinvestment
of all dividends and capital gain distributions and imposition of the CDSC, if
relevant, to the period quoted) and do not reflect any applicable contingent
redemption or exchange fee. Total return would be lower if such redemption or
exchange fee were included. Total return may also be presented for other
periods, on a cumulative (in addition to average annual) basis or without
deduction of a sales charge or CDSC. If a sales charge or CDSC is not deducted
in calculating total return, the Class C shares total return would be higher
than if such charges were deducted. All data are based on a Fund's past
investment results and do not predict future performance. Quotations of
investment performance for any period when an expense limitation was in effect
will be greater than if the limitation had not been in effect.
Dividends, Capital Gain Distributions and Taxes
The Funds declare and pay their net investment income to shareholders as
dividends annually. Each Fund also distributes all of its net capital gains
realized from the sale of portfolio securities. Any capital gain distributions
are normally made annually, but may, to the extent permitted by law, be made
more frequently as deemed advisable by the Trustees of the Trust. The Trustees
may change the frequency with which the Funds declare or pay dividends.
Dividends and capital gain distributions will automatically be reinvested in
additional shares of the same Fund on the record date unless an investor has
elected to receive cash.
Each Fund intends to qualify as a regulated investment company under the Code.
As a regulated investment company, and provided that the Fund distributes
substantially all its net investment income to its shareholders, the Fund itself
will not pay any federal income tax on its distributed income and gains.
Income dividends and short term capital gain distributions are taxable as
ordinary income whether distributed in cash or additional shares. Long-term
capital gain distributions from all Funds are taxable as long-term capital gains
(generally subject to a maximum tax rate of 20% for shareholders who are
individuals) whether distributed in cash or additional shares and regardless of
how long an investor has owned shares of a Fund. Distributions are taxable to a
shareholder of a Fund even if they are paid from income or gains earned by the
Fund prior to the shareholder's investment (and thus were included in the price
paid by the shareholder).
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Each Fund is required to withhold 31% of any redemption proceeds (including the
value of shares exchanged) and all income dividends and capital gain
distributions it pays to the investor (1) if the investor does not provide a
correct, certified taxpayer identification number, (2) if the Fund is notified
that the investor has underreported income in the past, or (3) if an investor
fails to certify to the Fund that the investor is not subject to such
withholding.
Certain designated dividends from the Funds are expected to be eligible for the
dividends-received deduction for corporate shareholders (subject to a holding
period requirement). However, any distributions received by a Fund from REITs
will not qualify for the dividends-received deduction. A Fund's investment in
REIT securities may require such Fund to accrue and distribute income not yet
received. In order to generate sufficient cash to make the requisite
distributions, the Fund may be required to sell securities in its portfolio that
it otherwise would have continued to hold (including when it is not advantageous
to do so). A Fund's investment in REIT securities also may result in the Fund's
receipt of cash in excess of the REIT's earnings; if the Fund distributes such
amounts, such distribution could constitute a return of capital to Fund
shareholders for federal income tax purposes.
First Data will send each investor and the Internal Revenue Service an annual
statement detailing federal tax information, including information about
dividends and distributions paid to the investor during the preceding year. Be
sure to keep this statement as a permanent record. A fee may be charged for any
duplicate information that an investor requests.
The International Equity Fund may be liable to foreign governments for taxes
relating primarily to investment income or capital gains on foreign securities
in the Fund's portfolio. The International Equity Fund may in some circumstances
be eligible to, and in its discretion may, make an election under the Code which
may allow certain Fund shareholders to claim a foreign tax credit or deduction
(but not both) on their U.S. income tax return. If the Fund makes the election,
the amount of each shareholder's distribution reported on the information
returns filed by the Fund with the Internal Revenue Service must be increased by
the amount of the shareholder's portion of the Fund's foreign tax paid. In
addition, the International Equity Fund's investment in foreign securities or
foreign currencies may increase or accelerate the Fund's recognition of ordinary
income and may affect the timing or amount of the Fund's distributions.
NOTE:The foregoing summarizes certain tax consequences of investing in the
Funds for shareholders who are U.S. citizens or corporations. Before
investing, an investor should consult his or her own tax adviser for more
information concerning the federal, state, local and foreign tax
consequences of investing in, redeeming or exchanging Fund shares.
Organization and Capitalization of the Trust
Each Fund is a series of the Trust. The Trust was organized as a Massachusetts
business trust on September 29, 1997. The Trust is authorized to issue an
unlimited number of full and fractional shares of beneficial interest in
multiple series. The Trustees may, without shareholder approval, divide the
shares of any series into multiple classes. Currently, each Fund has three
classes of shares -- Institutional Class shares, Investor Class shares and Class
C shares -- except for the International Equity Fund which has only two classes
of shares -- Institutional Class shares and Class C shares. Certain other series
of the Trust have only Institutional Class shares and certain other series of
the Trust have both Institutional Class shares and Investor Class shares, but do
not have Class C shares. Institutional Class shares and Investor Class shares
are offered in separate prospectuses. Each share in a Fund has one vote, with
fractional shares voting proportionally. All Trust shares entitled to vote will
vote together irrespective of series or class unless the rights of a particular
series or class would be adversely affected by the vote, in which case a
separate vote of that series or class will be required to decide the question.
Shares are freely transferable, are entitled to dividends as declared by the
Trustees of the Trust, and, if a Fund were liquidated, would receive the net
assets of such Fund. Each Fund may suspend the sale of shares at any time and
may refuse any order to purchase shares. The Trust does not generally hold
regular shareholder meetings and will do so only when required by law.
Shareholders may remove the Trustees of the Trust from office by votes cast at a
shareholder meeting or by written consent.
Class C shares are identical to Institutional Class shares and Investor Class
shares, except that (i) Class C shares are subject to certain front-end and
contingent deferred sales charges, (ii) Institutional Class shares bear no 12b-1
fees, (iii) Investor Class shares bear lower 12b-1 fees than Class C shares and
(iv) Investor Class and Class C shares have separate voting rights in certain
circumstances. Since a Fund's Institutional Class shares bear no
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<PAGE>
such 12b-1 fees and a Fund's Investor Class shares, if any, bear lower 12b-1
fees than Class C shares, such classes are expected to have a higher total
return than Class C shares of such Fund. None of the classes of shares of the
Funds have conversion rights into any other classes of shares of the Funds.
As of January 31, 1999, the following persons or entities held more than 25% of
the outstanding shares of a Fund, and as a result, may be deemed to "control"
such Fund as that term is defined in the 1940 Act.
Behavioral Growth Fund Charles Schwab & Co., Inc.
(on behalf of certain of its customers)
REIT Fund Charles Schwab & Co., Inc.
(on behalf of certain of its customers)
Small Cap Value Fund Charles Schwab & Co., Inc.
(on behalf of certain of its customers)
Core Equity Fund Charles Schwab & Co., Inc.
(on behalf of certain of its customers)
All Cap Value Fund None
International Equity Undiscovered Managers, LLC
Fund
Shareholders could, under certain circumstances, be held personally liable for
the obligations of the Trust. However, the risk of a shareholder incurring
financial loss on account of such liability is considered remote since it may
arise only in very limited circumstances.
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<PAGE>
Investment Adviser
Undiscovered Managers, LLC
Plaza of the Americas
700 North Pearl Street, Suite 1700
Dallas, Texas 75201
Toll free: 888-242-3514
Phone: 214-999-7200
Fax: 214-999-7201
Distributor
First Data Distributors, Inc.
4400 Computer Drive
Westborough, Massachusetts 01581
Legal Counsel
Ropes & Gray
One International Place
Boston, Massachusetts 02110
Transfer Agent
First Data Investor Services Group, Inc.
4400 Computer Drive
Westborough, Massachusetts 01581
Independent Auditors
Deloitte & Touche LLP
125 Summer Street
Boston, Massachusetts 02110
Custodian
The Bank of New York
48 Wall Street
New York, New York 10286
<PAGE>
[Logo] undiscoveredmanagers (TM)
UNDISCOVERED MANAGERS FUNDS
Statement of Additional Information
April 26, 1999
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information relates to the Undiscovered Managers Funds' Institutional
Class Prospectus dated December 28, 1998, the Undiscovered Managers Funds'
Investor Class Prospectus dated December 28, 1998 and the Undiscovered Managers
Funds' Class C Prospectus dated April 26, 1999. If a series of Undiscovered
Managers Funds has more than one form of current prospectus, each reference to
the "Prospectus" in this Statement of Additional Information shall include all
of such series' prospectuses unless otherwise noted. This Statement of
Additional Information should be read with the applicable prospectus. A copy of
the Prospectus may be obtained from Undiscovered Managers Funds, Plaza of the
Americas, 700 North Pearl Street, Suite 1700, Dallas, Texas 75201.
<PAGE>
Table of Contents
Investment Objectives, Policies and Restrictions 3
Management of the Trust 7
Ownership of Shares of the Funds 8
Investment Advisory and Other Services 13
Portfolio Transactions and Brokerage 17
Description of the Trust 18
How to Buy Shares 20
Net Asset Value 20
Shareholder Services 20
Redemptions 21
Income Dividends, Capital Gain Distributions
and Tax Status 22
Calculation of Total Return 24
Performance Comparisons 25
Financial Statements 27
Appendix A--Publications That May Contain Fund Information A-1
Appendix B--Advertising and Promotional Literature B-1
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<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The investment objective and policies of each series (each a "Fund" and
collectively, the "Funds") of Undiscovered Managers Funds (the "Trust") are
summarized in the Prospectus under "The Funds" and "More Information About the
Funds' Investments and Risk Considerations." The investment policies of each
Fund set forth in the Prospectus and in this Statement of Additional Information
may be changed by the Fund's adviser, subject to review and approval by the
Trust's Board of Trustees, without share-holder approval except that any Fund
policy explicitly identified as "fundamental" may not be changed without the
approval of the holders of a majority of the outstanding shares of the Fund
(which in the Prospectus and this Statement of Additional Information means the
lesser of (i) 67% of the shares of the Fund represented at a meeting at which at
least 50% of the outstanding shares are represented or (ii) more than 50% of the
outstanding shares).
Investment Restrictions -- Undiscovered Managers All Cap Value Fund,
Undiscovered Managers Behavioral Growth Fund, Undiscovered Managers Behavioral
Value Fund, Undiscovered Managers Core Equity Fund, Undiscovered Managers Hidden
Value Fund, Undiscovered Managers REIT Fund, Undiscovered Managers Small Cap
Value Fund, Undiscovered Managers Special Small Cap Fund, UM International
Equity Fund and UM International Small Cap Equity Fund
The following investment restrictions are fundamental policies of Undiscovered
Managers All Cap Value Fund (the "All Cap Value Fund"), Undiscovered Managers
Behavioral Growth Fund (the "Behavioral Growth Fund"), Undiscovered Managers
Behavioral Value Fund (the "Behavioral Value Fund"), Undiscovered Managers Core
Equity Fund (the "Core Equity Fund"), Undiscovered Managers Hidden Value Fund
(the "Hidden Value Fund"), Undiscovered Managers REIT Fund (the "REIT Fund"),
Undiscovered Managers Small Cap Value Fund (the "Small Cap Value Fund"),
Undiscovered Managers Special Small Cap Fund (the "Special Small Cap Fund"), UM
International Equity Fund (the "International Equity Fund") and UM International
Small Cap Equity Fund(the "International Small Cap Equity Fund").
Each Fund will not:
1. Borrow money in excess of 33 1/3% of the value of its total assets (not
including the amount borrowed) at the time the borrowing is made.
2. Underwrite securities issued by other persons except to the extent that, in
connection with the disposition of its portfolio investments, it may be deemed
to be an underwriter under certain federal securities laws.
3. Purchase or sell real estate, although it may purchase securities of issuers
which deal in real estate, securities which are secured by interests in real
estate, and securities which represent interests in real estate, and it may
acquire and dispose of real estate or interests in real estate acquired through
the exercise of its rights as a holder of debt obligations secured by real
estate or interests therein.
4. Purchase or sell commodities or commodity contracts, except that the Fund may
purchase and sell financial futures contracts and options, and may enter into
swap agreements, foreign exchange contracts and other financial transactions not
involving physical commodities.
5. Make loans, except by purchase of debt obligations in which the Fund may
invest consistent with its investment policies, by entering into repurchase
agreements, or by lending its portfolio securities.
6. Purchase securities (other than securities of the U.S. government, its
agencies or instrumentalities) if, as a result of such purchase, more than 25%
of the Fund's total assets would be invested in any one industry; except that
the REIT Fund will invest more than 25% of its total assets in securities issued
by real estate investment trusts (as defined in the Internal Revenue Code of
1986 (the "Code")).
7. Issue any class of securities which is senior to the Fund's shares of
beneficial interest, except for permitted borrowings.
Although the Funds are permitted to borrow money to a limited extent, no Fund
currently intends to do so.
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In addition to the foregoing fundamental investment restrictions, it is contrary
to each Fund's present policy, which may be changed without shareholder
approval, to:
Invest in (a) securities which at the time of such investment are not readily
marketable, (b) securities restricted as to resale (excluding securities
determined by the Trustees of the Trust (or the person designated by the
Trustees to make such determinations) to be readily marketable), and (c)
repurchase agreements maturing in more than seven days, if, as a result, more
than 15% of the Fund's net assets (taken at current value) would be invested in
securities described in (a), (b) and (c) above.
All percentage limitations on investments will apply at the time of the making
of an investment (except for the non-fundamental restriction set forth in the
immediately preceding paragraph) and shall not be considered violated unless an
excess or deficiency occurs or exists immediately after and as a result of such
investment.
Investment Restrictions--Undiscovered Managers Behavioral Long/Short Fund
The following investment restrictions are fundamental policies of Undiscovered
Managers Behavioral Long/Short Fund (the "Behavioral Long/Short Fund").
The Fund will not:
1. Borrow money in excess of 33 1/3% of the value of its total assets (not
including the amount borrowed) at the time the borrowing is made. Short sales
and related borrowings of securities are not subject to this restriction.
2. Underwrite securities issued by other persons except to the extent that, in
connection with the disposition of its portfolio investments, it may be deemed
to be an underwriter under certain federal securities laws.
3. Purchase or sell real estate, although it may purchase securities of issuers
which deal in real estate, securities which are secured by interests in real
estate, and securities which represent interests in real estate, and it may
acquire and dispose of real estate or interests in real estate acquired through
the exercise of its rights as a holder of debt obligations secured by real
estate or interests therein.
4. Purchase or sell commodities or commodity contracts, except that the Fund may
purchase and sell financial futures contracts and options, and may enter into
swap agreements, foreign exchange contracts and other financial transactions not
involving physical commodities.
5. Make loans, except by purchase of debt obligations in which the Fund may
invest consistent with its investment policies, by entering into repurchase
agreements, or by lending its portfolio securities.
6. Purchase securities (other than securities of the U.S. government, its
agencies or instrumentalities) if, as a result of such purchase, more than 25%
of the Fund's total assets would be invested in any one industry.
7. Issue any class of securities which is senior to the Fund's shares of
beneficial interest, except for permitted borrowings; any pledge or encumbrance
of assets; short sales; any collateral arrangements with respect to short sales,
swaps, options, future contracts and options on future contracts and with
respect to initial and variation margin; and the purchase or sale of options,
future contracts or options on future contracts.
Although the Fund is permitted to borrow money to a limited extent, it does not
currently intend to do so.
In addition to the foregoing fundamental investment restrictions, it is contrary
to the Fund's present policy, which may be changed without shareholder approval,
to:
Invest in (a) securities which at the time of such investment are not readily
marketable, (b) securities restricted as to resale (excluding securities
determined by the Trustees of the Trust (or the person designated by the
Trustees to make such determinations) to be readily marketable), and (c)
repurchase agreements maturing in more than seven days, if, as a result, more
than 15% of the Fund's net assets (taken at current value) would be invested in
securities described in (a), (b) and (c) above.
All percentage limitations on investments will apply at the time of the making
of an investment (except for the non-fundamental restriction set forth in the
immediately preceding paragraph and the paragraph immediately preceding such
paragraph) and shall not be considered violated unless an excess or deficiency
occurs or exists immediately after and as a result of such investment.
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Additional Description of Investments
The following is an additional description of certain investments of certain of
the Funds.
Short Sales. The Behavioral Long/Short Fund will seek to realize gains through
short sales. Short sales are transactions in which the Fund sells a security
that it does not own, in anticipation of a future decline in the value of that
security. To complete such a transaction, the Fund must borrow the security to
make delivery to the buyer. The Fund is then obligated to replace the security
borrowed by purchasing it in the market at or prior to the time of replacement.
The price at such time may be more or less than the price at which the security
was sold by the Fund. Until the security is replaced, the Fund is required to
repay the lender any dividends or interest that accrue during the period of the
loan. To borrow the security, the Fund may also be required to pay a premium,
which would increase the cost of the security sold. The net proceeds of the
short sale will be retained by the broker (or by the Fund's custodian in a
special custody account), to the extent necessary to meet margin requirements,
until the short position is closed out. The Fund will also incur transaction
costs in effecting short sales.
The Fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date which the
Fund replaces the borrowed security. The Fund will realize a gain if the
security declines in price between those dates. The amount of any gain will be
decreased, and the amount of any loss increased, by the amount of the premium,
dividends, interest or expenses the Fund may be required to pay in connection
with a short sale. An increase in the value of a security sold short by the Fund
over the price at which it was sold short will result in a loss to the Fund.
There can be no assurance that the Fund will be able to close out the position
at any particular time or at any acceptable price. The Fund's use of short sales
may cause the Fund to realize higher amounts of short-term capital gains which
are generally taxed at ordinary income tax rates than it would if it did not
engage in short sales.
Foreign Currency Hedging Transactions. Each of the International Equity and the
International Small Cap Equity Funds (the "International Funds") may engage in
foreign currency exchange transactions. The International Funds may (i) purchase
or sell a foreign currency on a spot (or cash) basis at the prevailing spot
rate, (ii) enter into negotiated contracts to purchase or sell foreign
currencies at a future date ("forward contracts"), (iii) purchase and sell
standardized, exchange-traded foreign currency futures contracts and (iv)
purchase exchange-listed and over-the-counter call and put options on foreign
currency futures contracts and on foreign currencies. A put option on a futures
contract gives a Fund the right to assume a short position in the futures
contract until the expiration of the option. A put option on currency gives a
Fund the right to sell a currency at an exercise price until the expiration of
the option. A call option on a futures contract gives a Fund the right to assume
a long position in the futures contract until the expiration of the option. A
call option on currency gives a Fund the right to purchase a currency at the
exercise price until the expiration of the option.
The precise matching of the amounts of foreign currency exchange transactions
and the value of any related portfolio securities will not generally be possible
since the future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
dates the currency exchange transactions are entered into and the dates they
mature.
It is impossible to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, in cases where a Fund seeks to protect the value of portfolio
securities through a foreign currency hedging transaction, it may be necessary
for a Fund to purchase additional foreign currency on the spot market (and bear
the expense of such purchase) if the market value of the security or securities
being hedged is less than the amount of foreign currency a Fund is obligated to
deliver and if a decision is made to sell the security or securities and make
delivery of the foreign currency. Conversely, it may be necessary to sell on the
spot market some of the foreign currency received upon the sale of the portfolio
security or securities if the market value of such security or securities
exceeds the amount of foreign currency a Fund is obligated to deliver.
Foreign currency transactions that are intended to hedge the value of securities
a Fund owns or contemplates purchasing do not eliminate fluctuations in the
underlying prices of those securities. Rather, such currency transactions simply
establish a rate of exchange which can be used at some future point in time.
Additionally, although these techniques tend to minimize the risk of loss due to
a change in the value of the currency involved, they tend to limit any potential
gain that might result from the increase in the value of such currency.
Currency Forward and Futures Contracts. A forward foreign currency exchange
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
as agreed by the parties, at a price set at the time of the contract. In the
case of a cancelable forward contract, the holder has the unilateral right to
cancel the contract at maturity by paying a specified fee. The contracts traded
in the interbank market are negotiated directly between currency traders
(usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement,
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and no commissions are charged at any stage for trades. A foreign currency
futures contract is a standardized contract for the future delivery of a
specified amount of a foreign currency at a future date at a price set at the
time of the contract. Foreign currency futures contracts are traded on futures
exchanges.
Forward foreign currency exchange contracts differ from foreign currency futures
contracts in certain respects. For example, the maturity date of a forward
contract may be any fixed number of days from the date of the contract agreed
upon by the parties, rather than a date selected in accordance with exchange
rules in a predetermined month.
Forward contracts may be in any amounts
agreed upon by the parties rather than standardized amounts. Also, forward
foreign exchange contracts are traded directly between currency traders so that
no intermediary is required. A forward contract generally requires no margin or
other deposit.
At the maturity of a forward or futures contract, a Fund may either accept or
make delivery of the currency specified in the contract, or at or prior to
maturity enter into a closing transaction involving the purchase or sale of an
offsetting contract. Closing transactions with respect to futures contracts are
effected on an exchange; a clearing corporation associated with the exchange
typically assumes responsibility for closing out such contracts. Closing
transactions with respect to forward contracts are usually effected with the
currency trader who is a party to the original forward contract. It may
therefore be more difficult to effect a closing transaction with respect to a
forward contract than with respect to a futures contract.
Positions in foreign currency futures contracts may be closed out only on an
exchange that provides a secondary market in such contracts. Although the Funds
intend to purchase or sell foreign currency futures contracts only on exchanges
where there appears to be an active secondary market, there is no assurance that
a secondary market on an exchange will exist for any particular contract or at
any particular time. In such event, it may not be possible to close a futures
position and, in the event of adverse price movements, a Fund would continue to
be required to make daily cash payments of variation margin.
Each International Fund will maintain cash or liquid securities eligible for
purchase by such Fund in a segregated account with the Fund's custodian in an
amount at least equal to (i) the difference between the current value of such
Fund's liquid holdings that settle in the relevant currency and such Fund's
outstanding obligations under currency forward contracts, or (ii) the current
amount, if any, that would be required to be paid to enter into an offsetting
forward currency contract which would have the effect of closing out the
original forward contract.
Foreign Currency Options. Options on foreign currencies operate similarly to
options on securities, and are traded primarily in the over-the-counter market,
although options on foreign currencies are listed on several exchanges. There
can be no assurance that a liquid secondary market will exist for a particular
option at any specific time. Options on foreign currencies are affected by
all of those factors that influence foreign exchange rates and investments
generally.
The value of a foreign currency option is dependent upon the value of the
foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, investors may
be disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the under-lying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign currencies
and there is no regulatory requirement that quotations available through dealers
or other market sources be firm or revised on a timely basis. Available
quotation information is generally representative of very large transactions in
the interbank market and thus may not reflect relatively smaller transactions
(less than $1 million) where rates may be less favorable. The interbank market
in foreign currencies is a global, around-the-clock market. To the extent that
the U.S. options markets are closed while the markets for the underlying
currencies remain open, significant price and rate movements may take place in
the underlying markets that cannot be reflected in the U.S. options markets.
Foreign Currency Conversion. Although foreign exchange dealers do not charge a
fee for currency conversion, they do realize a profit based on the difference
(the "spread") between prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to a Fund at one
rate, while offering a lesser rate of exchange should a Fund desire to resell
that currency to the dealer.
For a discussion of tax considerations relating to foreign currency
transactions, see "Income Dividends, Capital Gain Distributions
and Tax Status" below.
-6-
<PAGE>
MANAGEMENT OF THE TRUST
The Trustees and officers of the Trust, their ages, addresses and principal
occupations during the past five years are as follows (as of April 26, 1999):
*Mark P. Hurley (40)--Trustee and President. President and Chief Executive
Officer of Undiscovered Managers, LLC since September, 1997; formerly Managing
Director of Merrill Lynch & Company from February, 1996 to January, 1997;
formerly Vice President of Goldman, Sachs & Co. from August, 1992 to February,
1996.
Roger B. Keating (37)--Trustee. 550 15th Street, Suite 24, San Francisco,
California 94103; President and Chief Executive Officer of ReacTV since March,
1998; Senior Vice President of Online Division of Comcast Cable Communications
from May, 1996 to March, 1998; Area Vice President and General Manager of West
Florida area of Comcast Cable Communications from August, 1993 to May, 1996;
formerly Principal of Mercer Management Consulting from October, 1987 to August,
1993.
Matthew J. Kiley (37)--Trustee. ARAMARK Tower, 1101 Market Street, Philadelphia,
Pennsylvania 19107; Executive Vice President of Sports and Entertainment and
Vice President of Global Food and Support Services at ARAMARK Corp. since
September, 1996; formerly Manager at McKinsey & Company from January, 1990 to
September, 1996.
Robert P. Schmermund (43)--Trustee. 900 19th Street, N.W., Suite 400,
Washington, D.C. 20006; Communications Director of America's Community Bankers
since January, 1993.
Mary Chris Sayre (36)--Secretary. Employee of Undiscovered Managers, LLC since
October, 1997; formerly Assistant to Chairman and President and Special Events
Coordinator at Prentiss Properties Trust from February, 1997 to October, 1997;
formerly Director of University Honors Program and Dedman College Mentoring
Program at Southern Methodist University from June, 1991 to February, 1997.
* Trustees who are "interested persons" (as defined in the Investment Company
Act of 1940) of the Trust or of the Trust's investment adviser, Undiscovered
Managers, LLC.
The address of each Trustee and officer of the Trust affiliated with
Undiscovered Managers, LLC ("Undiscovered Managers") is Plaza of the Americas,
700 North Pearl Street, Dallas, Texas 75201.
The Trust pays no compensation to its officers or to the Trustees listed above
who are officers or employees of Undiscovered Managers. Each Trustee who is not
an officer or employee of Undiscovered Managers is compensated at the rate of
$10,000 per annum. The Trust provides no pension or retirement benefits to the
Trustees but has adopted a deferred payment arrangement under which each Trustee
who is to receive fees from the Trust may elect not to receive such fees on a
current basis but to receive in a subsequent period an amount equal to the value
that such fees would have if they had been invested in one or more of the Funds
on the normal payment date for such fees. As a result of this method of
calculating the deferred payments, each Fund, upon making the deferred payments,
will be in the same financial position as if the fees had been paid on the
normal payment dates.
The following table estimates the amount of compensation to be paid (or deferred
in lieu of current payment) by the Trust during its fiscal year ending August
31, 1999 to the persons who are to serve as Trustees during such period:
Total Compensation
Aggregate Compensation From Trust and
Person From Trust Fund Complex*
Mark P. Hurley $0 $0
Roger B. Keating $10,000 $10,000
Matthew J. Kiley $10,000 $10,000
Robert P. Schmermund $10,000 $10,000
* No Trustee receives any compensation from any mutual fund affiliated with
Undiscovered Managers, other than the Trust.
-7-
<PAGE>
OWNERSHIP OF SHARES OF THE FUNDS
As of January 31, 1999, the following persons or entities held more than 25% of
the outstanding shares of a Fund, and as a result, may be deemed to "control"
such Fund as that term is defined in the Investment Company Act of 1940 (the
"1940 Act").
Fund Name % Ownership
Behavioral Growth Fund Charles Schwab & Co., Inc.
(on behalf of certain of its customers) 61.89%
Behavioral Value Fund BankBoston, Custodian FBO
Dr. Roy F. Kokenge IRA 38.54%
Behavioral Long/Short BankBoston, Custodian
Fund FBO Dr. Roy F. Kokenge IRA 54.55%
Special Small Cap Fund Charles Schwab & Co., Inc.
(on behalf of certain of its customers) 83.68%
REIT Fund Charles Schwab & Co., Inc.
(on behalf of certain of its customers) 85.29%
Small Cap Value Fund Charles Schwab & Co., Inc.
(on behalf of certain of its customers) 87.35%
Hidden Value Fund None --
Core Equity Fund Charles Schwab & Co., Inc.
(on behalf of certain of its customers) 69.19%
All Cap Value Fund None --
International Equity Undiscovered Managers, LLC 100.00%
Fund
International Small Cap Undiscovered Managers, LLC 100.00%
Equity Fund
Institutional Class Shares
As of January 31, 1999, to the Trust's knowledge, the following persons or
entities owned of record or beneficially 5% or more of the outstanding
Institutional Class shares of the following Funds:
Fund Name and Address % Ownership
Behavioral Growth Fund Charles Schwab & Co., Inc. 66.36%
Special Customer A/C
FBO Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
Jewish Community Foundation of the 10.27%
Jewish Federation of South Palm Beach
9901 Donna Klein Boulevard
Boca Raton, FL 33428
(continued)
-8-
<PAGE>
Fund Name and Address % Ownership
(cont.)
Behavioral Growth Fund FTC & Co. 5.20%
Datalynx #846058621
House Account
P.O. Box 173736
Denver, CO 80217
Behavioral Value Fund BankBoston CUST 38.54%
FBO Dr. Roy F. Kokenge IRA
819 North 53 Avenue
Yakima, WA 98908
Lois B. Fuller 15.81%
2250 21st Street #330
Gering, NE 69341
Undiscovered Managers, LLC 13.40%
Plaza of the Americas
700 North Pearl Street
Dallas, Texas 75201
Russell J. Fuller, TTEE 12.65%
Fuller Revocable Trust
2202 Bettina Avenue
Belmont, CA 94002
John L. Kling & Lisbeth H. Kling, 10.93%
JTWROS
872 SE Edgeknoll Drive
Pullman, WA 99163
Behavioral Long/Short BankBoston CUST 54.55%
Fund FBO Dr. Roy F. Kokenge IRA
819 North 53 Avenue
Yakima, WA 98908
Russell J. Fuller, TTEE 20.89%
Fuller Revocable Trust
2202 Bettina Avenue
Belmont, CA 94002
George K. Fuller P/S/P 7.37%
4091 Lincoln
Oakland, CA 94602
Bruce & Sue Herman P/S/P 6.05%
251 Park Road
Burlingame, CA 94010
Special Small Cap Fund Charles Schwab & Co., Inc. 83.68%
Special Customer A/C
FBO Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
(continued)
-9-
<PAGE>
Fund Name and Address % Ownership
REIT Fund Charles Schwab & Co., Inc. 85.29%
Special Customer A/C
FBO Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
BankBoston Customer Rollover IRA 5.60%
FBO Myron DuBain
160 Sansome Street, 17th Floor
San Francisco, CA 94104
Small Cap Value Fund Charles Schwab & Co., Inc. 87.70%
Special Customer A/C
FBO Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
Hidden Value Fund Charles Schwab & Co., Inc. 14.48%
Special Customer A/C
FBO Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
Mark P. Hurley 5.85%
4121 Caruth Boulevard
Dallas, TX 75225
Michael B. Hermon 5.25%
David E. Hermon, CUST
P.O. Box 530
Marblehead, MA 01945
Ethan N. Hermon 5.25%
David E. Hermon, CUST
P.O. Box 530
Marblehead, MA 01945
Harley Goldberg Tod 5.21%
TTEES of Jeffrey B. Johnson Trust
1 Boatswains Way
Chelsea, MA 02150
Core Equity Fund Charles Schwab & Co., Inc. 69.93%
Special Customer A/C
FBO Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
FTC & Co. 14.87%
Attn: Datalynx House Account
717 17th Street, Suite 2600
Denver, CO 80202-3323
(continued)
-10-
<PAGE>
Fund Name and Address % Ownership
All Cap Value Fund Charles Schwab & Co., Inc. 26.14%
Special Customer A/C
FBO Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
BankBoston Customer IRA 21.14%
FBO Charles L. Edson
5802 Surrey Street
Chevy Chase, MD 20815
Mark P. Hurley 15.04%
4121 Caruth Boulevard
Dallas, TX 75225
BankBoston CUST 13.65%
James P. Nicholls IRA Rollover
737 Cole Street
San Francisco, CA 94117
Undiscovered Managers, LLC 13.18%
Plaza of the Americas
700 North Pearl Street
Dallas, TX 75201
BankBoston CUST IRA 7.70%
FBO Walter E. Grinder
4205 Minton Drive
Fairfax, VA 22032
International Equity Undiscovered Managers, LLC 100.00%
Fund Plaza of the Americas
700 North Pearl Street
Dallas, TX 75201
International Small Undiscovered Managers, LLC 100.00%
Cap Equity Fund Plaza of the Americas
700 North Pearl Street
Dallas, TX 75201
Investor Class Shares
As of January 31, 1999, to the Trust's knowledge, the following persons or
entities owned of record or beneficially 5% or more of the outstanding Investor
Class shares of the following Funds:
Fund Name and Address % Ownership
Behavioral Growth Fund Dain Rauscher Inc. 21.25%
FBO Washington Law School Foundation
Attn: Judi Christianson
1100 NE Campus Parkway
Seattle, WA 98105
(continued)
-11-
<PAGE>
Fund Name and Address % Ownership
(cont.)
Behavioral Growth Dain Rauscher Inc. 8.29%
FBO Michael G. King
Elizabeth W. King
Long Term Account
JT TEN/WROS
14800 164th Place NE
Woodinville, WA 98072
Dain Rauscher Inc. 8.27%
FBO SW WA Chapter NECA
Portfolio Focus
Attn: Tom Knox
8815 South Tacoma Way
Suite #102
Tacoma, WA 98499
Dain Rauscher Inc. 7.12%
FBO William F. Etter
Mary Beth D. Etter
JT TEN
Portfolio Focus
East 1906 23rd Avenue
Spokane, WA 99203
Dain Rauscher Inc. 6.79%
FBO J. Michael Blackwell
Premier Asset Management Plus
P.O. Box 22176
Juneau, AK 99802
Dain Rauscher Inc. 5.24%
FBO Ward Beattie
Long Term Account
1526 East Interlaken Blvd.
Seattle, WA 98112
Dain Rauscher Custodian 5.09%
Charles W. Hosmer
A/C # 4141-2715
Individual Retirement Account
1925 East Shore Avenue
Freeland, WA 98249
REIT Fund None --
Small Cap Value Fund Undiscovered Managers, LLC 47.32%
Plaza of the Americas
700 North Pearl Street
Dallas, Texas 75201
Sai H. Ho 38.56%
2209 Le Mans Drive
Carrollton, TX 75006
Marion William Blair 14.12%
Annalee Blair JTWROS
P.O. Box 170938
Irving, TX 75017
(continued)
-12-
<PAGE>
Fund Name and Address % Ownership
Hidden Value Fund Undiscovered Managers, LLC 100.00%
Plaza of the Americas
700 North Pearl Street
Dallas, Texas 75201
Core Equity Fund Undiscovered Managers, LLC 100.00%
Plaza of the Americas
700 North Pearl Street
Dallas, Texas 75201
All Cap Value Fund Undiscovered Managers, LLC 100.00%
Plaza of the Americas
700 North Pearl Street
Dallas, Texas 75201
Class C Shares
As of January 31, 1999, no Class C shares of any of the Funds were outstanding.
Ownership by Trustees and Officers
As of January 31, 1999, the Trustees and officers of the Trust owned
beneficially less than 1% of the shares of each class of each Fund, except for
Institutional Class shares of the following Funds, which represent the following
percentage ownership of Institutional Class shares of such Funds:
Fund Shares % Ownership
Special Small Cap Fund 17,125.181 1.12%
Hidden Value Fund 7,448.673 5.86%
Core Equity Fund 5,319.333 1.67%
All Cap Value Fund 5,195.656 15.04%
None of the foregoing amounts include amounts owned by Undiscovered Managers, of
which Mr. Hurley, a Trustee and officer of the Trust, is a controlling person.
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Adviser and Sub-Advisers
As described in the Prospectus, Undiscovered Managers is the investment adviser
of each Fund and as such, has responsibility for the management of each Fund's
affairs, under the supervision of the Trust's Board of Trustees. Each Fund's
investment portfolio is managed on a day-to-day basis by that Fund's
sub-adviser, under the general oversight of Undiscovered Managers and the Board
of Trustees. See "The Funds" and "Management of the Funds" in the Prospectus.
Undiscovered Managers is a limited liability company organized under the laws of
Delaware with two voting members, Mark P. Hurley and AMRESCO, Inc., a publicly
traded corporation, each owning more than 25% of the voting securities of
Undiscovered Managers and therefore regarded to control Undiscovered Managers
for purposes of the 1940 Act. As disclosed in this Statement of Additional
Information under the heading "Management of the Trust," (i) Mark P. Hurley is a
Trustee and the President of the Trust as well as the President and Chief
Executive Officer and a controlling member of Undiscovered Managers, and (ii)
Mary Chris Sayre is the Secretary of the Trust as well as an employee of
Undiscovered Managers. Undiscovered Managers is further affiliated with the
Trust through its ownership as of January 31, 1999, of more than 5% of the
outstanding shares of the Behavioral Value Fund, the All Cap Value Fund, the
International Equity Fund and the International Small Cap Equity Fund.
Under each Fund's advisory agreement with Undiscovered Managers, Undiscovered
Managers is entitled to fees, payable at least quarterly, of a certain
percentage of the average daily net asset value of such Fund. For a description
of such fees, see "Management of the Funds" in the Prospectus. During the
Trust's fiscal year ended August 31, 1998, the advisory fees incurred by the
Funds to Undiscovered Managers pursuant to the relevant advisory agreement
(before giving effect to expense reductions under the expense deferral
arrangements described below), and the amount of expense reductions under the
expense deferral arrangements, were as follows:
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<PAGE>
Fund Advisory Fee Expense Reduction
Behavioral Growth Fund $22,389 $22,389
Behavioral Value Fund -0-* -0-*
Behavioral Long/Short Fund -0-* -0-*
Special Small Cap Fund $61,497 $61,497
REIT Fund $36,513 $36,513
Small Cap Value Fund $31,827 $31,827
Hidden Value Fund $4,606 $4,606
Core Equity Fund $3,175 $3,175
All Cap Value Fund $1,260 $1,260
International Equity Fund -0-* -0-*
International Small Cap Equity Fund -0-* -0-*
* The Fund had not commenced operations as of August 31, 1998.
The advisory fee payable by the Special Small Cap Fund varies depending on the
Fund's investment performance. For a description of such fee rate see
"Management of the Funds" in the Prospectus.
As described in the Prospectus, Undiscovered Managers has agreed to certain
additional, voluntary arrangements to limit each Fund's expenses. These
arrangements may be modified or terminated by Undiscovered Managers at any time.
See "Trust Expenses" below.
Under each sub-advisory agreement relating to the Funds between Undiscovered
Managers and such Fund's sub-adviser, the sub-adviser is entitled to fees,
payable at least quarterly by Undiscovered Managers out of the fees it receives,
of a certain percentage of the average daily net asset value of such Fund. For a
description of such fees, see "Management of the Funds" in the Prospectus.
During the Trust's fiscal year ended August 31, 1998, Undiscovered Managers paid
the following amounts as sub-advisory fees to the following sub-advisers
pursuant to the relevant sub-advisory agreements:
Fund Sub-Adviser Sub-Advisory Fee
Behavioral Growth Fund Fuller & Thaler Asset Management, Inc. $14,139
Behavioral Value Fund Fuller & Thaler Asset Management, Inc. -0-*
Behavioral Long/Short Fuller & Thaler Asset Management, Inc. -0-*
Fund
Special Small Cap Fund Kestrel Investment Management Corporation $42,754
REIT Fund Bay Isle Financial Corporation $24,342
Small Cap Value Fund J.L. Kaplan Associates, LLC $21,214
Hidden Value Fund J.L. Kaplan Associates, LLC $2,907
Core Equity Fund Waite & Associates, L.L.C. $1,715
All Cap Value Fund E.R. Taylor Investments, Inc. $680
International Equity Unibank Securities, Inc. -0-*
Fund
International Small Unibank Securities, Inc. -0-*
Cap Equity Fund
* The Fund had not commenced operations as of August 31, 1998.
The sub-advisory fee payable by Undiscovered Managers relating to the Special
Small Cap Fund varies depending on the Fund's investment performance. For a
description of such fee rate, see "Management of the Funds" in the Prospectus.
Each Fund's advisory agreement and sub-advisory agreement provides that it will
continue in effect for two years from its date of execution and thereafter from
year to year if its continuance is approved at least annually (i) by the Board
of Trustees of the Trust or by vote of a majority of the outstanding voting
securities of the relevant Fund and (ii) by vote of a majority of the Trustees
who are not "interested persons" of the Trust, Undiscovered Managers or the
relevant sub-adviser, as that term is defined in the 1940 Act, cast in person at
a meeting called for the purpose of voting on such approval. Any amendment to an
advisory agreement must be approved by vote of a majority of the outstanding
voting securities of the relevant Fund and by vote of a majority of the Trustees
who are not interested persons, cast in person at a meeting called for the
purpose of voting on such approval. Any amendment to a sub-advisory agreement
must be approved by vote of a majority of the outstanding voting securities of
the relevant Fund and by vote of a majority of the Trustees who are not
interested persons, cast in person at a meeting called for the purpose of voting
on such approval, unless such approvals are no longer required by law.
The advisory agreement may be terminated without penalty by vote of the Board of
Trustees of the Trust or by vote of a majority of the outstanding securities of
the relevant Fund, upon sixty days' written notice, and by Undiscovered Managers
upon ninety days' writ-
-14-
<PAGE>
ten notice. The advisory agreement shall automatically terminate in the event of
its assignment. The advisory agreement for each of the Funds provides that
Undiscovered Managers owns all rights to and control of the name "Undiscovered
Managers." The advisory agreement for each of the International Equity Fund and
the International Small Cap Equity Fund also provides that Undiscovered Managers
owns all rights to and control of the name "UM." Each advisory agreement will
automatically terminate if the Trust or the Fund shall at any time be required
by Undiscovered Managers to eliminate all reference to the words "Undiscovered
Managers" or "UM," as applicable, in the name of the Trust or the Fund, unless
the continuance of the agreement after such change of name is approved by a
majority of the outstanding voting securities of the relevant Fund and by a
majority of the Trustees who are not interested persons of the Trust or
Undiscovered Managers, cast in person at a meeting called for the purpose of
voting on such approval.
Each sub-advisory agreement may be terminated without penalty by Undiscovered
Managers, by vote of the Board of Trustees or by vote of a majority of the
outstanding voting securities of the relevant Fund, upon sixty days' written
notice, and each terminates automatically in the event of its assignment and
upon termination of the related advisory agreement. Certain of the sub-advisory
agreements may be terminated by the relevant sub-adviser in certain
circumstances.
Each advisory and sub-advisory agreement provides that Undiscovered Managers or
the applicable sub-adviser shall not be subject to any liability in connection
with the performance of its services thereunder in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations and duties.
The Trust intends to apply for an exemptive order from the Securities and
Exchange Commission to permit Undiscovered Managers, subject to the approval of
the Trust's Board of Trustees and certain other conditions, to enter into
sub-advisory agreements with sub-advisers other than the current sub-adviser of
any Fund and amend sub-advisory agreements with sub-advisers without obtaining
shareholder approval. See "Management of the Funds" in the Prospectus.
Trust Expenses
The Trust pays the compensation of its Trustees who are not officers or
employees of Undiscovered Managers; registration, filing and other fees in
connection with requirements of regulatory authorities; all charges and expenses
of its custodian and transfer agent; the charges and expenses of its independent
accountants; all brokerage commissions and transfer taxes in connection with
portfolio transactions; 12b-1 fees; all taxes and fees payable to governmental
agencies; the cost of any certificates representing shares of the Funds; the
expenses of meetings of the shareholders and trustees of the Trust; the charges
and expenses of the Trust's legal counsel; interest on any borrowings by the
Funds; the cost of services, including services of counsel, required in
connection with the preparation of, and the cost of printing, the Trust's
registration statements and prospectuses, including amendments and revisions
thereto, annual, semiannual and other periodic reports of the Trust, and notices
and proxy solicitation material furnished to shareholders or regulatory
authorities, to the extent that any such materials relate to the Trust or its
shareholders; and the Trust's expenses of bookkeeping, accounting, auditing and
financial reporting, including related clerical expenses. 12b-1 fees with
respect to a Fund, if any, are allocated only to that Fund's Investor Class
shares or Class C shares, as applicable. Certain other expenses relating to a
particular class (such as class specific shareholder services fees) may be
allocated solely to that class.
As described in the Prospectus, Undiscovered Managers has voluntarily agreed,
for an indefinite period, to reduce its fees and pay the expenses of each Fund's
Institutional Class, Investor Class and Class C shares in excess of the
following annual percentage rates of the average daily net assets of such Fund's
Institutional Class, Investor Class and Class C shares, respectively, subject to
the obligation of each class of a Fund to repay Undiscovered Managers such
class's expenses in future years, if any, when such class's expenses fall below
the stated percentage rate, but only to the extent that such repayment would not
cause such class's expenses in any such future year to exceed the stated
percentage rate, and provided that such class is not obligated to repay any such
expenses more than two years after the end of the fiscal year in which they were
incurred:
Fund Institutional Class Investor Class Class C
Behavioral Growth Fund 1.30% 1.65% 2.30%
Behavioral Value Fund 1.40% N/A* N/A*
Behavioral Long/Short Fund 2.00% N/A* N/A*
Special Small Cap Fund 0.55% plus the N/A* N/A*
advisory fee rate
for the year in question
REIT Fund 1.40% 1.75% 2.40%
Small Cap Value Fund 1.40% 1.75% 2.40%
Hidden Value Fund 1.30% 1.65% N/A*
Core Equity Fund 0.99% 1.34% 1.99%
All Cap Value Fund 0.99% 1.34% 1.99%
International Equity Fund 1.45% N/A* 2.45%
International Small Cap 1.60% N/A* N/A*
Equity Fund
* The Fund does not currently have such class.
-15-
<PAGE>
Undiscovered Managers may change or terminate these voluntary arrangements at
any time.
Administrator
Pursuant to an Administrative Services Agreement between the Trust and
Undiscovered Managers, each Fund is obligated to pay Undiscovered Managers a fee
at the annual rate of 0.25% of such Fund's average net assets for providing
administrative services to that Fund. During the Trust's fiscal year ended
August 31, 1998, the following amounts were paid or payable to Undiscovered
Managers pursuant to the Administrative Services Agreement: $5,892 from the
Behavioral Growth Fund, $13,369 from the Special Small Cap Fund, $8,693 from the
REIT Fund, $7,578 from the Small Cap Value Fund, $1,212 from the Hidden Value
Fund, $1,073 from the Core Equity Fund and $426 from the All Cap Value Fund.
These amounts were subject to reduction and reimbursement under the expense
deferral arrangements described above. Undiscovered Managers has entered into an
agreement with First Data Investor Services Group, Inc. ("First Data") for the
provision of certain administrative services to the Funds at Undiscovered
Managers' expense. See "Management of the Funds" in the Prospectus.
Distributor
Institutional Class, Investor Class and Class C shares are sold on a continuous
basis by the Trust's distributor, First Data Distributors, Inc., (the
"Distributor"). Under the Distribution Agreement between the Trust and the
Distributor, the Distributor is not obligated to sell any specific amount of
shares of the Trust, but will use efforts deemed appropriate by it to solicit
orders for the sale of the Trust's shares and to undertake such advertising and
promotion as it believes reasonable in connection with such solicitation. The
Distributor received no underwriting commissions from the Trust for the fiscal
year ended on August 31, 1998.
Service and Distribution Plans
As described in the Prospectus, the Trust has adopted, under Rule 12b-1 under
the 1940 Act, a Service and Distribution Plan relating to its Investor Class
shares and a Service and Distribution Plan relating to its Class C shares
(together, the "Service and Distribution Plans"). The Service and Distribution
Plans permit the Trust to pay to the Distributor or any successor principal
under-writer of the Trust or to one or more other persons or entities (which may
but need not be affiliated with the Trust or any of its investment advisers or
other service providers), pursuant to agreements executed on behalf of the Trust
by one or more officers of the Trust or by the Distributor or any successor
principal underwriter of the Trust, fees for services rendered and expenses
borne in connection with the provision of certain services. The Service and
Distribution Plan with respect to Investor Class shares provides that such fees
may be paid as compensation for any or all of the following: (i) engaging in
activities or bearing expenses primarily intended to result in the sale of
Investor Class shares of the Trust, (ii) providing services relating to the
Investor Class shares of the Trust (which would be in addition to any general
services provided to a Fund as a whole) and (iii) providing additional personal
services to the Trust's Investor Class shareholders and/or for the maintenance
of Investor Class shareholder accounts. On an annual basis, the aggregate amount
of fees under the Service and Distribution Plan relating to Investor Class
shares with respect to each Fund will not exceed 0.35% of the Fund's average
daily net assets attributable to its Investor Class shares. The Service and
Distribution Plan with respect to Class C shares provides that such fees may be
paid as compensation for any or all of the following: (i) engaging in activities
or bearing expenses primarily intended to result in the sale of Class C shares
of the Trust and (ii) providing additional personal services to the Trust's
Class C shareholders and/or for the maintenance of Class C shareholder accounts.
On an annual basis, the aggregate amount of fees under the Service and
Distribution Plan relating to Class C shares with respect to each Fund will not
exceed 1.00% of the Fund's average daily net assets attributable to its Class C
shares.
Each Service and Distribution Plan may be terminated at any time as to any Fund
by vote of a majority of the Trustees of the Trust who are not interested
persons of the Trust (as defined in the 1940 Act) and who have no direct or
indirect financial interest in the operation of the Service and Distribution
Plan or any agreements related to it, or by a vote of a majority of the
outstanding Investor Class voting securities or Class C voting securities, as
applicable, of that Fund (as defined in the 1940 Act). Any change in a Service
and Distribution Plan that would materially increase the cost to the Investor
Class shares or Class C shares, as applicable, of a Fund to which the Service
and Distribution Plan relates requires approval by the Investor Class or Class C
shareholders, as applicable, of that Fund. The Trustees of the Trust review at
least quarterly a written report of such costs and the purposes for which such
costs have been incurred. All material amendments to a Service and Distribution
Plan requires a vote of the Trustees of the Trust, including a majority of the
Trustees of the Trust who are not interested persons of the Trust (as defined in
the 1940 Act) and who have no direct or indirect financial interest in the
operation of such Service and Distribution Plan or any agreements related to it,
cast in person at a meeting called for such purpose. For so long as the Service
and Distribution Plans are in effect, the selection and nomination of those
Trustees of the Trust who are not interested persons of the Trust shall be
committed to the discretion of such disinterested persons.
Each Service and Distribution Plan will continue in effect for successive
one-year periods, provided that each such continuance is
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specifically approved (i) by the vote of a majority of the Trustees of the Trust
who are not interested persons of the Trust (as defined in the 1940 Act) and who
have no direct or indirect financial interest in the operation of the Service
and Distribution Plan or any agreements related to it and (ii) by the vote of a
majority of the entire Board of Trustees of the Trust, in each case cast in
person at a meeting called for the purpose of voting on the continuance of the
Service and Distribution Plan.
The Trustees of the Trust believe that the Service and Distribution Plans will
provide benefits to each Fund with Investor Class shares and Class C shares, as
applicable. The Trustees of the Trust believe that the Service and Distribution
Plan relating to Investor Class shares is likely to result in greater sales
and/or fewer redemptions of the Trust's Investor Class shares, and thus higher
asset levels in the Funds with Investor Class shares, although it is impossible
to know for certain the level of sales and redemptions of the Trust's Investor
Class shares that would occur in the absence of such Service and Distribution
Plan or under alternative distribution arrangements. The Trustees of the Trust
believe that the Service and Distribution Plan relating to Class C shares is
likely to result in greater sales and/or fewer redemptions of the Trust's Class
C shares, and thus higher asset levels in the Funds with Class C shares,
although it is impossible to know for certain the level of sales and redemptions
of the Trust's Class C shares that would occur in the absence of such Service
and Distribution Plan or under alternative distribution arrangements. The
Trustees of the Trust believe that higher asset levels could benefit the Funds
with Investor Class shares and Class C shares by reducing Fund expense ratios
and/or by affording greater investment flexibility to such Funds.
Additional Arrangements
Custodial Arrangements. The Bank of New York, 48 Wall Street, New York, New York
10286, is the custodian for each Fund except the Behavioral Long/Short Fund.
Custodial Trust Company, 101 Carnegie Center, Princeton, New Jersey 08540, is
the custodian for the Behavioral Long/Short Fund. The custodians hold in
safekeeping certificated securities and cash belonging to the Funds and, in such
capacity, are the registered owners of securities held in book entry form
belonging to the Funds. Upon instruction, the custodians receive and deliver
cash and securities of the Funds in connection with Fund transactions and
collects all dividends and other distributions made with respect to Fund
portfolio securities. The custodians also maintain certain accounts and records
of the Funds.
Independent Auditors. The Funds' independent auditors are Deloitte & Touche LLP,
125 Summer Street, Boston, Massachusetts 02110. Deloitte & Touche LLP conducts
an annual audit of the Funds' financial statements, assists in the preparation
of the Funds' federal and state income tax returns and consults with the Funds
as to matters of accounting and federal and state income taxation.
PORTFOLIO TRANSACTIONS AND BROKERAGE
In placing orders for the purchase and sale of portfolio securities for each
Fund, each sub-adviser seeks the best price and execution, subject to each
sub-adviser's ability to pay brokers or dealers commissions in excess of
commissions another broker or dealer would have charged for effecting such
transaction in recognition of such broker's or dealer's provision of brokerage
and research products and/or services to the sub-adviser. Transactions in
unlisted securities are carried out through broker-dealers who make the primary
market for such securities unless, in the judgment of each sub-adviser, a more
favorable price can be obtained by carrying out such transactions through other
brokers or dealers. See "Portfolio Transactions" in the Prospectus.
During the fiscal year ended August 31, 1998, the Trust paid, on behalf of the
following Funds, the aggregate amount of commissions set forth below:
Fund Commissions
Behavioral Growth Fund $14,632
Behavioral Value Fund -0-*
Behavioral Long/Short Fund -0-*
Special Small Cap Fund $34,920
REIT Fund $40,434
Small Cap Value Fund $36,083
Hidden Value Fund $3,627
Core Equity Fund $1,156
All Cap Value Fund $743
International Equity Fund -0-*
International Small Cap Equity Fund -0-*
* The Fund had not commenced operations as of August 31, 1998.
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During the fiscal year ended August 31, 1998, the sub-advisers to each of the
following Funds directed brokerage transactions, in such aggregate amounts and
for such aggregate commissions as are set forth below, for the purpose of
obtaining research services:
Brokerage Related
Fund Transactions Commissions
Behavioral Growth Fund $7,101,041 $11,662
Behavioral Value Fund -0-* -0-*
Behavioral Long/Short Fund -0-* -0-*
Special Small Cap Fund $8,578,440 $25,667
REIT Fund $12,975,950 $31,252
Small Cap Value Fund $14,887,336 $33,691
Hidden Value Fund $1,926,828 $3,069
Core Equity Fund -0- -0-
All Cap Value Fund $541,934 $743
International Equity Fund -0-* -0-*
International Small Cap Equity Fund -0-* -0-*
* The Fund had not commenced operations as of August 31, 1998.
During the fiscal year ended August 31, 1998, the All Cap Value Fund purchased
securities of Merrill Lynch & Co., a regular broker of the Fund, that were
valued as of August 31, 1998 at $9,240.
DESCRIPTION OF THE TRUST
The Trust, registered with the Securities and Exchange Commission (the "SEC") as
an open-end management investment company, is organized as a Massachusetts
business trust under the laws of Massachusetts by an Agreement and Declaration
of Trust dated September 29, 1997 (as amended, the "Declaration of Trust").
The Declaration of Trust currently permits the Trustees to issue an unlimited
number of full and fractional shares of each series. Each share of each Fund
represents an equal proportionate interest in such Fund with each other share of
that Fund and is entitled to a proportionate interest in the dividends and
distributions from that Fund. The shares of each Fund do not have any preemptive
rights. Upon termination of any Fund, whether pursuant to liquidation of the
Trust or otherwise, shareholders of that Fund are entitled to share pro rata in
the net assets of that Fund available for distribution to shareholders. The
Declaration of Trust also permits the Trustees to charge shareholders directly
for custodial, transfer agency and servicing expenses.
The Declaration of Trust also permits the Trustees, without shareholder
approval, to subdivide any series of shares into various classes of shares with
such preferences and other rights as the Trustees may designate. The Trustees
may also, without shareholder approval, establish one or more additional
separate portfolios for investments in the Trust. Shareholders' investments in
such an additional portfolio would be evidenced by a separate series of shares
(i.e., a new "Fund").
The Declaration of Trust provides for the perpetual existence of the Trust. The
Trust or any Fund, however, may be terminated at any time by vote of at least
two-thirds of the outstanding shares of each Fund affected. The Declaration of
Trust further provides that the Trustees may also terminate the Trust or any
Fund upon written notice to the shareholders.
The Funds offer the following classes of shares:
Fund Institutional Class Investor Class Class C
Behavioral Growth Fund X X X
Behavioral Value Fund X
Behavioral Long/Short Fund X
Special Small Cap Fund X
REIT Fund X X X
Small Cap Value Fund X X X
Hidden Value Fund X X
Core Equity Fund X X X
All Cap Value Fund X X X
International Equity Fund X X
International Small Cap
Equity Fund X
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In general, expenses of each Fund are borne by all the shares in such Fund,
regardless of class, on a pro rata basis relative to the net assets of each
class. Fees under a 12b-1 plan with respect to a Fund, if any, however, are
allocated only to that Fund's Investor Class shares or Class C shares, as
applicable. Certain other expenses relating to a particular class (such as
class-specific share-holder services fees) may be allocated solely to that
class.
The assets received by any class of the Funds for the issue or sale of its
shares and all income, earnings, profits, losses and proceeds therefrom, subject
only to the rights of creditors, are allocated to, and constitute the underlying
assets of, that class. The underlying assets of any class of the Funds are
segregated and are charged with the expenses with respect to that class and with
a share of the general expenses of the corresponding Fund. Any general expenses
of a Fund that are not readily identifiable as belonging to a particular class
of such Fund are allocated by or under the direction of the Trustees in such
manner as the Trustees determine to be fair and equitable. While the expenses of
the Trust are allocated to the separate books of account of each Fund, certain
expenses may be legally chargeable against the assets of all classes of the
Funds.
Voting Rights
As summarized in the Prospectus, shareholders are entitled to one vote for each
full share held (with fractional votes for each fractional share held) and may
vote (to the extent provided in the Declaration of Trust) on the election of
Trustees and the termination of the Trust and on other matters submitted to the
vote of shareholders.
The Declaration of Trust provides that on any matter submitted to a vote of all
Trust shareholders, all Trust shares entitled to vote shall be voted together
irrespective of series or class unless the rights of a particular series or
class would be adversely affected by the vote, in which case a separate vote of
that series or class shall be required to decide the question. Also, a separate
vote shall be held whenever required by the 1940 Act or any rule thereunder.
Rule 18f-2 under the 1940 Act provides in effect that a series or class shall be
deemed to be affected by a matter unless it is clear that the interests of each
series or class in the matter are substantially identical or that the matter
does not affect any interest of such series or class. On matters affecting an
individual series or class, only shareholders of that series or class are
entitled to vote. Consistent with the current position of the SEC, shareholders
of all series and classes vote together, irrespective of series or class, on the
election of Trustees and the selection of the Trust's independent accountants,
but shareholders of each series vote separately on other matters requiring
shareholder approval, such as certain changes in investment policies of that
series or the approval of the investment advisory and sub-advisory agreements
relating to that series.
There will normally be no meetings of shareholders for the purpose of electing
Trustees except that, in accordance with the 1940 Act, (i) the Trust will hold a
shareholders' meeting for the election of Trustees at such time as less than a
majority of the Trustees holding office have been elected by shareholders, and
(ii) if, as a result of a vacancy on the Board of Trustees, less than two-thirds
of the Trustees holding office have been elected by the shareholders, that
vacancy may be filled only by a vote of the shareholders. In addition, Trustees
may be removed from office by a written consent signed by the holders of
two-thirds of the outstanding shares and filed with the Trust's custodian or by
a vote of the holders of two-thirds of the outstanding shares at a meeting duly
called for that purpose, which meeting shall be held upon the written request of
the holders of not less than 10% of the outstanding shares.
Upon written request by ten shareholders of record, who have been such for at
least six months preceding the date of such request and who hold shares in the
aggregate having a net asset value of at least one percent (1%) of the
outstanding shares, stating that such shareholders wish to communicate with the
other shareholders for the purpose of obtaining the signatures necessary to
demand a meeting to consider removal of a Trustee, the Trust has undertaken to
provide a list of shareholders or to disseminate appropriate materials (at the
expense of the requesting shareholders).
Except as set forth above, the Trustees shall continue to hold office and may
appoint successor Trustees. Voting rights are not cumulative.
No amendment may be made to the Declaration of Trust without the affirmative
vote of a majority of the outstanding shares of the Trust, except (i) to change
the Trust's name or to cure technical problems in the Declaration of Trust and
(ii) to establish, change or eliminate the par value of any shares (currently
all shares have no par value).
Shareholder and Trustee Liability
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Trust. However, the
Declaration of Trust disclaims shareholder liability for acts or obligations of
each Fund and requires that notice of such disclaimer be given in each
agreement, obligation or instrument entered into or executed by the Trust or the
Trustees. The Declaration of Trust provides for indemnification out of assets of
a Fund or assets attributable to the particular class of a Fund for all loss and
expense of any shareholder held personally liable for the obligations of such
Fund or such class. Thus, the risk of a shareholder incurring financial loss on
account of shareholder liability is considered remote since it is limited to
circumstances in which the disclaimer is inoperative and the Fund itself would
be unable to meet its obligations.
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The Declaration of Trust further provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law. However, nothing in the
Declaration of Trust protects a Trustee against any liability to which the
Trustee would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office. The By-Laws of the Trust provide for indemnification by the Trust of
the Trustees and officers of the Trust except with respect to any matter as to
which any such person is found after final adjudication in an action, suit or
proceeding not to have acted in good faith in the reasonable belief that such
action was in the best interests of the Trust. No officer or Trustee may be
indemnified against any liability to the Trust or the Trust's shareholders to
which such person would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his or her office.
HOW TO BUY SHARES
Subject to minimum initial investment requirements and certain other conditions,
an investor may make an initial purchase of shares of any class of shares of any
Fund by submitting a completed application form and payment to:
Undiscovered Managers Funds
4400 Computer Drive
P.O. Box 5181
Westborough, MA 01581-5181
The procedures for purchasing shares of any class of any Fund are summarized in
"How to Purchase Shares" in the Prospectus. The Prospectus for each class also
explains any applicable sales charge, 12b-1 fee, contingent deferred sales
charge, and, for the Behavioral Value Fund, Behavioral Long/Short Fund,
International Equity Fund and International Small Cap Equity Fund, any
redemption fee.
NET ASSET VALUE
The net asset value of any class of shares of each Fund is determined by
dividing that Fund's total net assets (the excess of its assets over its
liabilities) by the total number of shares of the Fund outstanding and rounding
to the nearest cent. Such determination is made as of the close of regular
trading on the New York Stock Exchange on each day on which that Exchange is
open for unrestricted trading, and no less frequently than once daily on each
day during which there is sufficient trading in a Fund's portfolio securities
that the value of that Fund's shares might be materially affected. The New York
Stock Exchange is expected to be closed on the following weekdays: New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Equity
securities listed on an established securities exchange or on the Nasdaq
National Market System are normally valued at their last sale price on the
exchange where primarily traded or, if there is no reported sale during the day,
and in the case of over-the-counter securities not so listed, at the last bid
price. Other securities for which current market quotations are not readily
available (including restricted securities, if any) and all other assets are
taken at fair value as determined in good faith by the Board of Trustees,
although the actual calculations may be made by persons acting pursuant to the
direction of the Board.
Generally, trading in foreign securities markets is substantially completed each
day at various times prior to the close of regular trading on the New York Stock
Exchange. Occasionally, events affecting the value of equity securities of
non-U.S. issuers not traded on a U.S. exchange may occur between the completion
of substantial trading of such securities for the day and the close of regular
trading on the New York Stock Exchange, which events will not be reflected in
the computation of the Fund's net asset value. If events materially affecting
the value of any Fund's portfolio securities occur during such period, then
these securities will be valued at their fair value as determined in good faith
by or in accordance with procedures approved by the Board of Trustees.
SHAREHOLDER SERVICES
Open Accounts
A shareholder's investment in any Fund is automatically credited to an open
account maintained for the shareholder by First Data. Following each transaction
in the account, a shareholder will receive an account statement disclosing the
current balance of shares owned and the details of recent transactions in the
account. After the close of each fiscal year First Data will send each
shareholder a statement providing federal tax information on dividends and
distributions paid to the shareholder during the year. This statement should be
retained as a permanent record. Shareholders will be charged a fee for duplicate
information. The open account system permits the purchase of full and fractional
shares and, by making the issuance and delivery of certificates representing
shares unnecessary, eliminates the problems of handling and safekeeping
certificates and the cost and inconvenience of replacing lost, stolen, mutilated
or destroyed certificates.
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The costs of maintaining the open account system are borne by the Trust, and no
direct charges are made to shareholders. Although the Trust has no present
intention of making such direct charges to shareholders, it reserves the right
to do so. Shareholders will receive prior notice before any such charges are
made.
Systematic Withdrawal Plan
A Systematic Withdrawal Plan, referred to in the Prospectus under "Shareholder
Services--Systematic Withdrawal Plan," provides for monthly, quarterly,
semiannual or annual withdrawal payments of $1,000 or more from the account of a
shareholder provided that the account has a value of at least $25,000 at the
time the plan is established. The proceeds from any such withdrawal shall equal
the amount redeemed less any applicable contingent deferred sales charge and/or
redemption fee.
Payments will be made either to the shareholder or to any other person
designated by the shareholder. If payments are issued to an individual other
than the registered owner(s), a signature guarantee will be required on the Plan
application. Income dividends and capital gain distributions will be reinvested
at the net asset value determined as of the close of regular trading on the New
York Stock Exchange on the record date for the dividend or distribution.
Since withdrawal payments represent proceeds from liquidation of shares, the
shareholder should recognize that withdrawals may reduce and possibly exhaust
the value of the account, particularly in the event of a decline in net asset
value. Accordingly, the shareholder should consider whether a Systematic
Withdrawal Plan and the specified amounts to be withdrawn are appropriate in the
circumstances. The Trust makes no recommendations or representations in this
regard. It may be appropriate for the shareholder to consult a tax adviser
before establishing such a plan. See "Redemptions" and "Income Dividends,
Capital Gain Distributions and Tax Status" below for certain information as to
federal income taxes.
Exchange Privilege
Shareholders may redeem their shares of any Fund, subject to any applicable
redemption fees, and have the proceeds applied on the same day to purchase the
same class of shares of any other Fund. No front-end or contingent deferred
sales charges will be imposed on any such exchange, but, for Funds that impose a
redemption fee, the exchange will be treated as a redemption and the redemption
fee will apply. The value of shares exchanged must be at least $1,000 and all
exchanges are subject to the minimum investment requirement of the Fund into
which the exchange is being made. This option is summarized in the Prospectus
under "Shareholder Services--Free Exchange Privilege."
Exchanges may be effected by (1) making a telephone request by calling
1-800-667-1224, provided that a special authorization form is on file with First
Data, or (2) sending a written exchange request to First Data accompanied by an
account application for the appropriate Fund. The Trust reserves the right to
modify this exchange privilege without prior notice.
An exchange constitutes a sale of the shares for federal income tax purposes on
which the investor may realize a capital gain or loss.
IRAs
Under "Shareholder Services--Retirement Plans," the Prospectus refers to IRAs
established under a prototype plan made available by the Distributor. These
plans may be funded with shares of any Fund. All income dividends and capital
gain distributions of plan participants must be reinvested. Plan documents and
further information can be obtained from the Distributor.
Check with your financial or tax adviser as to the suitability of Fund shares
for your retirement plan.
REDEMPTIONS
The procedures for redemption of shares of any class of any Fund are summarized
in the Prospectus under "How to Redeem Shares."
Except as noted below, signatures on redemption requests must be guaranteed by
commercial banks, trust companies, savings associations, credit unions or
brokerage firms that are members of domestic securities exchanges. Signature
guarantees by notaries public are not acceptable. However, as noted in the
Prospectus, a signature guarantee will not be required if the proceeds of the
redemption do not exceed $50,000 and the proceeds check is made payable to the
registered owner(s) and mailed to the record address.
If a shareholder selects the telephone redemption service in the manner
described in the next paragraph, Fund shares may be redeemed by making a
telephone call directly to Undiscovered Managers at 1-800-667-1224. When a
telephonic redemption request is received, the proceeds are wired to the bank
account previously chosen by the shareholder and a nominal wire fee (currently
$5.00) is deducted. Telephonic redemption requests must be received by
Undiscovered Managers prior to the close of regular trading on the New York
Stock Exchange on a day when the Exchange is open for business. Requests made
after that time or on a day when the New York Stock Exchange is not open for
business cannot be accepted by Undiscovered Managers and a new request will be
necessary.
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In order to redeem shares by telephone, a shareholder must either select this
service when completing the Fund application or must do so subsequently on the
Service Options Form available from First Data. When selecting the service, a
shareholder must designate a bank account to which the redemption proceeds
should be wired. Any change in the bank account so designated must be made by
furnishing to First Data a completed Service Options Form with a signature
guarantee. Whenever the Service Options Form is used, the shareholder's
signature must be guaranteed as described above. Telephone redemptions may only
be made if an investor's bank is a member of the Federal Reserve System or has a
correspondent bank that is a member of the System. If the account is with a
savings bank, it must have only one correspondent bank that is a member of the
System. The Trust, First Data, the Distributor, Undiscovered Managers and the
sub-advisers are not responsible for the authenticity of withdrawal instructions
received by telephone. In the event that reasonable procedures are not followed
in the verification of withdrawal instructions, the foregoing parties may be
liable for any losses due to unauthorized instructions.
The redemption price will be the net asset value per share next determined after
the redemption request and any necessary special documentation are received by
First Data or an approved broker-dealer or its authorized designee in proper
form, less any applicable contingent deferred sales charge and/or redemption
fee. Proceeds resulting from a written redemption request will normally be
mailed to you within seven days after receipt of your request in good order.
Telephonic redemption proceeds will normally be wired on the first business day
following receipt of a proper redemption request. In those cases where you have
recently purchased your shares by check and your check was received less than
fifteen days prior to the redemption request, the Fund may withhold redemption
proceeds until your check has cleared.
Each Fund will normally redeem shares for cash; however, each Fund reserves the
right to pay the redemption price wholly or partly in kind if the Board of
Trustees of the Trust determines it to be advisable in the interest of the
remaining shareholders. If portfolio securities are distributed in lieu of cash,
the shareholder will normally incur brokerage commissions upon subsequent
disposition of any such securities. However, the Trust has elected to be
governed by Rule 18f-1 under the 1940 Act pursuant to which the Trust is
obligated to redeem shares solely in cash for any shareholder during any 90-day
period up to the lesser of $250,000 or 1% of the total net asset value of the
Trust at the beginning of such period.
A redemption constitutes a sale of shares for federal income tax purposes on
which the investor may realize a long- or short-term capital gain or loss. See
"Income Dividends, Capital Gain Distributions and Tax Status."
INCOME DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAX STATUS
As described in the Prospectus under "Dividends, Capital Gain Distributions and
Taxes" it is the policy of each Fund to pay its shareholders, as dividends,
substantially all net investment income and to distribute at least annually all
net realized capital gains, if any, after offsetting any capital loss
carryovers.
Income dividends and capital gain distributions are payable in full and
fractional shares of the particular Fund based upon the net asset value
determined as of the close of regular trading on the New York Stock Exchange on
the record date for each dividend or distribution. Shareholders, however, may
elect to receive their income dividends or capital gain distributions, or both,
in cash. The election may be made at any time by submitting a written request
directly to First Data. In order for a change to be in effect for any dividend
or distribution, it must be received by First Data on or before the record date
for such dividend or distribution.
As required by federal law, detailed federal tax information will be furnished
to each shareholder for each calendar year on or before January 31 of the
succeeding year.
Each Fund intends to qualify each year as a regulated investment company under
Subchapter M of the Code and to qualify for the special tax treatment accorded
regulated investment companies and their shareholders. In order so to qualify,
the Fund must, among other things, (i) derive at least 90% of its gross income
from dividends, interest, payments with respect to certain securities loans,
gains from the sale of stock, securities or foreign currencies, or other income
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies; (ii) distribute with respect to each taxable year at least 90% of
the sum of its taxable net investment income, its net tax-exempt income (if
any), and the excess, if any, of net short-term capital gains over net long-term
capital losses for such year; and (iii) at the end of each fiscal quarter
maintain at least 50% of the value of its total assets in cash, cash items
(including receivables), government securities, securities of other regulated
investment companies, and other securities of issuers which represent, with
respect to each issuer, no more than 5% of the value of the Fund's total assets
and 10% of the outstanding voting securities of such issuer, and with no more
than 25% of the value of its total assets invested in the securities (other than
those of the U.S. government or other regulated investment companies) of any one
issuer or of two or more issuers which the Fund controls and which are engaged
in the same, similar or related trades and businesses. If it qualifies for
treatment as a regulated investment company, the Fund will not be subject to
federal income tax on income paid to its shareholders in the form of dividends
or capital gain distributions.
An excise tax at the rate of 4% will be imposed on the excess, if any, of each
Fund's "required distribution" over its actual distributions in any calendar
year. Generally, the "required distribution" is 98% of the Fund's ordinary
income for the calendar year plus 98% of its capital gain net income recognized
during the one-year period ending on October 31 plus undistributed amounts from
prior years. Each Fund intends to make distributions sufficient to avoid
imposition of the excise tax. Distributions declared by a
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Fund during October, November or December to shareholders of record on a date in
any such month and paid by the Fund during the following January will be treated
for federal tax purposes as paid by the Fund and received by shareholders on
December 31 of the year in which declared.
Dividends and distributions on a Fund's shares are generally subject to federal
income tax as described herein to the extent they do not exceed the Fund's
realized income and gains, even though such dividends and distributions may
economically represent a return of a particular shareholder's investment. Such
distributions are likely to occur in respect of shares purchased at a time when
a Fund's net asset value reflects gains that are either unrealized, or realized
but not distributed. Such realized gains may be required to be distributed even
when a Fund's net asset value also reflects unrealized losses. Shareholders of
each Fund will be subject to federal income taxes on distributions made by the
Fund whether received in cash or additional shares of the Fund. Distributions by
each Fund of net income and short-term capital gains, if any, will be taxable to
shareholders as ordinary income. Distributions of long-term capital gains
(generally subject to a maximum tax rate of 20% for shareholders who are
individuals), if any, will be taxable to shareholders as long-term capital
gains, without regard to how long a shareholder has held shares of the Fund.
In general, sales, redemptions and exchanges of each Fund's shares are taxable
events and, accordingly, shareholders may realize gains and losses on these
transactions. If shares have been held for more than one year, gain or loss
realized will be long-term capital gain or loss, provided the shareholder holds
the shares as a capital asset. If shares have been held for one year or less,
the gain or loss on the sale, redemption or exchange of such shares will be
treated as short-term capital gain. In general, if a shareholder sells Fund
shares at a loss within six months after purchasing the shares, the loss will be
treated as a long-term capital loss to the extent of any long-term capital gain
distributions received by the shareholder. Furthermore, no loss will be allowed
on the sale of Fund shares to the extent the shareholder acquired other shares
of the same Fund within 30 days prior to the sale of the loss shares or 30 days
after such sale.
Dividends and certain interest income earned by each of the International Funds
from foreign securities may be subject to foreign withholding taxes or other
taxes. So long as more than 50% of the value of a Fund's total assets at the
close of any taxable year consists of stock or securities of foreign
corporations, such Fund may elect, for federal income tax purposes, to treat
certain foreign taxes paid by it, including generally any withholding taxes and
other foreign income taxes, as paid by its shareholders. It is possible that
each of the International Funds will make this election in certain years. The
remaining Funds do not expect to be eligible to make this election. If a Fund
makes the election, the amount of such foreign taxes paid by the Fund will be
included in its shareholders' income pro rata (in addition to taxable
distributions actually received by them). A shareholder's ability to claim a
foreign tax credit or deduction in respect of foreign taxes paid by such Fund
may be subject to certain limitations imposed by the Code, as a result of which
a shareholder may not get a full credit or deduction for the amount of such
taxes. Shareholders who do not itemize on their federal income tax returns may
claim a credit (but no deduction) for such foreign taxes.
Each of the International Funds' transactions in foreign currencies and hedging
activities may give rise to ordinary income or loss to the extent such income or
loss results from fluctuations in value of the foreign currency concerned. In
addition, such activities will likely produce a difference between book income
and taxable income.
This difference may cause a portion of each such Fund's
income distributions to constitute a return of capital for tax purposes or
require such Fund to make distributions exceeding book income to qualify as a
regulated investment company for tax purposes.
Investment by each of the International Funds in "passive foreign investment
companies" could subject such Funds to a U.S. federal income tax or other charge
on the proceeds from the sale of its investment in such a company; however, this
tax can be avoided by making an election to mark such investments to market
annually or to treat the passive foreign investment company as a "qualified
electing fund."
A "passive foreign investment company" is any foreign corporation (i) 75 percent
or more of the income of which for the taxable year is passive income or (ii) at
least 50% of the assets of which (generally by value, but by adjusted tax basis
in certain cases), on average, produce or are held for the production of passive
income. Generally, passive income for this purpose means dividends, interest
(including income equivalent to interest), royalties, rents, annuities, the
excess of gains over losses from certain property transactions and commodities
transactions, and foreign currency gains. Passive income for this purpose does
not include rents and royalties received by the foreign corporation from active
business and certain income received from related persons.
The foregoing is a general and abbreviated summary of the applicable provisions
of the Code and regulations currently in effect. For the complete provisions,
reference should be made to the pertinent Code sections and regulations. The
Code and regulations are subject to change by legislative or administrative
action.
Dividends and distributions also may be subject to state, local and foreign
taxes. Shareholders are urged to consult their tax advisers regarding specific
questions as to federal, state, local and foreign taxes.
The foregoing discussion relates solely to U.S. federal income tax law. Non-U.S.
investors should consult their tax advisers concerning the tax consequences of
ownership of shares of a Fund, including the possibility that distributions may
be subject to a 30% U.S. withholding tax (or a reduced rate of withholding
provided by treaty).
A Fund is generally required to withhold and remit to the U.S. Treasury 31% of
the taxable dividends and other distributions paid
-23-
<PAGE>
to any individual shareholder who fails to furnish the Fund with a correct
taxpayer identification number (TIN), who has under-reported dividends or
interest income, or who fails to certify to the Fund that he or she is not
subject to such withholding.
The Internal Revenue Service recently revised its regulations affecting the
application to foreign investors of the back-up with-holding and withholding tax
rules discussed above. The new regulations will generally be effective for
payments made after December 31, 1999 (although transition rules will apply). In
some circumstances, the new rules will increase the certification and filing
requirements imposed on foreign investors in order to qualify for exemption from
the 31% back-up withholding tax and for reduced withholding tax rates under
income tax treaties. Foreign investors in a Fund should consult their tax
advisors with respect to the potential application of these new regulations.
CALCULATION OF TOTAL RETURN
Quotations of average annual total return for a Fund will be expressed in terms
of the average annual compounded rate of return of a hypothetical investment in
the Fund or class for periods of one, five, and ten years (or for such shorter
periods as shares of the Fund or class have been offered), calculated pursuant
to the following formula: P (1 + T) [n exponent]= ERV (where P = a hypothetical
initial payment of $1,000, T = the average annual total return, n = the number
of years, and ERV = the ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the period). Except as noted below, all total return
figures reflect the deduction of a proportional share of Fund expenses on an
annual basis, and assume that (i) the maximum sales load (or other charges
deducted from payments) is deducted from the initial $1,000 payment, (ii) any
deferred sales load will be deducted at the times, in the amounts and under the
terms disclosed in the Prospectus and (iii) all dividends and distributions are
reinvested when paid. Quotations of total return may also be shown for other
periods and without the deduction of front-end or contingent deferred sales
charges. The Fund may also, with respect to certain periods of less than one
year, provide total return information for that period that is unannualized. Any
such information would be accompanied by standardized total return information.
The table below sets forth the total return of (i) the Institutional Class
shares of each Fund from such Fund's commencement of operations through the
fiscal year ended August 31, 1998, and (ii) the Investor Class shares of each
Fund that offers such shares from the initial offering of such class of shares
through the fiscal year ended August 31, 1998. No performance information for
Class C shares of the Funds for such period is included because no Class C
shares of any of the Funds were outstanding on or before August 31, 1998.
Total Return* Total Return*
Fund Institutional Class Investor Class
Behavioral Growth Fund (5.12)% (19.61)%**
(commencement of operations
December 31, 1997)
Behavioral Value Fund N/A*** N/A***
(commencement of operations
after August 31, 1998)
Behavioral Long/Short Fund N/A*** N/A***
(commencement of operations
after August 31, 1998)
Special Small Cap Fund (16.80)% N/A***
(commencement of operations
December 30, 1997)
REIT Fund (14.88)% N/A***
(commencement of operations
January 1, 1998)
Small Cap Value Fund (12.80)% (18.88)%**
(commencement of operations
December 30, 1997)
Hidden Value Fund (21.92)% (19.27)%**
(commencement of operations
December 31, 1997)
Core Equity Fund 2.00% (13.56)%**
(commencement of operations
December 31, 1997)
All Cap Value Fund (7.76)% (18.76)%**
(commencement of operations
December 31, 1997)
International Equity Fund N/A*** N/A***
(commencement of operations
after August 31, 1998)
International Small Cap Equity Fund N/A*** N/A***
(commencement of operations
after August 31, 1998)
* Not annualized.
** Investor Class shares first offered on July 31, 1998.
*** No information available since either the Fund or the class within the Fund
was not offered prior to August 31, 1998.
-24-
<PAGE>
PERFORMANCE COMPARISONS
Total Return. Each Fund may from time to time include its total return
information in advertisements or in information furnished to present or
prospective shareholders. Each Fund may from time to time also include in
advertisements or information furnished to present or prospective shareholders
(i) the ranking of performance figures relative to such figures for groups of
mutual funds categorized by Lipper Analytical Services, Inc. or Micropal, Inc.
as having similar investment objectives, (ii) the rating assigned to the Fund by
Morningstar, Inc. based on the Fund's risk-adjusted performance relative to
other mutual funds in its broad investment class, and/or (iii) the ranking of
performance figures relative to such figures for mutual funds in its general
investment category as determined by CDA/Weisenberger's Management Results.
Lipper Analytical Services, Inc. ("Lipper") distributes mutual fund rankings
monthly. The rankings are based on total return performance calculated by
Lipper, generally reflecting changes in net asset value adjusted for
reinvestment of capital gains and income dividends. The rankings do not reflect
deduction of any sales charges. Lipper rankings cover a variety of performance
periods, including year-to-date, 1-year, 5-year, and 10-year performance. Lipper
classifies mutual funds by investment objective and asset category.
Micropal, Inc. ("Micropal") distributes mutual fund rankings weekly and monthly.
The rankings are based upon performance calculated by Micropal, generally
reflecting changes in net asset value that can be adjusted for the reinvestment
of capital gains and dividends. If deemed appropriate by the user, performance
can also reflect deductions for sales charges. Micropal rankings cover a variety
of performance periods, including year-to-date, 1-year, 5-year and 10-year
performance. Micropal classifies mutual funds by investment objective and asset
category.
Morningstar, Inc. ("Morningstar") distributes mutual fund ratings twice a month.
The ratings are divided into five groups: highest, above average, neutral, below
average and lowest. They represent a fund's historical risk/reward ratio
relative to other funds in its broad investment class as determined by
Morningstar. Morningstar ratings cover a variety of performance periods,
including 3-year, 5-year, 10-year and overall performance. The performance
factor for the overall rating is a weighted-average return performance (if
available) reflecting deduction of expenses and sales charges. Performance is
adjusted using quantitative techniques to reflect the risk profile of the fund.
The ratings are derived from a purely quantitative system that does not utilize
the subjective criteria customarily employed by rating agencies such as Standard
& Poor's and Moody's Investors Service, Inc.
CDA/Weisenberger's Management Results ("Weisenberger") publishes mutual fund
rankings and is distributed monthly. The rankings are based entirely on total
return calculated by Weisenberger for periods such as year-to-date, 1-year,
3-year, 5-year and 10-year. Mutual funds are ranked in general categories (e.g.,
international bond, international equity, municipal bond, and maximum capital
gain). Weisenberger rankings do not reflect deduction of sales charges or fees.
As is discussed in greater detail below, performance information may also be
used to compare the performance of the Funds to certain widely acknowledged
standards or indices for stock market performance, such as those listed below.
Consumer Price Index. The Consumer Price Index, published by the U.S. Bureau of
Labor Statistics, is a statistical measure of changes, over time, in the prices
of goods and services in major expenditure groups.
Dow Jones Industrial Average. The Dow Jones Industrial Average is a market
value-weighted and unmanaged index of 30 large industrial stocks traded on the
New York Stock Exchange.
Morgan Stanley REIT Index. The Morgan Stanley REIT Index is a market
capitalization weighted total return index of 93 REITs which exceed certain
minimum liquidity criteria concerning market capitalization, shares outstanding,
trading volume and per share market price.
MSCI EAFE Index. The MSCI EAFE Index contains over 1000 stocks from 20 different
countries with Japan (approximately 50%), United Kingdom, France and Germany
being the most heavily weighted.
MSCI EAFE ex-Japan Index. The MSCI EAFE ex-Japan Index consists of all stocks
contained in the MSCI-EAFE Index, other than stocks from Japan.
MSCI EAFE Small Cap Index. The MSCI EAFE Small Cap Index contains over 1200
stocks of companies that (i) have market capitalizations of between $200 million
and $800 million and (ii) are from any of 20 different countries with Japan,
United Kingdom, France and Germany being the most heavily weighted.
NAREIT Equity Index. The NAREIT Equity Index consists of all tax-qualified
equity REITs listed on the New York Stock Exchange, American Stock Exchange and
NASDAQ National Market System.
-25-
<PAGE>
Russell Midcap Index. The Russell Midcap Index is comprised of the 800 smallest
of the 1000 largest U.S.-domiciled corporations, ranked by market
capitalization.
Russell Midcap Value Index. The Russell Midcap Value Index is comprised of those
corporations within the 800 smallest of the 1000 largest U.S.-domiciled
corporations, with lower price-to-book ratios and lower forecasted growth
values.
Russell 1000 Index. The Russell 1000 Index is comprised of the 1000 largest
U.S.-domiciled corporations, ranked by market capitalization.
Russell 1000 Value Index. The Russell 1000 Value Index is comprised of those
corporations within the 1000 largest U.S.-domiciled corporations with lower
price-to-book ratios and lower forecasted growth values.
Russell 2000 Index. The Russell 2000 Index is comprised of the 2000 smallest of
the 3000 largest U.S.-domiciled corporations, ranked by market capitalization.
Russell 2000 Value Index. The Russell 2000 Value Index is comprised of those
companies within the 2000 smallest of the 3000 largest U.S.-domiciled
corporations with lower price-to-book ratios and lower forecasted growth values.
Russell 2500 Index. The Russell 2500 Index is comprised of the 2500 smallest of
the 3000 largest U.S.-domiciled corporations, ranked by market capitalization.
Russell 2500 Growth Index. The Russell 2500 Growth Index is comprised of those
companies within the 2500 smallest of the 3000 largest U.S.-domiciled
corporations with higher price-to-book ratios and higher forecasted growth
values.
Standard & Poor's/Barra Growth Index. The Standard & Poor's/Barra Growth Index
is constructed by ranking the securities in the S&P 500 by price-to-book ratio
and including the securities with the highest price-to-book ratios that
represent approximately half of the market capitalization of the S&P 500.
Standard & Poor's/Barra Value Index. The Standard & Poor's/Barra Value Index is
constructed by ranking the securities in the S&P 500 by price-to-book ratio and
including the securities with the lowest price-to-book ratios that represent
approximately half of the market capitalization of the S&P 500.
Standard & Poor's 500 Composite Stock Price Index (the "S&P 500"). The S&P 500
is a market value-weighted and unmanaged index showing the changes in the
aggregate market value of 500 stocks relative to the base period 1941-43. The
S&P 500 is composed almost entirely of common stocks of companies listed on the
New York Stock Exchange, although the common stocks of a few companies listed on
the American Stock Exchange or traded over-the-counter are included. The 500
companies represented include 400 industrial, 60 transportation and 40 financial
services concerns. The S&P 500 represents about 80% of the market value of all
issues traded on the New York Stock Exchange.
The S&P 500 is the most common index for the overall U.S. stock market.
3-month U.S. Treasury Bills. 3-month U.S. Treasury bills are direct obligations
of the United States Treasury which are issued with a three month maturity. No
interest is paid on Treasury bills; instead, they are issued at a discount and
repaid at full face value when they mature. They are backed by the full faith
and credit of the United States Government.
Wilshire Real Estate Securities Index. The Wilshire Real Estate Securities Index
is a market capitalization weighted index of publicly traded real estate
securities (such as REITs, real estate operating companies and partnerships)
which satisfy certain minimum requirements in book value, market capitalization,
percentage of revenue generated from ownership and operation of real estate
assets and liquidity.
Performance information about the Funds will be provided in the Funds' annual
reports, which will be available upon request and without charge. In addition,
from time to time, articles about the Funds regarding performance, rankings and
other characteristics of the Funds may appear in publications including, but not
limited to, the publications included in Appendix A. In particular, the
performance of the Funds may be compared in some or all of these publications to
the performance of various indices and investments for which reliable
performance data is available and to averages, performance rankings, or other
information prepared by recognized mutual fund statistical services. Such
publications may also publish their own rankings or performance reviews of
mutual funds, including the Funds. References to or reprints of such articles
may be used in the Funds' promotional literature. References to articles
regarding personnel of the sub-advisers who have portfolio management
responsibility may also be used in the Funds' promotional literature. For
additional information about the Funds' advertising and promotional literature,
see Appendix B.
-26-
<PAGE>
FINANCIAL STATEMENTS
The Trust's audited Financial Statements for the fiscal year ended August 31,
1998, included in the Trust's Annual Report filed with the Securities and
Exchange Commission, pursuant to Section 30(d) of the 1940 Act and the rules
promulgated thereunder, are hereby incorporated in this Statement of Additional
Information. A copy of the Trust's Annual Report is available without charge
upon request from Undiscovered Managers, LLC, Plaza of the Americas, 700 North
Pearl Street, Suite 1700, Dallas, Texas 75201 or by calling toll free
1-888-242-3514.
-27-
<PAGE>
SPECIMEN PRICE MAKE-UP
CLASS C SHARES
Total Offering Price
Per Class C Share (as of August 31, 1998)*:
Behavioral Growth REIT Small Cap Value
Fund Fund Fund
Net Asset Value and Redemption
Price Per Share** $11.86 $10.64 $10.90
Maximum Offering Price Per Share
(($) Net Asset Value x 100/99.0) $11.98 $10.75 $11.01
Core Equity All Cap Value International Equity
Fund Fund Fund
Net Asset Value and Redemption
Price Per Share** $12.75 $11.53 $12.60
Maximum Offering Price Per Share
(($) Net Asset Value x 100/99.0) $12.88 $11.65 $12.73
* August 31, 1998 is the date of the last balance sheet filed by the Trust.
Since the Trust did not have any Class C shares outstanding prior to April 26,
1999 (the date of this Statement of Additional Information), each net asset
value and redemption price per Class C share in this Specimen Price Make-up
Sheet is based on the net asset value and redemption price per share of the
relevant Fund's Institutional Class shares as of August 31, 1998 (except for the
net asset value and redemption price per Class C share of the International
Equity Fund, which is based on the net asset value and redemption price per
share of such Fund's Institutional Class shares as of January 5, 1999, the date
of the commencement of operations of such Fund).
** Redemption price subject to a contingent deferred sales charge and/or a
redemption fee under certain circumstances.
-28-
<PAGE>
Appendix A
Publications That May Contain Fund Information
ABC and affiliates
Adam Smith's Money World
America On Line
Anchorage Daily News
Atlanta Constitution
Atlanta Journal
Arizona Republic
Austin American Statesman
Baltimore Sun
Bank Investment Marketing
Barron's
Bergen County Record (NJ)
Bloomberg Business News
Bond Buyer
Boston Business Journal
Boston Globe
Boston Herald
Broker World
Business Radio Network
Business Week
CBS and affiliates
CDA Investment Technologies
CFO
Changing Times
Chicago Sun Times
Chicago Tribune
Christian Science Monitor
Christian Science Monitor News Service
Cincinnati Enquirer
Cincinnati Post
CNBC
CNN
Columbus Dispatch
CompuServe
Dallas Morning News
Dallas Times-Herald
Denver Post
Des Moines Register
Detroit Free Press
Donoghues Money Fund Report
Dorman, Dan (syndicated column)
Dow Jones News Service
Economist
FACS of the Week
Fee Adviser
Financial News Network
Financial Planning
Financial Planning on Wall Street
Financial Research Corp.
Financial Services Week
Financial World
Fitch Insights
Forbes
Fort Lauderdale Sun Sentinel
Fort Worth Star-Telegram
Fortune
Fox Network and affiliates
Fund Action
Fund Decoder
Global Finance
(The) Guarantor
Hartford Courant
Houston Chronicle
INC
Indianapolis Star
Individual Investor
Institutional Investor
International Herald Tribune
Internet
Investment Advisor
Investment Company Institute
Investment Dealers Digest
Investment Profiles
Investment Vision
Investor's Daily
IRA Reporter
Journal of Commerce
Kansas City Star
KCMO (Kansas City)
KOA-AM (Denver)
LA Times
Leckey, Andrew (syndicated column)
Lear's
Life Association News
Lifetime Channel
Miami Herald
Milwaukee Sentinel
Money Magazine
Money Maker
Money Management Letter
Morningstar
Mutual Fund Market News
Mutual Funds Magazine
National Public Radio
National Underwriter
NBC and affiliates
New England Business
New England Cable News
New Orleans Times-Picayune
New York Daily
News New York Times
Newark Star Ledger
Newsday
Newsweek
Nightly Business
Report
A-1
Orange County Register
Orlando Sentinel
Palm Beach Post
Pension World
Pensions and Investments
Personal Investor
Philadelphia Inquirer
Porter, Sylvia (syndicated column)
Portland Oregonian
Prodigy
Public Broadcasting Service
Quinn, Jane Bryant (syndicated column)
Registered Representative
Research Magazine
Resource
Rocky Mountain News
Rukeyser's Business (syndicated column)
Sacramento Bee
San Diego Tribune
San Francisco Chronicle
San Francisco Examiner
San Jose Mercury
Seattle Post-Intelligencer
Seattle Times
Securities Industry Management
Smart Money
St. Louis Post Dispatch
St. Petersburg Times
Standard & Poor's Outlook
Standard & Poor's Stock Guide
Stanger's Investment Advisor
Stockbroker's Register
Strategic Insight
Tampa Tribune
Time
Tobias, Andrew (syndicated column)
Toledo Blade
UPI
US News and World Report
USA Today
USA TV Network
Value Line
Wall Street Journal
Wall Street Letter
Wall Street Week
Washington Post
WBZ
WBZ-TV
WCVB-TV
WEEI
WHDH
Worcester Telegram
World Wide Web
Worth Magazine
WRKO
-A-2-
<PAGE>
APPENDIX B
Advertising and Promotional Literature
Undiscovered Managers Funds' advertising and promotional material may include,
but is not limited to, discussions of the following information:
o Undiscovered Managers Funds' participation in wrap fee and no transaction fee
programs
o Characteristics of the various sub-advisers, including the locations of
offices, investment practices and clients
o Specific and general investment philosophies, strategies, processes and
techniques
o Specific and general sources of information, economic models, forecasts and
data services utilized, consulted or considered in the course of providing
advisory or other services
o Industry conferences at which the various sub-advisers participate
o Current capitalization, levels of profitability and other financial
information
o Identification of portfolio managers, researchers, economists, principals and
other staff members and employees
o The specific credentials of the above individuals, including but not limited
to, previous employment, current and past positions, titles and duties
performed, industry experience, educational background and degrees, awards and
honors
o Specific identification of, and general reference to, current individual,
corporate and institutional clients, including pension and profit sharing plans
o Current and historical statistics relating to:
- -- total dollar amount of assets managed
- -- Undiscovered Managers Funds' assets managed in total and by Fund -- the
growth of assets -- asset types managed
References may be included in Undiscovered Managers Funds' advertising and
promotional literature about 401(k) and retirement plans that offer the Funds.
The information may include, but is not limited to:
o Specific and general references to industry statistics regarding 401(k) and
retirement plans including historical information and industry trends and
forecasts regarding the growth of assets, numbers or plans, funding vehicles,
participants, sponsors and other demographic data relating to plans,
participants and sponsors, third party and other administrators, benefits
consultants and firms with whom Undiscovered Managers Funds may or may not have
a relationship.
o Specific and general reference to comparative ratings, rankings and other
forms of evaluation as well as statistics regarding the Funds as 401(k) or
retirement plan funding vehicles produced by industry authorities, research
organizations and publications.
-B-1-
<PAGE>
UNDISCOVERED MANAGERS FUNDS
Supplement dated April 26, 1999
to Institutional Class Prospectus and Investor Class Prospectus,
each dated December 28, 1998
Each of Undiscovered Managers Behavioral Growth Fund, Undiscovered Managers REIT
Fund, Undiscovered Managers Small Cap Value Fund, Undiscovered Managers Core
Equity Fund, Undiscovered Managers All Cap Value Fund and UM International
Equity Fund now offers Class C shares in addition to offering Institutional
Class shares and Investor Class shares (except for UM International Equity Fund,
which does not offer Investor Class shares). Class C shares are identical to
Institutional Class shares and Investor Class shares except that (i) Class C
shares are subject to certain front-end and contingent deferred sales charges,
(ii) Institutional Class shares bear no 12b-1 fees, (iii) Investor Class shares
bear lower 12b-1 fees than Class C shares and (iv) Investor Class shares and
Class C shares have separate voting rights in certain circumstances. Since in
any of the foregoing funds, Institutional Class shares bear no such 12b-1 fees
and Investor Class shares, if any, bear lower 12b-1 fees than Class C shares,
Institutional Class shares and Investor Class shares of a fund are expected to
have a higher total return than such fund's Class C shares. None of the classes
of shares of any fund of Undiscovered Managers Funds have conversion rights into
or may be exchanged for any other classes of shares of such fund or of any other
fund of Undiscovered Managers Funds. In general, fees and expenses of any fund
of Undiscovered Managers Funds are allocated pro rata among the shares of such
fund, regardless of class. However, fees paid pursuant to a 12b-1 plan with
respect to a fund, if any, are allocated solely to the class of shares of that
fund to which the plan relates. Certain other expenses relating to a particular
class (such as class-specific shareholder services fees) may also be allocated
solely to that class.
Class C shares are described in a separate prospectus. To obtain more
information about Class C shares, please call toll free 1-888-242-3514.
<PAGE>
